Dennis Wu, Senior Partner, Futu Holdings Ltd, suggests some ways in which employee equity incentives can help to build the motivation of team members and thereby avoid organisational entropy.
The term ‘entropy’ was originally derived from the second law of thermodynamics, a branch of science dealing with the transference of heat within a closed system. Energy will flow from the area with higher temperature to the part that has lower temperature. The process, called ‘entropy’, is irreversible, and in a closed system it can only increase. As time goes by, when entropy reaches its highest level, the amount of disorder or chaos in a thermodynamic system also reaches the maximum.
The concept of entropy is also relevant to business management. Over time, there is often a tendency towards inefficiency, rigidity and overstaffing in a company’s management system and corporate culture. This trend is referred to as ‘organisational entropy’ and exists in both traditional and new economy enterprises. Resisting disorder and stimulating organisational vitality have therefore become one of the goals of good corporate governance. The development of digital technology has not only changed the way disorder and inefficiency is manifested in corporate governance, but has also brought new ideas and tools for entrepreneurs to solve this problem.
People as a key asset
Many great entrepreneurs and management experts have proposed ways to resist organisational entropy. For example, Amazon’s CEO Jeff Bezos has proposed maintaining the company’s agility as it was on day one, which is regarded as a standard by many entrepreneurs; and Ren Zhengfei, the founder of Huawei, often mentions the importance of resisting organisational entropy in Huawei’s various internal studies. With the advancement of science and technology, and the improvement of corporate digitalisation, governance has entered a new stage, providing new ideas for entrepreneurs to resist organisational entropy and improve corporate governance.
There is no doubt that new economy enterprises are replacing traditional companies and have become a major force in the modern business environment. According to PwC’s Global Top 100 Companies March 2021 report, within the top 10 companies, 80% are consumer companies driven by technology or innovation.
Emerging growth-oriented new economy enterprises have also attracted capital. From 2018 to 2020, whether in the Hong Kong stock market or the Mainland’s A share market, the amount of initial public offering financing in telecommunications, media and technology sectors has far exceeded that of other industries, such as real estate, manufacturing and energy.
New economy enterprises all share one common feature – they are technology-driven. The most important asset behind technology-driven enterprises is people, that is, the company’s employees. This differs from traditional enterprises in traditional sectors, such as manufacturing and energy, where the most important assets tend to be raw materials, production and machinery etc. For new economy enterprises, the key element to resist organisational entropy is employee motivation.
Professor Arthur Yeung, a well-known human resources and organisation management expert, developed the following formula for business success: business success = strategy x organisational capability.
Strategy lies at the top level of corporate governance and organisational capability is the only way to make strategy a reality. Regarding organisational capabilities, Professor Yeung proposed the Yeung Triangle Theory, in which all the essential ingredients relate to employees – employee thinking, employee capabilities and employee governance. The first item in Yeung’s triangle theory is employee thinking, that is, employees’ values, behaviour and commitment, which are closely related to employee motivation.
Talent incentives in the new economic era
In the process of corporate governance, there are many ways and tools to stimulate employee motivation, such as promoting corporate culture and building employee growth systems. Another important tool is employee equity incentives.
Increasing numbers of enterprises are now implementing equity incentives to achieve the consistency of interests between the enterprise and its employees. In contrast to the equity incentives of traditional enterprises, which are mainly granted to a small number of core managers, new economy enterprises are adopting more inclusive equity incentives.
For example in 2016, to celebrate the 18th anniversary of the creation of the Tencent Group, the company issued commemorative stocks to every employee. This was widely reported and discussed in social media since no Mainland company had ever issued equity incentives to employees on such a wide scale. In addition to Tencent, other large internet companies in the Mainland, including Alibaba, Baidu and ByteDance, have been using equity incentives to motivate employees and compete for talent.
The Mainland market has widely accepted this mechanism of equity incentives. According to PwC’s China Overseas Listed Companies Equity Incentive Trends Survey, published in 2019, 40% of Chinese overseas listed companies adopted equity incentives before listing and 52% have implemented equity incentives after listing.
However, although the original intention of the company is to stimulate the motivation of employees and enhance the vitality of the organisation through equity incentives, insufficient attention to the actual employee experience during the implementation of these schemes can sometimes mean that the incentive effect not only fails, but may even produce the opposite effect.
Technology stimulates organisational vitality
Companies have never put so much emphasis on employee experience as they do now. In the era where people are seen as the core asset of a company, people born after the 1990s and 2000s are now entering job markets. They have lived in the internet age since they were born and are accustomed to mobile internet and instant messaging services.
All aspects of life in the Mainland, including getting food, clothing, housing and transportation, can now be done completely online, led by internet companies such as Taobao, Meituan Dianping, Ctrip, Didi, etc. However, the efficiency of online-centric workplaces are slightly slower and employees complain about the company system from time to time. The Covid-19 pandemic has sped up the transition to tech-centric enterprises and the rate of online meetings and online document collaboration has increased a lot during the pandemic.
As mentioned above, in order to stimulate employee motivation and enhance organisational vitality through equity incentives, it is essential to enhance the employee experience. Some corporate managers lack the necessary communication and visualisation tools on the employee side when adopting employee incentives, which causes employees to doubt the authenticity of the incentives and the sincerity of the company. On workplace social networks, we have also seen employees complaining that the options granted by the company are nothing but a ‘bad cheque’.
The online management of equity incentives is just one way to stimulate organisational vitality. The digital transformation of enterprises will continue to happen, reducing communication costs between employees and improving operational efficiency. Online systems will allow technology to play a more important role in stimulating organisational motivation.
Dennis Wu, Senior Partner
Futu Holdings Ltd
毫无疑问，新经济公司已经替代传统企业，成为现代商业社会的主角：据普华永道发布的2021年全球市值百强企业报告(Global Top 100 companies – March 2021)显示，排名前十的公司80%是科技或科技驱动的消费企业。
企业的数字化转型还会不断深化，通过在线系统降低员工之间的沟通 成本、提升运营效率，将让技术在 激发组织积极性过程中发挥更重要的作用。 邬必伟 富途控股高级合伙人