Photographer: Tomohiro Ohsumi/Bloomberg

Banker Stock Incentives Left Languishing in China's Reform Drive

  • Ministry of Finance said to leave 2014 plans gathering dust
  • China's biggest banks may bleed talent on poor compensation

They run some of the world’s biggest banks, yet the leaders of Chinese state-owned lenders aren’t getting any closer to the kind of compensation that could encourage them to put shareholders first.

It was in August 2014 that the big banks started floating plans for stock options, optimistic that President Xi Jinping’s officials would give approval as part of a plan to give markets a bigger role in the economy.

It never happened. The Ministry of Finance has yet to follow up on consultations held with banks that year, according to two bank officials who asked not to be identified because they aren’t authorized to speak publicly. The ministry didn’t respond to a request for comment.

With China’s economy slowing and the Communist Party preoccupied with discontent over widening inequality, top bankers have instead been hit with stricter pay limits. And slumping share prices amid a surge in bad loans means the prospect of stock options has lost some of its allure, the people said. Still, the longer-term risk is that the best executives will keep leaving for higher-paying jobs including at the financial startups that are targeting the largest banks’ customers.

“Last year was a gloomy year for China’s banks and those working there, and I wouldn’t expect to see any light in the tunnel in 2016,” said Bai Rui, a partner at PXC Consulting, a Beijing-based human resources adviser and data provider. “We may see a surge in departures after Chinese New Year, when people get their annual bonuses," said Bai, referring to the annual holidays that take place in early February this year.

Sinking Pay

Companies use stock-based incentive compensation to better align the interests of corporate leaders and shareholders. For Lloyd C. Blankfein, the chief executive of Goldman Sachs Group Inc., a $31 million compensation package for 2014 included $14.7 million in restricted shares, half of which were tied to return on equity.

In China, many senior executives’ pay fell in 2015 to the lowest level in at least a decade, according to PXC. The government imposed a 600,000 yuan ($91,000) cap on the pay of the Communist Party appointees atop the five biggest state-owned lenders, including the chairmen, presidents, deputy presidents and supervisory board chairmen, according to people familiar with the matter.

That dragged down the compensation of the likes of Jiang Jianqing, the chairman of Industrial & Commercial Bank of China Ltd., who earned 2 million yuan as recently as 2013. It also had a chilling effect on pay at lower levels in banks -- just as a wave of financial technology startups offered new job possibilities.

Slow Progress

While finance industry reforms have included moves toward market-driven interest rates, “not much has been achieved” on changing incentives and ownership structures to improve the performance of the big banks, according to Sanford C. Bernstein & Co. analyst Faye Gao, who’s based in Hong Kong.

A Ministry of Finance ban on state-owned listed financial institutions offering share incentives dates back to 2008. In the excitement of late 2014, when analysts speculated that incentive plans would boost valuations across the banking industry, China International Capital Corp. said that the restriction could be gone within weeks.

Bank of Communications Co., the nation’s fifth-largest bank, said that it wanted to be the first listed lender to introduce stock incentives, while China Construction Bank Corp. said it was studying such plans.

Press officers of both banks declined to comment.

Revolutionary Change

When China Minsheng Banking Corp., a privately owned lender, announced plans in 2014 for discounted share sales to staff, Sinolink Securities Co. said that it would be a revolutionary change for the bank. That plan is yet to be put to shareholders. Likewise, a proposal by China Merchants Bank Co. hasn’t been carried out.

In the background were tensions between the incentive proposals, a state frugality drive and the Communist Party’s awareness that, like bankers around the world, those in China aren’t always favorites with the public. In 2014, Xi said executives at banks and state-owned enterprises had “unreasonably high” incomes and that their pay was a source of public discontent. Central bank Governor Zhou Xiaochuan had previously noted public concerns.

More recently, officials may have been diverted by an anti-corruption drive sweeping through the finance industry.

It’s “pretty difficult” to push for incentive plans given anti-banker sentiment and the anti-corruption campaign means it’s “bad timing,” said Wei Hou, a senior analyst with Sanford C. Bernstein in Hong Kong.

Jumping Ship

More than 50 top banking executives -- those ranked as department heads or higher -- resigned in 2015, a turning point from the previous 20 years when senior staff typically held on to their jobs, according to China Business News, which cited its own calculations. High-profile bankers leaving for Internet finance rivals included Bank of Hangzhou Co.’s former President Yu Shengfa who joined Alibaba Group Holding Ltd.’s banking affiliate MYbank.

Looking back, the finance ministry’s 2014 consultations on potential trials of incentives hadn’t been promising.

The ministry proposed letting staff at the big-five banks use as much as 30 percent of their salaries to buy shares at about market price and subject to lockup periods, according to people familiar with the matter. It wasn’t clear how that would be an incentive or be more rewarding than buying on the open market.

Unloved Stock

Some lenders are also concerned that the poor performance of banking shares, with Chinese lenders typically trading at below book value, may mean that staff won’t want even discounted stock, according to people familiar with banks’ work on incentive proposals. Shares of the biggest five lenders had lost an average 8 percent in Shanghai and 12 percent in Hong Kong by mid-January.

Banking shares may remain sluggish as Sanford C. Bernstein’s Hou expects 2016 to be another challenging year, while BNP Paribas SA analyst Judy Zhang cut earnings estimates for the industry, citing pressure on asset quality and margins. Analysts’ average 12-month target price for ICBC fell to HK$6.5 as of Jan. 15 from HK$7.9 during July, according to data compiled by Bloomberg.

While compensation of Chinese bank executives is low compared to their global counterparts, their pay has been higher than executives at other state enterprises -- another headache for any government officials or banks wanting to sell the public on the value of incentives.

— With assistance by Jun Luo

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