Weekly Observation Summary on Equity Incentives (Aug. 21–28): 'Institutional Innovation Week' and the 'New Normal' of Equity Incentives

KeHua Data’s mechanism is relatively straightforward: if the扣非 net profit growth rate falls below 10%, no special incentive fund is allocated; if it falls between 10% and 30%, up to 5% of the fund may be allocated; between 30% and 50%, up to 8%; and if it exceeds 50%, the maximum allocation is capped at 10%. The three-year period from 2026 to 2028 is treated as a single integrated cycle, with the incentive fund combined with employee self-funding serving as the funding source. Each cycle is assessed independently, and the performance assessment period lasts exactly three years. Signal Two: Performance evaluation criteria for equity incentives are increasingly incorporating multidimensional corporate governance objectives. We present three relevant cases: Universal Scientific Electronic (USI), Southeast Electronics, and VeriSilicon Holdings. First, consider USI’s performance conditions, which include not only revenue targets but also ESG metrics—for example, the following ESG indicators for 2026: ESG has been a prominent topic in recent years. However, based on our research, this marks the first time ESG metrics have appeared in the performance conditions of an A-share listed company’s employee stock ownership plan (ESOP). Aside from Jidong Cement’s restricted stock incentive plan—which includes a metric for carbon emissions per ton of clinker—there are virtually no other domestic precedents. By contrast, among the 100 largest U.S. companies, 71% incorporate ESG metrics into their incentive compensation plans (Debevoise, 2024). Note that these “incentive compensation plans” encompass both annual executive bonuses and long-term incentives collectively—not solely ESOPs. In the short term, such practices remain experimental. Nevertheless, we forecast that ESG-based evaluation criteria will become increasingly common across (broadly defined) equity incentive programs of listed companies. The reason is simple: USI operates manufacturing bases across four continents, necessitating alignment with international ESG standards. VeriSilicon Holdings revised its draft restricted stock incentive plan—not only adjusting internal allocation quantities while keeping the total quota unchanged, but also modifying performance conditions: At the company level, the original sole revenue target was replaced by a dual-metric system linking vesting eligibility to two components: (A) achievement of revenue-related targets and (B) achievement of profit-related targets. The overall company-level vesting ratio is calculated as A × 50% + B × 50%. Southeast Electronics’ equity incentive plan includes “measures to offset dilutive impact on earnings per share (EPS) as a prerequisite for unlocking shares”: The shares for Southeast Electronics’ current equity incentive plan are sourced from secondary-market repurchases. Yet the plan contains the following clause: This clause originates from mandatory regulatory requirements imposed by China’s Securities Regulatory Commission (CSRC), whose core purpose is to protect the interests of minority investors—specifically, to prevent directors and senior executives from benefiting from equity incentives unaffected by EPS dilution arising from corporate fundraising via new share issuances or convertible bond offerings. To clarify briefly: when a company issues new shares or convertible bonds, its total share capital expands while net income remains unchanged, thereby diluting EPS—effectively shrinking the “pie” shared by all shareholders, including minority investors. If directors and executives could still unlock and monetize their incentive shares without adjustment under such circumstances, a misalignment of interests would arise: shareholders bear the dilution cost of corporate financing, while executives continue reaping full incentive benefits. In practice, measures to offset immediate EPS dilution include accelerating core business development and enhancing profitability, strengthening fund management to ensure efficient project implementation, and similar actions.

Compensation Incentive Systems: Equity Incentives, Employee Stock Ownership, Management Buyouts, and Stock Option Incentives

Article 10: Methods of Acquiring Equity 1. Core personnel may acquire equity either by self-funding or by obtaining loans from original shareholders. Where loans are used, core personnel must enter into formal loan agreements with lenders specifying repayment methods, repayment deadlines, and interest rates. 2. For listed companies, stock options may be used to incentivize core management personnel. Managers contribute personal funds to purchase a specified number of shares. The company and managers jointly agree upon share lock-up periods, as well as rights and obligations during and after the lock-up period. Article 11: Share Price The price of shares used for equity incentives shall be determined based on the company’s book value per share (i.e., net asset value per share), subject to deliberation and approval by the Board of Directors. Chapter IV: Equity Incentive Models Article 12: Performance Shares or Performance Units 1. Performance shares refer to shares granted to incentive recipients upon achieving pre-determined, reasonable performance targets set at the beginning of the year. If the recipient meets the target by year-end, the company awards a specified number of shares—or allocates a designated bonus fund to purchase company shares. The liquidity and transferability of performance shares are typically subject to time- and quantity-based restrictions. 2. Performance units operate similarly to performance shares and serve comparable long-term incentive functions. However, performance units primarily take the form of cash awards rather than actual shares. Article 13: Stock Options 1. Stock options grant core management personnel the right—within a specified timeframe—to purchase a predetermined number of company shares at a fixed exercise price. 2. Recipients may elect to exercise this right or forfeit it entirely. Article 14: Phantom Stock Phantom stock refers to a notional or virtual equity instrument granted to incentive recipients. Such phantom shares cannot be transferred or sold, and automatically expire upon the recipient’s departure from the company. Nevertheless, recipients retain entitlement to a proportionate share of dividends and appreciation gains tied to the underlying stock’s market value. Article 15: Stock Appreciation Rights (SARs) Stock appreciation rights grant incentive recipients the right to receive gains corresponding to increases in the company’s stock price. Upon exercising SARs, recipients obtain either cash or company shares equivalent in value to the appreciation amount—without any out-of-pocket payment required at exercise. Article 16: Restricted Stock Restricted stock imposes conditions on both acquisition and disposal. It refers to company shares granted to incentive recipients subject to pre-specified terms. Recipients gain full ownership and resale rights—and thus realize economic benefit—only upon satisfying stipulated service-period requirements or performance targets. Article 17: Deferred Payment Deferred payment refers to equity incentive income provided to recipients but not disbursed in the year earned. Instead, such income is paid out after a prescribed deferral period—either in the form of company shares or in cash equivalent to the then-prevailing share market value. Article 18: Recipient Equity Holding Recipient equity holding refers to granting incentive recipients a certain number of the company’s shares. These shares may be gifted to recipients free of charge, purchased by recipients using self-raised funds, or partially subsidized by the company. Recipients benefit from share price appreciation and bear losses from depreciation. Article 19: Recipient-Led Acquisition Recipient-led acquisition refers to incentive recipients acquiring company shares through external financing, thereby becoming shareholders who jointly assume risks and share rewards with other shareholders—ultimately realizing equity-based operational control of the company.

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Ecolab Inc. director Tracy B. McKibben acquired 131.17 shares via stock award on September 30, 2026, raising her direct holdings to 11,820.74 shares.

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