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Keeping an Eye on the Dragon:Expert Discussion and Starbucks CaseStudy on Using Equity Compensation in
ChinaSession 6:4 | 11 April 2008 | 11:25 am – 12:40 pm
Kimberly HackmanInternational Stock Manager
Starbucks Coffee Company (US)
Wei ZhengExecutive Remuneration Leader – Asia
Mercer (China)
Jewon WeeVP, Product Delivery, Training & Strategic
ItemsFidelity Investments (US)
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Agenda
• Current trends and key developments in China
• Case Study: Exporting Bean Stock to China
•Q&A
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CURRENT TRENDS AND
KEY DEVELOPMENTS CONCERNING
STOCK-BASED COMPENATION
IN CHINA
Wei ZhengMercer
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Setting the contextOverview of China marketplace
•Continued growth and FDI•Value-added services
•Surging competition
• MNCs vs. Local
•Demand for “talent” impactsgrowth strategies
•Rising business costs and littlepricing power
•Volatility continues in this capitalmarket
• Implemented New regulations
•Economic Factors…•GDP ~ 11% +
•Rising Inflation ~ 4.8%+
•Unemployment ~ 4.6% per“official” statistics (urban)
•Limited capital markets
•Demographics –“one child”
•Geographic implications•Move to 2nd / 3rd tier cities
Business Themes Historical Influences
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Setting the contextHR is a critical business issue in China
• Rising customer expectations• Changing job and technology
requirements• Increasing use of offshoring
and outsourcing
• Need to grow earnings• Need to rationalize staffing after M&A
• Agingpopulation
• Talentshortages
Operating pressuresOperating pressures
Looming
workforce risks
Looming
workforce risks
Economic pressuresEconomic pressures
Demographic shifts
Demographic shifts
• Fierce competition for talent• Misalignment of skills with future business requirements• Employee dissatisfaction with existing career
paths/rewards• Increased turnover, training and recruitment costs• Shifting cultural and behavioral norms
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• Talent supply not inpace with marketdemand
• Shortage of “talent”• Job change socially
acceptable• Distorted career
progression; rampanttitle inflation
• PRC nationalstargeted for key jobs
• Aggressive expansionand new market entrants
• Greater levels technicalcapability demanded
• Leadership void - fiercecompetition / poaching
• Pay is skyrocketing• … productivity not
commensurate
Looming
workforce risks
Looming
workforce risks
SupplyDemand
What makes China distinct?The big dilemma: labor demand vs. supply
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What does this mean?Labor markets are still segmented
•Talent market is still an emerging market
•The segmentation between local firms and foreign
invested enterprises has shown convergence,
but…
• Most local companies do not have long-term incentive
plans or equity-based incentive plans
• Most MNCs China operations follow the compensation
practices of their global headquarters
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What does this mean in 2008?The new regulatory environment is emerging
•Regulatory changes favoring equity plans• Local companies and investors have signalled
acceptance and use of the new regulations
•MNCs have been looking again at the equity-based incentive plans• In response to a new regulation by the State
Administration of Foreign Exchange (SAFE)
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What’s working today?Stock Options is still most prevalent
•75% offered an equity plan to employees inChina.
Data sources: Mercer Mini-survey 2006
7%
21%
43%
86%
0% 20% 40% 60% 80% 100%
PhantomShares
PerformanceShares
RestrictedStocks/Units
Stock Options
Frequency of responses
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What’s working today?Attraction and retention is the key reason
Data sources: Mercer Mini-survey2006
Reasons for Offering an Equity Plan
7%
50%
0%
21%
57%
0% 10% 20% 30% 40% 50% 60%
Others
Incentives or rewards
Competitiveness withlocal firms
Competitiveness withMNCs in China
Attraction andRetention
Frequency of responses
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New compliance requirements?Is the SAFE regulation applied to me?
•The SAFE regulation provides a formal way ofimplementing an equity plan in China
• A new special account• Should be established with a designated financial institutions in
China for fund transfers used for participation in equity plans
• The application procedure is one-time only and it takesfrom 2 to 4 months• However, once approved, companies have to file with local tax
bureaus regularly
•Attention should be paid to other relevantRegulations as well
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In SummaryUse of equity will become more prevalent
•Talent shortage will intensify• Look for ways – other than pay – to differentiate from
competition
•Changed regulatory environments become morefriendlier towards equity-based incentives• Increased willingness to use equity incentives
•Concentrate on your own company• The ideal solution for your own business is more
important than the solutions of others
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STARBUCKS CASE STUDY:
EXPORTING BEAN STOCK TO CHINA
Kimberly HackmanStarbucks Coffee
Company
Jewon WeeFidelity Investments
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About Starbucks
• Founded in 1971 in Seattle, Washington• “Mission Statement – To establish Starbucks as the premier
purveyor of the finest coffee in the world while maintaining ouruncompromising principles as we grow”
• Went public on June 26, 1992• Common Stock (SBUX) traded on Nasdaq
• Six corporate guiding principles.• “# 1 of 6 – Provide a great work environment and treat each other
with respect and dignity.”
