Motivation, Reward System and Stock Option in China and UK

Such reward systems are necessary to motivate the employees to increase the quality and quantity of production of their companies. Further, it provides incentive to the employees to contribute to greater development of the company. However there are few differences between UK and Chinese motivation and reward systems. While in UK there has been flexible system of motivation, in China till recently the employees were not much motivated.

However, with the introduction of reforms in China, there have been great changes and attempts are made to motivate the employees. In UK, one popular method of motivation is the stock options, which are given to top executives in the UK firms. However, in China, although stock options are not unknown, they could not become popular because of the political and economic system that existed in the region. However, recently attempts are being made to implement the stock options in the Chinese companies also.

The study highlights the difference between motivation and reward system in China and UK through quantitative and qualitative analysis of the data.

Introduction

In this study an attempt will be made to compare and contrast motivation system found in UK and China. In both the countries incentive system can be found in the form of reward system and stock option. In the present age of globalization it is important to analyze the ways to provide incentive to the employees so that they would contribute to increase in the production and profits of the company.

Hence, the companies have realized the need for giving incentive which is given in the form of rewards. Rewards comprise the incentive systems such as promotions and stock option. Among these two categories stock option has emerged as the latest method of providing incentive to the employees particularly in the profit making multinational companies. In the present work China and UK are taken up for study because this study has potential of leading the researchers to new dimensions in the study of reward system.

There are various ways to manage the human resources. These different methods, for example, relate to positive methods and negative methods. The positive methods refer to the incentives while the negative systems refer to the punishments. It is important to remember that sometimes even punishments can act as an incentive.

However, in this work it will be argued that promotions and stock options are the most important methods used by the companies in both UK and China to motive the employees. However, there are various differences between the two regions.This study has taken up China and UK because these two countries belong to the two different economic categories. The UK is one of the most developed countries in the world while China is one of the most important developing countries of the world.

However, among the developed countries many studies have been done in the case of other countries such as USA while there are not many studies which deal with UK reward system. Hence, it is important to bridge this gap in the research work pertaining to reward system in UK. As far as China is concerned, there are only a few scattered studies pertaining to reward system and motivation. This necessitates the need for the study of Chinese system of motivation.

Stock option is found in both the countries. However, due to the basic differences in the political and economic systems there are differences in the attitudes of the British and the Chinese towards stock options. While this system has proved a great success in the western countries, it is yet to prove its worth in the case of the Asian economies. The comparative methodology that is used in this study is helpful to analyze the differences between the Chinese and UK system of giving incentive to the employees.

By understanding these limitations of motivation in these two countries, it is possible to suggest remedies for the problems faced by the industries in these regions.Aims and ObjectivesOne important aim of this study is to present the synthesis of research pertaining to the study of incentives including promotions and stock option in China and UK. This research synthesis is achieved by the literature survey and analysis of the literature which discuss the reward system and stock option in these two regions. The study will use the both deductive and inductive methodologies to find the limitations in the incentives including stock options in China and the UK.

The deductive methodology is theory based and studies the topic with the help of the review of the literature while inductive methodology will use the quantitative information obtained through the surveys and questionnaires and obtaining answers from the participants. This data will be analysed based on the theoretical discussion.

This study has the following objectives:To introduce motivation theories and reward systemsTo decide the employee’s attitude towards the motivation methods. For example, it is important to know the difference in the employee attitude in the two countries pertaining to motivation system such as stock option.

Investigating stock option system in China and UK.Finding the limitations in the stock option and other reward systems found in these two regions.Suggesting remedies to solve the problems being faced by the companies in these two regions.MethodologyThis study will use the deductive research methodology by providing the description of the various research works which have studied the aspects related to incentives including stock options in China and UK.

An attempt will be find the limitations and merits of these incentive systems based on the comparative explorative methodology which has been mentioned earlier in this work. The comparative methodology provides the information pertaining to similarities and differences between the reward systems found in UK and China. This study will use the different sources such as books, journal articles, electronic sources, and the government data. The use of these sources is helpful to comprehend the problems faced by the industries to achieve the maximum motivation of their employees.

This dissertation also intends to use inductive methodology by collecting the quantitative data and testing the hypothesis and theories of motivation with the help of this quantitative information. Apart from the exploration of the various sources, this study will attempt the survey of the employees and obtain information through their survey by distributing them questionnaires through oral means and obtaining answers through telephonic or face to face conversation. The data will be analysed in the ‘findings’ section. Thus, this study will use both quantitative and qualitative information and will analyse them in the later section of this dissertation.

However, this methodology has its own limitations. It is not possible in this research work to present the exhaustive research details pertaining to the industries in UK and China. For example, only a few industries have been covered when this researcher obtained quantitative information.This study will use the theories such as Herzberg’s two factor theory of motivation and Maslow’s hierarch of needs theory (tutor2u.net)

This study will also use the theoretical models such as needs theory of motivation (Steers and Potter, 1987), performance based wage system model (Yuping, 2003-2004), expectancy theory and agency theory of executive compensation, (Pennings, 2000) and theory of principal-agent relationship (Rosenberg, 2004 ; Tylecote and Cai, 2004). By the use of these different theories and models an attempt will be made to give theoretical framework which will be used to analyze the information obtained through the exploration of the existing research work that can be found pertaining to the of the present research topic.

The modern incentive systems such as stock options are successful in UK while it is a failure in China.Plan of the workThis work is divided into five chapters. The first chapter is the introductory chapter, which gives information regarding the background of the study, purpose and objective of the research, methodology, and plan of the work.

The second chapter attempts a survey of the relevant literature and provides information regarding previous research on this research topic.The third chapter highlights the nature of motivation and reward system that is noticed in China and UK.Aspects relating to the stock options are discussed separately in the fourth chapter. In the fifth chapter an attempt will be made to provide the information regarding the research findings.

Literature Survey

A few works have been published pertaining to the concepts of motivation and reward system in general and with reference to motivation and reward system in UK and China in particular. In this chapter, an attempt will be made to present the result of the literature survey pertaining to the research topic.Maslow presented two factor theory of motivation or the content theory of motivation which refers to the importance of satisfying different needs of the workers who try to achieve these needs.

He discussed the hierarchy of needs. Initially the individual tries to achieve the basic needs and later to he tries to achieve other needs mentioned in the hierarchy. These different needs listed by Maslow are physiological needs, safety needs, social needs, esteem needs, and self actualization. The achievement of these needs satisfies the workers and leads to their motivation in their workplace.

However, this theory has not been tested in all the situations – developed and developing economies of the world. (tutor2u.net)This dissertation also proposes to use Herzberg’s two factor theory of motivation which refers to the two categories of factors – hygiene factors and motivator factors. Hygiene factors include factors such as: company policy and administration, wages and salaries, quality of interpersonal relations, and feelings of job security.

Motivator factors included factors such as: status, opportunity for advancement, gaining recognition, responsibility, stimulating work, and sense of personal achievement. Herzberg believed that it is possible to motivate the workers though job rotation and job enrichment. By satisfying both the basic and other needs of the workers it is possible to motivate them ((tutor2u.net).

These two theories can be used to analyse the factors which motivated the employees in China and UK.Richard Steers and Lyman Porter (1987) accepted the fact that motivation has become an important feature in the present industrial scenario.  Steers and Porter suggest that an important theory behind motivation is the theory of hedonism, which informs that the main motive of the individual is to minimise pain and maximise pleasure. All the individuals have the aim of achieving maximum pleasure.

Similarly, workers in a company would like to avoid negative results and accept positive results.There are different theories and approaches to motivation. For instance, we find reference to need theories of motivation. This theory states that ‘needs’ are the basis of the emergence of motivation among the employees.

