I wrote about this topic a while back on china/divide, explaining that although China was seriously looking into compensation limits for bank executives, there were serious problem in moving ahead with comprehensive rules:

[B]anks are not independent institutions in China and, at least in the past, were specifically referred to as “policy banks,” since they were instrumental in implementing economic development policies.

When the government wants to stimulate the economy, like it did last year, the policy banks get the job done, lending to a variety of capital projects around the country. In return for doing so, they are backstopped to some extent by the government with respect to risks like Non-performing Loans.

So when it comes to assessing bank executive performance, one cannot simply take a look at the balance sheet or stock price — there’s a lot more going on at any given time. Moreover, it’s not even easy to define exactly what “compensation” is at a State-owned institution[.]

Seems like quite a complicated issue, and certainly not something that lends itself to a quick fix. The U.S. approach was to go for simplicity, a USD 500,000 cap, which is quite a ham-handed way of dealing with this.

Given what was announced yesterday, the China solution is starting to look a lot like the U.S. rule:

Senior bank executives’ performance-related bonuses should be within three times that of their basic salary, the China Banking Regulatory Commission said in its new guidelines.

At least 40 percent or more of an executive’s bonus must be delayed for a minimum of three years and could be withheld if their bank suffers losses due to poor control of risk.

Well, the three-year holding period is kind of interesting. If someone racks up huge numbers in one year and receives a fat bonus for his work, but then those investments go sour within 36 months, the bonus could be adjusted. On paper, that sounds like a good way to reduce risk-taking.

That sort of holding period would never fly on Wall Street. Those guys already despise the (usually) much shorter mandatory holding periods following IPOs, M&As, etc. (depending on either legal or contractual provisions). Asking them to wait three years before they can spend/invest that bonus cash? Heaven forbid!

On the other hand, are those bonus reductions mandatory/automatic or discretionary? If the latter, then all of this may be bullshit at the end of the day.

Banks must consider a range of indicators, such as capital adequacy ratio, non-performing loan ratio and provisions for bad loans, when assessing executives’ performance, the banking regulator said.

OK, but again, what does this mean? Will there be quantitative guidelines? How much is mandatory and how much discretionary? I think we’re going to need some lengthy implementing regulations on this one.