Jiang Jianqing, chairman of Industrial & Commercial Bank of China Ltd., earned less than 2 percent of Jamie Dimon’s compensation last year while reporting twice the profit of JPMorgan Chase & Co. 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 companies 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 bolster support by tackling 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 rising levels of soured credit. 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 Securities Co. and Changjiang Securities Co.
“The big four state banks are really large entities that depend on hundreds -- if not thousands -- of highly skilled bankers to operate,” said Victor Shih, an associate professor at the University of California at San Diego who studies China’s politics and finance. An exodus of key staff could leave “a big mess,” he said.
The nation’s five largest state-controlled banks -- ICBC, China Construction Bank Corp. (939), Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. -- paid their combined 1.7 million employees an average of 230,300 yuan ($37,500) in salaries, bonuses and benefits in 2013, according to data compiled from annual reports.
That’s one-third less than at Beijing-based China Minsheng Banking Corp. (1988), the country’s only privately owned listed lender and one of 12 mid-size national banks with mixed ownership, also known as joint-stock banks.
The gap was even larger with foreign firms: JPMorgan (JPM) spent an average of $122,700 in employee salaries and benefits globally, while at HSBC Holdings Plc (5), the largest European bank, the amount was $71,400, according to data compiled by Bloomberg. Citigroup Inc.’s (C) locally incorporated China unit spent an average of about 363,000 yuan, or $59,000, on employee compensation last year, including salaries, bonuses, stock incentives and benefits, according to its annual report.
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 $326,000, or 1.6 percent of the $20 million in total compensation for Dimon, 58, who is chairman and chief executive officer of New York-based JPMorgan, the largest U.S. lender by assets. ICBC (1398), based in Beijing, declined to comment on its outlook for pay and staff retention.
The salaries of the heads of banks and so-called central state-owned enterprises may be reduced by as much as 70 percent and capped at 600,000 yuan, or less than $100,000, Caijing magazine reported on Aug. 25, citing people it didn’t identify in the ministries of finance and human resources. Two calls to the State Council Information Office seeking comment on the Caijing report went unanswered.
The cutbacks at state-owned enterprises also involve bans or restrictions on perks such as cars, club memberships, golf and “physical therapy,” the government said on Aug. 29.
Agricultural Bank’s President Zhang Yun said on Aug. 26 that the Beijing-based lender will “unswervingly support and strictly implement” any pay cuts, a position echoed by the leaders of other state-run banks.
Zhang was paid 1.79 million yuan in 2012. His 2013 compensation is yet to be disclosed. Bank of China Chairman Tian Guoli got 1.36 million yuan for his first nine months at the Beijing-based lender after joining in April 2013.
The pay-cut plans come as the government pledges to improve incentives at state-owned enterprises, 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 on such compensation. Caijing reported Aug. 25 that Bank of Communications and Bank of China may be selected for a trial.
Wang Yichuan, a Wuhan-based bank analyst at Changjiang Securities, said staff may find that stock incentives do no more than offset salary cuts.
“It’s unrealistic to expect employee stock incentives to offer any meaningful lift to bankers’ pay levels,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities. “That would run against the government’s campaign to limit excessive pay at SOEs and promote fairness amid public discontent.”
Bad loans, weaker margins, slower loan growth and a struggle to boost revenue mean that Chinese lenders may need to cut costs, adding pressure on pay, according to Cao. Bank employees in the eastern city of Wenzhou already face pay cuts because of rising bad loans and falling profits, China Business News reported Sept. 4, citing unnamed banking officials.
The nation’s five biggest banks this year probably will report the smallest growth in combined profit in more than a decade, according to analysts’ estimates compiled by Bloomberg.
Shares of ICBC are up about 1 percent this year in Shanghai and 2 percent in Hong Kong. The five banks are trading at the cheapest price-to-earnings valuations of comparable global lenders, data compiled by Bloomberg show.
Financial crises in nations such as Sweden and the U.S. point to the challenges ahead for Chinese bankers, who are managing $27 trillion of assets, almost double the $15.2 trillion held by U.S. banks as of June. In China, soured credit is at a five-year high and loosely regulated high-yield investment products -- part of the shadow-banking industry -- are at risk of defaulting after the economy slowed and property prices slumped.
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 capped bonuses at twice fixed pay, a limit the U.K. is due to challenge in court today. The Bank of England, meanwhile, has told lenders to ensure that such payments can be clawed back as long as seven years. In July, U.S. President Barack Obama said banks “take big risks because the profit incentive and the bonus incentive is there for them.”
In China, the Ministry of Finance banned stock incentives at financial institutions in 2008, saying the government wanted to “avoid further widening the gap with the average pay level in society.” Now, as officials change tack, the finance ministry is drafting rules for such measures and seeking feedback, according to Liu Xinhua, a vice chairman at the China Securities Regulatory Commission.
The finance ministry is planning trials that would let almost all staff at big state banks use as much as 30 percent of their salaries to buy shares, two people with knowledge of the matter said, declining to be identified because they aren’t allowed to speak publicly. The employees would pay about market price, one of the people said, raising questions about how it would be an incentive, or different from buying shares through personal accounts in the open market.
The number of staff to be affected by pay cuts isn’t clear. Beijing-based China Construction Bank, the world’s third-largest by assets, says salary reform involves only high-level executives. The government has indicated that the key targets are executives, like Jiang, who are political appointees installed by the Communist Party.
The biggest state-run banks have one highly paid executive: Chim Wai Kin, Bank of China’s chief credit officer in Beijing. A British citizen hired from overseas in 2007, he earned $1.4 million last year, according to a company filing. That indicates flexibility in compensation is possible. Chim has worked in credit and risk management for more than 20 years including at Standard Chartered Plc, Bankers Trust Co. and Deutsche Bank AG. He declined to comment through a press officer.
Still, reductions at the top threaten to have a chilling effect on the pay of more junior managers, according to Cao. Shih said 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 state-owned companies.
“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,’” said Shih. “Of course, if you engage in corruption then the pay can be quite high, but there’s a lot of risks in doing that, also.”