There are different kinds of needs. Some of them are basic needs and others are the expectations by the employees. When the needs of the workers are satisfied, this leads to the emergence of concept of gratification leading to the motivation of the workers. (Steers and Porter) The above study made by Steers and Porter has given the necessary conceptual and theoretical model regarding aspects of motivation.

Scholars have made several theoretical and empirical studies regarding the motivation, reward system and stock option in the various regions of the world. One also discerns few case studies, which deal with the existence of these aspects in the regions like UK and China.For instance, a recent work by Rosenberg (2004) brings out the importance of stock option as an incentive to the work force. Rosenberg suggests that stock option given to the employee motivates the worker to take greater risk leading to the growth of the company.

Rosenberg refers to the principal-agent analysis wherein there is contractual relationship between the employer and the employee. One can also discern the use of incentive model to explain the principal-agent analysis. This gives a theoretical foundation to the study of the stock option, which is usually given as incentive to the employee. The principal gives incentive to the agent because in many respects the principal is not able to control the activities of the agent and in order to monitor the activities of the agent there is the use of incentive system in the form of stock option.

By allowing the agent to share the profits, attempt is made to protect the interest of the entrepreneurs and the investors. In the process, the principal is able to transform the risk to the agent in return for the incentives that is given to the agent. Now stock option is also being offered to the non-executives. Stock options given to the executives are supposed to be exercised before the expiry of the contract.

This theory has been used by many scholars to explain the process of giving incentive in the form of stock option. Such studies by Rosenberg and various other scholars give information regarding the incentive system that is being practiced by the corporate world.For instance, one finds that important contributions are made by Fung et.al. ,(2001) who studied the stock option system that is found in China. This study has given details regarding the incentive system such as stock option being pursued in China. The agency theory has been used by the scholars to understand the relationship between top executives and board of directors. However, at the same time this theory has “…failed to explain the pervasive use of low intensity use of profit sharing arrangements for many employees.

In the case of UK it is found that incentive is provided in the form of “piece rates, options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred compensations, and so on”. (Prendercast, 1999, p.7). However the same author believes that, “the most common means of rewarding white collar workers for effort is by promotion.”(Prendercast, p. 9).

This study has showed the different methods of incentives found in UK. Regarding stock option as an incentive in UK it is suggested that “…unlike US CEO option contracts, the stock options received by UK CEOs are often subject to performance criteria…” (Canyon et.al, p. 479). This study has showed first, the difference between UK and USA stock option rewards and secondly, it has showed that the performances of the executives are constantly monitored in order to improve the company’s performance. However, stock option in UK is considered as one of the different methods of financial participation.

The main reasons for financial participation including stock option is to increase productivity, increase the remuneration flexibility, provide employee benefits and obtain better performance from them, discourage unionisation, and financing the company during the times of financial crisis. (Poutsma, 2002) Regarding stock options in UK it has been argued that, “The use of stock options is generally seen as one of the most efficient means of aligning the interests of managers and shareholders.

This work has showed the advantages of introducing stock options in the UK scenario.  One study has showed that there is relationship between stock options and the improved performance of the companies in different parts of the world. (Sesil, Kruse and Brasi, 2001)In the case of China the multinational companies have introduced the incentive systems such as stock options.

However, due to the newness of this system, there has been vagueness in the Chinese legislations which has led to lack of clarity and employees pertaining to the use of these stocks. This is a major hindrance to implement stock option incentive system in China. (Loose, 2005)The companies have been asked to evaluate the use of stock option in the Chinese scenario. (Greguras and Morgan, 2005) In the case of China one can notice the ideology of Confucianism and communism as the employees take pride in maintaining their social relationship based on the Confucian values.

These values are different from the western values. In spite of the introduction of western reward system including stock options in China, it is showed that the Chinese government owned enterprises could not improve their profits. (Tylecote and Cai, 2004) It is showed that, “the socialistic approach is still very much in place and the managers tend to cap their compensation package as a multiple of the wage of average workers of the corporation.” (Fung, Firth and Rui, 2001, p.4)

The scholars have found the cultural differences between Chinese business and the UK business environment. Hence, the foreign companies need to understand these cultural differences before establishing their companies in China. (Child and Warner, 2003) It is found that the Chinese public sector industries have not performed well when compared to the private sector particularly during the post-reform years. (Zhang, 2005)  These studies have showed the difference between the UK and China scenario.

There are also various cultural differences in UK and China which has led to different attitudes of the employees in these two countries.This literature survey has showed that the scholars have presented their studies on the basis of different theoretical models. The most important theories used by the scholars are principal-agent relationship theory and agency theory. These scholars have also provided quantitative data to study the difference between the incentive systems in China and UK.

This literature survey has also revealed that there are only a few works which have concentrated on the comparison between the incentive systems in the UK and China. Hence, this study obtains greater importance as one can study the incentive systems including stock option in China and their relationship with the performance of the company.

Motivation and Reward system in China and UK

In this chapter, an attempt will be made to provide information pertaining to the causes and consequences of providing the motivation and reward system in China and UK. An attempt is made to highlight the similarities and differences between the two economies with reference to incentive that is given to the work force.

Motivation and Reward SystemMotivation to the employees can be assured by providing options, bonus, promotions, profit sharing, efficiency wages, deferred compensation etc. (Prendercast, 1999). By providing for these different means of motivation, the company achieves the welfare of both the company as well as the employees. This will encourage the employees to put more hard work and naturally this will lead to increase in the profit of the company.

Giving the extended contract with the company rewards some employees such as salesmen while others are given incentive by providing for profit sharing with the company. However, some employees like the pay for performance system while there may be few employees who do not like this system. Hence, only those who are capable of competing with other employees in the company will be able to obtain greater hike in their pay. However, contract system has few defects.

For instance, it will encourage the employees to perform only in those areas, which is specified in the contract, which means that they would not be able to really contribute to the development of the company. Another important method of compensation is by giving promotion to the employees. Promotion can be considered as the recognition of the contribution of the employees to the growth of the company. These incentives can be found in any country of the world.

However, there are few differences in the pay package and the system of giving compensation to the workers.(Prendercast)In any country, it is usual practice that the employees always try to find attractive wage package which includes handsome salary, periodic allowances such as provident fund, health benefits, and so on. The periodic promotions and recognition of their contribution to their organization also attract the employees. Thus when one speaks about the motivation and reward system it includes all the above issues.

However, motivation does not always depend on monetary benefits. Motivation also involves personal relationship between employers and employees and also among employees themselves.(tutor2u.net) In an ideal company, there is an ideal atmosphere for the employees to work for their company.

In other words, the companies need to provide peaceful and encouraging working atmosphere so that the employees would be inspired to contribute more towards the growth of their company. Thus, motivation and reward system includes all these aspects which are very important for both the employers and employees. When such incentives are not given, this will lead to friction between the employer and employees leading to the struggle which does not in any way benefit the company. Thus, incentives include monthly wages, housing, bonus and welfare.

In the case of UK, major amount of fund is reserved for the payment of cash wages.  In many countries incentive is given to the employees in the form of annual incentives, bonus, awards and so on. Through these methods, attempt is made to provide motivation to the employees. Conyon et.al.,(2000, 35) suggested that incentives in UK consisted of various elements such as basic salary, annual bonus, and long term pay and long term pay consisted of the stock options and long term incentive plan (LTIP) Motivation in ChinaIt is found that in China there was no proper motivation system before the initiation of economic reforms.

After the introduction of economic reforms companies in China have offered greater motivation to the employees by providing for higher wages and bonus to the employees. (Yuping, 2003-2004)Motivation and incentive is also based on the evaluation of the performance of the employees in the company.

For instance, in China we notice the existence of performance based wage system which means that hike in the wage is allowed based on the performance of the employees. This provides for rewarding the greater quality and higher productivity of the employees. It is suggested by Yuping that there is need to implement this model in many nations since it is important to recognise the real contribution of some employees over others. However, at the same time there is need to adopt the motivation and reward system based on the business culture of various nations.

