In China, fund managers asked to buy their own funds. Bankers will have to defer performance pay.
Pay guidelines for securities firms and funds in China
Eight senior bankers at firms including Goldman, Morgan Stanley, and UBS working on China vented their frustrations privately to Bloomberg, which published a story on Monday, June 13. In addition to the mid-and long-term challenges, recent Chinese intervention in their pay stood out:
One after another, the big names in global finance were summoned by Chinese officialdom.
On the agenda: pay—specifically, telling Credit Suisse Group AG, Goldman Sachs Group Inc. and UBS Group AG to report details on how they compensate their top bankers.
Don’t reward your top people too lavishly, Chinese regulators warned the banks this year in meetings in Shanghai and Beijing, or you might run afoul of the Communist Party, according to people familiar with the matter.
People familiar with the meetings [allegedly between bankers and China’s securities regulator CSRC] characterized the discussions as a highly unusual, if not unprecedented, regulatory intrusion into foreign banks’ personnel decisions. It’s a sign that they are being put on the same footing as local brokers, who were told in the past two years to cut pay and expenses.
Executives in attendance, which included Credit Suisse’s local Chairman Janice Hu and Goldman’s China co-head Sean Fan, were told by top regulators to keep compensation, especially for senior managers, in line with the “common prosperity” agenda.
The CSRC didn’t respond to a request for a comment.
(Emphasis on the interesting characterization by Pekingnology, as I didn’t know international bankers, if they work in one same jurisdiction, shouldn’t be put on the same footing as local brokers?)
CSRC then issued a Q&A denying the meetings were held and explaining the moves on pay.
Q: Recently, it was reported in the media that CSRC held meetings in Shanghai and Beijing this year to require foreign investment banks to report details of executive compensation and to propose not to overpay executives. What is the CSRC's comment on this?
A: The above-mentioned report is untrue. The CSRC, relevant securities regulators posted by CSRC in the cities, and industry associations have not held the above-mentioned meetings.
The compensation system is an important element of corporate governance. The construction of a scientific and reasonable compensation system is the basis for maintaining the core competitiveness of the industry, but also to maintain the sound and sustainable development of the industry.
Global regulators have paid more attention to compensation incentive-related systems in recent years, with the aim of preventing financial risks caused by excessive speculation and incentives.
In summing up the lessons of the 2008 financial crisis, the Financial Stability Board (FSB) said "Compensation practices at large financial institutions are one factor among many that contributed to the financial crisis that began in 2007. High short-term profits led to generous bonus payments to employees without adequate regard to the longer-term risks they imposed on their firms."
Europe, the United States, and other countries and international organizations have formulated relevant regulatory systems and rules for compensation in the financial industry. The Financial Stability Forum (FSF) issued the Principles for Sound Compensation Practices. The European Union issued the Capital Requirements Directive IV. The Federal Reserve issued the《金融企业薪酬政策监管方案》 Financial Companies Compensation Policy Supervision Program [Pekingnology: sorry I can’t locate this particular regulation.]
These are aimed at regulating financial industry professionals’ compensation and avoiding executives' excessive speculative behavior in order to obtain high salaries…
In order to guide the industry to establish a sound remuneration system, improve the remuneration incentive and restraint mechanism, and promote the high-quality development of the industry, recently, the CSRC, in conjunction with industry associations, and on the basis of fully listening to the views and suggestions of the industry, arranged for Securities Association of China and Asset Management Association of China to respectively issue guidelines on compensation…
In recent years, in accordance with the unified plan of the opening up of the country’s financial industry, the CSRC, in adherence to the principles of market-oriented, rule of law, internationalization, eased and cancelled restrictions over foreign ownership in securities and fund management. The CSRC has approved 11 foreign-owned securities and fund management companies. Their overall business development in China is good. The CSRC conducts uniformed supervision in accordance with the laws and regulations and fully respect the autonomy of the institution's business decisions.
The Bloomberg story didn’t cite the publicly available guidelines but relied on anonymous sources to describe pressure over pay.
regulators have pressed banks to reduce cash compensation and extend deferred bonuses to three years or more, people familiar with the meetings say
Also, on Monday, the Financial Times published a story that helpfully filled in the blanks.
On Friday, the Asset Management Association of China instructed fund houses to “enhance [their] social responsibility and capability to serve the economy and the country’s strategies”.
According to the AMAC’s new rules, at least 40 per cent of bonus payments to senior staff should be deferred for three or more years.
