Chapter 56 Equity incentives gather people's hearts

With the rise of domestic independent innovation and entrepreneurship, human capital has gradually become the core capital of high-tech enterprises, and selection, cultivation, retention, and use have become the core value modules of human resource management.During the economic downturn, shrinking market, tight cash flow and unstable capital guarantee chain will lead to crisis of enterprise survival; while the stability of human capital and the stimulation of potential are the core capabilities for enterprises to seize opportunities and grow stronger in the economic crisis.Huawei's equity incentives during the crisis have important implications for companies to cope with the crisis.

Huawei's internal equity plan began in 1990, and has implemented four large-scale equity incentive plans so far.On the one hand, Huawei's equity incentive mechanism reduces the company's cash flow risk, and on the other hand, it enhances employees' sense of belonging and stabilizes the entrepreneurial team. 1. Stock incentives during the start-up period.In the early days of its business, Huawei needed a lot of funds for market expansion and scale expansion. On the other hand, it needed a lot of scientific research investment to suppress competitors. Coupled with the nature of private enterprises at that time, financing difficulties appeared.Therefore, Huawei gives priority to internal financing.Internal financing does not need to pay interest, has a low risk of financial distress, does not need to pay a high rate of return to external shareholders, and can motivate employees to work hard.

In 1990, Huawei first proposed the concept of internal financing and employee stock ownership.At that time, the price of participating in shares was 10 yuan per share, and 15% of the after-tax profit was used as equity dividends.At that time, the salary of Huawei employees consisted of wages, bonuses and stock dividends, and the three parts were almost equal.Among them, the stock is distributed according to factors such as the employee's position, quarterly performance, and qualification status after the employee has joined the company for one year, and is generally purchased with the employee's annual bonus.If the annual bonus for new employees is not enough for the amount of shares distributed, the company will help employees obtain bank loans to purchase equity.At this stage, Huawei completed the strategic task of "encircling cities from rural areas". In 1995, its sales revenue reached RMB 1.5 billion. In 1998, it expanded its market to major cities in China. In 2000, it established a research and development center in Stockholm, the capital of Sweden. $100 million.

2. Equity incentives during the Internet economic bubble period. During the dot-com bubble period in 2000, the IT industry was devastated and financing was unprecedentedly difficult. At the end of 2001, due to the impact of the Internet economic bubble, Huawei ushered in the first winter in its development history. At this time, Huawei began to implement the option reform called "virtual restricted shares". "Virtual stock" refers to a kind of virtual stock granted by the company to the incentive object. The incentive object can enjoy a certain amount of dividend rights and stock price appreciation rights, but has no ownership, no voting rights, cannot be transferred and sold, and will automatically expire when leaving the company. .The issuance of virtual stocks maintains the ability of Huawei's management to control the company, and will not cause a series of management problems.Huawei has also implemented a series of new equity incentive policies: (1) New employees will no longer be issued one-yuan-per-share shares that remain unchanged for a long time; (2) Old employees’ stocks will gradually be converted into stock; The bulk of the income from options is no longer fixed dividends, but the value-added part of the company's net assets corresponding to the futures stocks.Options are more reasonable than stocks. Huawei stipulates that according to the company's evaluation system, employees can obtain a certain amount of options. The exercise period of the options is 4 years, and the annual cash amount is 1/4. 10,000 shares, and the stock price in that year was 1 yuan/share. After 2002, it could choose 4 ways to exercise the option year by year: cashing out the price difference (assuming that the stock price rose to 2 yuan in 2002, it would make a profit of 250,000 yuan); Buy the stock at the price of the stock, cash it out later, and give up (that is, do nothing).The reform from fixed stock dividends to "virtual restricted shares" is the transformation of Huawei's incentive mechanism from the "inclusive" principle to "key incentives".Lowering the basic salary of fresh graduates and widening the income gap between employees is a reflection of this change.