Thus, the motivation system that is found in China may not be a great success in other countries as always there is difference between the enterprise cultures in the different countries. It is the duty of the companies to assure the job satisfaction of workers in any company. This satisfaction is not always assured through benefits. However, Yuping also suggested that it is the most challenging job for the entrepreneurs to provide for a pay package, which consists of large number of motivations to the employees of the company.

The above study of Yuping is important when one attempts a comparison between China and UK system. It indicates that although there might be significant differences between the motivation and reward system in these two countries, the underlying objectives of reward system is almost the same because the attempt of the entrepreneurs is to achieve the highest growth of their company which is possible by providing proper incentives to the employees of the company.The incentives include both monetary and non-monetary benefits to the employees of the company. There is need to provide different kind of packages to the western and the Asian workers as there is difference in the culture of these workforces.

The westerners would like to work independently, while the Chinese like to work with other workers for an organisation and they enjoy their long-term association with a particular organisation. In China, more importance is given by the government authorities to provide various non-monetary benefits to the employees, as there is stringent tax regime. Thus, housing benefit was given to motivate the employees to work for the company for longer period. Although, stock options are also provided to executives, due to the tax regime, the executives were forced to pay more income tax.

Thus some Chinese companies concentrate on giving non-monetary benefits such as free housing and medical benefits.  Further, some companies also offer housing loans at low rate of interest. This is done to provide incentive to the workforce to live in the area near the company building.  (Gross and Thadni, 2005) Hence, there is need for different kind of motivation and incentive systems for the UK workers and the Chinese workers.

Reform in the Chinese corporate sector began in 1978 when the government decided to give some autonomy and incentives to the state owned enterprises. Before 1978, the state owned enterprises were fully controlled by the government authorities. Thus, it is after 1978 that an attempt was made to change the structure of the business in China. After 1993, there was demand to introduce further reforms in the Chinese economy.

Consequently, we find the growth of the corporations in China. The Chinese authorities thought that this decision would bring more efficiency in the state owned institutions in China. Thus, after the beginning of reforms, there was the introduction of changes in the pay structure of the employees also. (Fung et.al)In China one can find two phases in the growth of economy. The first phase is the pre Asian crisis phase, which existed before 1999. During the phase, there was great economic growth in China when the Chinese economy was growing at an annual average of 10-15% of GDP. However, after the famous Asian economic crisis, which took place in 1990s, there have been significant changes in the Chinese economy.

These various phases of Chinese economy were important in determining the policy of the Chinese government entrepreneurs regarding the wage package to the employees. Before the crisis, although there was great economic development, there existed fixed wages, which rarely increased, and this did not help in motivating the employees. However, after the crisis, the labour unions have become more active and they have demanded for more attractive pay package as well as various other benefits. Consequently, Chinese government and entrepreneurs have introduced the pay package which depends on performance and not on seniority.

This means that even when the senior person in the company fails to deliver, he would get less salary than a junior person who proves that his service is more beneficial to the organisation. This change in the policy of the entrepreneurs went a long way in motivating the employees to contribute according to their potential. The companies, both MNCs and Chinese, are compelled to provide competitive pay package to the workers. The companies also do not want to lose efficient employees and hence they are provided with the maximum possible benefits and facilities in the existing company so that these efficient employees would not leave their company and join another company.

Now, pay package and incentive in China has almost reached the level of other developed countries. The demand for increased number of executives has compelled the companies in China to offer greater incentives to their employees. The government of China has framed rules, which facilitated the training of the employees. Further, according to the legal provisions, the employees were discouraged from leaving their jobs and if they decided to leave their jobs, they were expected pay the cost of their training.

Thus, in the training sessions also attempt was made to provide motivation to the employees.  (Gross and Thadni)Thus, one can suggest that there were various economic changes in China, which has affected the nature of incentives that is given to the employees in China. However, of late there have been great positive developments in the area of pay package, which act as a great source of motivation to the employees.There is a close relationship between the pay and financial performance of the company.

Few scholars have tried to substantiate this theory through empirical studies.  Fung et.al (2001) argue that corporate governance plays an important role in the determination of pay packages of managers in the companies in China. Earlier there existed contract system, which suffered from few defects such as inefficiency of the managers in China, as they were not sure of possessing continuity of employment in the same company.

Modern corporate governance system was considered as the solution to the problems that China faced before 1997. In the political circles, there was discussion regarding this issue and consequently the reforms were introduced in this sector. In this context, the reforms had impact on the method of motivation and reward system in China. (Fung et.al)

Before 1978 there were many restrictions on the state owned enterprises (SOE) which were expected to hand over the profit of their companies to the government. During this period, there was no scheme to provide incentive to the managers and other employees in the companies. Thus period before 1978 can be considered as very rigid period when the state was the sole authority, which controlled the activities of the managers and the employees of the SOE. In China, the government determines the compensation system.

Further, the managers in China are more motivated due to political factors than due to economic factors. Thus, political status is more in demand than economic status. Achieving political status itself is regarded as a great reward for the workers in the Chinese enterprises. (Fung et.al.)Thus, one can see differences in the compensation system between China and UK. Naturally, there were difference in the method of motivation and incentives that is given to the mangers and the workers in the two countries. However, one cannot always accept the argument that the workers and managers were not motivated by the economic factors.

After all, we cannot deny the fact that money is a great motivating factor in any field.There is debate among the scholars whether there is relationship between pay of the CEOs and performance of the company. On both the sides scholars have provided theoretical and empirical information to prove their arguments. However, as far as incentive is concerned, it is found that it is only recently that in China we find the beginning of the process of giving incentive to the managers and other employees.

In the case of USA and other developed countries it is suggested that there is excessive compensation paid to the executives. (Fung et.al.) However, in the case of China one can find that there is under compensation of the executives. This under compensation of the Chinese CEOs is due to the nature of government control on the companies. Chinese economy is guided by the principles of socialism, which does not give much importance to the role of managers. Socialism does not allow the authorities to give greater compensation to the managers as the government authorities fix an upper limit regarding the salary of managers. (Fung et.al.)

Perhaps in order neutralise this disadvantage, recently attempt is made to provide more compensation to the Chinese CEOs so that they would contribute to the greater profit of their respective companies.Traditionally in China, working class is given great respect by the government and the society. Before 1980’s there existed the system of permanent employment.

In this system, the workers, in the normal circumstances, could not be removed from their jobs. This meant that there existed only limited number of workers who were assigned some jobs in various fields by the labour department of the government. The permanent character of the jobs did not motive the workers to increase the productivity. However, after 1990s there have been many reforms.

Consequently, at present there are various kinds of jobs such as permanent jobs, contract jobs and temporary jobs. The later two kinds of jobs give great importance to the performance of the workers and their contribution to their companies. This change is due to the emergence of many private Chinese and foreign private companies. The private companies have devised their own strategy to provide motivation and reward to the workers as a result of which there emerged the motivation and reward system in China.

This can be considered as significant development, which went a long way in providing incentive to the employees of SOEs and private enterprises.(Lei and Trim, 2005)In order to motivate the workers there was the use of the techniques such as rule enforcement and internalised motivation. In the earlier system of permanent jobs, the workers had become irresponsible and lazy and this had led to decrease in the productivity. However, with the implementation of rules by the directors of the company, the employees were motivated or compelled to demonstrate better results.

The authorities also encouraged the efficient workers by the implementation of the reward system. However, rule enforcement had limited impact, as it was not able to discipline the workers due to the lack of motivation. Another technique that was pursued by the Chinese government was the internalised motivation. This was achieved by linking the workers with the ideology of the party and the model worker was honoured by giving him better political status.