The association also decreed that senior staff should invest at least 20 per cent of their bonuses in financial products issued by their own companies. It added that the guidelines were intended to corral “risk-taking behaviour and potential risks” stemming from executives’ pursuit of short-term bonus payouts.
The Securities Association of China issued similar guidelines last month.
What’s the added value of this newsletter? Pekingnology will translate some relevant articles from the two guidelines.
基金管理公司绩效考核与薪酬管理指引 June 10, 2022
Guidelines for Performance Appraisal and Remuneration Management of Fund Management Companies
by 中国证券投资基金业协会 Asset Management Association of China
Article 7 The remuneration referred to in these Guidelines includes the following four parts:
(I) basic remuneration; (2) Performance-based remuneration; (3) welfare and allowances; (4) Medium-and long-term incentives.
Article 8 A fund management company shall reasonably determine and timely adjust the basic salary standard and salary structure for different positions in strict accordance with the standard procedures based on the actual situation and market level of the company such as financial status, development planning, compliance and risk management, etc. Basic remuneration and performance-based remuneration should be appropriately structured to avoid potential risks and risk-taking behaviors that may arise from the unreasonable remuneration structure.
Article 9 Medium-and long-term incentives include equity incentives and cash incentives. Fund management companies are encouraged to adopt diversified incentive and restraint measures, such as equity, options, restricted equity, and dividend rights, which are bound up with the long-term development of the company and the long-term interests of the fund management company and investors of the fund, to establish a long-term incentive and restraint mechanism.
Article 10 A fund management company may reasonably determine that part of the performance-based remuneration shall be paid together with the basic remuneration according to the financial situation and the assessment by stages.
The fund management company shall establish and implement a deferred payment system for performance-based remuneration, and specify the scope of applicable personnel, term, and the proportions, etc.
The deferred payment period and the deferred payment amount of performance-based remuneration shall be consistent with the long-term interests and business risks of the fund. The deferred payment period shall not be less than 3 years, and the deferred payment speed shall not be faster than the equal proportion.
[Pekingnology: I think it means funds can’t say let’s do 98%, 1%, and 1% for three respective years. And they have to award less than 33% in the first year.]
The scope of personnel applicable to the performance-based remuneration deferred payment system includes but not limited to the chairman of the board of directors, senior management personnel, heads of major business departments, heads of branches, and core business personnel.
Among them, the portion of deferred payment in performance-based remuneration for senior management personnel, fund managers, and other key positions shall not be less than 40% in principle. The fund management company shall regularly adjust the deferred payment system based on the amount of performance-based remuneration and changes in risks.
[Pekingnology: I think that means for a $1m performance-based bonus, they can pocket $600k at the most in the first year, and at least $400k has to be deferred for at least three years.]
Article 11 A fund management company shall establish a strict accountability mechanism…including but not limited to remuneration suspension, recourse, and deduction, etc.
It shall be clear that if the relevant personnel fail to perform their duties diligently and are responsible for the company's illegal acts or operating risks, the company shall investigate the internal economic responsibilities in accordance with the relevant provisions of the remuneration system, and may stop paying the unpaid part of the remuneration of the relevant responsible personnel, and require them to refund the relevant bonus for the year in which the relevant acts occurred or stop implementing long-term incentives for them, etc.
Accountability mechanisms should apply equally to staff who have left the company. The fund management company shall specify the aforesaid matters in its internal management system and labor contract.
Article 12 Senior management personnel, heads of major business departments, and fund managers of a fund management company shall use a certain proportion of performance-based remuneration from the company to purchase the funds of the company or run by themselves [at the company]. And they shall abide by relevant statutory time limits. Senior management personnel and heads of major business departments shall use not less than 20% of the current year's performance-based remuneration to buy their company’s funds, among which the purchase of equity funds shall not be less than 50%, except that the company does not have equity funds.
The fund manager shall use not less than 30% of the performance-based remuneration for the current year to buy funds from the company, and they should give priority to funds run by themselves [at the company], except for those funds that halted public buy-in. Where the fund manager is also a senior manager and a person in charge of a major business department, the aforesaid requirements shall be met simultaneously.
Article 13 …The fund management company shall adopt a combination of quantitative and qualitative methods to determine the performance appraisal indicators. The performance appraisal indicators shall include economic indicators, compliance indicators, and social responsibility indicators.
