In short: By increasing the company’s total share capital, diluting shareholder holdings, NIO replaces part of the cash compensation with equity, which is also recorded as an expense for the company (for example, shares granted to R&D personnel are recorded as NIO’s R&D expenses). These shares are granted to eligible employees and are generally locked for several years. After the lock-up period, employees are free to sell the shares and cash out.
In Silicon Valley startups, equity incentives are a common win-win strategy. They reduce the company’s cash pressure and align employees’ long-term interests with the company, effectively serving as “golden handcuffs” (with a lock-up period) to retain talent.
For example, Tesla previously implemented widespread employee ownership (allowing employees to share in the significant gains from stock price increases, although most Tesla employees did not hold onto the stock). NIO also practices widespread employee ownership.
This strategy integrates employees into the company’s vision and saves a substantial amount on cash compensation expenditures.
From its inception, NIO has systematically implemented equity incentives for all employees, generally on an annual basis.
The total scale of equity incentives for 2015, 2016, and 2017 was 46.26 million shares, 18 million shares, and 33 million shares, respectively.
In the 2018 plan, the initial scale was 23 million shares. Thereafter, the total incentive pool will automatically increase annually by 1.5% of the total issued and outstanding share capital as of the end of the previous year.
NIO’s equity incentives have also helped the company retain a large number of talents. The equity incentive expenses generated by R&D personnel accounted for 16.1%, 24.8%, and 27.3% of the total equity incentive costs in 2018, 2019, and 2020, respectively. In the first three quarters of 2021, the proportion was 35.4%.
