Li Shixin, deputy general manager of one of Beijing's biggest pharmaceutical companies, is about to make the biggest gamble of his life. He will invest 100,000 yuan (about HK$93,380) to buy stock options in his company. This will either bring him a profit of 400,000 yuan within five years - or he could end up losing all his money. 'When I worked out the risk, I got a big shock,' said Mr Li, No 2 at Beijing Shuang Qiao Pharmaceutical. 'It is a risk and an attractive challenge at the same time. Success and failure are not decided on a single day. If our products are not good enough, we can improve them. If our sales are too low, we can increase them.' Shuang Qiao is one of the first 10 state firms chosen by the Beijing city government - as an experiment - to offer stock options to senior managers. It wants to expand the trial next year, especially to high-technology firms. The condition is they have to put up at least 100,000 yuan of their own money at the beginning of a three-year contract. If the net profit of their companies over the next three years grows each year, they will, two years after the end of the contract, be able to turn the options into stock worth up to four times their original value. But, if the companies make a loss, they must pay the balance of the loss out of their own pocket or give up the stock options. For example, Ma Guodong, general manager of Beijing Kaijian Construction & Engineering with a registered capital of 8.27 million yuan, is putting up 100,000 yuan. If he can achieve an annual profit of 1.5 million yuan for the three years of his contract, then he will receive at least 500,000 yuan two years after the end of the contract. But, if the firm makes a loss, it will keep his 100,000 yuan. Conservative Beijing is far from the first place to offer incentives to those who run state companies. Other cities have been doing so since 1996, in concerns that are well-run, profitable and have a clear ownership structure. One aim is to try to stem the loss of managers from a state system handicapped by centrally set wage levels and pensions to foreign-invested companies able to offer better wages and incentives. The other is to make the rewards more commensurate with the risks and workload and end what Chinese call the '59-year phenomenon' - on the eve of retirement, managers steal large sums of money or take bribes to give them the lifestyle they think they deserve after they finish work. The most famous example in recent years was Chu Shijian, 71, who for 18 years ran the country's biggest cigarette firm. It paid the state 20 billion yuan a year in taxes, but he received a salary of just 4,000 yuan a month. In September last year, he was given a life sentence for appropriating six million yuan. Stock options were invented in the United States in 1952 and are widely used in the West to pay managers and employees. But, in the ideological world of the mainland's state economy, they are a sensitive issue, because they widen the income gap between worker and manager and involve a 'loss' of state assets when managers become stockholders. 'One problem is inequality of income,' said one economist. 'Another is that officials see their power vanishing as managers become owners of companies. If firms belong to their workers and managers, what role, if any, do the officials have?' It is this conservatism that inserted the penalty clause in the Chinese version of the stock-option system. Originally, 17 firms in Beijing were chosen for the trial but the managers of seven rejected the plan as too risky. One Western lawyer in Beijing described the penalty clause as 'absurd'. 'How can they do this if the idea is to compete with stock options in the private sector? In any case, this should not be called a stock option but a profit-sharing plan, since only one of the 10 companies is listed. As such, profit-sharing is a good idea for state firms.' But Mr Li said the penalty clause was not the only trap. 'If the firm makes a profit, it is good for everyone, not just the manager. It is good for the workers, their benefits and the environment of the plant. But will the contract be honoured, does it have a legal guarantee? 'Now the risk of an official tearing up the contract is probably 1 per cent. In five years from now, it could be 100 per cent. That is the most worrying thing,' he said.