China issued guidelines governing the payout of bonuses to executives at Chinese financial companies, joining the ranks of countries trying to discourage excessive risk taking by changing the way senior bankers are paid.
Under the rules, banks should retain at least 40% of the funds budgeted for bonus payments against possible future risks. They can then pay out the retained funds after a lockup period of three years, the China Banking Regulatory Commission said in a statement Wednesday. If the banks have significant losses, they will have the power to take back previously paid bonuses and stop further payments, the regulator said.
The new rules also limit bonus payments for senior managers to no more than three times their base salaries.
The global financial crisis prompted a re-examination of executive pay in the U.S. and other countries. In China, salary levels have risen in recent years with rising profits, but executives in the financial sector generally earn a fraction of what their counterparts at Western companies make—even though China’s banks are among the largest in the world and have mainly avoided the losses that crippled many foreign counterparts.
In 2008, Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing received total compensation of about $236,000, according to the bank’s annual report. Citigroup Chief Executive Vikram Pandit received more than $38 million that year. (For 2009, Mr. Pandit received cash compensation of $128,751 after cutting his salary to $1 in February 2009.)
Still, compensation in the financial sector has been a contentious subject in China, where almost all major banks and insurers are majority-owned by the government, and most top executives are appointed by the ruling Communist Party.
China moved early in the crisis to rein in financial-sector pay. The Ministry of Finance issued a notice in April saying it had capped total compensation for financial institutions in 2008 at 90% of the amount executives received the year before. For financial firms at which revenue fell in 2008, the limit was set at 80%, the ministry said.
Back then, when a downturn in global demand resulted in layoffs in China’s export sector, the government said its actions were driven by the need to ensure “fair distribution of income in society.” By contrast, Wednesday’s statement was focused on controlling risk in the financial system.
“The global financial crisis showed an inappropriate payment system in many countries’ financial industries led to overly risky bets and excessive profit-chasing by financial companies, which destabilized both the firms and the sector,” the banking regulator said.
It also said its new measures aren’t an attempt to decide remuneration levels at commercial banks.
In November, Hong Kong proposed similar guidelines that would require top banking executives to defer at least 60% of their bonuses for at least three years, with a clawback policy in the event of future losses.
The rules will apply to all Chinese banks as well as state-run asset-management companies, trust companies, financial-leasing companies and the financial units of state-owned companies. Foreign banks in China weren’t included in the list of institutions covered by the guidelines.