The amount of performance-related pay will likely be determined by the level of risk that the employee has exposed the bank to and will be calculated in reference to the bank's capital adequacy ratios, ratio of bad loans and other factors.

"If the major risk indices of any bank don't reach the goals as laid out by the regulator, then the performance-related income of high-level executives at that bank will be substantially reduced," an employee in the department of human resources employee at a commercial bank said.

Meanwhile, the CBRC will also require banks to pay their performance-related pay by installments and cancel any bonus payments made to executives if they are later found to have engaged in business that exposed the bank to excessive risk.

That's to say, the performance-related pay will not be paid at the end of the year, but will be paid by installments, with final payment on being made after it's possible to assess all the risks that the bank has been exposed to.

"As I understand it, the CBRC will require banks to delay payment of 30 percent of the performance-related income by at least three years. If, during this period, the business that this employee is responsible for is exposed to excessive risk, the fraction of the bonus that has already been deposited in the employee's account will be taken back," a high-level executive at a joint-stock bank revealed.

The CBRC also plans to periodically inspect the proposed payment system at banks, in order to monitor the implementation of the new policy.

Why the Reform?

In late 2009, at the "Beijing International Finance Forum 2009", Jiang Dingzhi, Deputy Chairman of the CBRC, argued that in order to ensure the sustainable development of the country's banking system in the wake of the financial crisis, Chinese banks needed to seriously consider and improve reforms to the system of executive remuneration.

Jiang argued that China's baking industry should, after readjusting the risks, set up a performance evaluation system centered on capital returns, so as to ensure that executive income reflected the level of risk that banks were exposed to.

As the risks incurred often only emerge after the fact, payment to high-level executives should be delayed.

A source working at the CBRC informed the EO that high-level executive incomes were to be determined by individual company boards and shareholders, the CBRC would take no part in determining exactly how much a bank executive should be paid.

"But, as a regulator of the banking industry, the CBRC will ensure that incentives are both reasonable and effective in order to prevent a situation in which excessive rewards are offered for risky behaviour, similar to what happened on Wall Street, emerging in China."

Part of a Broader Plan

At the end of 2009, the Ministry of Finance issued a set of regulations covering executive pay within China's state-owned financial institutions.

Known as the Rules of Performance Evaluation of State-owned Financial Institutions and Other State-owned Enterprises, the regulations outlined how the performance of financial companies would be evaluated.

Similar to the proposed new bank executive remuneration package, these regulations also focused attention on the importance of monitoring capital adequacy ratios, the ratio of bad loans.

The regulations also classified financial institutions into four distinct types: banks, securities companies, insurance companies and comprehensive financial institutions.

"The CBRC is only responsible for the structure, payment and supervision of the salaries of bank executives, while the Ministry of Finance, as the biggest shareholder of state-owned financial enterprises, is authorized to decide how high-level executives at state-owned financial institutions, including China's largest banks, are to be paid. The CBRC's proposed changes are, at most, technical guidelines" a source close to the CBRC revealed.

According to their annual reports, the pay of high-level executives at the major state-owned banks declined by 10% in 2008.