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I. Background and Requirements for Listed Companies in Establishing Compensation Management Systems for Directors and Senior Management Personnel

In October 2025, the China Securities Regulatory Commission revised and issued the "Guidelines for Corporate Governance of Listed Companies," which came effect on January 1, 2026. The guidelines explicitly require listed companies to establish and improve compensation management systems for directors and senior management personnel (hereinafter referred to as "directors and senior management"), ensuring the formation of a comprehensive incentive and restraint mechanism. The core of these regulatory requirements is to strengthen the strong correlation between the compensation of directors and senior management and their performance.

In accordance with the aforementioned guidelines and relevant laws and regulations, this article analyzes the key compliance considerations for establishing compensation management systems for directors and senior executives within listed companies under the current legal framework, providing insights for such enterprises.

In summary, the compensation management system for directors and senior executives of listed companies must systematically encompass the following five essential components, none of which can be omitted. These components are: the total compensation determination mechanism, the compensation structure for directors and senior executives, the performance evaluation system, the compensation payment mechanism, and the payment suspension and recovery mechanism. This article will analyze each of these five components in detail.

II. Mechanism for Determining Total Wage Amount

The total wage amount refers to the aggregate labor compensation directly paid by a company to all its employees within a specified period, including time-based 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 contributions, and the employer's share of housing provident fund contributions.

When establishing a total wage determination mechanism, listed companies should link the total wage amount to core indicators such as total profit, net profit, and operating revenue. The growth rate of the total wage amount should, in principle, be lower than both the growth rate of economic performance and the growth rate of labor productivity. Additionally, companies should refer to industry compensation levels and regional labor market prices to reasonably determine the total wage level, clearly delineate the management boundaries between executive compensation and that of regular employees, and avoid excessive pay disparities.

Listed companies should formally incorporate the aforementioned linkage and distribution rules their compensation management systems, establishing clear operational guidelines for the entire process of total payroll budget preparation, review, implementation, and adjustment to ensure the mechanism is quantifiable, execu, and subject to oversight. Total payroll management must balance the company's long-term development, shareholder returns, and employees' legitimate rights and interests, with regular post-implementation reviews and dynamic optimization based on operational performance and industry developments.

III. Compensation Structure for Board Members and Senior Management

The compensation for directors and senior executives of listed companies shall consist of base salary, performance-based compensation, and medium-to-long-term incentive payments, with performance-based compensation accounting for no less than 50% of the total compensation package in principle. The three-component structure of "base salary + performance-based compensation + medium-to-long-term incentives" strengthens the deep alignment between compensation and performance, shareholder returns, and individual job performance. It is prohibited to circumvent these ratio requirements through compensation splitting or disguised payment methods.

Basic salary is the fixed compensation that ensures the fundamental living standards of directors and senior executives, reflecting their job value and responsibilities, and is typically paid monthly; performance-based compensation is a variable payment linked to annual business performance and individual performance evaluations, reflecting short-term performance contributions; medium-and long-term incentive compensation is an incentive-based remuneration tied to the company's long-term development goals and shareholder value growth, including stock options, and reflects long-term value creation.

IV. Performance Evaluation System

Listed companies shall establish fair and transparent standards and procedures for evaluating the performance and履职 of directors and senior management. The performance evaluation of directors and senior management shall be organized by the Compensation and Assessment Committee under the board of directors; listed companies may engage third parties to conduct such evaluations.

Board member performance evaluations should serve as a critical basis for determining compensation and incentives. There is a significant positive correlation between executive compensation and corporate performance in listed companies. When a company transitions from profitability to loss or experiences worsening financial losses while the average performance-based compensation for board members remains unchanged, the underlying reasons must be disclosed. The determination and payment of performance-based compensation and medium-to-long-term incentives must rely fundamentally on performance evaluations conducted using audited financial data—the sole legitimate basis for such assessments. The use of unaudited management reports or internal statistical data as final evaluation criteria is strictly prohibited. When engaging third-party evaluators, clear qualification requirements and liability boundaries must be established to ensure evaluation independence. Procedurally, a comprehensive closed-loop system should be implemented, encompassing evaluation initiation, data collection, metric calculation, result feedback, and appeal review. All relevant documentation—including meeting minutes, scoring drafts, and communication records—must be properly retained to ensure traceability.

V. Compensation Payment Mechanism

The compensation plan for senior executives of listed companies shall be formulated by the Board's Compensation and Assessment Committee, specifying the basis and detailed components for salary determination.