3. The voluntary salary reduction campaign during the SARS period. In 2003, Huawei, which had not yet survived the bubble economy, was hit hard by SRAS, and the export market was affected. At the same time, the property rights lawsuit with Cisco directly affected Huawei's global market.Huawei internally called on middle-level and above employees to voluntarily submit "salary cut applications" in the form of a campaign. At the same time, it further implemented management buyouts to stabilize the workforce and tide over the difficulties together. There are three obvious differences between the 2003 allotment and Huawei’s previous annual allotment method: first, the allotment quota is very large, and the average is close to the sum of the employees’ existing shares; second, the cashing method is different. The company can also choose to cash out at a certain percentage each year. The annual cash out ratio for general employees does not exceed 1/4 of the total personal equity, and for core employees who hold more shares, the annual cash out ratio does not exceed 1/10; the third is Equity is tilted towards the core layer, that is, the allotment quota for key employees is much higher than that of ordinary employees.The allotment stipulates a 3-year lock-up period, and cashing out is not allowed within 3 years. If the employee leaves the company within 3 years, the allocated shares will be invalid.At the same time, Huawei has also adopted some supporting measures for employees to purchase virtual equity: employees only need to provide 15% of the required funds, and the company will provide the rest in the form of bank loans.Since this reform, Huawei has achieved a rapid increase in sales performance and net profit.

4. Incentives in times of global economic crisis. In 2008, the global economic crisis triggered by the US subprime mortgage crisis caused heavy losses to the world economic development.Faced with the impact of the economic crisis and the deterioration of the economic situation, Huawei launched a new round of equity incentives. In December 2008, Huawei announced the "Allotment of Shares". The stock price of this allotment was 4.04 yuan per share, with an annual interest rate of more than 6%, covering almost all employees who had worked in Huawei for more than one year.Since this allotment is a "saturated allotment", that is, different job levels match different shareholdings. For example, employees with a level of 13 can hold up to 20,000 shares, and employees with a level of 14 can hold 50,000 shares.Most of the old employees at Huawei's headquarters did not participate in this allotment because their shareholdings had reached the upper limit of their level of shareholding.Some industry insiders estimated that Huawei's internal shares in 2006 were about 2 billion shares.According to the above-mentioned scale, the scale of the allotment is between 1.6 billion and 1.7 billion shares. Therefore, it is a large-scale transformation of Huawei's internal employee shareholding structure.The allotment method this time is similar to the past. If employees do not have sufficient financial strength to directly purchase shares from the company with cash, Huawei will provide a guarantee to the bank in the name of the company to help employees purchase company shares.

The history of Huawei's equity incentives shows that equity incentives can closely link the human capital of employees with the future development of the company, forming a virtuous cycle system.Employees obtain equity and participate in company dividends to realize company development and increase the value of employees' personal wealth. At the same time, internal financing synchronized with equity incentives can increase the company's capital ratio and buffer the company's tight cash flow. 1. The two-way promotion channel ensures the development space of employees.Technology and management belong to two fields, and one person often cannot become a management and technical professional at the same time, but the difference in salary between the two positions will directly affect the effort of scientific research and technical personnel.In order to get rid of this dilemma, Huawei has designed a two-way promotion channel for job qualifications.New employees first start as grassroots business personnel, and then rise to the backbone. Employees can choose managers or technical experts as their future career development path according to their own preferences.Before reaching senior professional titles, the wages between grassroots managers and core backbones, between middle managers and experts are the same, and the two positions can also be transferred to each other.When it comes to the positions of senior managers and senior experts, the positions of managers and experts cannot be changed. The development direction of managers is professional managers, while the career of senior experts is professional technicians.Huawei's two-way employment channel takes into account the individual development preferences of employees, gives employees more opportunities to choose, and at the same time considers technical and management functions equally to help employees grow.In addition to the two-way promotion channel for job qualifications, Huawei provides a mentor for new employees to provide care and guidance in work and life.When employees become the backbone of management, they will also be equipped with an experienced mentor to give guidance.Huawei's comprehensive career development channel and tailor-made mentor system for employees can effectively help employees grow and reduce the turnover rate of outstanding employees.

2. Emphasize the value of human capital and dilute the proportion of major shareholders.Equity incentives are not a panacea. When the strength of equity incentives is not strong enough, the effect of equity incentives is also quite limited.At the beginning, Huawei’s equity incentives were biased towards core middle and high-level technical and management personnel. As the company expanded, Huawei consciously diluted the equity of major shareholders, expanded the scope and proportion of employees’ shareholding, and increased Employees' sense of responsibility to the company. 3. There are different salary systems.To achieve the purpose of incentives through the salary system, we must first set up a differentiated salary system.Through equity incentives, Huawei not only makes Huawei a company for most employees, but also widens the gap in wages and income levels.With the development of Huawei in recent years, the proportion of dividends has increased significantly, which is very motivating for employees.

