CMS Expert Guide to ESG Compensation in China

In China, there are currently no specific regulations governing ESG obligations for determining remuneration for executives.

However, ESG criteria/obligations may be considered when determining executive remuneration by the shareholders or the board of directors of a company if the parties agree that ESG criteria/obligations will be set as part of the executives work duties/targets.

As mentioned above, there are no specific regulations in relation to the remuneration of executives. It is entirely up to companies themselves (the shareholders and board of directors), regardless of which sectors/industries the companies belong to, to decide whether to link ESG criteria/obligations to the executive remuneration or not and to reach agreement with the executives. Usually, companies will do so if the countries where their shareholders are located have such regulatory requirements.

There are currently no specific regulations defining ESG in China. In general understanding, E stands for "Environment", S stands for "Social" and "G" for "Governance". As for the detailed content of ESG, this is entirely subject to the interpretation of the companies themselves or the regulatory requirements (if any) of the country where the shareholders are located.

As mentioned above, there are no specific regulations on ESG. Therefore, the ESG criteria/obligations to be considered when determining executive remuneration are fully subject to the decision of the company (shareholders and board of directors) and the agreement of the executive.

In practice, directors in foreign-invested companies in China usually do not hold executive positions in the company and do not receive remuneration unless there are special agreements in place. Top management employees are usually in charge of the company's day-today operations and receive remuneration based on the employment contract. Therefore, when talking about executive remuneration in China, it mainly refers to the remuneration of top management employees. If both directors and top management employees receive remuneration from the company, there is no different treatment in terms of ESG. 

N/A – as with executive employees, it is entirely up to the companies themselves to decide whether to link ESG criteria/obligations to the non-executive employees' remuneration and to enter into agreements with them.

There are no specific ESG-related regulatory requirements in terms of addressing the gap between executive and workforce remuneration and/or executive gender pay gap. However, as a general principle of PRC employment law, the rule of equal pay for equal work will apply when determining the remuneration of male and female executives and the remuneration of the workforce.

In practice, the executive's remuneration usually includes base salary, allowance, variable annual bonus, stock options, etc.

N/A 

Since ESG is a new concept in China, for the time being, not many companies have linked ESG criteria/obligations to the remuneration of executives. 

Yes. The market practices are derived from self-regulation of companies. 

Yes. Since there are no specific regulations on the definition of ESG in China, different sectors and industries have different requirements on the detailed content of ESG.

Environment

• Reduction of CO2 emissions
• Reduction of the CO2 intensity of the company's portfolio
• Use of renewable/green energy
• Improvement of energy efficiency
• Increase in the share of sustainable products
• Use of sustainable materials in production

Social

• Diversity and inclusion

     Note: In China, with regard to social, companies are more focused on participating in social activities such as charity or public welfare activities.

Governance

• Compliance
• Prevention of corruption and bribery
• Risk management

ESG KPIs can be included in the short term or long term or both, which is subject to the decision of the companies (shareholders and board of directors).  

In China, there is not a significant trend related to ESG-related variable remuneration. 

N/A

N/A – because there are no such regulations.

N/A

It is possible that ESG reports may be required for listed companies in the future. However, for the time being, only a few foreign-invested companies are listed companies in China.