Executive Pay at Chinese Banks to be Tied to Risk Management Performance
News, page 5, March 8, Issue 459
Translated by Tang Xiangyang
Original article: [Chinese]
Update: The China Banking Regulatory Commission posted the new guidelines to their website yesterday. They became effective as of March 1, 2010. You can refer to the Chinese text of the new guidelines here.
Chinese bankers may find it a little harder to earn annual bonuses running into the millions of yuan at the end of this year, as, according to a source working in one of China's commercial banks, the China Banking Regulatory Commission (CBRC) is currently considering a plan that will link executive pay to a banker's ability to handle long-term risk management.
Under the proposed plan, the CBRC may even require banks to cancel any bonus payments made to executives that are later found to have engaged in business that exposed the bank to excessive risk.
According to the draft regulations, performance-related pay will be determined by how much risk the executives have exposed the bank to, with a focus on capital adequacy ratios, bad loan ratios and other factors.
It's also suggested that banks should delay paying executives until they're able to properly assess the quality of the employee's risk management.
"That means, if the business they are responsible for is exposed to huge risks in the short term, they will earn much less," a researcher working at a large bank explained to the EO.
Details of the Proposed Changes
Sources revealed that the CBRC was planning to divide the income of bank executives into three fundamental areas: basic pay, performance-related pay and long-term inducements.
The amount of performance-related pay will likely be determined by the level of risk that the employee has exposed the bank to and will be calculated in reference to the bank's capital adequacy ratios, ratio of bad loans and other factors.
"If the major risk indices of any bank don't reach the goals as laid out by the regulator, then the performance-related income of high-level executives at that bank will be substantially reduced," an employee in the department of human resources employee at a commercial bank said.
Meanwhile, the CBRC will also require banks to pay their performance-related pay by installments and cancel any bonus payments made to executives if they are later found to have engaged in business that exposed the bank to excessive risk.
That's to say, the performance-related pay will not be paid at the end of the year, but will be paid by installments, with final payment on being made after it's possible to assess all the risks that the bank has been exposed to.
"As I understand it, the CBRC will require banks to delay payment of 30 percent of the performance-related income by at least three years. If, during this period, the business that this employee is responsible for is exposed to excessive risk, the fraction of the bonus that has already been deposited in the employee's account will be taken back," a high-level executive at a joint-stock bank revealed.
The CBRC also plans to periodically inspect the proposed payment system at banks, in order to monitor the implementation of the new policy.
Why the Reform?
In late 2009, at the "Beijing International Finance Forum 2009", Jiang Dingzhi, Deputy Chairman of the CBRC, argued that in order to ensure the sustainable development of the country's banking system in the wake of the financial crisis, Chinese banks needed to seriously consider and improve reforms to the system of executive remuneration.
Jiang argued that China's baking industry should, after readjusting the risks, set up a performance evaluation system centered on capital returns, so as to ensure that executive income reflected the level of risk that banks were exposed to.
As the risks incurred often only emerge after the fact, payment to high-level executives should be delayed.
A source working at the CBRC informed the EO that high-level executive incomes were to be determined by individual company boards and shareholders, the CBRC would take no part in determining exactly how much a bank executive should be paid.
"But, as a regulator of the banking industry, the CBRC will ensure that incentives are both reasonable and effective in order to prevent a situation in which excessive rewards are offered for risky behaviour, similar to what happened on Wall Street, emerging in China."
Part of a Broader Plan
At the end of 2009, the Ministry of Finance issued a set of regulations covering executive pay within China's state-owned financial institutions.
Known as the Rules of Performance Evaluation of State-owned Financial Institutions and Other State-owned Enterprises, the regulations outlined how the performance of financial companies would be evaluated.
Similar to the proposed new bank executive remuneration package, these regulations also focused attention on the importance of monitoring capital adequacy ratios, the ratio of bad loans.
The regulations also classified financial institutions into four distinct types: banks, securities companies, insurance companies and comprehensive financial institutions.
"The CBRC is only responsible for the structure, payment and supervision of the salaries of bank executives, while the Ministry of Finance, as the biggest shareholder of state-owned financial enterprises, is authorized to decide how high-level executives at state-owned financial institutions, including China's largest banks, are to be paid. The CBRC's proposed changes are, at most, technical guidelines" a source close to the CBRC revealed.
According to their annual reports, the pay of high-level executives at the major state-owned banks declined by 10% in 2008.
Guo Shuqing, Chairman of the Construction Bank of China, had his salary reduced from 1.795 million yuan in 2007 to 1.569 million yuan in 2008. Xiao Gang and Li Lihui, respectively chairman and director of the Bank of China, earned 1.507 million yuan and 1.544 million yuan in 2008, down 10 percent from what they both earned in 2007.
Links and Sources
MOF: Operation Rules of Performance Evaluation of State-owned Financial Institutes and Other State-owned Enterprises (Chinese)
CBRC: New Guidelines (Chinese)
The views posted here belong to the commentor, and are not representative of the Economic Observer |