TYGlobe

Catering enterprises, especially large catering groups and chain enterprises, have recognized the significance of talents. Against the general environment of high employee turnover, it is difficult to retain talents merely by traditional remuneration. Accordingly, a large number of catering enterprises have developed various employee incentive schemes with reference to the practices of start-ups. Generally speaking, the employee shareholding schemes of such catering enterprises shall be structured around two categories of personnel: the headquarters management and the store management.

Headquarters Management

Equity incentives for listed companies in China may be implemented in accordance with the *Measures for the Administration of Equity Incentives of Listed Companies*. However, for non-listed companies, there are no specific laws and regulations currently in force to provide for how to implement equity incentives. In practice, for the management at headquarters, the employee incentive scheme adopted by a catering enterprise intending to enter the capital market is similar to the equity incentive plans that many startups grant to their senior management and core employees: the company grants a certain number of expectable equity interests to employees, and employees may directly or indirectly purchase such equity interests within a specified term at the agreed preferential price and subject to the agreed conditions. Employees may decide on their own whether to exercise the right. Upon exercise of the right, employees will directly or indirectly hold the company's equity interests, and be entitled to the company's dividends and capital gains derived from such equity interests.

① Implementation Procedures for the Equity Incentive Plan

The following figure sets forth the basic procedures for the implementation of the equity incentive plan:

② Core Contents of the Equity Incentive Plan

At present, the mainstream equity incentive plans in the market mainly adopt the method of holding the company's equity by establishing a limited partnership shareholding platform, split the shareholders' equity held by the shareholding platform into virtual equity as underlying options, and distribute the same to incentive recipients. The general partner of the shareholding platform is generally a limited liability company controllable by the founder. After exercising their options, the incentive recipients may become limited partners of the shareholding platform, thereby indirectly enjoying the equity proceeds of the company through the shareholding platform.

An Equity Incentive Plan shall generally specify the following contents:

a. Forms of equity incentive: What form shall be adopted to grant options to incentive recipients, namely, directly granting equity at the company level, or granting the corresponding "phantom equity" at the level of the equity holding platform?

b. The source of incentive shares, the total number of shares used for equity incentives and the corresponding proportion of the company's equity, as well as the number of shares granted to incentive recipients;

c. Eligibility conditions, methods, exercise periods and consideration payment methods for the vesting and exercise of stock options;

d. The rights enjoyed by the option grantees after the exercise of stock options

e. Mechanisms for the transfer, withdrawal and repurchase of stock options and the corresponding equity interests after the exercise of such options, including provisions on how to dispose of the exercised equity interests and unexercised stock options in the event that an equity incentive grantee resigns or deceases.

f. Who shall be responsible for the interpretation and implementation of the company's equity incentive plan?

g. Entry into Force and Termination of the Incentive Plan

Generally, an equity incentive plan is an important component of a company's development strategy, covering a wide range of areas including capital, human resources, law, taxation and finance. Catering enterprises shall, when designing incentive plans, take into account their different requirements and objectives, to finally work out a comprehensive equity incentive plan, and execute a full set of equity incentive transaction documents with the incentive recipients.

2) Store Management

Stores generally need to take three core positions into consideration: store manager, front-of-house and back-of-house (for chain enterprises that have fully or partially realized standardized product lines, the weight of back-of-house positions may be further reduced). The employee equity incentive for a single store is generally implemented within the aforesaid store, and the profits of the store may be distributed by means of phantom equity. For the same reason, a regional manager may hold phantom equity in his or her regional business entity to enjoy relevant profit distribution. Whether the equity corresponds to all stores in the region or only several of them shall be determined in light of specific circumstances. In addition, during the process of store replication, outstanding employees may be granted the preemptive investment right in new stores. Rewards given to veteran store managers for cultivating new store managers may also be reflected in the employee incentive system.

The following are employee incentive cases of two successful catering enterprises for your reference.

