First Payment of Long Term Employee Incentive Plan of Ping An of China

Bonus accounts for 2.6% of profits in the whole year 

Ping An Insurance (Group) Company of China Ltd. recently released its 2007 performance report. As per International Financial Reporting Standards, business growth was robust in 2007. Net profits hit CNY19.219bn, up around 140% YOY. At the same time, the annual report showed that the down payment in Ping An’s long term incentive plan launched in 2004 was paid in 2007. This payment was made in line with the rule that total bonus set by the Company should not exceed 4% of forecast profits.  Ping An spent CNY 500 million for the first payment of its long-term employee incentive plan, accounting for 2.6% of the insurer's net profits in 2007 and lower than 10% of HR cost. 

According to the annual report, thanks to the Company’s business robust growth in 2007 and first payment of long term incentive plan, Ping An managements were granted a total of CNY282mn in remuneration in 2007, up around 122% YoY. Among it, annual performance bonus linked to performance and first payment of long term incentive plan accounted for over 80% of total income in 2007. Obviously, growth of management incomes was mainly from two parts. The first was the payment of long term incentive plan tied to the company's H-share stock established four years ago. The second was performance bonus related 2007 business growth.

Approved by the first Extraordinary General Meeting in 2004, Ping An established a scheme of long term incentive plan in the manner of virtual share appreciation rights for the senior executives and certain key employees of the Group. No shares will be issued under this scheme. The rights are granted in units with each unit representing one H share of the Company. Calculation of bonus when it is due is the product of the number of units exercised and the difference between the exercise price and market price. This scheme draws upon incentive methods used in global markets, which combine senior management’s interests and shareholders' value together. Conditions for senior management to obtain bonus include the Company’s KPI. Payment period is long in the scheme in order to promote management more concern on the Company’s long term development.

Who should receive the bonus and the number of units were determined based on employees' performance and contribution each year from 2004 to 2008 and approved by the Remuneration Committee of board of directors of the Company. This long term bonus was granted in five installments. In the first installment in 2004, the issuance price ( HKD10.33) was taken as the grant price when the Company went to public in the H-share market. 41.92mn units were granted. In 2007, 2008 and 2009, 13.9733mn units were exercised respectively. From 2005 to 2008, long term bonus granted each year should be paid in the 3rd year from the grant date. In 2005, 15.72mn units were granted at HKD12.47; In 2006, 15.72mn units were granted at HKD21.5.   

As per the above long term incentive plan, the first long term bonus granted in 2004 was exercised in 2007 for the first time. Upon exercise of the said rights, the participants will receive a cash payment. Exercise price will be the lower of intraday closing price on 24 Jun, 2007 and average price of closing prices in previous five days. However, as per usual prudent accounting principle, a total of bonus of plan participates shall not exceed 4% (the upper limit) of forecast net profits (International Financial Reporting Standards). This upper limit does not only motivate management to bring good returns for shareholders but also avert excessive incentives to senior management.

As shown in the 2007 annual report of Ping An of China, due to increase of performance-linked bonuses and the first payment of the long-term incentive plan in 2007, total bonuses of Ma Mingzhe (Chairman and CEO of Ping An), Zhang Zixin (President of Ping An Group) and Liang Jiaju (Vice President and Chief Insurance Officer)  saw relatively large increase with their respective after-tax income exceeding 20 million yuan. In terms of the income structure, their basic salaries remained unchanged on the whole comparing to those in 2006, and the bonus increase including option incentives was the main reason. After deducting personal income tax, remunerations (salaries plus bonus) of Mr. Ma, Mr. Zhang and Mr. Liang were 25.794 million yuan, 26.648 million yuan and 26.882 million respectively, a considerable increase compared to 13.382 million yuan, 11.155 million yuan and 17.103 million yuan in 2006. As disclosed in the H share annual report of Ping An, effective tax rates of five people with the highest incomes ranged between 30.8 to 44.2%.  

In addition, public donations made by the management were disclosed in the annual report of Ping An: Ma Mingzhe donated 20 million yuan to China Soong Ching Ling Foundation; and Wu Yuehan, Vice President of Ping An donated, 100,000 yuan to China Youth Development Foundation.  

According to an HR responsible person in Ping An, Ping An implements a performance-orientated remuneration system: remuneration of senior executives consists of fixed basic salaries and performance bonuses, and so personal incomes are linked to personal performances and contributions to performance of the company. Each year, the company sets clear three-year rolling plans and annual accountability targets for senior management, conducts strict accountability assessments twice in line with the target achieving status. Comprehensive evaluations for senior management are given based on the 360-degree feedback assessment. The accountability results are closely linked to long- / short- term bonuses and remunerations, appointments and dismissal of the management. And the comprehensive evaluations are important factors for considering the development of the management.  

According to this responsible person, Ping An’s remuneration incentive plan is worked out on the basis of both international and domestic remuneration levels as well as profit growth and performance growth of the company by independent remuneration consultants hired by the board of directors, reviewed and revised in line with suggestions of the BOD remuneration committee, and reviewed and approved by the shareholder meeting.  

As the first joint stock insurance corporation in China, since its establishment, Ping An has set up the “value-maximization” oriented corporate culture, and made the remuneration incentive plan based on the principle of “having clear orientation, showing gaps, encouraging performance, reflecting the market and optimizing costs”. Meanwhile, as a domestic financial enterprise who took the lead in importing foreign executives, around 60% of the first 100 people in the senior management of Ping An are foreigners. Therefore, a remuneration system consistent with international practice is implemented for foreign senior executives. According to the HR responsible person of Ping An, facts have approved that the company can maintain its vigor and competitive edges in the fierce market competition via the strict implementation of the performance accountability and market remuneration system with the above principle.