The technique of internalised motivation gave importance to the growth of high moral character of the workers. The labour unions did not hinder productivity because interest of the labour force is guaranteed by the government policy. Hence, the productivity was not affected by the activities of the labour unions of China. (Lei and Trim, 15)The above study reveals that apart from financial motivation, there existed another method of motivating the Chinese workers.

However, one does not know to what extent this was successful due to the lack of empirical study regarding this research topic. However, recently the directors are given the power to hire and fire the workers. Greater importance is given to the contractual employment. The government also adopted the hire and fire policy in order to encourage efficient and talented workers.

This policy has motivated the workers to prove their capacity and efficiency. Now, the government gave importance to giving material rewards to the employees as the government realised that by giving such material rewards it is possible to really motivate the Chinese workers to increase their productivity.(Lei and Trim)

Regarding motivation and reward system in China it is rightly suggested that, “…the contract responsibility system gave enterprises the authority to fire workers according to their performance and contribution, and as a result threat of unemployment motivated workers. From this one can see that material rewards have been adopted by most Chinese enterprises and as a consequence individual workers have been motivated, and their performance and contribution can now be recognized.

The above study of Lei and Trim revealed that there were different stages in the growth of the incentive system in China. The earlier system of government control did not encourage efficiency. However, with the changes in the policy of the government regarding the motivation and reward system, there have been positive results. The employees and managers have contributed to the growth of their respective companies.

In this context, it is interesting to know that unemployment became an important incentive leading to greater efficiency, which was absent when there existed the system of permanent employment.Differences between China and UKThere are differences in the pay package and incentive system between China and the western countries such as United Kingdom. The managers tend to maintain close political relations. Further there is not much competition to the people who entered the managerial positions in China since there are only few qualified candidates who are available.

This has given greater job security to the Chinese managers than the CEOs in UK. In the bigger companies there is greater responsibility on the managers and hence they are usually given higher pay. This motivates the managers to take responsibility and positively contribute to the increasing profit of the company. (Fung et.al.) Thus, Fung et.al., could identify some of the differences in the pay package given to the CEOs in UK and China.

It is important to be aware of these differences, as they will give an idea regarding the nature of the basic structure of compensation in the two countries.Many scholars have suggested the need to maintain a link between the pay and performance. That is, pay should depend on the performance of the employee or the manager of the company. Earlier it has been mentioned that in China pay is determined by the government agencies.

It is found the even in the case of UK, many firms have appointed remuneration committees, which are controlled by the government authorities. At least in this respect, one can say that there are similarities between China and UK. (Mayor, 1996).ConclusionThere existed differences in the incentives that is found in western countries and the incentives that is found in China.

In China, incentive was given in the form of political status and prestige, while in the case of the western countries such as United Kingdom, always incentives consisted of material benefits to the employees. However, even in China, after the introduction of reforms, importance is given to material benefits, as it is realised that there is need to motivate the workers through pay, bonus, rewards, gift, and so on. This is also due to the emergence of competition between various companies in China. Chapter 4Stock OptionIn this chapter, an attempt is made to exclusively discuss the aspects of stock option in China and UK.

An attempt is made to analyse the causes and consequences of stock options that were given to the executives and the lower officials of the companies in UK and China.Equities have become an important component of investment in the various countries of the world. For instance, in USA and Australia, 50% of the population own one or the other kind of equity. The companies also tend to provide equity compensation, as it is not possible for the people to manage their high standard of life with the wage increases which is usually slow.

Hence, the companies issued equity as incentive to the employees. (Sesil et.al., 2001, 3) Naturally equity compensation has acted as motivating factor to the employees including the executives in both UK and China. Stock options “consist of right (but not the obligation) to purchase shares at a fixed price at some date in the future”. (Conyon et.al, 2000, p. 35) The use of words ‘right but not the obligation’ is significant in the preset context.

This would imply that stock options were given to the executives with the motive of providing incentive to them. The definition also implies that sometimes in the future the stocks could be bought by the executives at price that was fixed earlier as mentioned in the documents given to the executives. This indicates that the executives did not have to face much risk while accepting the stock options as the price was already decided beforehand and there was no fear of incurring losses to the executives. Naturally, this would provide greater motivation to the UK executives.

Executive compensation has been described based on two theories: expectancy theory and agency theory. There is expectation among the employees that if they put more effort it will lead to great success in their profession and that it will provide for more salary compensation. Agency theory refers to contracts signed between the companies and the employees. These contracts relate to improving the performance of the employees or achieving a particular strategic target that is specified in the contracts.

Here the employee becomes the agent.  (Pennings,2000)In this context already this work has mentioned about the principal-agent mechanism. This analysis gives necessary background regarding theoretical foundation of the discussion regarding aspects of executive compensation leading to their motivation.It is suggested that due to the existence of strict tax regime in China, greater importance was given to housing rather than stock option.

Through housing to the executives, an attempt was made by the companies to motivate the employees.(Gross and Thadani) However, this does not mean that stock options were not given in China. With the emergence of market reforms and the process of liberalisation, importance was also given to providing the stock option to the executives.Stock options in ChinaIn order to comprehend the causes of giving stock options in China, it is necessary to discuss the nature of relationship between the government and the SOEs.

Before the beginning of market reforms, the managers or the executives did not enjoy various autonomous powers and they were compelled to remit the profit of their companies to the state treasury. Employment structure in China also did not facilitate the motivation of the employees. However, with the beginning of the market reforms, the government realised that there is need for the agent to note the responsibility and accountability. Consequently, the companies were given the shape of corporations.

The shares of these companies were sold to the public and their shares were listed in the stock exchanges of China. In order to find an agent by the principal, the shares were also allotted to the senior executives in the company. However, the government authorities still maintained control over the company by preserving majority of shares with the government. There was dilemma among the government authorities whether they should give more autonomy to the executives by giving more powers and more stock options to the employees of these companies.

However, now importance is given to greater participation of agents in the administration of the companies. Consequently, the CEOs were allowed to own the shares of their companies and they could monitor the performance of their company, which was revealed through the performance of their company shares in the stock markets of China. However, in China the process of westernisation was achieved very rapidly and there were no laws to restrict the commercial activities of the heads of the new corporations.  Hence, there was concentration of powers in the hands of the executives who were given greater autonomy and power. This can be considered as a great revolution that took place in China after the introduction of market reforms. (Fung et.al.)However, there is difference in the management of the companies in the UK and other western countries and China.

The managers in China give importance to satisfying the party leaders in the central government, while in the case of UK, the CEOs showed allegiance only to the company and the shareholders. Hence, in China the shareholders found it difficult to control the activities of the CEOs. Also there existed the principal and many agents in China. This happened due to the bureaucratic system of decision making in China. This is different from the system of corporate governance, which is found in the countries such as UK. (Fung et.al.). It is argued by Fung et.al., that the compensation given to the executives in China is very low when compared to the executive compensation in western countries. They suggest that the pay for performance should be implemented in the case of China.

Consequently, when this theory of pay for performance is not pursued the shareholders are not in a position to question the activities of the CEOs of the companies since they are given lower compensation when compared to CEOs in UK. (Fung et.al.)In the case of UK, it is found that in few companies, pay for performance resulted in positive results, although there are exceptions.

Performance of the CEOs is evaluated through stock return or the price of the share in stock market, which can be considered as the indicator of the achievement of the executives of the company. When the stocks are given to the CEOs they would actively participate in the development of their company. Further, as long as the government exercised complete domination over the administration of the company, the CEO compensation remained low because the government did not want great difference between the executives and the ordinary employee of the company. However, with the privatisation process, the CEO salary went up from the earlier level and this can be considered as a great incentive.

It is suggested that the executives who were given greater ownership in their companies were more motivated to achieve the goals of their companies. When the executives were not given greater amount of stock option, they lacked motivation to bring the welfare of their firm.  (Fung et.al).