Case 1: Haidilao's "Mentorship System" Incentive Model

The core of Haidilao's approach to achieving high-quality growth lies in the principle of "aligning interests and standardizing management". To address this development challenge, Haidilao has adopted the "mentor-apprentice system" model. In each Haidilao hot pot restaurant, the store manager is entitled not only to performance-based commissions from the store under his or her management, but also to a certain proportion of performance-based commissions from stores managed by his or her apprentices and grand-apprentices if he or she meets the eligibility criteria, which binds the interests of stores operated by mentors and their apprentices at all levels. At Haidilao, store managers of Class A restaurants are eligible to serve as mentors. Mentors independently select their apprentices, and the group does not interfere in the selection process. However, there is a cap on the number of apprentices each store manager may mentor. The group also organizes qualification examinations to certify apprentices, and those who pass the examinations will be appointed as reserve store managers. Mentors are also entitled to a share of the profits generated by stores managed by their apprentices and grand-apprentices. Profits entitled to a mentor = Profits of the restaurant operated by the mentor himself/herself × 0.4% + Profits of restaurants operated by the mentor's apprentices × 3.1% + Profits of restaurants operated by the mentor's grand-apprentices × 1.5%

Suppose a Class A store manager trains 20 apprentices, who in turn train 400 grand-apprentices. The master shall be entitled to 3.1% of the profits of each store operated by his apprentices. Assuming all stores generate equal profits, the aggregate profits derived from the 20 apprentices are equivalent to 62% of the profit of a single store. Meanwhile, the master shall also be entitled to 1.5% of the profits of each store operated by his grand-apprentices, and the aggregate profits derived from the 400 grand-apprentices are equivalent to 600% of the profit of a single store. In conclusion, the master may obtain profits equivalent to 662% of the profit of a single store, which is equal to the total profits of 6.62 stores. For catering business operators, in respect of each such store, the store manager is entitled to 0.4% of the profits, the store manager's master is entitled to 3.1% of the profits, and the master of the store manager's master is entitled to 1.5% of the profits, with the total proportion of distributed profits accounting for only 5%. That is to say, the business operator only needs to set aside 5% of the profits of each store as incentives, which enables store managers to see geometrically increasing profits and constitutes a considerably strong incentive.

Case 2: Xibei's "Entrepreneurial Division + Competition Arena System" Incentive Model

Most catering enterprises divide their departments into operating units in different regions such as the Southwest Region, North China Region, East China Region and Northern Region on a geographical basis. Xibei follows a different mode. It has established entrepreneurship divisions under its umbrella, which are founded with the general manager of each division as the core, and even the names of the divisions are named after the names of the respective general managers. Each entrepreneurship team of Xibei is a partner of Xibei and enjoys the right to dividends. Another unique feature of Xibei's entrepreneurship division system is that it breaks the traditional geographical division method adopted by conventional enterprises, and two entrepreneurship divisions may even conduct business operations simultaneously in the same region.

For example, if General Manager A is responsible for an entrepreneurship branch in Shanghai, General Manager B may also apply for the establishment of an entrepreneurship branch in Shanghai to explore the market as long as the eligibility requirements are satisfied, thus forming competition with A. The headquarters will, however, coordinate the store site selection for both A and B to ensure that the competition between them is healthy, rather than regional competition caused by the close proximity of their stores. Nevertheless, not all teams are eligible to open stores. Xibei generally conducts quarterly competitions and rankings for entrepreneurship branches, which are divided into four rating tiers: A+, A, B and C. A license for store opening shall be obtained only when four Grade A ratings are accumulated, that is, to open one store, and one Grade A+ rating is equivalent to two Grade A ratings.

Meanwhile, to encourage internal competition, Xibei Headquarters issues "business licenses" to its entrepreneurship divisions on an annual basis, and carries out a "national general ranking" through the assessment of indicators including profit, customer evaluation and so on. For the management teams ranking in the bottom 30%, Xibei Headquarters shall withdraw their business licenses, reissue such licenses to newly established entrepreneurship divisions, break up the aforesaid management teams and reassign their members to other teams, so as to realize the mechanism of selecting the superior and eliminating the inferior. This is the so-called "competition arena system" within Xibei. With respect to store opening teams, the headquarters generally holds 60% of the equity, while the store opening team holds the remaining 40% of the equity. In addition, to help the management teams get through the most difficult period at the initial stage of store opening, Xibei Headquarters shall bear all capital costs within the first three months after the store is opened. Upon expiration of the three-month period, the stores operated by such management teams shall assume sole responsibility for their own profits and losses, and share profits with the headquarters.

In practice, catering enterprises vary greatly in their actual conditions, and their proprietors have diverse demands. There is no one-size-fits-all optimal solution, only the most appropriate one tailored to specific situations. TYGlobe is fully capable of developing the most suitable employee equity incentive plans for catering enterprises by virtue of its in-depth understanding of the catering industry and its familiarity with cutting-edge market equity incentive plans.