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A stock option incentive scheme for top management at China's 166 central State-owned enterprises (SOEs) is soon to be released by their supervisory body.

"Although the stock option incentive scheme is a frequently used tool to encourage top management, it could also be a double-edged sword especially in an immature market economy," Li Rongrong, minister of the State-owned Assets Supervision and Administration Commission (SASAC), told reporters yesterday.

The SASAC is therefore taking a cautious approach, placing explicit requirements on corporate governance, the target and extent of the incentive measures, Li added.

For SOEs that introduce the stock option scheme, external directors should account for more than half the board. And the salary committee must consist of external directors.

The SASAC introduced a similar stock option incentive scheme for overseas-listed SOEs in February to trial the idea.

The incentive plan grants management the right to buy a specified number of shares at a stipulated price during a specified time. The idea is that management will be less likely to indulge in short-sighted business moves as their compensation is directly linked to the performance of the company in the longer term.

Lin Jun, president of the China Grain Reserves Cooperation, said although his company is unlikely to introduce such a scheme, given its highly monopolized nature, it is an important move.

"It is highly necessary for the SASAC to roll out the rule as the incentive scheme is an effective way to retain talent," Lin told China Daily, adding his company has been frustrated by a loss of talent due to its comparatively low salaries.

The SASAC has also encouraged SOEs to quicken their pace to list and complete non-tradable shares reform.

In the first six months of the year, SOEs affiliated to the central government raised funds totalling HK$6.77 billion on the Hong Kong bourse and 440 million yuan (US$55 million) on the Shanghai and Shenzhen exchanges, according to SASAC statistics.

"The listing of a large number of SOEs at home and abroad led to a remarkable improvement in their corporate governance," said Li Rongrong.

By the end of June, 81.3 percent, or 152 of the 187 listed companies controlled by central SOEs have begun or completed non-tradable shares reform, which aims to make all shares of listed companies tradable on the market.

Improved management and innovative technology has seen the country's 166 central SOEs realize 351.65 billion yuan (US$43.96 billion) in first-half profits, up 16 percent on a yearly basis.

And their sales revenue also climbed 20.6 percent compared with the same period last year.

(China Daily August 16, 2006)