Models of share incentive plans of non-public companies

Non-public companies benefit from ample flexibility in designing their share incentive plans due to the lack of pertinent legal and regulatory provisions in China governing equity incentives provided by non-public companies. In accordance with the Circular of the Ministry of Finance and the State Administration of Taxation on Improving the Income Tax Policies for Equity Incentives and Technology Investments, generally there are three categories of underlying securities from which non-public companies may choose for their share incentive plans (SIPs), namely, restricted shares, share options and shares. In practice, equity incentives are provided especially in forms that include virtual shares, share appreciation rights, free shares (also known as “dry” shares), performance shares, share options and restricted shares. Below is a table that provides a comparative overview of these equity incentives.

A snapshot of features of non-public companies’ SIPs. Although there is not any well-established legal framework for SIPs of non-public companies, they can design and operate their SIPs with reference to laws and regulations applicable to public companies as well as their SIPs. SIPs of non-public companies have the following features compared with those of public companies.

How incentives are provided. Public companies generally provide equity incentives by issuing share options, restricted shares and other appropriate securities, while non-public companies benefit from more flexibility that enables them to provide more diversified incentives, which include but are not limited to share appreciation rights, virtual shares and performance shares.