Original title: Hankun • Views | Salary management will be included in corporate governance - "Guidelines for Performance Appraisal and Remuneration Management of Fund Management Companies" Review
Author: Hankun Law Firm Ge Yin丨Mao Hui丨Fu Huijin
China Securities Investment Fund Industry Association (" Fund Industry Association ") issued the "Guidelines for Performance Appraisal and Remuneration Management of Fund Management Companies" (China Fund Association [2022] No. 209) (" "Guidelines" "), aiming to standardize the performance appraisal and salary management behavior of fund management companies and improve the long-term incentive and constraint mechanism of the public fund industry.
"Guidelines" further refined the relevant performance appraisal and salary management requirements mentioned in the "Opinions on Accelerating the High-Quality Development of the Public Fund Industry" (Securities and Supervision Commission [2022] No. 41) (" "Opinions" "), that is, urge fund managers to establish and improve a long-term assessment mechanism covering core employees such as business management and fund managers, and to ensure compliance risk control level for more than three years. The performance of the period investment, actual profit of investors, etc. are included in the performance appraisal scope, weaken the assessment proportion of indicators such as scale ranking, short-term performance, income and profit; urge fund managers to strictly implement the salary deferral system, establish and improve the bonus follow-up mechanism for core employees such as management and fund managers, implement the bonus retrieval and deduction system for violating responsible persons, and strictly prohibit short-term incentives and excessive incentives; support fund management companies to explore and implement diversified long-term incentive and constraint mechanisms, and study the use of equity, options, restricted equity, dividend rights and other methods to achieve consistency between employees and the company's long-term development and long-term interests of holders.
In addition, the "Guidelines" also implements the requirements of "Public fund managers to establish a scientific salary management system and assessment mechanism, reasonably determine the salary structure, standardize salary payment behavior, and performance appraisal should be linked to compliance and risk management, strictly prohibit short-term assessment and excessive incentives, and establish a interest binding mechanism for fund practitioners and fund share holders" to balance the interests of employees, managers, shareholders and other stakeholders. Regarding issues that have attracted widespread attention from the Guidelines, we have sorted out the following questions to provide reference for the industry.
1. Applicable subjects for salary deferral
According to the "Guidelines", salary includes basic salary, performance salary, benefits and subsidies, and medium- and long-term incentives, and almost covers economic remuneration in various currencies and non-monetary forms. The scope of applicable personnel for the performance-based remuneration deferred payment system includes but is not limited to the chairman of the fund management company, senior management personnel, heads of major business departments, heads of branch offices and core business personnel. Among them, the amount of deferred payments for senior management personnel, fund managers and other key positions shall be no less than 40%.
The above-mentioned applicable subject scope is consistent with the relevant requirements in the "Regulations on Supervision and Administration of Directors, Supervisors, Senior Management Personnel and Practitioners of Securities and Fund Management Institutions" (China Securities Regulatory Commission Order No. 195) (" "Regulations on Directors, Supervisors and Senior Management" "), that is, securities and fund management institutions should establish a long-term and reasonable salary management system to fully reflect compliance management and risk management requirements, and avoid short-term, excessive incentives and other improper incentives. Securities and fund management institutions shall establish a salary deferred payment mechanism for the chairman, senior management personnel, main business departments, branch office leaders and core business personnel, and reasonably determine the salary deferred payment standards, years and proportions in labor contracts and internal systems.In addition, the above-mentioned requirements for deferred payments by applicable personnel also echo the relevant provisions in the "Regulations on Implementing the Supervision and Administration Measures for Publicly Promoted Securities Investment Fund Managers" (China Securities Regulatory Commission Announcement [2022] No. 33) (" "Implementation Regulations" "). Public fund managers shall establish and implement systems such as deferred payment and recourse deduction. "Deferred payment of remuneration" includes but is not limited to: the deferred payment period is not less than 3 years, and the amount of deferred payment to senior management personnel, fund managers and other key positions shall not be less than 40%.
As for the issues of how to define and apply "main business department heads", "core business personnel", and "key position personnel" in the scope of the above personnel, we understand that due to the different strategic positioning, talent management and business models of different companies, the scope of the above personnel may not be completely the same. But generally speaking, investment, research and sales-related front-end departments, as the leading departments of fund management companies' business, should be recognized as the main business departments; and fund management companies may have relatively large discretion in the scope of "key position personnel". For example, the definition of "key position personnel" by fund management companies that have ETF products and no ETF products may be different.