The economic indicators shall reflect a long-term assessment - more than 3 years - , the actual profit for investors in the fund, investment research and other professional capacity building…
Article 14 The Board of Directors' assessment of the management and the Company's assessment of key positions such as investment research and sales shall be based on the long-term investment performance, investors' long-term investment gains, compliance and risk management, professional ethics, etc., and shall not take the ranking of the fund’s scale [among comparable funds in the market], management fees, short-term performance, etc. as the main basis for remuneration assessment.
Long-term investment performance refers to the investment returns for the most recent 3 years or more. …
Article 19 The Association may conduct regular or irregular on-site and off-site inspections on the implementation of these Guidelines by fund management companies, and the fund management companies and their relevant personnel shall cooperate.
If a fund management company or its employees violate these guidelines, the association may, depending on the seriousness of the case, take disciplinary measures, such as verbal reminders, written warnings, requests for corrections within a time limit, industry-wide condemnation, public censure, suspension of acceptance or handling of relevant procedures [before the Association], and determination that the violators are not suitable for engaging in a relevant business and record the matters in the integrity registry for professionals in the industry.
If there is a suspected violation of laws and regulations, the Association will transfer it to the China Securities Regulatory Commission or other competent authorities for investigation and punishment according to law.
证券公司建立稳健薪酬制度指引 May 13, 2022
Guidelines for Securities Companies to Establish a Sound Remuneration System
by 中国证券业协会 Securities Association of China
Article 14 When formulating the remuneration system, a securities company shall…not blindly target market ranking, indicators on its business scale, and short-term performance…shall not provide employees with hedging measures to reduce the correlation between remuneration and risks. In the remuneration system, it should be made clear that it does not…implement excessive incentives by way of independent assessment such as direct proportional sharing, and does not directly link the income of employees with the income of projects undertaken or contracted by them.
Article 15 When formulating the remuneration system, a securities company shall establish a deferred payment mechanism for the remuneration of the chairman of the board of directors, senior management personnel, heads of major business departments, heads of branches, and core business personnel, specifying the applicable conditions, payment criteria, years, and proportion, etc. The remuneration package should ensure that the Company is well-capitalized and able to continue as a going concern. The length of deferred payments should match the risk duration of the relevant business, and the rate of deferred payments should not be faster than on an equal-percentage basis.
Article 16 When formulating the remuneration system, a securities company shall establish a strict accountability mechanism…including but not limited to the payment suspension, recourse, and deduction of remuneration such as bonuses and allowances, and investigate the internal economic responsibilities of the executives and key positions and other relevant responsible personnel who violate laws and regulations or cause the company to have excessive risk exposure.
Article 17 When formulating the remuneration system, a securities company may, in accordance with the provisions of relevant laws and regulations, establish remuneration mechanisms such as annuities, employee stock ownership, and equity incentives that are consistent with the long-term interests of the company. We support and encourage the employees of the company to establish personal pension accounts, and promote the organic combination of a sound remuneration mechanism and pension system.
Article 19 A securities company shall incorporate its management of compensation into the company's reputation risk management system, and strengthen the compensation-related reputation risk management.
Article 20 A securities company shall clearly inform its employees of the main principles of the company's remuneration system, the relevant requirements on labor discipline, and the relevant provisions on confidentiality…
Article 22 The Association may conduct regular or irregular inspections on the formulation and implementation of the remuneration system of securities companies through on-site inspections and off-site inspections. The securities company and its staff shall cooperate and provide relevant information truthfully.
Article 23 Where a securities company violates these Guidelines or fails to effectively implement the remuneration system of the company, the Association shall take self-disciplinary measures against it in accordance with the Measures for the Implementation of Self-disciplinary Measures of the Securities Association of China (CHN), and instruct the company to discipline the relevant responsible personnel. If it is found that there are defects in the remuneration management of securities companies involving corporate governance, compliance, and internal control, the Association will draw the attention of the regulatory authorities. If there is a suspected violation of laws and regulations, the Association will transfer relevant clues to the regulatory authorities for investigation.
The FT reported
Michael Pettis, a finance professor at Peking University, said the rules were a “good idea” given that “performance-related bonuses can trigger behaviour that exacerbates volatility, especially among traders and investors”.
But he added that it posed a headache for global financial institutions. “The problem is that it is very hard for banks and investment funds that operate internationally to transform pay in China if pay isn’t transformed the same way everywhere,” Pettis said. “If Beijing is serious about doing this, it will only increase the split between Chinese and global financial systems.”
Prof. Pettis has a brief thread on Twitter