Ren Zhengfei's strategy: equity incentive for striving shareholders


Ren Zhengfei's strategy: equity incentive for striving shareholders

Huawei's greatest reliance on building hundreds of billions of Empires is not "wolf culture", but adherence to the equity incentive system for nearly 30 years.

Ren Zhengfei's strategy: equity incentive for striving shareholders

Wen Wen / reporter Su Ye

Ren Zhengfei said: the essence of the operation mechanism of enterprises is the drive mechanism of interests.

Since its establishment in 1987, Huawei's equity incentive system has gone through three stages (real stock, virtual stock, virtual stock + TUP), which has helped it grow into an international technology giant with an annual income of more than 600 billion yuan.

Financing of private enterprises

In 1990, the newly established HUAWEI started internal financing to solve the problem of financing difficulties.

Huawei distributes subscription qualifications to employees of Huawei and its joint venture company who have worked for one year at the price of 1 yuan per share. After employees buy their own shares, the company issues a certificate of ownership, stamps the red stamp of Huawei's capital planning department, and dividends 15% of the company's after-tax profits.

HUAWEI's net assets per share remained above 1 yuan, but the subscription price of 1 yuan / share lasted until 2001. In the early days of financing difficulties, HUAWEI got enough financing to tide over the difficulties.

However, the real share incentive has dispersed the company's equity and the management's right to speak is threatened. For this reason, since June 1997, HUAWEI has simplified the structure of shareholders and highlighted the management status.

Before the restructuring, Huawei's registered capital was 70.5 million yuan, of which 688 Huawei employees held 65.15% of the shares, while 299 employees of its subsidiary Huawei New Technology held 34.85% of the shares.

After the first restructuring, Huawei trade union, Huawei new technology trade union and Huawei new technology owned 61.86%, 33.09% and 5.05% respectively. At the same time, it was decided that the shares held by employees of the two companies would be centrally trusted by the trade unions of the two companies and voted on behalf of shareholders.

In June 1999, Huawei Trade Union acquired 5.05% and 21.24% of Huawei's shares in Huawei New Technology and Huawei New Technology Trade Union respectively. Its ownership structure was restructured into 88.15% and 11.85% of Huawei New Technology Trade Union.

In December 2000, Huawei's board of directors decided to incorporate 11.85% of Huawei's new technology trade union shares into Huawei's trade union and establish Ren Zhengfei as an independent shareholder, holding 1.07% of the shares separately.

In 2003, Huawei set up Huawei Holdings Co., Ltd. and all the shares held by Huawei Trade Union were transferred to Huawei Holdings. At this time, Huawei's shareholders changed from 98.93% of the original company's trade union shares, 1.07% of Ren Zhengfei's shares, to 99.99% of Huawei's holding shares, and 0.01% of Huawei's vice president Ji Ping's shares.

1 years later, HUAWEI's shareholders changed to HUAWEI holdings and Ren Zhengfei, and Ren Zhengfei held 1%.

In parallel with the restructuring, the State Council and the former State Sports Reform Commission issued two papers calling for the suspension of the approval and issuance of internal staff and workers'shares and the standardization of internal staff and workers' shares transactions. These prompted Huawei to study the equity incentive system in the United States in 1998 and to introduce the virtual stock system in July 2001.

The virtual stock specifies that the stockholder has the right to share dividends and revaluation, but has no ownership and voting rights. Virtual stocks do not need to go through the cumbersome approval procedures of securities, and the virtual stock system of non-listed companies can also avoid the impact of stock price fluctuations brought about by the open market.

Huawei adopts the pricing of net assets per share, issuing a certain number of stocks every year. The calculation of net assets refers to KPMG's audit report, but the specific calculation method is not open. After the shares are purchased by the entity controlling shareholders, the controlling trade union issues equal proportion of virtual shares and sells them to employees, whose share of purchases is evaluated by performance.

The new employees no longer distribute the subscription share according to the price of 1 yuan / share, instead of the new pricing.

Old employees have a four-year option and can exercise the following four rights every year since 2002: 1. Cash the difference of 1/4 of the shares held by the trade union; 2. Continue to buy the current ration share at the price of 1 yuan per share; 3. Retain the shares and cash them later; 4. Give up the purchase of the current ration share.

Employees will still be repurchased by the trade union at the price of 1 yuan per share (after 2003, it will be repurchased at the price of net assets per share at the time of separation).

The company encourages old employees to go back to their posts through competitive recruitment, so that the unions can buy back real shares.

The benefits of virtual shares include two aspects: annual dividends and cash-in of par value appreciation, in which the proportion of dividends is about 40% of annual profits.

As a result, HUAWEI gradually absorbed the real shares of its employees into virtual shares.

In the process of virtual share issuance, Huawei's annual report and the company's articles of association of Huawei Holdings say that the shareholders'representatives are elected by the shareholders' representatives and exercised their rights by the shareholders'congress. The highest authority of the company is the shareholders' meeting.

However, in fact, the rights of shareholders are limited to dividends and stock price appreciation gains, not related to property rights, and the controlling shareholders'meeting of Huawei holds the actual power. When it comes to the issues of increasing capital and increasing shares, dividends and appointment and removal of personnel in Huawei Holdings, only Ren Zhengfei and Sun Yafang attend the previous shareholder meetings, they are the real shareholder representatives of Huawei Holdings.

Unlike the shareholding system of Lenovo Holdings and other companies, Lenovo Holdings ultimately implements the company's property rights to each individual, while Huawei has only one entity shareholder Ren Zhengfei, and other employees exist in the form of corporate associations. Under the corporate legal system, the key to mutual maintenance is not equity, but labor contracts.