2. Regarding the establishment of an accountability mechanism
The "Guidelines" require fund management companies to establish a strict accountability mechanism to enhance the binding force of salary management, including but not limited to stop payment of salary, recourse and deduction, etc.; and it is clear that relevant personnel fail to perform their duties diligently and are responsible for illegal and irregular behaviors or business risks of the company, the company shall pursue internal economic responsibility in accordance with the relevant provisions of the system, and may stop paying the unpaid part of the salary of the responsible personnel, and require them to return the relevant bonuses for the year incurred in the relevant behavior, or stop implementing long-term incentives for them. The accountability mechanism should also apply to resigning personnel.
Fund management companies shall clarify the aforementioned matters in their internal management systems and labor contracts. The Implementation Regulations also stipulate that public fund managers should clarify in the labor contract that if relevant personnel fail to perform their duties diligently and are responsible for illegal and irregular behaviors or operating risks of public fund managers, in accordance with the relevant provisions of the recourse and deduction system, the public fund managers may stop paying the unpaid part of the salary of the relevant responsible personnel, and require them to return the relevant bonuses for the year incurred in the relevant behavior, or stop implementing long-term incentives for them. The above-mentioned regulations on recourse and deduction also apply to resigning personnel. Regarding the requirements for deferred payment of compensation and recourse deductions, the "Guidelines" and the "Implementation Regulations" require fund management companies to adjust and improve before December 20, 2022. In addition, other public fund managers and fund management company subsidiaries shall implement the relevant provisions of the "Guidelines".
Because the accountability mechanism is directly linked to the economic interests of company employees, it is particularly important to establish a fair, just and reasonable quantifiable compliance scoring and accountability mechanism. The specific implementation of compensation stop payment, recourse and deductions related to the accountability mechanism should be based on the corresponding company system and labor contract. There are still many details that need to be discussed and discussed in terms of the specific application and implementation of "requiring violations to refund relevant bonuses in the year of the relevant acts" and "the accountability mechanism applies to resigned personnel", including how to balance the application of multiple laws and regulations at the same time. For companies with different shareholder backgrounds, different corporate cultures and different personnel management systems, accountability, salary deferral, recourse deduction and corresponding personnel management mechanisms that are most suitable for the company's own compliance culture and internal control requirements.
3. Regarding the medium and long-term incentive forms
The "Guidelines" stipulate that medium and long-term incentives include incentive measures and cash incentives of equity nature. Fund management companies are encouraged to adopt diversified incentive and constraint measures that are bound to the long-term development of the company and the long-term interests of holders, and establish a long-term incentive and constraint mechanism.
Previously, the "Opinions" also supported fund management companies to explore and implement diversified long-term incentive and constraint mechanisms, and studied the use of equity, options, restricted equity, dividend rights and other methods to achieve consistency between employees and the company's long-term development and long-term interests of holders. At present, the industry generally adopts the equity incentive model of the limited partnership platform, that is, only employees of the company are eligible to obtain the corresponding equity. When employees resign or retire, the equity must be transferred or repurchased according to the agreed method and the agreed price. We look forward to the specific design and implementation of medium- and long-term incentive and constraint mechanisms such as options, restricted equity and dividend rights in the industry in the future. For example, for restricted equity, restriction may be reflected in the qualifications to obtain equity and future sales conditions. According to Article 22 of the "Regulations on the Management of Equity Incentives of Listed Companies", restricted stocks refer to the company's stocks whose incentive targets have restricted their transfer and other rights in accordance with the conditions stipulated in the equity incentive plan. Non-listed companies can flexibly refer to them. Regarding dividend rights, the Company Law of the People's Republic of China stipulates that "company shareholders enjoy the rights of asset income, participate in major decisions and choose managers in accordance with the law." The right to earn money of such asset is the dividend rights of shareholders. The company shareholders may transfer or donate the dividend rights to other persons. The transferee or donor only becomes the beneficiary of the dividend rights of the equity and does not own other rights attached to the equity. We will continue to pay attention to the specific application and practice of the above medium- and long-term incentive and constraint mechanisms.
