Article 61 of the Securities Act 1999 states that companies with publicly listed stocks or bonds should disclose in their annual reports the resumes of all directors, supervisors and top managers together with their shareholdings in the company. The Companies Law, which was promulgated in 1999 and revised in 2005, requires that “a company shall regularly disclose to its shareholders information about remunerations obtained by the directors, supervisors and top managers from the company.” Both the Securities Act and Companies Law have laid the foundation for compensation disclosure in limited liability corporations.
Before 1997, executive compensation disclosure was not well regulated. In 1997, a new accounting standard (Related Party Transactions) was issued by the Ministry of Finance (MOF) that defines key management personnel as related parties and thus mandates that their compensation must be disclosed as the main transaction of a related party. However, as there were no detailed disclosure rules, compensation disclosures differed greatly in both format and content.
The second disclosure requirement – Content and Format of Annual Reports – of the Format and Content of Information Disclosure by Companies with Public Offering Securities regulations issued by the China Securities Regulatory Commission (CSRC) in 1997 had a great effect on compensation disclosure. It requires listed companies to disclose more details of executive compensation and was revised seven times between 1998 and 2012.4 The 2001 version requires that companies disclose the compensation decision-making process and the determinants of compensation for directors, supervisors and senior managers, and the total amount of compensation received by the top three directors and senior managers. It also requires the separate disclosure of independent directors’ allowances and other benefits. The 2005 version requires companies to disclose the total compensation of each individual director, supervisor and senior manager. Thus, studies conducted before 2005 use only the top three directors’ or managers’ total compensation, and studies conducted after 2005 typically use individual compensation data for the CEO or board chairperson. In 2007, the requirements changed again to mandate the disclosure of the compensation committee’s duties and the implementation of stock-based incentive plans. These disclosure regulations have contributed significantly to increasing the transparency of executive compensation.
With the establishment of the Growth Enterprise Market (GEM), the CSRC issued the Content and Format of the Annual Report of GEM Listed Companies in 2009. This document stipulates the standards for executive compensation disclosure in GEM companies. It requires a summary report of the compensation committee’s duties under the board of directors, including the audit opinion of the disclosed compensation of directors, supervisors and senior managers; clarification of whether the company has established a sound and effective system to assess its directors, supervisors and senior managers; and the incentive system and its implementation. The report must also include a verification opinion on whether the authorization process in the implementation of the company’s stock-based incentive plan is compliant and whether the exercise condition is fulfilled. This report requirement was revised in 2013 and now GEM companies are required to disclose their decision-making processes and the determinants of compensation for directors, supervisors and senior managers, in addition to the actual payments made to each of them.