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I. Background Requirements for Listed Companies to Formulate Remuneration Management Systems for Directors and Senior Managerial Personnel

In October 2025, the China Securities Regulatory Commission (CSRC) revised and issued the *Code of Corporate Governance for Listed Companies*, which shall come into force on January 1, 2026. It explicitly requires listed companies to establish and improve the remuneration management system for directors and senior management (hereinafter referred to as "D&SM"), and form a complete closed loop of incentives and constraints. The core of this round of regulatory requirements lies in strengthening the strong correlation between the remuneration of D&SM of listed companies and corporate performance.

Pursuant to the requirements of the aforesaid guidelines and in conjunction with the provisions of other relevant laws and regulations, this article analyzes the key compliance points for listed companies to establish a remuneration management system for directors and senior executives under the current legal framework, for the reference of listed companies.

In general, the remuneration management system for directors and senior executives established by listed companies shall systematically cover the following five modules, none of which shall be omitted. The five modules are: total payroll determination mechanism, remuneration structure for directors and senior executives, performance appraisal system, remuneration payment mechanism, and payment suspension and recovery mechanism. This article will elaborate on each of the aforesaid five modules one by one.

II. Total Wage Determination Mechanism

The total amount of wages refers to the total sum of labor remuneration directly paid by a company to all its employees within a certain period, including hourly wages, piece-rate wages, bonuses, allowances and subsidies, overtime pay, and wages paid under special circumstances. It excludes welfare expenses, labor protection expenditures, social insurance premiums, the portion of the housing provident fund contributed by the employer, etc.

When a listed company establishes a mechanism for determining its total payroll, it shall link the total payroll with core indicators such as total profit, net profit and operating revenue. In principle, the growth rate of the total payroll shall be lower than the growth rate of economic benefits and also lower than the growth rate of labor productivity. Meanwhile, the company shall refer to industry compensation levels and regional labor market prices to reasonably determine the total payroll level, and properly distinguish the management boundaries of total compensation between directors and senior executives and ordinary employees, so as to avoid excessive compensation gaps.

Listed companies shall formally incorporate the aforesaid linkage and distribution rules into their salary management systems, specify the operation norms for the whole process of preparation, examination and approval, implementation and adjustment of the total salary budget, so as to ensure that the mechanism is quantifiable, enforceable and supervisable. The management of total salary shall give consideration to the long-term development of the enterprise, shareholder returns and the legitimate rights and interests of employees, carry out regular review and evaluation on the implementation effects, and conduct dynamic optimization in light of the enterprise's operation conditions and industry changes.

III. Remuneration Structure of Directors and Senior Executives

The remuneration of directors and senior executives of listed companies shall consist of basic remuneration, performance-based remuneration, medium- and long-term incentive income, etc. In principle, the proportion of performance-based remuneration shall not be less than 50% of the total sum of basic remuneration and performance-based remuneration. The three-tier remuneration system for directors and senior executives of listed companies composed of "basic remuneration + performance-based remuneration + medium- and long-term incentives" strengthens the in-depth binding of remuneration with operating performance, shareholder returns and individual performance of duties. It is prohibited to circumvent the aforesaid proportional requirements through remuneration splitting or disguised remuneration distribution.

Base Remuneration refers to the fixed remuneration that guarantees the basic livelihood of directors and senior executives, reflects the value and responsibilities of their positions, and is usually paid on a monthly basis. Performance-based Remuneration is the floating remuneration linked to the annual operating performance of the company and the assessment results of individual performance of duties, which reflects short-term performance contributions. Medium- and Long-term Incentive Income is the incentive remuneration linked to the long-term development objectives of the company and the growth of shareholder value, including stock options and other forms, which reflects long-term value creation.

IV. Performance Appraisal System

A listed company shall establish fair and transparent standards and procedures for evaluating the performance and duty fulfillment of directors and senior executives. The performance evaluation of directors and senior executives shall be organized by the Remuneration and Assessment Committee set up under the board of directors. A listed company may entrust a third party to carry out the aforesaid performance evaluation.

The performance evaluation of directors and senior executives shall serve as an important basis for the determination of remuneration and incentives. There is a significant positive correlation between the remuneration of senior executives of listed companies and corporate performance. Where a company shifts from profit to loss or suffers an increase in losses, while the average performance-based remuneration of its directors and senior executives does not decrease, the reasons therefor shall be disclosed. The determination and payment of performance-based remuneration and medium- and long-term incentives must take performance evaluation as an important basis. Performance evaluation shall be carried out based on audited financial data, which is the sole legitimate basis for performance evaluation. It is prohibited to use unaudited management statements or internal statistical data as the basis for final assessment. Where a third party is entrusted to conduct the evaluation, its qualification requirements and scope of liability shall be explicitly defined to ensure the independence of the evaluation. Procedurally, it is recommended to establish a complete closed loop covering such links as evaluation initiation, data collection, indicator calculation, result feedback, appeal and review. Compliance evidence such as meeting minutes, scoring working papers and communication records shall be retained throughout the process to ensure traceability.

