Chinese banks start to shake-up compensation schemes to compete with private sector

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Employee stock ownership plans (ESOP) have long been used to incentivise bankers to stick with their current employer in Western markets, but in China – where the big banks are state-owned – this concept is only just taking off.

The Big Four state-owned banks have yet to embrace share-schemes, but some mixed-ownership institutions – like China Merchants Bank, China Minsheng Bank and the Bank of Beijing – have recently started ESOPs. And the fact that China’s fifth-largest bank, the Bank of Communications, is also hinting at rolling one out has had many anticipating a similar move from the Big Four.

The ESOPs may not be all they’ve cracked up to be. For a start, they’re not being rolled out across the entire organisation. According to Wu Haichuan, director of benefits in China at a leading global professional services company Towers Watson who has consulted with the clients on these schemes, there were banks which would issue shares only to senior executives in headquarter or branch offices. Consequently, only about 10% of the entire workforce would be included.

Nonetheless, there’s pressure to roll out share schemes following a wave of pay-cuts across Chinese banking industry. Senior executives at the Big Four state-owned banks have seen their pay slashed for up to 50%, while Shanghai Pudong Development Bank is said to have cut pay by 20% across board. ESOPs, therefore, could be a key retention tool to stop bankers switching into more lucrative jobs at international or privately-owned banks.

"The ‘Big Four’ are most likely to wait and see how these schemes perform," notes a Shanghai-based financial headhunter who asked not to be named.

Compensation structures are generally different in Chinese banks compared to their international counterparts. Bonuses can be centred around softer performance factors like management skills, or given on occasions like birthdays and weddings.

Matthew Phan, a Singapore-based senior analyst covering Asia-Pacific banks at financial research firm CreditSights, adds: "I'm not sure that even with stock options there is a clear link between doing your job well and getting more long-term compensation", because Chinese banks are still "government-owned and I question to what extent we can truly see them as purely commercial entities".

And these awards might or might not be popular for long - China is in the midst of a bull market, but what if share price plunges (again) as it did a few years’ ago? "Staff morale will certainly get a hit, " says Wu. "It's a double-edged sword".

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