Stock Market and Stock Option Plan
Should the company implement the proposed employee stock option plan? In a typical stock option plan, the employee is offered a specific number of shares which he/she can exercise (buy) at some specified time in the future. The price at which the employee can buy the stock is equal to the market price at the time the stock option was granted (grant price). The employee 's gain is equal to the market value of the stock at the time it is exercised, less the grant price. If the market price of the stock remains the same or decreases relative to the grant price, then the stock option is worthless. Stock options are typically offered to managers, most technical individual contributors and about half of the other professionals. Smaller organizations offer stock options more widely, in some cases to all employees In THTF case, stock options are offered to the former category. There are various factors that Tsinghua Tongfang should consider before implementing the proposed employee stock option plan. Future growth Stock options are appropriate for small companies where future growth is expected. Being a young company, THTF looks to be well posed for future growth. Cultural differences In China, there is high importance attached to feeling valued and having a sense of belonging. This results in Chinese companies having to maintain a good reputation for treating their employees well or risk unwanted attention. In the current economic climate, competitions for key employees are extremely fierce. Options, to a certain extent, do inspire loyalty and commitment and provide employees with a sense of ownership which is a unique and potentially powerful compensation tool. However, research (Economist’s article “False Options”) has shown that unlike the US counterparts, the Chinese rarely exercise vested stock options during their tenures at the firm. This may be due to the perceived notion in China where cashing out stock option may suggest disloyalty to the