Regulations for Compensation of Listed Company's Directors and Senior Management Need to be Further Detailed

Huang Jingqiu

Recently, a listed company announced that its board of directors had reviewed 16 proposals, including one on the performance bonuses for senior management in 2024. The proposal was passed with 5 votes in favor and 2 against, mainly due to concerns over the company's declining performance.

The listed company reported a loss of 1.06 billion yuan in 2024, down from a profit of 1.13 billion yuan in 2023. The opposing directors argued that the company's 2024 profits were significantly lower than those of the previous year, and that the internal control audit report issued by the company was not satisfactory, leading to concerns over stock trading and other risks.

The compensation system for senior management in listed companies typically consists of "basic salary, performance-based bonuses, and long-term incentives." The Codex of Corporate Governance requires listed companies to establish a mechanism linking executive compensation to the company's performance and individual achievements. This regulation is too vague.

Although some listed companies have regulations that prohibit performance-based bonuses for directors and senior management in cases where they cause significant harm to the company or result in major economic losses, these individual regulations lack specific standards or guidelines.

Additionally, the Codex of Corporate Governance requires the board of directors or its designated compensation and evaluation committee to be responsible for evaluating the performance of directors and senior management. The evaluation methods include self-assessment, peer assessment, and others. The remuneration matters of directors and senior management are decided by the shareholders' meeting, while the compensation distribution plan for senior management must be approved by the board of directors. These decision-making processes for executive compensation are too loose and vague.

To improve the decision-making process for executive compensation in listed companies, we recommend:

1. Further detailing the link between executive compensation and company performance. The company's autonomy should be limited to a certain scope, with laws and regulations providing clear guidelines.

2. Reforms should focus on improving the decision-making process for executive compensation. On one hand, proposals on high-level remuneration should be subject to public shareholder voting. On the other hand, proposals on high-level remuneration for companies with financial difficulties or debt overruns should also be subject to creditor meetings.

3. Performance-based bonuses should follow the principle of "effort-based rewards." Directors and senior management must establish performance assessment indicators and meet certain criteria before receiving performance-based bonuses. The completion status of these indicators should be certified by an independent auditing institution. Any behavior that does not set key performance indicators but still awards bonuses will be considered a violation of regulations and subject to punishment.

4. Establishing a mechanism for the delayed distribution of executive compensation and clawback of unearned bonuses. The notice issued by the State Administration of Financial Institutions requires that state-owned financial institutions delay at least 40% of their senior management's performance-based bonuses for a period of not less than three years. If senior management fails to perform their duties and causes significant risks, the company should recover part or all of the previously paid bonuses.

This article represents the author's personal opinion only.