Slashing of bankers' pay in China may lead to exodus
Jiang Jianqing, chairman of Industrial & Commercial Bank of China (ICBC), earned less than 2 per cent of JPMorgan Chase CEO Jamie Dimon's compensation last year while reporting twice the profit. Instead of a reward, Jiang is poised for a pay cut.
China's government said last month it will reduce salaries for executives at state-owned enterprises (SOEs) because "unreasonably high" incomes have become a source of public discontent. The biggest banks have pledged to implement the plans, part of President Xi Jinping's campaign to tackle government waste and corruption.
The risk is that lenders will bleed talent just when China needs skilled managers to grapple with interest-rate deregulation, an explosion in shadow banking and bad debt. While banks plan to test stock incentives for employees, the rollout of such measures may be slow and their scope limited, according to Guotai Junan and Changjiang Securities.
"The big four state banks are really large entities that depend on hundreds - if not thousands - of highly skilled bankers to operate," says Victor Shih, an associate professor at the University of California at San Diego. An exodus of key staff could leave "a big mess", he says.
The five largest state-controlled banks - ICBC, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications - paid their combined 1.7 million employees an average of 230,300 yuan (HK$290,000) in salaries, bonuses and benefits in 2013, according to their annual reports. That is one-third less than at Beijing-based China Minsheng Banking, the country's only privately owned listed lender.
The gap was even larger with foreign firms: JPMorgan spent an average of US$122,700 (HK$951,000) in salaries and benefits globally, while at HSBC, the largest European bank, the amount was US$71,400, according to Bloomberg data.
ICBC's Jiang, 61, earned 2 million yuan last year in salary, bonus and benefits as head of the world's biggest bank by assets and profit. That's equivalent to about 1.6 per cent of the US$20 million in total compensation for JPMorgan chairman and CEO Dimon, 58.
The salaries of the heads of China's banks and SOEs may be reduced by up to 70 per cent and capped at 600,000 yuan, Caijing magazine reported last month, citing unnamed sources in the ministries of finance and human resources.
The cutbacks at SOEs also involve bans or restrictions on perks such as cars, club memberships, golf and "physical therapy", the government said on August 29.
Agricultural Bank of China president Zhang Yun said on August 26 the lender will "unswervingly support and strictly implement" any pay cuts, a position echoed by the leaders of other state-run banks.
The pay-cut plans come as the government pledges to improve incentives at SOEs, reduce state ownership and hire top executives from outside government.
Bank of Communications, the Shanghai-based lender partly owned by HSBC, says it wants to be the first to introduce stock incentives when China lifts a ban imposed in 2008.
Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities, is doubtful of the impact of such a measure. "It's unrealistic to expect employee stock incentives to offer any meaningful lift to bankers' pay levels," he says. "That would run against the government's campaign to limit excessive pay at SOEs and promote fairness amid public discontent."
Since the global financial crisis, regulators around the world have wrestled with how to align bankers' pay with the long-term interests of shareholders, depositors and other stakeholders to discourage excessive risk-taking. The European Union has capped bonuses at twice fixed pay, a limit Britain is challenging in court. In July, US President Barack Obama said banks "take big risks because the profit incentive and the bonus incentive are there for them".
The number of staff to be affected by pay cuts isn't clear. China Construction Bank, the world's third-largest bank by assets, says salary reform involves only high-level executives who are political appointees installed by the Communist Party.
Still, reductions at the top threaten to have a chilling effect on the pay of more junior managers, according to Cao.
Shih says that may lead mid-level executives who have opportunities at non-government-controlled banks or Hong Kong lenders to think twice about taking or staying in jobs at big SOEs.
"I know people who have turned down a job in a state-owned bank because they say, 'If I want to make a living honestly, the pay is too low'," Shih says. "Of course, if you engage in corruption then the pay can be quite high, but there are a lot of risks in doing that."