The study of Fung et.al., revealed few difference between corporate governance in China and United Kingdom. There existed difference in the pay packages and the nature of incentives as complete autonomy was not given to the Chinese CEOs and they were not able to achieve the greater results.

Although stock options were given to the Chinese executives also, the bureaucratic system created multiple agencies and the principal found it extremely difficult to monitor the agency as it was difficult to pin point the agency.When compared to UK, one discerns that incentive scheme is entirely different in China. This is because of differences in the political and social ideology in the two nations. It is found that most of the SOEs after the initiation of reforms have not performed well.

Earlier it has been mentioned that before the initiation of reforms in China, the government exercised its extreme control over the SOEs. Nevertheless, during those pre reform days, the SOEs were able to perform better than during the post reform days. For instance, during pre reform period, SOEs contributed more than 70% of the production of China, while during the post reform days this production went down to less than 30% of the total production of the country and this shows that there existed certain defects in the reforms. Perhaps one reason for this is that without preparing any background, western social and economic ideology was introduced in China, as the intention of the government was to achieve rapid economic progress.

Realising the defects with the state controlled SOEs it was decided to convert the SOEs into joint stock companies. The stocks of these companies were sold to the public and the officials. (Tylecote and Cai, 2004)One study has applied the principal-agent theory in the case of China. It is argued that it is not possible to simplistically aver that agency always wanted to look after their benefits as when the company benefited this helped not only the owners but also the employees.

While discussing about the Chinese management practices, one will do well to remember that Confucian ideology was the basis of the economy and polity of China. Confucius gave importance to mutual respect. In the case of corporate governance, the employer and employee exhibited mutual respect. The main philosophy of Chinese is to preserve their political and social status.

Thus, we cannot simply say that Chinese agencies always wanted to achieve only their benefit because they believed in the philosophy of status. (Tylecote and Cai)The study of Tylecote and Cai revealed that initially the managers were allowed to buy shares of the companies at a discounted price. However, the managers considered this as an opportunity to invest their capital and they obtained profit by selling the shares in the market. However, later the government allowed stock options to the executives.

Nevertheless, there were many problems with these stock options. For instance, the executives were not allowed to sell the shares when they were in service. This clause did not act as providing financial reward.(Tylecote and Cai)Thus, here one can find the difference between stock options in China and stock options in UK.

Further, although more autonomy was given to the executives, the local government was not willing to give up its control over the companies. Hence, the main objective of the executives was to demonstrate their allegiance towards political figures. Tylecote and Cai suggested that in China, there are two kinds of motivation. One is political status and that other is financial reward.

When the employee obtained political status, it safeguarded their position in the company. As far as financial rewards are concerned, there are many limitations to increasing the salary of the executives. Hence, it was a common feature in China wherein the executives would leave their parent company and they would join the other companies.  It is argued that the stock option scheme and financial reward scheme did not work in the case of China.

Also these scholars argue that those companies without contracts with the agency, performed better than those companies which had signed contracts with the executives. This indicates the difference between UK and China.(Tylecote and Cai).This study has revealed some of the significant lacunae in the Chinese system of corporate governance and this has failed in providing essential motivation to the employees of SOEs in China.

The above study provides rather negative picture of the consequences of stock compensation in the case of China. In this context one may refer to the views of Sesil et.al., who suggested that : “…studies indicate employee is linked to better outcomes on average but employee ownership clearly does not automatically improve workers and firm outcomes…” (Sesil et.al, 1)The above statement is significant for the researchers because it takes a balanced view of the stock ownership and tries to avoid simplistic interpretation of stock ownership. It implies that stock ownership alone is not the solution to the financial losses of the company. However, this statement is made in the context of the western companies and not in the context of the companies of China as the empirical data did consist of the data from Chinese sources. This indicates that there existed differences between the western data and data from the Asian companies.

Thus, it is not possible for us to accept the views of Sesil et.al., with reference to the Chinese situation.Many foreign companies have established their branches in China and they have pursued the policy of giving stock options, which is usually followed in the western countries leading to the motivation of the employees.

However, it is argued by Fred Greguras and Lisa Morgan that the foreign companies need to be careful before issuing such stock options to the Chinese employees because there are stringent stock, employment and tax rules in China which are different from the western countries. It is true that the main aim of granting options in China, as in western countries such as UK, is to encourage the employees to dedicate themselves for the development of their respective companies. However, in China the authorities have warned that the employees need to be careful before accepting the stock options because there are various rules in China pertaining to holding of options. Greguras and Morgan suggest that the companies need to realise the mentality of the Chinese employees.

The Chinese employees would expect dignity in the society and they expect to enjoy a sense of belongingness. Most of the foreign companies have given stock options to only few top employees of the companies. This meant that the lower categories of employees are denied of this incentive. Hence, there is discrimination between higher and the lower cadres of employees.

It is not possible for the Chinese to hold huge amount of foreign currency in their foreign accounts. For instance, the Chinese cannot remit more than $10000 to the foreign countries. Further, the Chinese rule recognises only salary in cash and not salary in kind. Hence, when stock options are given, it is considered as salary in kind.

Further, when the employees sell their stocks, this will attract tax deductions. Hence, Greguras and Morgan suggest that the companies need to be conservative before embarking on the policy of declaring stock options to few employees. (Greguras and Morgan) The main aim of the companies should be to encourage all the employees by following the strategies. The argument of Greguras and Morgan is interesting in the sense that it brings to light the difference between the western economic system and the rules existing in China.

This implies that it is not possible to blindly implement the western incentive systems in the case of China due to cultural and economic differences between the two regions.It is true that in theory it is very attractive principle to introduce and implement stock options in China by the multinational companies. However, in practice it is not easy to implement this practice. The main problem is that since the stock options are new to China, there are no clear rules framed by the Chinese authorities.

Hence, the Chinese authorities suggested that the foreign companies should not be in a great hurry to implement stock options in China as the authorities are going to frame new laws pertaining to stock options in the near future. This has discouraged many companies from introducing the stock options as a measure of motivation of the employees. The Chinese Security Regulatory Commission (CSRC) is planning to implement new rules to determine the aspects of stock options. On certain occasions, the CSRC refused to recognise the stocks issued by the companies to the individual employees.

This has created great uncertainty among the companies regarding the issue of stocks to their employees. Consequently, nearly 80% of the companies in China do not offer any stock option plans to their local employees due to lack of knowledge regarding the stocks as rewards and lack of legislations favouring stock option plans to the employees. (Loose, 2005) This indicates that it is not very easy to introduce stock options in China. These details also highlight the major differences between UK stock option practices and Chinese stock options indicating the major hindrances to implement such reward systems in the case of China.

Most of the above studies have provided a negative picture of the stock options in China. However a report published in People’s Daily (2000) provided a different perspective of this issue. According to this report, before the introduction of reforms in China, the academicians found it very difficult to maintain their family with the meagre salary. However, with the introduction and implementation of the market reforms in China, there was the emergence of several millionaires, particularly the scientists, who were given the stock options by the major companies.

For instance, the scientists like Sun, Wang and Yuan emerged as millionaires due to the provision of the stock options. This report argued that in fact in the near future there would be emergence of nearly 1000 millionaires in China. However, one should remember that this report deals with the achievement of those scientists who made exceptional contributions through their constant research. This study gives positive picture of the stock options.

It is true that there are few individuals who have become rich due to stock options. However, we find that this theory that many people emerged as millionaires in China may not be applied in the case of the ordinary managers of the companies, as the above studies have found that there were legal and other complications which acted as hindrance to the introduction and implementation of the stock options in China. The companies tried to introduce stock options to motivate the employees. However, they did not take much time to realise that the legal and economic atmosphere in China does not encourage such new systems of motivation.

