World-renowned business school Industrial Economics

Author: Wang Jiankun
Publisher:
Publish Date: 2000-01-01
Features: Whether in China or the West, in the business and enterprise community, there exists a certain bias to some extent, believing that economics is primarily for government decision-making and has little relevance to the specific business and investment activities of enterprises and individuals. This understanding is, in fact, a great misconception of modern economics. Because modern economics has been studied in many aspects to be quite specific and in-depth, it can not only provide macro-level guidance and mindset influence for the specific economic behavior of enterprises and individuals but also, in many cases, offer clear scientific decision-making solutions. In the United States, a family-owned enterprise, as it expands in scale, begins to hire important managerial personnel from outside the family. To incentivize these non-family managers, the corporate board discusses allocating equity to them. The board decides to convert 3 million yuan of the company's assets into 3 million shares and grant them to these managers for free. However, the economist participating in the discussion proposes an alternative plan: the external managers must personally invest 300,000 yuan, which is then converted into 300,000 shares, making the total 3.3 million shares now allocated to them. The board immediately recognizes that the economist's plan is more brilliant, and thus, the plan is reconsidered. Because the board members understand that the economist not only adds 300,000 yuan in capital to their company but more importantly, this 300,000 yuan is both affordable to the managers and not a small amount, which enables them to share risks and benefits to a certain extent with the company, greatly enhancing the incentive and restraint effects compared to the original plan.