Written by Brenda Nakalema

China Considers Limits on Bank Executive Pay in the Latest Move for the “Common Prosperity” Plan.

Chinese President Xi Jinping’s latest directive for banks to reduce “excessive” pay for executives is the most recent sign of …

Chinese President Xi Jinping’s latest directive for banks to reduce “excessive” pay for executives is the most recent sign of the extent of his “common prosperity campaign”, analysts say.

This indicates what’s to come but wasn’t much of a surprise after President Xi Jinping’s speech last year, where he reiterated that a major goal was to “regulate excessively high incomes, and encourage high-income people and enterprise to return more to society.”

A few tactics used to enforce the President’s Common Prosperity Campaign have included a wide range of regulatory tightening for China’s growing tech sector; stopping profits for most private education institutions; plus a conservative turn for cultural industries like celebrity endorsements and video games, which he claims fall into what make a prosperous society.

At the start of the year, China’s securities regulator met with leading financial institutions like Citic (ticker: 267. Hong Kong) and China International Capital (ticker: 3908. Hong Kong), including foreign institutions Credit Suisse Group (ticker: CS), Goldman Sachs Group (ticker: GS), and UBS Group (ticker: UBS).

Recently, new meetings we held with foreign and domestic banks in attendance, China’s security regulator announced.

According to the new rules, the executive pay should not vastly exceed that of lower-level workers and shouldn’t be directly tied to performance in deals such as underwriting. The standards executives are expected to abide by were also tightened, such as lowering risk exposure, and they stand to face harsher punishment if regulatory violations occur.

“The directive is nothing short of interference with company autonomy on personnel and compensation decisions and more of a reflection of a command economy system. But I am not sure how enforceable it will become,” said James Zimmerman, a partner in the Beijing office of Perkins Coie and former chairman of the American Chamber of Commerce China.

“Extravagant executive compensation is a frequent topic everywhere in the world, but at the end of the day, most governments take a hands-off approach. The problem in China is that state-run companies are too interconnected with the government to ignore even mere suggestions. We’ll have to see if this works in practice.”

The new rules come at a strange time for China. Although some foreign funds and financial institutions have been permitted complete ownership of their previous joint ventures, pandemic and travel restrictions are turning away top talent, according to the European and American chambers of commerce in China.

“Assuming companies get in line and implement the directive, dictating compensation levels may lead to brain-drain from the financial sector (or outside of China) as people gravitate toward employment opportunities elsewhere. This could impact the performance of those companies that are required to pay their people less,” Zimmerman added.

In addition to these reservations, the interconnectedness of the global financial system might make it hard to implement, said Perking University professor Michael Pettis.

“The problem is that it is hard for international banks and investment funds to transform pay in China if the pay isn’t transformed the same way elsewhere. If Beijing is serious about doing this, it will only increase the split between Chinese and global financial systems,” he added.

Despite all this, Pettis says there might actually be an upside.

“I like these proposals. There’s no question that performance-related bonuses can trigger behaviour that exacerbates volatility, especially among traders and investors. It is pretty easy to prove this using basing option theory, and it is even easier to see it in action,” he said.

“Deferred bonus schemes and requirements that people invest their own money in their own funds are a throwback to the old partnership system in which your income and wealth were tied to the long-term performance of your bank and not the short-term performance of your desk. This is almost certainly a good idea,” he added.

Sceptics saw the move as populist, indicating that Xi is set to be anointed for a third term- an unprecedented feat in modern China.

“Xi has seen the excesses of the western financial system, and controlling payouts is viewed as one way of mitigating risky incentives. It may also be a matter of optics: highly paid foreign bankers making money off of Chinese households is not a good look in the age of common prosperity,” Leland R. Miller, CEO of economic research firm China Beige Book.

Zimmerman also emphasized this point when he said, “Common Prosperity is not really defined in details, and no one really knows what’s included and what’s not, or how this undefined policy will be implemented. Until there are more details, it’s nothing more than populist sloganeering.”