The Crimson Press Curriculum Center

First Page and the Assignment Questions:
If Tsinghua Tongfang can keep its pace of development as it does now … it will make one hundred ten-millionaires and 1,000 millionaires within a period of at most three to five years.1

                   —Lu Zhicheng, CEO-Tsinghua Tongfang Co. Ltd.

Historically, the vast majority of the corporations in the People's Republic of China used bureaucratic forms of control characterized by, for example, centralization of authority, subjective performance evaluations and, if any, only relatively small performance-based incentives. However, as China adapted to its new socialist market economy and competition in the global economy, Chinese corporations were changing their control systems rapidly. They were decentralizing their operations, developing more formal performance evaluation systems, and providing larger performance-related incentives. Still, subjective performance evaluations remained common and heavily weighted in many Chinese corporations in the early 21st century.

Tsinghua Tongfang Co. Ltd. (THTF), one of China's most successful high-tech companies, was different. A young company, it had a relatively well developed and objective performance measurement, evaluation, and incentive system. Significant bonuses were offered to most of the company's management-level employees based on performance measured in terms of return-on-investment (ROI).

THTF managers were generally pleased with their measurement/incentive system, although they knew that the system would have to evolve over time, as Meilan Han (chief financial officer) explained:

We've taken a conservative approach that is designed to prevent failures. We worry that if we have failures, we can ruin the reputation of the company and Tsinghua University [the company's largest shareholder]. Our conservative approach has been very successful. But as we continue to grow, it is inevitable that our systems will have to change.

One change that the company's managers were hoping to make as soon as possible was to add stock options to the compensation packages of at least some employees, if and when the Chinese government legalized their use.

Assignment

1.   Evaluate the Tsinghua Tongfang control, performance evaluation, and incentive systems. What changes would you suggest, if any?

2.   Should the company implement the proposed employee stock option plan?