The director compensation plan shall be determined by the shareholders 'meeting and disclosed accordingly. When the board of directors or the compensation and performance evaluation committee evaluates or discusses an individual director's remuneration, that director shall recuse themselves.

The compensation plan for senior management shall be approved by the Board of Directors, disclosed to the shareholders' meeting, and fully disclosed to the public.

Listed companies with losses must explicitly disclose at each stage of executive compensation review whether the changes in executive compensation comply with performance-linked requirements. When conducting internal control audits, accounting firms should focus particularly on the effectiveness of performance evaluation controls and whether compensation payments adhere to internal control requirements.

Listed companies are encouraged to establish a deferred payment mechanism for executive performance-based compensation that considers industry characteristics and business models, specifying the applicable scenarios, relevant personnel, deferral ratios, and implementation arrangements. The determination and payment of performance-based compensation and medium-to-long-term incentives must be based primarily on performance evaluations; no payment shall be made without valid evaluation results. Regarding the deferral period, in accordance with specialized regulatory provisions for the financial industry, the deferral period is generally no less than three years, with a deferral ratio of at least 40%.

VI. Payment Suspension and Recovery Mechanism

When directors or senior officers of a listed company breach their obligations, causing losses to the company, or are at fault for illegal activities such as financial fraud, fund misappropriation, or unauthorized guarantees, the listed company shall, depending on the severity of the circumstances, reduce or suspend payment of outstanding performance-based compensation and medium-to-long-term incentive payments, and fully or partially recover the performance-based compensation and medium-to-long-term incentive payments already paid during the relevant periods. This recovery obligation constitutes a statutory recourse obligation of the company and cannot be waived through the company's articles of association or any agreements.

Scenarios warranting payment suspension and recourse include: when a company retrospectively restates its financial reports due to misstatements such as financial fraud; when directors or senior executives breach their duty of loyalty and diligence, causing losses to the company; when directors or senior executives are at fault for illegal activities including financial fraud, fund misappropriation, or unauthorized guarantees; when performance fraud or materially inaccurate assessment results result in excessive compensation payments; or when such misconduct is discovered after an individual's departure from the company.

In cases the aforementioned circumstances exist, the listed company shall, depending on the severity of the situation, reduce or suspend payment of outstanding performance-based compensation and medium-to-long-term incentive payments, and fully or partially recover the performance-based compensation and medium-to-long-term incentive payments already paid during the relevant period. It is noteworthy that if the payment suspension and recovery involve personal income tax, the relevant tax laws shall apply.

VII. Conclusion

To ensure that the management of listed companies faithfully and diligently fulfill their duties, and to prevent controlling shareholders and actual controllers from abusing their controlling positions to harm the interests of the company and its shareholders, the "Guidelines for Corporate Governance of Listed Companies" further strengthen the responsibilities of key stakeholders—including directors, senior executives, controlling shareholders, and actual controllers—thereby establishing a more effective incentive and restraint mechanism. This will play a crucial role in advancing the development of modern enterprise systems and enhancing the standardized operational practices of listed companies.

The new "Guidelines for Corporate Governance of Listed Companies" came effect on January 1, 2026. Given that the revision of the compensation system involves complex tasks such as corporate governance restructuring, shareholder communication, and plan design, major stock exchanges have granted listed companies a six-month transition period to avoid compliance pressures arising from a one-size-fits-all approach. Relevant revisions, reviews, and disclosures of the regulations must be completed by June 30,2026; failure to meet this deadline will constitute a governance violation and expose companies to regulatory accountability risks.

During the transition period, listed companies shall promptly establish a dedicated task force led by the Board of Directors and the Compensation and Performance Committee to refine the compensation system in accordance with the five core modules of the new regulations, while simultaneously completing internal reviews, shareholder communications, and preparations for decision-making processes. The formulation of the system must strictly adhere to statutory decision-making procedures: it shall be reviewed by the Board of Directors, submitted to the Shareholders 'Meeting for approval, and timely disclose the information required by law. The Board of Directors, directors, and senior management of listed companies bear primary responsibility for ensuring the compliant implementation of the compensation system, must exercise due diligence, and proactively advance corrective measures. Failure to complete these tasks within the specified timeframe will result in regulatory actions by the exchange, including regulatory inquiries, warning letters, and orders to rectify violations. Such non-compliance records will be incorporated corporate governance evaluations, directly impacting the company's credit standing in the capital market and its future capital operations. Both the listed company and relevant responsible individuals shall bear corresponding regulatory consequences.