By Guo Tianyong (China Daily)
Updated: 2007-09-11 16:08

Improved internal management is more important than executive stock options for the future development of China's State-owned banks.

China Construction Bank (CCB), the nation's second-largest bank that is due to sell shares in Shanghai soon posted a 47.5 percent increase in net profit for the first half this year. Its net profit rose to 34.25 billion yuan (US$4.51 billion), up 11.03 billion yuan compared to the same period last year. Its assets at home and abroad exceed 6 trillion yuan.

CCB's good performance will benefit its smooth return to the A-share market.

The stock incentive program set up by the CCB earlier this year is also praise-worthy. The People's Bank of China, the central bank, announced recently that the reform of State-owned commercial banks will go further to enhance their competitiveness and urged commercial banks to launch stock incentive programs.

The programs - staff shareholding and stock options for senior management, is part of an effort to deepen the reform of human resources management, with the aim to increase employees' sense of belonging to the company and to attract and retain employees to serve the bank over the long term.

The CCB is the only one of the Big Four State-owned commercial banks that has set up a stock incentive plan to allow about 270,000 employees to acquire 800 million of its shares starting on July 6.

In fact, CCB triggered constant criticism during the process. Some said the CCB by raising payments to its staff would widen the society's income gap. Some even said the program would lead to loss of State assets.

Such criticism is understandable. After all, the overall income level in China is still low and the banking industry is among the high-income sectors. To give stock incentives to employees may further widen the social income gap.

But it should be observed that stock incentive programs are quite common in listed companies in Western countries and it is an effective way of helping companies to create more value. It fits with international practice to launch similar programs in the banking industry.

Besides, the share-holding reform of State-owned banks aims to build the banks into independent financial entities and therefore to set up an incentive mechanism is natural.

What is more, competition between domestic and foreign banks is getting fierce. The relatively low-income level and lack of incentive programs of domestic banks are the reasons for the brain drain. The stock incentive program will to a certain degree help change the situation.

Also, the stock incentive program aims to increase the managerial and operational efficiency level of banks. In the long run, it will not lead to loss of State assets but serve as a vehicle in the preservation and appreciation of State assets.

In this sense, to launch stock incentive programs are reasonable and realistic.

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