4. Regarding the purchase of funds by practitioners
The "Guidelines" require that senior management personnel of fund management companies, heads of major business departments, and fund managers of fund management companies shall purchase a certain proportion of performance compensation for public funds managed by the company or themselves, and must comply with the term limits for fund practitioners to invest in funds. Senior management personnel and the heads of major business departments shall purchase no less than 20% of the performance compensation of the company in the current year, of which the purchase of equity funds shall not be less than 50%, except in the case where the company has no equity funds; the fund manager shall purchase no less than 30% of the performance compensation of the company in the current year, and shall give priority to the purchase of public funds managed by the company, except for reasons such as the funds managed by him, which cannot be purchased because the funds managed by him are in a closed period. If the fund manager is also a senior management and the head of the main business department, he shall also meet the above requirements.
The above provisions are further refinement of the "Fund management companies should establish a mechanism for binding interest of fund practitioners and fund share holders" required in the "Manager Measures" and the "Implementation Regulations". According to the Implementation Regulations, the "interest binding mechanism" includes but is not limited to the senior management personnel of public fund managers, heads of major business departments and fund managers who shall purchase a certain proportion of performance bonuses for public funds managed by the company or themselves, and comply with the maturity restrictions of fund practitioners for investment funds. The "term limit on fund practitioners' investment funds" required in the "Guidelines" refers to the term limit of Article 3 of the "Regulations on Matters Related to Fund Practitioners' Investment in Securities Investment Funds" (China Securities Regulatory Commission Announcement [2012] No. 15) (" Investment Regulations" "), that is, the term limit for fund practitioners to hold fund shares shall not be less than 6 months, senior management personnel, heads of fund investment and research departments shall hold fund shares managed by the company and fund managers shall not be less than 1 year, and investment in money market funds and other cash management tool funds shall not be subject to the above period limit. In addition, the specific application and related details of "performance compensation for the current year" in practice still need to be further observed. In summary, the requirements for fund practitioners to purchase funds can be summarized as follows:
Note: 1. If the fund manager is also a senior management personnel and the head of the main business department, he shall meet the requirements of the category at the same time; 2. Investing in money market funds and other cash management tool funds is not subject to the above period restrictions.
55. Regarding the internal control management of salary, the internal control management of salary of fund management companies will implement their respective responsibilities from four levels: the board of directors, the compensation committee or other committees authorized by the board of directors (hereinafter collectively referred to as " compensation committee "), the management level, the company's compensation management and supervision department. Among them, the board of directors assumes the main responsibility and reviews the basic system of the company's salary management, the salary budget, the compensation incentive mechanism of senior management personnel, etc.; the compensation committee is responsible for discussion, conducts full research and discussion on board meetings such as compensation policies and plans, and puts forward professional opinions and suggestions; the management assumes the execution responsibility, and is responsible for organizing and implementing the company's salary management system and relevant resolutions of the board of directors; the specific company's salary management responsible departments carry out daily work, and the supervision department or organization supervises the implementation of the company's system, and reports to the board of directors regularly. The structure of the aforementioned internal compensation management is shown in the figure below:
Specifically:
(1) Fund management companies shall establish and improve a scientific and reasonable compensation management organizational structure, and the board of directors shall bear the main responsibility for compensation management. When performing salary management responsibilities, directors should have professional competence and express opinions independently to avoid being improperly affected by the management. The board of directors shall review the basic system of the company's salary management, salary budget, and compensation incentive mechanism for senior management personnel.
The board of directors' assessment of the management level, and the company's assessment of key positions such as investment research and sales should be combined with long-term investment performance, investors' long-term investment income, compliance and risk management, professional ethics level, etc., and scale ranking, management fee income, short-term performance, etc. shall not be used as the main basis for salary assessment.
(2) The board of directors of the fund management company shall conduct full research and discussion on board meetings such as compensation policies and plans through the compensation committee, and put forward professional opinions and suggestions based on factors such as the company's financial status, operating conditions, risk prevention and control and development planning. Members of the Remuneration Committee shall have corresponding professional abilities and include a certain number of independent directors.
(3) The management of the fund management company is responsible for organizing and implementing the company's compensation management system and relevant resolutions of the board of directors.
(4) Fund management companies shall designate special departments to be responsible for the daily work of compensation management and provide support for the work of the board of directors and its compensation committee. Fund management companies shall establish a supervision mechanism for the implementation of performance appraisal and salary management systems, and clarify the supervision departments or institutions for the implementation of the system. Relevant departments or institutions shall supervise the implementation of the company system and report to the board of directors regularly.