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Starbucks “Great Place to Work”
Also in 2007:• Best Companies in Mexico (#2)• UK’s 50 Best Workplaces (Top 10)• Best Companies to Work for in Latin America (#11)• Best Workplaces in Spain (#23)• 100 Best Workplaces in Europe
In 2008 Starbucks was named #7 on FORTUNE’s100 Best Companies to Work for in America
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About Starbucks (continued)
•Global presence:• US – operate in 50 states, plus District of Columbia and
Puerto Rico.• 8,505 company-operated coffeehouses and
• 4,310 licensed stores
• Outside US - operated in 42 countries, 5 regions• 3,737 stores (company-operated, joint venture & licensed)
• People’s Republic of China (“PRC”) - 499 stores
• Worldwide partner population• North America (US & CA) - 158,000+ partners
• Outside North America – 67,000+ partners
• People’s Republic of China (“PRC”) - 8,700+ partners
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About Bean Stock
•Broad-based stock option plan
•Eligibility: Partner must be employed byStarbucks Corporation or Subsidiary
•Annual grants to ~ 85,000 partners in 15countries
•Program Objectives:
• Attract and motivate partners
• Encourage employee ownership culture
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• Drivers for rolling out Bean Stock to Chinese Partners
• Bean Stock is a key component of our Global TotalPay strategy
• Every partner shares in the success of Starbucks
•Guiding principles for program design andimplementation
• Globally consistent program design
• Transparency for Partners
Evaluation/Due Diligence
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• Internal stakeholders:
• Total Pay, Partner Resources (HR), Legal, Tax,Treasury, Accounting, Payroll, Public Relations
• US & Chinese counter-parts
• External stakeholders:
• Vendors: PwC (tax), Baker McKenzie (legal), Fidelity(administrator)
• PRC regulatory agencies:• CSRC (China Securities Regulatory Commission)
• SAFE (State Administration of Foreign Exchange)
• SAT (State Administration of Taxation)
• LTBs (Local Tax Bureaus)
Evaluation/Due Diligence:Stakeholders Involved
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•Long-term incentive prevalence
•Securities laws restrictions
•Exchange controls
•Taxation – employee
•Tax withholding and reporting
•Data privacy
•Language requirements
Evaluation/Due Diligence: Findings fromdue diligence research in July 2006
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• Grant Bean Stock to all eligible partners in company-owned entities
• Require cashless exercises to minimize securities andexchange control risks• All Chinese residents (Chinese nationals, localized transfers,
expatriates)
• Hire dedicated resource in China to support on-going:• Administration in country• Partner communication/education
• HR system in China is needed to ensure:• Partner data integrity• Support growth• Track necessary partner information• Compliance
Evaluation/Due Diligence:Recommendations
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Implementation
• Building working relationships with regulatory agencies
• CSRC (China Securities Regulatory Commission)
• LTBs (Local Tax Bureaus)
•Working with vendors to develop administrative solutions
• Mandatory cashless exercise
• Language translation
• Communication & education
• Stock team in China
• Chinese participants
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Administration – People
•Division of labor
• Tasks managed in-house• Program design and partner communications
• On-going monitoring of regulatory developments
• Partner eligibility management
• Grant allocation
• Vendor management
• Tasks outsourced• Develop and maintain technology solutions
• Day-to-day plan operations, including handling of requested plantransactions based on plan rules
• Partner services by web and phone
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Administration – Technology
•For Partners• Participant web portal (maintained by Fidelity)
• View Bean Stock plan documents outstanding grants
• Submit plan-related transaction requests (e.g., grant acceptance)
•For Starbucks Stock Team• Plan sponsor web portal (maintained by Fidelity)
• Role-based access for US and Chinese stock team members
• Access and update participant information, plan transaction reports
• Approval history, online collaboration among internal and externalteam members
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Questions?
Thank you for your participation
For GEO Conference attendees only. Not for distribution to the public.Mercer, Starbucks Coffee Company, and Fidelity Stock Plan Services
are independent companies and are not affiliated.488063 | Fidelity Stock Plan Services, LLC