Guidelines for Equity Incentive Implementation by Central SOE–Controlled Listed Companies

(III) Where an equity incentive plan is implemented in phases, the corporate performance indicators and target values set forth in each phase’s implementation plan shall, in principle, maintain consistency and comparability. If the performance targets stipulated in a later-phase implementation plan are lower than those in an earlier-phase plan, the listed company must fully explain the reasons and rationale therefor. Article 41: Listed companies shall disclose, concurrently with the announcement of the draft equity incentive plan and its implementation plan, the scientific validity and reasonableness of the selected performance indicators. For industries subject to government price controls or operating under legally mandated monopolies or exclusive franchises, the performance indicators for relevant enterprises shall expressly stipulate, in advance, methodologies or principles for excluding the impact of uncontrollable factors—such as price adjustments or changes in government policy—on performance. Article 42: Performance assessment under the equity incentive program shall be based on the financial data disclosed in the company’s annual report, and the company shall publicly explain, in its external disclosures, the extent to which the equity incentive performance targets have been achieved. Article 43: If a listed company fails to meet the performance targets for equity grant stipulated in its equity incentive plan, no equity grants may be made in that year. If it fails to meet the performance targets for equity vesting (release from restrictions), the company shall handle the matter as follows: (1) Stock options and stock appreciation rights scheduled to vest in that year shall not vest and shall be cancelled; (2) Restricted shares scheduled to be released from restrictions in that year shall remain restricted; the listed company shall repurchase them at a price no higher than the lower of the grant price and the market price of the stock. Section 2: Performance Evaluation of Incentive Recipients Article 44: Listed companies shall establish and improve performance evaluation mechanisms for incentive recipients, explicitly linking the granting and vesting (release from restrictions) of equity interests to individual performance evaluation results. Based on such evaluation results, the company shall determine recipients’ eligibility to participate in the equity incentive plan and tiered vesting (release) ratios. Where an incentive recipient’s performance evaluation is unsatisfactory, the company shall handle the matter in accordance with the provisions of Article 43 herein. Article 45: Equity interests granted to directors and senior executives of listed companies shall be exercised or settled based on term-of-office evaluation outcomes. For overseas-listed companies, at least 20% of the granted stock options must be retained for exercise only after successful completion of term-of-office (or tenure) evaluations following expiration of the restriction period; alternatively, upon exercise, the incentive recipient must retain at least 20% of the granted shares until successful completion of term-of-office (or tenure) evaluations following expiration of the restriction period before selling them. For granted stock appreciation rights (SARs), the cash proceeds from exercise must be deposited into an account established by the listed company for the incentive recipient; at least 20% of such cash proceeds may be withdrawn only after successful completion of term-of-office (or tenure) evaluations following expiration of the restriction period. For granted restricted shares, at least 20% of the granted quantity shall remain locked until successful completion of term-of-office (or tenure) evaluations following expiration of the restriction period before release. Where term-of-office evaluations yield unsatisfactory results—or where audits of economic responsibilities uncover inaccurate reporting of operational performance, loss of state-owned assets, managerial dereliction, or serious violations of laws or discipline—the company shall institute a clawback mechanism for equity interests already exercised during the responsible person’s term of office, and any resulting equity incentive gains shall be remitted to the listed company. Section 3: Performance Assessment for Equity Incentive Implementation by STAR Market–Listed Companies Article 46: Central SOE–controlled STAR Market–listed companies shall implement equity incentives in compliance with relevant regulations governing equity incentives for state-controlled listed companies, as well as the Shanghai Stock Exchange STAR Market Stock Listing Rules and other applicable provisions.

Stock Appreciation Rights: Focus on the Company’s Intrinsic Value

Stock appreciation rights (SARs) constitute a form of phantom equity: incentive recipients do not actually own shares, possess no shareholder voting rights or dividend rights, and may neither transfer SARs nor use them as collateral or for debt repayment. Each SAR corresponds to one share of stock. The gain per SAR equals the market price of the stock minus the grant price. Typically, the market price is defined as the closing price on the last valid trading day prior to the date the SAR holder submits the exercise application. SARs are commonly adopted by companies that are already listed—or about to list—because stock prices are readily ascertainable. The validity period of SARs varies but generally spans five to eight years from the grant date. A stock appreciation right is a right granted by the company to an incentive recipient, entitling the recipient to receive cash or an equivalent number of company shares equal to the appreciation in the stock’s market price upon exercise. No cash payment is required at exercise. For example, suppose a senior executive is granted 100,000 SARs when the stock price is RMB 5 per share, and the stock price rises to RMB 10 per share at exercise time. With an appreciation of RMB 5 per share, the executive receives RMB 500,000 in incentive compensation. I. Nature of SAR-Based Equity Incentives Granting SARs does not confer actual equity ownership in the company; recipients enjoy only the right to appreciation gains, leaving corporate ownership and control unaffected. Consequently, SAR-based incentives require no registration amendments with industrial and commercial authorities nor approval from the China Securities Regulatory Commission (CSRC), rendering their implementation straightforward. Nevertheless, SARs represent a legal right—and like all rights, they entail corresponding obligations: recipients may exercise them only upon achieving specified targets and thereby claim the associated appreciation gains; otherwise, unexercised SARs automatically lapse. The inherent characteristics of SARs mean this incentive method is better suited for companies with ample cash flow, since the appreciation portion is funded from net profits. At exercise, the company must pay out cash to employees—a burden that may strain corporate cash flow, especially if the stock experiences sharp short-term price surges. Although SARs do not affect corporate ownership, their incentive efficacy remains vulnerable to external uncertainties. Logically, SARs reward recipients based on stock price fluctuations: incentivize employees → boost operational performance → drive up stock price → reward employees with appreciation gains. In practice, however, secondary-market stock price movements do not necessarily correlate positively with corporate performance. Numerous factors influence stock prices—including, notably in A-share markets, speculative ‘concept stock’ trading—where dramatic price increases may bear no relation to underlying fundamentals. Under such circumstances, granting SARs risks fostering speculative employee behavior rather than motivating genuine performance improvement; alternatively, if the stock price at exercise falls below the grant price, recipients may simply abandon exercise, resulting in incentive failure. ‘Sensitive Timing’ Must Be Avoided While SARs appear operationally simple on the surface, several risk points warrant special attention in practice. Improper handling of any one could render the entire incentive scheme ineffective—or even become a hindrance to corporate development. Risk Point One: Identifying Eligible Incentive Recipients Typically, these include core personnel such as directors, supervisors, senior executives, key technical staff, and core business personnel.

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