Why Did China Ask Banks To Limit Executive Pay?

Posted: June 16, 2022

For the past few years, the topic of executive compensation has been a hot-button issue in the United States. This is because top executives routinely bring home $20 million or more in annual compensation. Meanwhile, the minimum wage is still around $7/hour in many places. As it turns out, lofty payouts for top executives is not only a capitalist issue. China, the world’s biggest communist economy, also recently issued new rules limiting bonuses for banking executives. Let’s take a look at what these new rules are and why China is enforcing them. What are the rules? According to the Financial Times, the Asset Management Association of China (AMAC) asked banks to delay 40% of bonus payments to senior staff for three or more years. This is quite a blow to top executives that might have been set to receive a large bonus. Now, these bonuses are effectively cut in half with the rest of the payment getting pushed out into the future. The timing of this decision is interesting and could have something to do with the effect of COVID-19 on the economy. Another interesting rule is that senior banking officials will now be required to invest a minimum of 20% of their bonuses in the financial products that their companies offer. This is actually a fascinating update that could help bring transparency to the financial sector. In the past, the financial sector has been guilty of profiting off the sale of shoddy financial products that they sell to customers. For example, in the 1990s, “pump and dump” stock market schemes were fairly common. Brokerages would earn a high commission by selling dicey stocks to unsuspecting investors. Or, in the years leading up to 2008, investment firms repackaged sub-prime mortgages as top-quality investments. The banks made money from selling financial products instead of investing in them. Now, banking officials in China will need to put their money behind their firm’s financial products instead of just their words. The final new rule is that banks will be able to reclaim bonuses and compensation from any employee found guilty of misconduct. So, what’s China’s main motivation behind these new updates? Why did China do this? China is a communist country. This means that it is built on an idea of common prosperity. It believes that all of its citizens are equal and should be of equal means. When banking executives are raking in million-dollar bonuses, this idea of common prosperity becomes harder to sell. This could be part of the reason why the government is trying to stem the flow of money that’s going into banking executives’ pockets. In its own words, the Chinese government encouraged banking institutions to, “enhance [their] social responsibility and capability to serve the economy and the country’s strategies”. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.