Starbucks, already at the forefront of one revolution in Chinese consumerism by introducing espressos and double decaf mochas to a nation of tea drinkers, is planning an equally big contribution to Chinese savings habits.
The US company, with 4,000 staff on the mainland, is putting the finishing touches on a plan to offer share options to all employees in the mainland cafés that it controls, becoming one of the first multi-nationals in China to broaden incentive packages from the boardroom to the barista.
The initiative is attracting a lot of attention because it brings together three important trends in the Chinese corporate world: the renewed interest in equities, the gradual relaxation of the country’s capital controls, and the fierce battle among multinationals to retain talented staff.
According to Eden Woon, vice-president of Starbucks Greater China, staff will qualify for the options scheme if they have been employed by the company since April last year and work more than 20 hours a week. (Staff in Shanghai and Zheijiang and Jiangsu provinces will not be included as stores there belong to a franchise controlled by Uni-President of Taiwan.)
The plan will bring China into line with the group’s “bean stock” incentive plan that has been in place in the US since 1991.
The Starbucks options initiative is one of the most ambitious, but a number of other foreign companies are beginning to experiment with the idea of employee stock plans, particularly in the information technology sector.
Computer-maker Dell awards stock options to its middle managers, while Intel encourages staff to take part in the company’s global stock options plan. Microsoft awards shares in the company to staff to award them for excellent performance.
Share incentive plans are becoming more important to multinationals in China because of the intensifying battle to keep good staff. Rapid economic growth and heavy investment are allowing employees with strong credentials to change jobs regularly at ever-higher salaries, to the extent that the American Chamber of Commerce says staff retention is one of the biggest challenges facing US companies in China. Yet the market for people with the technical and language skills needed to prosper at a multinational is limited.
The popularity of stock options became apparent when Ebay’s Chinese partner EachNet was acquired by Beijing-based Tom Online. EachNet employees took the unusual step earlier this month of posting an online letter of protest to Meg Whitman, Ebay’s chief executive, in which they asked to keep their Ebay stock options.
The staff said the options were a way of boosting their income given that their base salaries were “far below those at other multinational companies in China”.
One of the obstacles to issuing stock options to Chinese staff has been controls that China uses to prevent capital outflows, which limit the ability of employees to take foreign currency out of the country to exercise their options.
To get around this restriction, some companies have introduced “cashless” options, which allow employees to capture profits from selling shares in the company without actually exercising any options.
Although this allows companies to provide some form of stock-related incentive, such plans have not encouraged employees to hold company shares for any length of time, one of the underlying motives behind stock options.
Other companies have introduced phantom options that award bonuses to staff based on the performance of the share price; however, such incentives have to come out of a company’s profits, which makes them less attractive.
But with its foreign currency reserves now exceeding $1,000bn, the Chinese government has begun to encourage larger outflows of domestic savings. It is putting in place rules that would allow Chinese citizens to take as much as $50,000 a year overseas. This should allow employees of multi-nationals to build a significant investment in their company’s stock.
The Starbucks plan comes at a time when there is strong interest among Chinese companies in stock option plans. At the start of last year, the government gave preliminary approval to state-owned companies listed on the mainland to issue options to staff. Since then, more than 100 companies, including Baosteel, the country’s largest steel company, and white goods maker Haier have announced incentive plans, subject to final approval by the regulators
For the government, employee options could provide a way to improve corporate governance standards at listed companies. As well as giving executives a sense of ownership in the company, it could help control corruption. One explanation for widespread bribery among managers of state-owned companies is the low basic salaries many receive.
Xue Zhongxing, at consulting group Jingbang in Shanghai, says the stock options will help bring the interests of managers at state-owned companies into line with those of the shareholders.
However, critics have warned that the incentive plans at Chinese companies will have to be carefully monitored to prevent abuse. Without close supervision, they say, executive stock options could become as controversial as they are now in Starbucks’ home country.