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Executive Compensation in China

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Executive compensation in China still differs from compensation models in Europe and the U.S. This article explores the unique characteristics of executive compensation in China and highlights current trends for local and expatriate pay.

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Executive Compensation in China

  1. 1. www.ginkgosearch.com EXECUTIVE COMPENSATION IN CHINA: AN OVERVIEW 2018 Executive compensation in China still differs from compensation models in Europe and the U.S. This article explores the unique characteristics of executive compensation in China and highlights current trends for local and expatriate pay.
  2. 2. 01 Executive Compensation in China: An Overview Introduction China’s economy is booming and Chinese businesses are fighting hard to recruit the best talent locally and abroad. Executive compensation in China still differs from compensation in the U.S. and Europe but the landscape is changing rapidly. Although promotion and bonuses are the norm for compensation, now there are new elements at play, such as stock options, or the added pressure of accountability as Chinese-listed companies must now declare their executive's salaries publicly. This article gives a brief background to executive compensation in China and highlights current trends for local and expatriate pay for executive talent. Executive compensation in China is in a state of flux. Since the late 70s China has been transforming from a centrally planned economy to a more market-oriented one. The market is growing quickly and China's contribution to global GDP is expected to surpass that of the U.S. in 2018. The demand for both local and expatriate executives is expected to further increase to maintain the boom and executive salaries are by necessity becoming more competitive. Unlike in the U.S. and Europe, equity compensation and stock options are fairly new forms of compensation in China. There is also greater accountability for executive compensation, as from 2006 Chinese-listed businesses are required to report the total compensation of individual board members and top management. However, transparency and what data companies choose to release varies greatly. For example, releasing a median versus a mean salary changes the perception of executive compensation. Listed firms are now able to propose the adoption of equity incentive plans, although executive salary and compensation in China, for the most part, comes from indirect compensation such as executive accounts or under-the-table bonuses. There is still not a lot of regulation in company law regarding stock options, and when executives may sell their shares, it opens the possibility of stock options being exploited. The Brief Background to Executive Compensation in China
  3. 3. 02Executive Compensation in China: An Overview Based on research done by Conyon (2016) executive compensation in China comes for the most part from salaries and bonuses, as stock options and equity incentives are relatively rare. State- owned enterprises have a uniform salary management system, while private enterprises usually have a performance-based model. Conyon noted a positive correlation between the stock market, accounting performance, and total compensation. Determining pay based on performance can sometimes be difficult, based partly on the challenges of objectivity and how much information company management can access. If you’re missing key information on earnings, it can be hard to determine performance-based pay. Thus external consultants typically come in to provide a more objective view of management's performance and determine executive compensation. Calculating executive salary in China can be unreliable due to the benefits that often exist outside the employment contract or even off the books. The main source of income for top Chinese executives is indirect compensation, for example flexible allocations for communications or travel expenses. As an example, in April 2011, Sinopec, a top petrochemical corporation, spent millions in yuan on wine for top executives. Under-the-table bonuses are also a big form of income as it angers the public when businesses declare huge salaries for their executives. A securities company in China delivered 300 million yuan in cash at the end of 2008 most of which went to those in senior management. However, promotion is also a major, and perhaps the most important, form of compensation. What are the Typical Components of Chinese Executive Compensation?
  4. 4. 03 Executive Compensation in China: An Overview Expatriate executive compensation in China is growing aggressively as Chinese companies are recruiting internationally to attract the best talent. Between 2015 and 2016 China jumped from the 4th to the 2nd place in the ranking of expatriate pay packages. The typical package for a middle manager grew from $276,000 to $290,000, or $231,000 when factoring in Tier 2 cities with lower salaries. Compensation for local executives has been growing too - by 9.1% in 2017. According to Nikkei Asian Review the average compensation of Chinese executives is $150,000. Industries such as finance and real estate lead the charge, with compensation reaching up to 25% higher than the $233,000 U.S. executive salary average for the same positions. These salaries typically include a base salary with a fixed allowance for expenses such as entertainment or communication. What are the Differences Between Expatriate & Local Executive Compensation?
  5. 5. 04Executive Compensation in China: An Overview Trends in Chinese Executive Compensation Talent recruitment in China can be challenging for several reasons. Companies are expanding without outlining a clear system for executive compensation. There’s also the balancing act between attracting and retaining high performers without displeasing the public or shareholders with exorbitant compensation packages. Recruitment in China for middle management and top executives is undergoing a massive overhaul. Salaries are rising both for expatriates and local talent and the way in which executives receive compensation is changing as stock options are becoming part of compensation packages and businesses are forced to have greater transparency for their employee salaries. However, there is not much legal regulation regarding stock options yet, so they are sometimes abused and thus are not a common form of compensation. The direction of Chinese economy will be influenced in part by how businesses recruit their executive talent. If Chinese companies are able to provide consistency and clear standards in their executive compensation, they will be able to recruit the talent necessary to grapple with both foreign and local markets. If not, it will be hard for Chinese companies to maintain their current success and expand. Ultimately, although strong economic growth and demand for talent are driving up the executive salaries in China, clear, accountable structures need to be put in place for executive compensation if businesses are to recruit and retain top talent locally and abroad. For further information on the latest tax reforms implemented by the Chinese government to attract and retain executive talent in China please read China Offers Personal Tax Relief to Attract Executive Talent on Ginkgo Search.
  6. 6. About Ginkgo Search Partners Ginkgo Search Partners aspires to be one of the most reputable international boutique executive search firms specializing in attracting outstanding professionals to fill management positions in China. We know where to find and how to attract exceptional leaders with profound knowledge of your specific industry and match to the culture of your organization. We serve both national and international companies in a diversity of industries and work in each market segment with only a limited number of clients. This approach ensures the least possible restriction on potential sources and provides us access to a large talent pool. Building on long-term relationships with our clients allows us to better understand your business and talent strategy needs and enables us to stay practically focused. If you have any questions about our executive search services in China, please don’t hesitate to email us directly at info@ginkgosearch.com www.ginkgosearch.com