In addition to incentives in the salary structure, equity incentives also require fairness in performance appraisal.Huawei adopts regular inspections and real-time update of employees' wages in the performance appraisal of employees. Employees don't need to worry about their efforts not being discovered by the management, as long as they work hard.Huawei's measures ensure a relatively simple competitive environment for scientific researchers, which is conducive to the development of employees.The basis for Huawei's equity allocation is: sustainable contribution, highlighting talent, morality, and risks assumed.Equity allocation is tilted towards the core layer and the backbone layer, and at the same time, equity institutions are required to maintain dynamic rationality.

While maintaining the rationality of performance appraisal, in order to reduce or prevent office politics, the company also conducts inspections of leadership from a three-dimensional perspective, namely, the leader's personal performance, the views of superior leaders, and the relationship between the leader and employees at the same level and subordinates.Leaders have to pass a 6-month employee assessment before officially taking office. Good performance only means high salary, and does not mean that they will be promoted.Such a leadership promotion mechanism restricts the personal power of leaders from the perspective of morality and interests, and further reflects respect for the opinions of subordinate employees.

4. Promising prospects for the future.Equity incentives are not empty talk about equity. The key to the successful implementation of equity incentives is the ability to achieve development and dividends in the future.In the industry, Huawei's leading industry position and stable sales revenue have become the economic guarantee for the implementation of its internal equity incentives. Huawei's past cash dividends and asset appreciation are one of the factors that motivate employees to buy Huawei's equity without hesitation.It is understood that with the rapid expansion of Huawei, Huawei's internal shares have achieved a substantial appreciation in recent years, and the annual rate of return for employees has reached 25% to 50%.Such a high stock dividend is also an important reason why employees are willing to buy Huawei shares. As one of the leading companies in the world's communications industry, Huawei's unique wolfish culture and Ren Zhengfei's personal charm are difficult for other companies to copy.However, we can still get some inspiration from Huawei's equity incentives: First, attach importance to human capital and actively implement equity incentives.For some employees who have mastered core technologies, if there are no measures such as equity incentives, employees may start their own businesses based on their own technologies, or switch to competitors to obtain higher returns.Then enterprises not only face the impact of brain drain, but also face the risk of losing market share.However, equity incentives are not always attractive to employees. If employees are not satisfied with the company's management level or pessimistic about the company's prospects, equity incentives are more of a risk for employees.Therefore, enterprises should continue to improve their management level. When profits and development are considerable, they should provide equity incentives in a timely manner, allowing employees to share risks and profits, improve the combat effectiveness of enterprises, and achieve leapfrog development.For some enterprises with better profit models and rapid development, the implementation of equity incentives is conducive to stabilizing employees and increasing their competitive advantages.However, for some companies with good future prospects, but the current operating conditions are not clear, major shareholders give up part of the equity to core employees, which can increase the cohesion of core employees and stimulate their potential. Second, it is necessary to ensure the career development space of employees.For some start-up companies, the salaries of technicians and managers should be reasonably designed according to the characteristics of the company and the dependence on technicians.For some companies with high technology dependence, Huawei's two-way promotion channel for qualifications is a good choice to ensure the development space of employees.After learning from Huawei's two-way promotion channel for job qualifications, China South Locomotive has reasonably solved the problem of technicians wanting to become managers, and at the same time made the company's talent structure more stable. Third, equity incentives should be carried out during the economic crisis to retain the core talents of the enterprise and at the same time develop the market.During the economic crisis, the brain drain of many companies is not layoffs, but when employees expect the company's future performance to be poor, they voluntarily choose to leave in order to have more opportunities to find better jobs.Then, equity incentives for employees, on the one hand, increase the sense of ownership of employees, and on the other hand, it is also conducive to reducing the turnover rate of talents.At the same time, equity incentive is an incentive model based on the future profit level. The company should not only implement equity incentives, but also actively explore the market and increase market share to ensure the company's broad development space and stable cash flow in the future. Fourth, weaken the power of management functional departments.For high-tech companies, if the management department intervenes too much in the scientific research department, it will inevitably cause dissatisfaction with scientific research talents and affect the work mood of employees.Reasonably positioning the responsibilities of the management department, weakening the power of managers to a certain extent, and developing smooth communication channels are conducive to the competitive environment within the enterprise.Another function of weakening the functions of the management department is to facilitate the fairness of performance appraisal.Office politics is the most troublesome problem in human resource management, and performance appraisal without supervision is not conducive to the development of a benign office culture.Huawei's three-dimensional assessment and six-month inspection for cadre promotion are worth learning for existing high-tech companies.