On Regulating Senior Executives’ Compensation In Financial Institutions From The Perspective Of Financial Stability

After the 2007-2008 global financial crisis,there has been increasing researches on executive compensation regulation in financial institutions worldwide.However,with the crisis fading away,despite the fact that relevant researches are still being conducted by scholars and legislative experts in China,the main regulatory object has been shifted from executives in the financial industry to executives in state-owned enterprises and listed companies.Meanwhile,in terms of specific regulation methods,more emphasis is placed on indirect regulation measures such as improving compensation governance and strengthening the public disclosure of executive compensation information.Few people pay attention to direct regulation measures that are more intrusive and adjust the substance of executive compensation scheme outright.The reason lies in the lack of awareness of the effectiveness of regulating executive compensation in financial institutions to prevent financial risks,and doubts about deeply intervening in executive compensation issues that were originally within the scope of company autonomy.In the report of the 19th National Congress of the Communist Party of China in 2017,the prevention and resolution of major risks was listed as one of the three tough battles,emphasizing the importance of improving financial supervision system and preventing systemic financial risks in China.As an important part of the battle to prevent and resolve major financial risks,improving the corporate governance of financial institutions by perfecting the executive compensation incentive mechanism of financial institutions has once again entered the vision of regulators.In the Three-year Action Plan for Improving Corporate Governance in Banking and Insurance Industry(2020-2022)issued by China’s Banking and Insurance Regulatory Commission in 2020,it is proposed that an important measure is to build an executive incentive mechanism that takes into account risks and benefits,pays equal attention to both long-term and short-term remuneration,and inspires executives both spiritually and materially.As the latest document in the field of executive compensation regulation in China’s financial institutions,Guidance on Establishing and Improving the Performance Compensation Recourse and Deduction Mechanism of Banking and Insurance Institutions was published by the CBRC in 2021.It clearly pointed out the goal of the performance remuneration recourse mechanism is to ensure that remuneration amount should be in line with risk-adjusted performance and prevent radical business behaviors,thus promoting the sound operation and sustainable development of banking and insurance institutions.This shows that in the process of regulating executive compensation of China’s financial institutions,the regulatory authorities have gradually shifted from the perspective of fair distribution to the perspective of financial stability.Based on such background,this thesis aims to demonstrate the positive significance of regulating executive compensation of financial institutions in maintaining financial stability.And by learning from the mature experience of relevant countries and regions,this thesis explores the basic principles,interest conflicts and balancing mechanisms of regulating executive compensation of financial institutions from the perspective of financial stability,which helps to establish a universal and normalized financial institution executive compensation regulation mechanism which is conducive to financial stability.The full text includes three parts:introduction,main text and conclusion.The main text is divided into four chapters.Starting from the background and significance of the topic,the "introduction" part introduces in detail the research status at home and abroad in the field of executive compensation regulation of financial institutions from the perspective of financial stability,and expounds the research ideas,research priorities,research methods,main innovations and deficiencies of this thesis.From the perspective of financial stability,the "main text" part discusses many aspects of governmental regulation of executive compensation in financial institutions,including the basic issues,the conflicts of interest and balancing mechanisms,the supervising subjects and specific measures,and the legislative improvement of relevant regulations in China.The first chapter discusses the three basic issues of regulating executive compensation in financial institutions from the perspective of financial stability,which means the issue of regulation effectiveness,the issue of regulation necessity and the basic principles of regulation.The empirical research results by economists show that an inappropriate incentive mechanism for executive compensation will lead to excessive collection of risks by individual financial institutions and endanger their operational stability,confirming that regulating executive compensation in financial institutions is conducive to financial stability.In practice,the compensation committee,shareholders,media and public opinion are unable to effectively restrain executive compensation.In addition,the three-legged theorem and behavioral law theory provide a theoretical basis for regulating executive compensation in financial institutions.The practice and theories jointly prove that it is necessary for the government to externally regulate executive compensation of financial institutions.A short-sighted executive compensation incentive mechanism can easily induce high-risk business behavior,and low compensation can lead to brain drain,while company autonomy should be respected as much as possible.Therefore,the long-term risk binding principle,incentive principle and proportionality principle should be taken as the basic principles for regulating the executive compensation of financial institutions from the perspective of financial stabilityThe second chapter discusses the possible interest conflicts and the corresponding interest balancing