As mentioned earlier that the government tax authorities have been planning regarding the process of imposing individual income tax on the stock options. Earlier, the stock options were not considered as part of the salary of the managers. However in March 2005, the tax authorities issued one circular, which clarified many issues pertaining to the tax implications of the stock options. (2005).

According to the circular no. 35 issued by the government authorities, the stock options are considered as the salary of the employee when the employee exercises such stock options. Such an employee is expected to report regarding the stocks received by him to the tax authorities. Obviously, the stock options have attracted the attention of the tax authorities and this has increased the tax incidence on the pay of the Chinese employees.

Consequently, in certain cases the stringent Chinese tax laws have not encouraged the employees to accept the stock purchase plans and other equity related schemes although in the long run they prove to be beneficial to them. Obviously, there is difference between the tax regime of China and the western countries such as UK.Stock option in UKStock option is given to provide incentive to the employees. This is part of the concept of profit sharing by the higher officials in the companies.

In the case of the European countries, stock option is an important means of providing incentive. Shares are allotted to the executives in addition to their regular salary. In the United Kingdom, large number of companies introduced the concept of stock option during the period – 1980 to 1990. In fact, one study has revealed that as many as 45% of UK business units have encouraged stock option to their employees.

When compared to other European nations, in UK there is high percentage of companies, which provided for stock options. (Yuping, 27).This study suggested that there existed the practice of giving stock option in UK and various other European countries and USA.  Yuping compared the system of stock option in Japan and other developed countries and this study is also relevant to understand the present research topic which compares the stock option between China and UK.

Yuping found that in the case of Japan, there was less number of business units, which gave the stock options. Although, this work of Yuping acts as a guide for the present research venture, it does not mean that one can accept the argument of Yuping as there are differences between China and Japan. In China, after the introduction of market reforms, there was the process of rapid westernisation of the Chinese industries.It is suggested that executive stock options or ESO became the single largest mode of providing incentives to the executives in USA and also in UK.

In fact, after 1990, it is found that there was great increase in the number of companies depending on ESO to provide incentive to the executives. The study attempted to evaluate the nature of impact of stock options that was given to the UK executives. This study was based on the pay for performance sensitivity methodology and it was found that the stock option that was given to the executives provided better value than its face value. This acted as a great incentive to the executives and naturally this led to increase in the performance and productivity of the executives of the UK companies which provided stock options to their employees.

However some companies in UK have begun to replace ESOs with Long Term Incentive Plan (LTIP) as it is suggested by some scholars that it is not possible to monitor the activities of agency in the case of ESOs which are short term incentive plans. The executives are usually given the position for the period of three years and their positions are reviewed after three years. However, Lee et.al., suggested that ESOs have been able to provide incentive to the executives as there was improvement in their performance in the company. Nevertheless, this study of Lee et.al., indicates that there are some scholars who do not agree with the effectiveness of ESOs.

By adopting the model of conditional valuation approach, Lee et.al., have proved that ESOs provided incentives to the executives which is demonstrated by the pay for performance sensitivity. (Lee et. al.)In the United Kingdom, stock option was introduced with the intention of providing necessary incentive and motivation to the executives of the companies. However, scholars have discussed regarding the problem of monitoring the activities of the agency. This problem can be solved by increasing the number of non-executives in the board of directors and also by imposing certain limitations on the powers of the executives.

However, stock options, which became more popular after 1990s did not have uniform returns as their returns depended on the functioning of the stock market and many other important issues. For instance, when the stock market entered loss period, the pension liabilities of the US and UK companies increased. When the stock market return declined, this led to decrease in the stock options that were given to the executives. Instead, the bonuses were increased in the case of UK executives.

In fact, after 2001 stock market crisis, bonuses in UK comprised 60% of the basic salary of the executives. This increase in the pay of the CEOs was criticised by the shareholders. It is suggested that in UK there was an increase in the pay of the executives and this provided better motivation to the executives. In UK, there has been increase in the salary of the CEOs.

In 1997, the average pay of CEOs in UK was £660000 per year, while in 2002 this increased to £930000. In UK, we discern that only small percentage of the total compensation package consisted of stock option. In the case of USA, more importance was given to giving stock option to the employees. In 2002, in UK basic salary consisted of 49% of compensation, bonuses comprised 27% while the stock option and other long-term incentives comprised 24% of the total compensation package. However, in USA stock options comprised 59% of the total pay package. (Erturk et.al.,)This demonstrates the apparent difference in the attitude of the companies towards the stock options.

Compared to USA, less importance was given to stock options in UK. This study shows that although in UK stock options were given, they were not given as much importance as in the case of USA. This implies that each country needs to evolve its own policies regarding providing motivation to the employees of companies. This study has provided another dimension of the problem of stock options.

Stock option can be considered as one of the financial participation schemes. It is found among financial participation schemes.  Profit sharing schemes in UK have become more popular. Scholars have discussed the various merits and demerits of stock options.

Stock options do not indicate that the executives would be able to increase the revenue of the executives.  Stock options were given with the intention of protecting the interest of the company against the labour union movements. Stock options convert the employee into employer.A study (poutsma, 2002) argues that stock options increases the risk of employee because a part of the compensation is paid in the form of shares and when the shares do not perform well in the stock market, this does not provide necessary revenue to the shareholder.

Further, all the shareholders are not given the right to vote and there are particular shares, which do not accompany the right to vote. This limits the power of the employee as the shareholders of the company. Stock options also increase the risk of the employer because when the employee leaves the job, the company purchases his shares. These purchased shares become a liability to the employer.

In UK, the smaller companies did not favour giving share holding power to the executives. It is found that in UK, only public sector’s companies with more than 200 employees have provided for stock options. This situation is different from USA, where even the small business houses provided for the stock options to their executives. In UK, stock option plans are supported by the government policies.

The main aim of these options is to provide incentive to the middle term employees. The government gives tax benefits to the employees who prefer stock option plans. (Poutsma) This study by Poutsma has revealed the difference in the attitude of USA and UK regarding the profit sharing schemes and stock options. We have also mentioned earlier that there existed such differences between USA and UK incentive systems.

The problem of lack of empirical data regarding executive compensation in UK, is solved by the study of Conyon et.al., (2000). This study used quantitative and qualitative methodology to study the stock options and their consequences on the CEO performance in UK.

This study used the data available regarding 200 companies of UK. The authors obtained data from 50 of 250 large UK companies, which were listed in the stock exchanges of UK. This analysis demonstrated the difference in the nature and the structure of the pay packages between different companies. In other words, pay packages and motivation system depended on the relative financial position of the company.

This implies that those companies with greater financial wealth are in a position to provide better motivation than those firms with less financial strength. An important feature of the UK stock options is that before the CEOs exercise the options, they need to prove the real value of the shares of their companies. Here one finds the difference between UK options and options exercised in USA. This study of Conyon et.al., suggested that there is direct relationship between pay and performance. Whenever the executives were able to provide better performance, this led to increase in their pay leading to further motivation. Through empirical studies it is possible to demonstrate the link between granting of stock options to the executives and the improved performance of the companies.

It is showed that when the executives held share worth £5, this leads to increase of the wealth of shareholders by £100. This calculation indicates the direct relationship between the pay and performance. However, some studies have suggested the need to introduce LTIPs in order to overcome the defects of stock options (Conyon et.al. such as lack of identification of agency, etc. Nevertheless, this stud has demonstrated that the incentives given to the executives were really effective in increasing the performance of the company.There has been criticism regarding the executive compensation that they are overpaid for their work when compared to the other work force. The lower workers were not able obtain the wage rise that can be seen in the case of the executives.

Hence, there emerged a gap between the executives who were over paid and the lower employee cadres who were paid less when compared to the payment received by the executives. Pay for performance theory has been discussed in great detail in academic circles. However, it is not very easy to analyse in quantitative terms the pay for performance, as it is difficult to conceptualise and provide empirical information regarding pay for performance. Hence, some scholars have been sceptical of the theory of pay for performance, as there is no ideal empirical methodology to evaluate pay for performance.