The "Guidelines" clarify that the board of directors, as the responsible entity for remuneration management, acts through the remuneration committee, and the management is responsible for providing daily support. At the same time, a corresponding supervision mechanism should be established to ensure the effective implementation of the remuneration management system. The "Guidelines" emphasize that the board of directors should independently perform its management responsibilities and should not be improperly affected by the management level. It also requires strengthening corresponding internal control management requirements, improving the organizational structure and internal system construction of the fund management company, and establishing a scientific salary management method. The relevant adjustments and improvements should be completed before December 20, 2022, and other public fund managers and fund management company subsidiaries shall be implemented in accordance with the reference.
6. The core work that fund companies should implement in the future
In summary, we suggest that fund management companies should implement the following aspects of work:
(I) Comprehensively sort out the company's compensation system
In addition to the "Guidelines", the "Regulations on the Management of Directors, Supervisors and Senior High Schools", "Interim Regulations on the Operation and Management of Private Asset Management Business of Securities and Futures Business Institutions" (China Securities Regulatory Commission Announcement [2016] No. 13), "Regulations on the Operation and Management of Private Asset Management Plans of Securities and Futures Business Institutions" (China Securities Regulatory Commission Announcement [2018] No. 31), "Guidelines for Internal Control of Bond Investment Trading Business of Securities and Fund Business Institutions" (China Securities Association Fa [2018] No. 319), "Guidelines for Fund Managers to Concurrently Asset Management Investment Managers of Private Asset Management Plans (Trial)" (China Securities Association Association No. 55) and other relevant regulations all stipulate the compensation system and deferred requirements of fund practitioners at all levels and types of funds.
recommends that fund management companies sort out the company's compensation system as a whole, and based on the actual situation and market level of the company's financial status, development plan, compliance and risk management, and strictly follow the standard procedures, reasonably determine and timely adjust the basic salary standards and salary structures of different positions. It is worth noting that basic salary and performance salary should be properly constructed to avoid risks and risk-taking behaviors that may arise due to unreasonable salary structure, so as to meet the overall needs of relevant laws and regulations, human resources development, and company culture. Correspondingly, the relevant terms of the company's labor contract should also be comprehensively sorted out.
(II) Formulate a systematic control plan
Regarding the specific provisions of fund practitioners in the above-mentioned "Guidelines" for the purchase of funds, relying solely on manual control may be time-consuming and labor-intensive and prone to errors. It is recommended that fund management companies can conduct overall system research and development on relevant control requirements, and implement control of personnel classification, maintenance, control, etc. through systematic methods, and supplemented by certain manual control. Since the division of labor and cooperation between multiple departments and personnel may be involved in the implementation of the specific plan, we suggest that we can further sort out the corresponding system authority and the scope of insiders, and at the same time establish corresponding authority management and confidentiality mechanisms for compensation plans and compensation information. The company's relevant systems should strictly follow the "minimization" principle to allocate system permissions, and the allocation and changes of permissions should strictly follow the company's relevant system regulations, and the information technology department will operate after appropriate approval.
(III) Promote and guide employees and
Company compensation is related to the vital interests of employees. At present, for the chairman, senior management, heads of major business departments, heads of branches, core business personnel, bond investment trading personnel, fund managers and other personnel, it is necessary to establish a corresponding incentive and constraint mechanism that fully reflects the matching of risks and returns, link employees' income levels with risk control levels, compliance levels, and professional ethics. Through diversified salary systems such as deferred payment of bonuses, employees should be promoted to establish long-term concepts and strengthen employees' compliance risk control awareness. Therefore, certain publicity and guidance are necessary. Through the above two-way communication, employees can truly understand the principles of formulating the salary system and lay a good foundation for the future implementation of the salary system.
(IV) Clarify the responsibilities of each level and department
According to the "Guidelines", the board of directors of the fund management company shall conduct full research and discussion on board meetings such as compensation policies and plans through the compensation committee, combined with the company's financial status, operating conditions, risk prevention and control and development planning, and put forward professional opinions and suggestions. Members of the Remuneration Committee shall have corresponding professional abilities and include a certain number of independent directors. Therefore, the subsequent overall compensation plan should be submitted to the Company Remuneration Committee for research and discussion and reviewed and approved by the Board of Directors.At the same time, compliance, risk management, human resources, information technology, fund operation, audit and other lines need to implement specific division of labor for specific compensation plans and fund practitioner investment plans. It is recommended to make a good division of responsibilities for the corresponding department and determine the methods and paths for specific work in the future.
