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Mainland China bankers pay: recent developments

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Ho Victor
Victor Ho

Registered Foreign Lawyer, Cal

Hong Kong

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Ng Susana
Susana Ng

Of Counsel

Hong Kong

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07 April 2010

The G20 process has had a ripple effect into the main Asian markets. Hong Kong and Singapore have adopted many of the Principles and Standards issued by the Financial Stability Board (FSB).

Mainland China authorities have taken similar steps. Initially, the measures taken relate to the pay restraints applicable to state-owned financial institutions and financial institutions with a controlling state interest.

On 10 March 2010, the China Banking Regulatory Commission (CBRC) issued a set of supervisory guidelines regulating the compensation practices of commercial banks (the Supervisory Guideline). The Supervisory Guideline applies to commercial banks in Mainland China and covers key aspects such as Compensation Structure and Payout; Alignment to "Time Horizon of Risk", Measurement of Performance; Governance and Adequate Disclosure.

On 10 March 2010, the CBRC issued the Supervisory Guideline in response to the Principles for Sound Compensation Practices issued by the FSB and other applicable international standards. The objective of the Supervisory Guideline is to ensure that commercial banks establish a proper and effective corporate governance mechanism with a view to promoting sound operation and sustainable development of the banking sector in Mainland China.

Who does the Supervisory Guideline apply to?

The Supervisory Guideline applies to all commercial banks in Mainland China. "Commercial banks" are those legal entities incorporated within Mainland China which carry on the business of public deposit-taking, lending and arranging of accounts settlement. The Supervisory Guideline is equally applicable to other types of banks and non-bank financial institutions under the supervision of the CBRC.

In respect of overseas subsidiaries, branches and/or non-bank financial institutions established by a commercial bank, their compensation policies should be in line with the Supervisory Guideline as well as the applicable law in the relevant jurisdictions.

When did the Supervisory Guideline come into effect?

The Supervisory Guideline came into operation with effect from 1 March 2010

Key Features of the Supervisory Guideline

The Supervisory Guideline regulates five main aspects: Compensation Structure and Payout; Alignment to "Time Horizon of Risk", Measurement of Performance; Governance and Adequate Disclosure.

Compensation structure and payouts

All commercial banks are required to design a uniform compensation system which applies to all employees and to ensure that their compensation payout schedule aligns with the time horizon of risks of the relevant business lines.

The CBRC recognizes that the compensation package of employees in commercial banks should contain three main components, namely (a) fixed compensation; (b) performance-linked compensation; and (c) welfare benefits.

Fixed compensation: includes base salary, allowance and subsidies and should in principle be no more than 35% of the total compensation.

Performance-linked compensation: the amount of performance-linked compensation for top executives should be determined by the results of annual performance assessment and must be no more than 3 times their fixed compensation.

  • Deferrals: between 40-60% of performance-linked compensation for key employees should be deferred, subject to minimum vesting periods (at least three years) and vest no faster than on a pro-rata basis. Employees are restricted from hedging deferred compensation.

  • Clawback: clawback arrangements in respect of the performance-linked compensation should be established so as to empower commercial banks to claw back the vested portion of the performance-linked compensation in case of extraordinary losses and stop the payouts of the unvested portion. Such clawback arrangements should also apply to ex-employees.

  • Guaranteed Bonuses: guaranteed minimum bonuses are generally not allowed. However, if a guaranteed bonus is "necessary", this should only apply to the first-year payout for newly recruited employees.

Welfare benefits: refer to benefits which are of a welfare nature, including insurance benefits and housing fund. Commercial banks should manage welfare benefits in accordance with applicable law.

Measurement of Performance

All commercial banks are required to have a set of sound performance assessment indicators in place which should include (a) economic performance indicators; (b) risk control indicators; and (c) social responsibility indicators. If a commercial bank fails to observe any the indicators, the remuneration of all employees would need to be adjusted downward.

Compensation Governance

All commercial banks are required to have a sound compensation governance structure in place.

Board of Directors: The Board has ultimate responsibility for designing and monitoring the implementation of the compensation system in accordance with the Supervisory Guideline. The Board is also responsible for setting the annual performance assessment indicators of the bank at the beginning of the year and reporting the scheme to the CBRC.

Independent compensation committee: All commercial banks should set up an independent compensation committee under the Board. At least 1/3 of the members should be "financial experts".

Audit Department: The bank’s auditing department must conduct annual audits on the design and implementation of compensation system and report the results to the Board and the CBRC.


The Board is required to disclose information about the bank's compensation practices to the CBRC on an annual basis. Such information needs to form an important part of the bank’s annual report.

CBRC's Power

The CBRC will evaluate the soundness and effectiveness of commercial banks’ compensation governance at least once a year. It also monitors the compensation practices of commercial banks on an ongoing basis and conducts on-site audits. If the compensation practices and related performance assessment practices are not in compliance with the Supervisory Guideline or the applicable rules and regulations, the CBRC has the power to take supervisory action in accordance with the Law of People’s Republic of China on Banking Regulation and Supervision . That would include suspending the relevant bank's business, restricting its asset transfers, making disciplinary sanction against the relevant directors and senior managers and/or disqualifying them .

What should you do now?

  • Implement the Supervisory Guideline – commercial banks should implement the Supervisory Guideline, to the extent they have not already done so, by setting sound performance assessment indicators, establishing an independent compensation committee, and ensuring that the Board members fully understand their responsibilities. Systems need to be put in place to monitor ongoing compliance with the Supervisory Guideline.

  • Commercial banks should check if policies and contractual documentation are consistent with the Supervisory Guideline and enter into agreements with their employees in order to address the matters contained in the Supervisory Guideline.

How can we help?

Allen & Overy Hong Kong has an integrated employment and regulatory team to assist with preparations and implementation of the Supervisory Guideline (including in conjunction with our Global Employment Practice to assist in relation to group arrangements in Europe and the US). In Asia, we also have offices in the People's Republic of China (Beijing and Shanghai), Singapore, Bangkok, Sydney and Tokyo and the regional coverage to assist, on a coordinated basis, with the roll-out of these types of measures in other jurisdictions as and when adopted.

For a comparison with developments in Hong Kong and Singapore, you can refer to our recent bulletin covering those jurisdictions.