Annual bonus, long term bonus and stock options are considered as high compensation risk. This is because of the fact that there is probability of conflict between the executives and employers. In many cases it is found that executives try to target low but guaranteed returns as they have a fear of losing their position if they fail to deliver. This creates great risk for the company.

Moreover, in few cases executives obtain stock options at the end of their career and they want to achieve only short term targets which lead to creation of risk for the company. (Pennings, 2000)Hence, the scholars have pointed out various defects of the stock options. This analysis has also pointed out the problems with the pay for performance theory as the empirical details are usually lacking. Further, the policy of giving stock options has created two classes of employees: the executives and the ordinary workers who are not given the stock options incentives.

The stock option and pay for performance has forced the executives to look for short-term targets instead of long term ones. However, in the case of western countries this was the major feature of many companies although there were differences between USA and UK. Nevertheless, the Chinese government, unlike western countries such as UK and USA, was not prepared to encourage great wage differences between the executives and ordinary workers.Another problem noticed by the scholars regarding the executive stock options is that it is possible to provide the predictive data regarding the purchase of the stock by the executives, but it is not possible to trace the predictability of sale of the stock options.

In other words, the executives are given the option to exercise their stock option whenever they like. When the executives exercise their option, this is regarded as an investment, while when the executives sell the stock, it can be considered as profit. Stock options provide for the right to the executives to purchase stock options and there in no obligation for him to buy the stock. However, it is noticed that the executives continue to hold the stock for a longer period of time particularly in UK because of the government policies.

For instance, the insurance laws of UK are such that they would not allow the exercise of the stock option over a particular limit. This has discouraged the executives from exercising all their stock options. Secondly, the tax regime of the UK does not consider the purchase of the stock option as the earning of the individual. The UK tax regime considers tax liability only when the person sells the stock.

In order to avoid tax burden also the UK executives decide to hold their stock for a long period of time. However, some scholars do not buy the argument that the purchase of shares by executives has more predictability than the sale of the shares by them. (Kyriacou and Mase).This demonstrates that executives can indulge in insider trading and they can determine the share price of their companies.

However, this provision in the stock options provides the incentive to the executives. Nevertheless, this is one defect, which can be noticed, in the executive stock options. There is need to provide for certain checks and balances so that the executives will not be able to misuse their position and manipulate the price of their shares in the stock market.ConclusionIn UK, one can discern that stock options are becoming more and more popular with the managers and this has increased the total pay of the top executives and the studies have indicated that the companies have performed better when stock option plans are offered to the employees.

Obviously, they acted as great motivating factor leading to increase in the profit for the company since the increase in profit leads to greater remuneration to the employee also. However, in China we find that there is a different picture. This is firstly because of the fact that the stock options and the other managerial practices are new to the Chinese culture and, secondly, there are many hindrances to the stock options in China. However, there are few companies in China which have offered stock options in order to provide incentive to the employees.

Chapter 5Findings and AnalysisThis study has tried to provide the synthesis of the research done on the present research topic. The literature review has provided information pertaining to the comparison between the incentive systems in China and UK. In this chapter an attempt will be made to discuss the various findings of this research work based on the literature review and the survey results.This researcher has approached the employees belonging to UK and Chinese companies and tried to identify the differences between the two regions.

The questions were asked either through telephonic conversation or face to face interaction. This method has succeeded in obtaining information from most of the employees. However, this researcher could approach only a few companies and is aware of the fact that it is necessary to approach more number of employees in order to obtain a better picture of this research topic. However, due to the nature of the present research work it is not possible to approach large number of employees to obtain their feedback pertaining to their job satisfaction level.

There were exceptions to the results presented in the table.Expansion: Y = Yes ; N = No ; Y&N = No consensus among the participants.The above survey shows that most of the UK executives were satisfied with the salary and the stocks which were given to them while most of non executives in UK were not satisfied with their satisfaction level as they were not given the stock option and they were not given the responsibility in their institutions and consequently they have informed that they would like to leave their organization if they get job with better salary and other facilities. Most of the Chinese non executives and executives were satisfied with their workplace environment as they informed that they liked the family atmosphere that they obtained in their organizations.

However, the non executives in the Chinese companies were not satisfied with the fact that they were given less responsibility and they expected better status in their company. Nevertheless, most of the Chinese employees refused to leave their jobs. Compared to the UK employees, most of the Chinese expressed the opinion that they enjoyed job security. Obviously, this was due to the close relationship between the Chinese political leaders and the employees.

On the other hand, all the UK employees did not enjoy job security. This study has revealed the significant similarities and differences between Chinese and UK employees’ motivation level. However, this study has revealed that there is a need to provide motivation not only to the executives but also to the non executives. The stock options have created the two classes of employees within the same organizations.

However, the Chinese executives were not very much enthusiastic of the stock options as there are many hindrances to the introduction of stock options in China while the UK executives informed that their productivity has informed after they obtained the stock options. This study has also proved the argument that different needs of the workers should be considered while providing motivation to the workers. The above survey has proved that salary is one of the many factors which motivate the employees. The employees also expect better interpersonal relationship, greater responsibility, better status, recognition of their work, and better relationship with the management.

In the following section an attempt will be made to present the findings from the literature review.The incentive system can be broadly divided into two categories: traditional and modern. Traditional methods of incentive consist of the promotions and salary hikes which can be seen both in UK and China. Modern methods of motivation include inter personal relationship and stock options, a part of the financial participation system found in the modern industrialized countries.

However, motivation is not provided solely by giving salaries and promotions.(tutor2u.net) Motivation also includes the personal relationship between the employer and the employee. The Chinese employees give much importance to their relationship with the employers.

The workers in the UK give more importance as individualism and would like to concentrate on their profession. On the other hand in China, workers would like to work in a group and they develop affection and attachment with their organization and they like to maintain long term relationship with their company. In China, the government authorities introduced incentives to the employees after 1970s when reforms were introduced in the Chinese economy. For example, one can notice the introduction of the pay for performance method in China.

However, the most popular incentives in China are the non monetary benefits such as tax concessions and housing loans.The scholars have used pay for performance model to evaluate the incentive system in these two countries. While in the western countries the executives were overpaid, in China they were underpaid because they were influenced by the government rules which has imposed a ceiling on the maximum salary given to the top executives. In China importance was given to pursue rigid socialist policies which could not inspire the workers to improve their productivity as the Chinese workers were protected by the legislations which were influenced by the socialistic principles.

Traditionally the Chinese employees have been maintaining close contact with the political parties. However, recently attempts have been made to introduce reforms such as contract responsibility in order to increase the productivity of the workers. Nevertheless, one can notice many differences between the Chinese and the UK system of providing incentive to the employees. Another important outcome of this study is that in the western countries such as UK importance is given to the stock options which act as incentives to the employees.

The people in the western countries have developed ‘stock culture’ and the executives benefited when they were provided with the stock options. The scholars have used agency theory to explain the aspects related to stock option. The employees are considered as the agents of the employer and the duty of the workers is to enhance the performance of the company. By giving stocks the employees realized that they need to contribute to dramatically improve the company performance to obtain better returns from the company shares which were allotted to them.

One can also notice the use of the theoretical models such as principal-agent relationship while dealing with the aspects concerning stock option.In the case of China it is difficult to identify particular agent to be responsible for the work of the company. This is due to the fact that there are many agents and not one agent and the Chinese executives maintained direct contact with the government authorities rather than the shareholders. In the case of UK it is found that the pay for performance principle worked at least in the case of a few companies.

