(Yicai) Dec. 8 -- China’s securities watchdog has unveiled draft rules that would tie the pay of public mutual fund managers much more closely to long-term performance, aiming to tackle the long-standing problem of managers earning high salaries despite investor losses.

For years, investors have questioned how management fees are structured in China’s public fund sector. Fund managers’ compensation, which comes out of these fees, has been subject to criticism, especially when they continue to earn big paychecks despite poor results.

If an equity fund manager fails to meet the benchmark by more than 10 percentage points over three years and the fund posts a loss, at least 30 percent of his or her performance-based pay must be cut, according to the Guidelines for the Performance Appraisal and Management of Fund Management Companies released by the China Securities Regulatory Commission on Dec. 6, which are now open to feedback from the public. On the flip side, managers who deliver strong gains and outperform their benchmark can receive reasonable pay increases.

More than 1,400 of the 3,757 equity funds that have been active over the past three years, or 37 percent, had performed below the benchmark by over 10 percentage points as of Dec. 5, according to financial information provider Wind. This involves nearly 1,000 fund managers, including several high-profile names such as Liu Yanchun, Liu Gesong and Zhang Kun, all of whom could face pay cuts under the new framework.

By contrast, 982 equity funds beat their benchmarks by more than 10 percentage points over the same period, and 146 of them outperformed by over 50 percentage points.

The new rules further strengthen the alignment of interests between fund managers, senior executives and investors, compared with the version of the guidelines released in 2022. This includes expanding deferred performance pay and increasing investment in the funds they manage.

For example, senior executives and heads of key business units now have to invest at least 30 percent of their performance-based pay for the year into the public funds their firms manage, up from the previous 20 percent. The minimum share that must go into equity funds would rise from 50 percent to 60 percent. And investment by fund managers in their own products would increase from 30 percent to 40 percent.

This shift toward long-term evaluation and compensation reform is not unexpected. Back in January, CSRC Chairman Wu Qing said all public funds should adopt performance assessments covering periods of three years or longer and that the proportion of equity funds and the weight of long-term performance metrics in regulatory evaluations would be increased.

Editor: Kim Taylor