Stock Market and Stock Option Plan

Should the connection implement the proposed employee melody option plan? In a natural assembly line option plan, the employee is offered a specific number of sh atomic number 18s which he/she chamberpot exercise (buy) at some specified time in the future. The damage at which the employee can buy the stock is affect to the trade charge at the time the stock option was granted (grant expense). The employees gain is equal to the market value of the stock at the time it is exercised, less(prenominal) 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 ar typically offered to managers, most technical individual contributors and about half of the other professionals. small 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 ar gue before implementing the proposed employee stock option plan. Future growth Stock options are appropriate for small companies where future growth is expected. Being a youngish gild, THTF looks to be easy posed for future growth.Cultural differences In china, in that respect is high importance attached to feeling valued and having a moxie of belonging. This results in Chinese companies having to maintain a good re rollation for treating their employees well or risk unwanted attention. In the current economic climate, competitions for cardinal employees are extremely fierce. Options, to a certain extent, do inspire dedication and commitment and provide employees with a sense of ownership which is a unique and emfly powerful fee tool. save, research (Economists article out of true Options) has shown that un corresponding 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 firm since one time the options are cashed, the alignment of ownership and management no longer exists. Thus, options experience an ineffective measure. Hence, on that point may a need for the company to knock over the level of witnessing among its Chinese employees with regard to options. An option may break an ineffective measure as seen from above.Educating employees is one resolution but the approach and logistical burden of such undertaking may outweigh the potential welfares for company and its employee. In THTFs case, as the key management are pushing for the implementation of the stock option, it can be inferred that they do understand the practisefulness of stock options. Retention Retention of employees is of great interest peculiarly in the high-tech industry THTF was based in. Key management were exceedingly sought after. Stock options can serve as a store mechanism as stocks options will motivate employees to remain with the firm as they can see their investment grow.Stocks options will likewise encourage less risk-averse and optimistic employees or have employees that can increase value to construct at the firm. This may be aligned with THTF interests. Therefore, stock options can service to retained and attract suitable people to work at the firm. However stock options can fall underwater due to bearish stock market conditions rather than poor firm performance and cause major(ip) morale and retention problems. This may lead to stock options not having their mean cause. Still, in this THTFs case, they are currently in a square-built and high-growth economy, thus stock prices are unlikely to fall.From an incentive point of view, employees benefit when stock price goes up, so stock options motivate employees to increase their companys price. This si aligned with the portionholders interest as when stock price goes up, presumably value has been created. The stock option s may blend in the employees to think like shareholders. Nonetheless, this may not be the case. An option holder does not share the downside in holding the stock. If the stock loses value, the option holder will just now just fail to exercise the option and thus avoid the loss. happen that would scare off a shareholder is a matter of unemotionality to an option holder.This may lead management taking too such(prenominal) risk as the upside to taking the risk gives high paybacks whereas there is virtually no downside. In THTF, other measures need to be put into place to make sure of the interests alignment before implement stock options compensation. Employees From the employees point of view, receiving stock options is a huge benefit as the employee can reap financial success from the firm. But is it really so? The executives may suffer from the more volatility then the market as they are too under diversified with their stake too over concentrated in a irm. Employees should not put their eggs instruments and remuneration into one basket. Thus, this will lead to the undervaluing of options by the employees. This shows that options are wasted on employees. Market Paranoia Stock options compensation may also lead to the market being deeply suspicious of the corporation. When top executives are paid in stock options compensation, they get huge compensation packages which are hidden forth from public scrutiny. Furthermore, stock options also dilute shareholders.Management may also manipulate the market before the stock options grant date to get a better deal for themselves which would lead to excess volatility. Thus, having stock options compensation may lead to distrust from the market, having long term adverse effects on the stock prices. Conclusion Given the current restrictions and ambiguities of the Chinese laws and regulations relevant to options, THTF should take a conservative approach to such practice. If THTF determined that the use of options i s immediately necessary for the recruitment and retention of employees, the options should be granted.