V. Remuneration Payment Mechanism

The remuneration plan for directors and senior executives of a listed company shall be formulated by the Remuneration and Assessment Committee of the Board of Directors, which explicitly specifies the basis for remuneration determination and the specific components thereof.

The director remuneration scheme shall be determined by the Shareholders' Meeting and disclosed accordingly. When the Board of Directors or the Remuneration and Appraisal Committee evaluates an individual director or discusses his/her remuneration, the director concerned shall recuse himself/herself.

The remuneration plan for senior executives shall be approved by the board of directors, explained to the shareholders' meeting, and fully disclosed.

Loss-making listed companies shall, at all stages of the deliberation of the remuneration of directors and senior executives, explicitly state whether any change to the aforesaid remuneration complies with the performance linkage requirements. Accounting firms shall, when conducting internal control audits, focus on the effectiveness of performance appraisal control and whether the payment of remuneration complies with internal control requirements.

Listed companies are encouraged to establish a deferred payment mechanism for performance-based remuneration of directors and senior executives in light of such factors as industry characteristics and business models, and specify the specific scenarios applicable to deferred payment, relevant personnel, deferral ratio and implementation arrangements. The determination and payment of performance-based remuneration and medium- and long-term incentives shall take performance appraisal as the core basis, and no payment shall be made without valid appraisal as the supporting basis. With respect to the term of deferred payment, with reference to the special regulatory provisions for the financial industry, it is generally stipulated that the deferral term shall be no less than three years, and the deferred payment ratio shall be no less than 40%.

VI. Stop Payment and Recourse Mechanism

Where directors and senior executives of a listed company breach their duties and cause losses to the company, or are at fault for such illegal and irregular acts as financial fraud, capital misappropriation and illegal guarantees, the listed company shall, in light of the severity of the circumstances, reduce or suspend payment of the unpaid performance-based remuneration and medium- and long-term incentive income, and fully or partially recover the performance-based remuneration and medium- and long-term incentive income already paid during the relevant period. The aforesaid recovery obligation is a statutory recovery obligation of the company, which shall not be exempted through the company's articles of association or agreements. Circumstances for payment suspension and recovery include: the company conducts retrospective restatement of financial reports due to misstatements such as financial fraud; directors and senior executives breach their duty of loyalty and diligence and cause losses to the company; directors and senior executives are at fault for such illegal and irregular acts as financial fraud, capital misappropriation and illegal guarantees; performance fraud and seriously false assessment results lead to overpayment of remuneration; the aforesaid acts committed during their tenure are discovered after their resignation.

Where any of the aforesaid circumstances exist, a listed company shall, in light of the gravity of the circumstances, reduce or suspend the payment of unpaid performance remuneration and medium- and long-term incentive income, and recover all or part of the performance remuneration and medium- and long-term incentive income already paid during the occurrence of the relevant conduct. Notably, where the suspension of payment and recovery involves Individual Income Tax, the matter shall be handled in accordance with the provisions of tax laws and regulations.

VII. Conclusion To urge the business management of listed companies to conscientiously perform their duties of loyalty and diligence, and prevent controlling shareholders and actual controllers from abusing their controlling positions to harm the interests of the company and its shareholders, the *Code of Corporate Governance for Listed Companies* further strengthens the responsibilities of "key minority" groups including directors, senior executives, controlling shareholders and actual controllers, and establishes a more effective incentive and restraint mechanism, which will also play a more significant role in promoting the improvement of the modern enterprise system and elevating the standardized operation level of listed companies. The revised *Code of Corporate Governance for Listed Companies* came into force on January 1, 2026. Given that the revision of the remuneration system involves complex work such as adjustment of corporate governance structure, shareholder communication and scheme design, all stock exchanges grant a 6-month transition period to listed companies to avoid compliance pressure caused by one-size-fits-all implementation. Relevant work including system revision, deliberation and disclosure shall be completed before June 30, 2026. Failure to complete such work within the time limit will constitute a governance irregularity, and the relevant entity will face the risk of regulatory accountability. During the transition period, listed companies shall set up a special working group as soon as possible, led by the board of directors and the remuneration and appraisal committee, to improve the system content item by item against the five core modules of the new rules, and complete internal demonstration, shareholder communication and preparation for decision-making procedures simultaneously. In the process of system formulation, statutory decision-making procedures shall be strictly followed: the system shall be submitted to the general meeting of shareholders for adoption by voting after deliberation by the board of directors, and the information disclosure obligation shall be fulfilled in a timely manner. The board of directors, directors and senior management of a listed company bear primary responsibility for the compliant implementation of the remuneration system, and shall effectively perform their duty of diligence and proactively promote rectification and implementation. For entities failing to complete relevant work within the time limit, stock exchanges will take measures including regulatory inquiry, warning letter issuance, order for rectification and other measures in accordance with the law. Relevant irregularity records will be included in corporate governance assessment, which directly affects capital market credit and subsequent capital operation. Both the listed company and relevant responsible persons shall bear corresponding regulatory consequences.