Long live the striving

In order to promote the smooth progress of the virtual stock system, Huawei has formulated a series of supporting measures, such as the implementation of share allotment in 2003 to reduce wages and increase incentives at the core level.

Huawei calls on middle-level and above employees to voluntarily submit "application for salary reduction" and set a three-year lock-in period for the allocation of shares far exceeding those of ordinary employees.

However, with the growth of Huawei Company, the drawbacks of virtual stock incentives have gradually emerged, with roughly three problems.

First, the continued issuance of virtual shares has increased HUAWEI's performance pressure. Virtual shares are essentially equity financing. For every additional 1% share issue, net asset growth of not less than 1% is needed to bring the expected incentive strength for shareholders. Theoretically, virtual shares can be issued indefinitely, but the growth rate of net assets has an upper limit.

Second, long-term implementation of a single virtual stock system, the stimulation of grass-roots employees into the weak period. Employees can estimate the approximate income through rationing shares. In this way, incentives become fixed income, and without other incentives, corruption is easy to breed.

Thirdly, for most new employees, the allotment is priced at net assets rather than at 1 yuan per share, resulting in great economic pressure. Since 2001, HUAWEI has secured four major commercial banks to provide loans to help employees. But this was stopped in 2011 because it violated the relevant policies of the CBRC.

In order to solve these drawbacks, HUAWEI has made some efforts and attempts. In 2008, Huawei fine-tuned the incentive system and implemented a saturated allotment system, which stipulates the upper limit of allotment for employees, so that employees who reach the grade limit will no longer participate in the new allotment. This rule has limited the number of HUAWEI employees who are holding large numbers.

Although nominally "saturated allotment" is designed to motivate new employees and bundle their interests, for new employees, on the one hand, they want to continue to buy allotments, after all, the future dividends are considerable; on the other hand, most of the salaries are used to purchase allotments, and the actual wages of employees do not increase or decrease, so in the short term. No sense of encouragement.

In April 2011, Ren Zhengfei held a symposium with Huawei executives on "How to Share Benefits with Strugglers", followed by measures to "Identify Strugglers".

In 2013, Huawei gradually adopted the TUP-time unit plan in parallel with the virtual stock system, which complemented the incentive system.

The TUP plan is essentially a cash reward "deferred + incremental" allocation plan. That is to say, first give employees a right to gain profits without investing in purchasing, but the benefits need to be gradually realized in the next N years.

The basic model of Huawei TUP is: if 5,000 shares are allocated to employees in 2014, the current stock value is 5.42 yuan, which stipulates that there is no dividend right in that year (the first year).

In 2015 (second years), the right to dividend of 5000 x 1/3 can be obtained.

In 2016 (third years), the right to dividend of 5000 x 2/3 can be obtained.

In 2017 (fourth years), the dividends of 5000 shares can be fully obtained.

In 2018 (fifth), the right to dividends was fully granted. If the stock price rises to 6.42 yuan in that year, the return you can get in the fifth year is: dividend in 2018 + 5,000 * (6.42-5.42). At the same time, the rights and interests of these 5000 shares are cleared.

Huawei adopts a five-year (N = 5) TUP, which increases the dividend right returns in the first four years, and in the last one year, besides the full dividend returns, it may also gain the gains of equity appreciation in the last five years. Moreover, TUP occupies the saturated quota and shares the same dividend and value-added rights as the virtual restricted shares. It does not have the characteristics of stock circulation, responsibility and power.

TUP is a kind of cash deferred incentive within enterprises, and there is no legal obstacle.

Therefore, in the short run, the implementation of TUP can solve the unification of incentive systems for employees of different regions and nationalities in the world, and fulfill the acquisition-sharing system that Zhengfei insisted on: as long as employees pull cars and can pull them well, their value must be reflected in the distribution, which has nothing to do with skin color, nationality and seniority.

The second is to solve the problem of insufficient incentive for new employees within 5 years. According to the general cycle of the return on human capital investment: the employee is in the investment period within two years of employment, and then is the investment return period. In this stage, the turnover of outstanding employees causes the most serious losses to the enterprise. Huawei's five-year TUP model and the "delayed + incremental" distribution scheme can just hedge this situation. When employees want to leave after 2 to 3 years, they will choose to quit because of the high opportunity cost; after 5 years, other more effective incentives will follow for the top 30% of the outstanding employees.

In the medium and long term, with the gradual increase of the scope and intensity of TUP implementation, the proportion of the original virtual share returns in the total returns will gradually decline, and the proportion of incentives to the "puller-the main creator of company value" will gradually catch up with or even exceed the recognition of the historical contribution of "rider-profit class", thus gradually correcting it. The incentive system of the original stock ownership has caused the unreasonable side of the historical contribution due to the long implementation time.

In recent years, the TUP plan has allowed Huawei to ride through the period of virtual stock incentive with obvious disadvantages. However, as it is an incentive system for employees rather than for core leadership, after the five-year cycle, whether to continue to improve the TUP plan or to try out a new equity incentive system is still being explored. Cable.

Review

Yao Wengang, general manager of Shanghai Ren Ge Human Resources Management Co., Ltd.

When Huawei implements the "virtual restricted stock" incentive, it not only achieves internal financing and guarantees cash flow, but also adjusts the ownership structure and guarantees management voice. It is indeed a benchmark enterprise in the field of employee incentives in China. But besides the incentive, whether the "virtual restricted shares" correspond to the same number of shares in Huawei is still unknown.

Huawei's equity incentive model combines the interests of enterprises and employees to form a community of interests, which has played its due incentive effect and achieved a win-win situation between shareholders and employees. But there are some legal and financial risks. Most of the HUAWEI models are based on gentlemen's agreement.


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