Scholars argue that financial reward and stock option system failed in China because of the domination of the political authorities. The stringent tax regime has also discouraged the companies from giving stock options to the Chinese executives. On the other hand it is found that in UK greater importance was given to stock options as a means to provide incentive to the top executives. The pay for performance principle has worked in UK because the executives in UK have tried to increase the value of their shares by putting that much more hard work.

The use of the principal-agent relationship model has provided useful information pertaining to the impact of stock options in UK and China. While in the case of UK it was found that it was possible to pin point the agent, in the case of China, the principal found it difficult to identify a particular agent. The government tax regime also did not facilitate the introduction of stock option incentive system. Hence, there are many hindrances which act as bottlenecks to implement the stock option system in China.

In UK on the other hand one does not find these obstacles and consequently the stock option in UK has succeeded in improving the performance of the companies.However, even in UK the stock options suffered from various limitations. There was the problem of identifying the agent. Attempt was made to solve this problem by appointing non executives in the board of directors.

One can notice flexibility in the incentive system in UK. For example, during the recession period of the stock market, instead of stock options bonus and other salary related incentives were given.There are various limitations of stock option. For example, it has created gap between the executives and the non-executives as the former were overpaid while the latter were underpaid.

This objective is endeavoured to be achieved with the help of the comparative explorative methodology which implies that this work is based on the literature review pertaining to this research problem. This study has used the theoretical models such as motivational theories propounded by Maslow and Hertzberg (tutor2u.net), agency theory of executive compensation (Pennings, 2000) and principal-agent theory. (Rosenberg, 2004 ; Tylecote and Cai, 2004).

Based on these theoretical models attempt is made to find the similarities and differences between incentive systems in China and UK. The literature survey showed that a few scholars have studied the various aspects related to the incentive systems in these countries. The scholars have used the theoretical models specified above while analyzing the various aspects of incentive system including stock option. (Steers and Porter, 1987; Rosenberg, 2004; Rayton, 2005; Prendercast, 1999; Loose, 2005).

This study has the theoretical models given by Herzberg and Maslow and these models have analysed the various needs and the factors which motivate the employees. (tutor2u.net)The literature survey showed that there have been a few studies which deal with incentive system in UK and China. However, there is lack of works which completely explore the aspects related to incentive system in these two countries.

After identifying the limitations of the existing literature, attempt is made to provide a synthetic review of the literature leading to better understanding of the present research topic. The work also consists of one chapter which analyses the findings relating to the present topic.In both UK and China attempt has been made by the employers to provide incentive to the workers by increasing salary and providing various allowances and thereby recognizing the contribution of the employee to the development of the organization. (Conyon et.al, 2000; Prendercast, 1999).

This is found particularly in the case of UK. However, in the case of the socialist China there was not much incentive provided before the introduction of market reforms during 1970s. It is during 1980s that attempts have been made to introduce the contract responsibility system and pay for performance policy which has contributed to the productivity.(Yuping, 2003-2004)

In the case of UK it is found that the pay for performance principle has been applied and it has proved successful in improving the financial condition of the company. (Prendercast, 1999) This shows the difference between the UK system of incentives and the Chinese system of incentives. For example, the Chinese employees expected not only financial incentives but also non monetary benefits such as maintaining personal relationship with the organization, ideal working atmosphere in the company, and so on. This also shows the difference in the work culture between UK and China.

Particularly due to the strong presence of the unions in China it was difficult to motivate the workers to increase their productivity. However, the Chinese authorities introduced rule enforcement system and internalized motivation in order to compel the workers to increase their contribution to the advancement of the organization.  (Gross and Thadni, 2005; Feng et.al., 2001; Lei and Trim, 2005).

Another important method that was introduced to motivate the workers was the stock option system which refers to the allotment of company stocks to the top executives. By doing this attempt was made to reduce the unity of the workers and motivate the workers to increase the profit of the company. In the case of UK, there was the introduction of the stock option system after 1980s and this led to great rise in the compensation paid to the top executives.

This led to the debate pertaining to finding the agent. In order to identify the agent in the case of UK, it has been suggested that non-executives should be made the members of the board of directors. However, it is found that pay for performance principle was applied in the case of UK and this led to the increase in the productivity of the employees leading to increase in the price of the share. (Yuping, 2002-2004; Conyon et.al, 2000)

The scholars have used the theoretical models such as agency theory and principal-agent relationship theory to analyse the nature of impact of stock options on the employees. By granting stock options it was possible to find the agent as the employees became responsible for increasing the price of their stocks which would have benefited them. However, it has been argued in the case of UK that executive compensation in the form of stock options led to differentiation between the top executives and the lower cadre employees as there was big difference between the pay packages given to the workers belonging to two different cadres. (Pennings, 2000)On the other hand, this study has showed many hindrances to the implementation of stock option in China.

This can be seen particularly in the public sector as it is completely controlled by the government authorities. In China, the employees aim at maintaining close relationship with the political authorities rather than with the shareholders. This has emerged as an obstacle to find the agent by the principal as there are many agents and it is difficult to pinpoint the responsibility. The Chinese workers are influenced by Confucianism and Socialism, the two ideologies which have influenced the attitude of the workers.

The Chinese legislations do not allow much difference between the top executives and the workers of low cadres. While the UK system encouraged stock option system, the Chinese system discouraged stock option method of motivation. In China, the tax regime is also uncertain regarding the stock options. The executives in China fear that they may have to pay more taxes if they accepted stock options.

This analysis has showed the difference between the UK system of stock options and the Chinese system of stock options. There is a need to introduce further reforms in China in order to encourage the stock option system.(Fung et.al.; Tylecote and Cai; Sesil et.al. ; Greguras and Morgan; Loose).The survey of the Chinese and UK workers showed that there are differences in the job satisfaction level of the UK and Chinese employees.

While most of the Chinese enjoyed job security, a few UK employees were not satisfied with the fact that they were not given the job security. This survey also showed that while the UK executives were satisfied with the stock options that were given to them, the UK non-executives complained that they expected better status and responsibility in their organization. Most of the Chinese employees expressed their desire to stay in the same organization in spite of the problems that they faced in the company although they would like to enjoy better position in their company. On the other hand the UK employees were willing to take employment elsewhere in case it implies a rise in their salary and other allowances.

This work has showed that there are both hygiene factors and motivator factors, as discussed by Herzberg, which leads to the motivation of the employees. On the other hand, this study found it difficult to prove Maslow’s theory of motivation as it is difficult to generalize the needs of the people as different employees have given preference to different needs.RecommendationsBased on the above study, the following recommendations can be suggested:

1. China is lagging behind in implementing the new methods of motivation such as stock options. China needs to introduce these new methods in order to provide further incentive to the employees.
2. This study also indicated few limitations of the UK motivation system. For instance, during the time of recession the shareholders complained that the salary and other benefits of the CEOs continued to rise. UK needs to realise these limitations and devise strategy to overcome these problems.
3. There are many legal and political hindrances to the introduction of stock option system in China. The authorities need to devise strategy to overcome these problems so that it is possible for the companies to implement stock options in their companies which would motivate the employees. China needs to set right limitations in the tax rules in order to facilitate the introduction of stock option plans.
4. The employees in China should not depend too much on their political status. They need to work for the growth of their companies.
5. Based on the experience of the western countries and its own experience, China needs to devise its own strategy to provide motivation to the employees.

The basic needs of the employees of both the countries should be satisfied and attempt should be made to satisfy the higher hierarchy needs such as status, improving self esteem in the organization by giving them greater responsibility and providing such other non monetary incentives to the workers.

This work tried to explore the data that is available regarding motivation and reward system in UK and China. Although this work has used the latest literature available pertaining to this research topic, it is necessary to provided exhaustive quantitative information. The quantitative data given in this work is limited in the sense that it has studied the views of only a few employees and there is a need to conduct rather exhaustive survey of the employees to understand the factors which lead to their motivation.

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