mechanisms while regulating the executive compensation of financial institutions from the perspective of financial stability.Conflicts of interest are mainly manifested as:due to the expanded application of relevant regulatory tools,the business autonomy of practitioners in other industries is endangered;the short-term profitability of financial institutions is reduced after regulation,which is not conducive to the maximization of short-term interests of shareholders;the vague definition of regulation object endangers ordinary employees’ right to remuneration for labour;violation of the "commercial judgment rule" leads to disputes with senior executives over the standard of reasonable care;and by restricting the decision-making power of the compensation committee in executive compensation,independent directors are hindered from exercising basic functions.The corresponding interest balancing mechanisms include:clarify the division of supervision,abide by the principle of proportionality,and improve complaint channels,so as to improve supervision governance and curb the generalization of supervision;reduce the obligation of shareholders to replenish capital and cut the fee rate for financial institutions to participate in industry guarantee funds,so as to compensate for the loss of shareholders’ short-term interests;clarify the supplementary judgment criteria when expanding the concept of senior executives,so as to clearly distinguish senior executives from ordinary employees;based on their powers and influence on risk profile,set up different standards for reviewing the rationality of executives’ business behavior;establish a cooperative rather than a substitutive relationship between regulators and independent directors on executive compensation matters.The third chapter discusses the cooperation and coordination mechanism and concrete measures for regulating financial institution executive compensation from the perspective of financial stability.When regulating financial institution executive compensation with the goal of financial stability,a cooperation system should be established with professional financial supervision departments as the main supervising subjects and non-professional financial supervision departments as supplementary supervising subjects.Macro-prudential or financial stability regulatory authorities,such as the central bank,play the main role of rule-makers and regulation coordinators;other professional financial regulatory authorities,such as sub-industry regulatory agencies,undertake the main law-enforcement work;non-professional financial regulatory authorities,such as tax authorities,play a supplementary law-enforcement function by cooperating with professional financial supervision departments to implement regulatory measures.In terms of specific regulatory measures,according to whether they directly adjust the substantive content of executive compensation schemes,they can be divided into indirect regulatory measures and direct regulatory measures.The former,through procedural requirements and taxation methods,guides financial institutions to strengthen rationality consideration in advance in the process of formulating executive compensation schemes,while the latter directly adjusts the substantive content of executive compensation schemes.The inspection of extraterritorial legislative practices and their effectiveness shows that direct regulatory measures can promote financial stability more effectively.The fourth chapter,based on the previous three chapters,discusses how to improve the legislation of executive compensation regulation in China’s financial institutions from the perspective of financial stability.The defects of China’s legislation in regulating executive compensation of financial institutions are mainly reflected in four aspects:fuzzy regulatory objective and principles,unclear boundaries of regulatory objects,insufficient communication and cooperation between supervising subjects,and lack of operability of regulatory tools.The above-mentioned defects are rooted in the fact that China’s relevant legislation is guided by the idea of commercial law.Therefore,in the process of perfecting relevant legislation:the idea of economic law should be taken as guidance,and financial stability should be established as the new regulatory goal according to the idea of humanism,substantive justice and social orientation;as regard to regulatory method,the idea of sustainable development and moderate intervention suggests more attention to direct regulation and hard constraints,enhancing the precision of regulation and improving the effectiveness and stability of relevant legislation.The specific countermeasures include clarifying the regulatory objective and principles,clearly defining the scope of regulatory objects,constructing the cooperation mechanism between supervising subjects,and strengthening the operability of regulatory tools.The "conclusion" part reviews the origin of executive compensation regulation in financial institutions and reiterates the significance of this study.China’s existing legislation on regulating financial institutions executive compensation lacks full consideration of the characteristics of the financial industry and the goal of financial stability,which often brings negative effects to financial stability,indicating that China is in urgent need of relevant researches.Meanwhile,strengthening the regulation of executive compensation of financial institutions helps to lessen regulatory pressure in other fields,enabling supervisors to focus on key issues.In addition,the regulation of executive compensation in financial institutions reflects the intersection trend between financial supervision law and company law,and is an example of the shift of supervision idea.Strengthening the research on it will help to improve the understanding of departmental law theory and financial supervision theory.Under the current global economic situation with high financial risks,the financial stability value of executive compensation regulation in financial institutions needs to be further explored.