The China Securities Regulatory Commission (CSRC) has suggested implementing salary reductions of up to 50% for fund managers whose investment products either incur losses or fail to meet benchmarks by 10% or more. This initiative, announced on March 14, 2025, is part of efforts to reform China’s $4.6 trillion mutual fund sector in light of economic difficulties, such as decelerating growth, a sluggish stock market, and ongoing trade disputes with the United States, as noted by Dhirendra Kumar, Founder and Chief Executive of Value Research.
In a post on social media platform X, Kumar indicated that this proposal arises from concerns regarding disappointing fund performance, with active managers achieving an average return of 4%, compared to the CSI 300 Index’s 15%. By linking compensation to investment returns, the CSRC aims to better align the interests of fund managers with those of investors, moving away from traditional metrics such as firm size or rankings.
This measure also aligns with China’s “common prosperity” initiative, targeting income disparity in high-paying sectors like finance. Earlier in 2025, financial regulators, including the CSRC, saw 50% pay cuts to match civil servant salaries. Still, in draft form, the proposal lacks a set timeline but complements broader regulatory efforts, such as reducing fees and tightening fund oversight. While it could improve accountability, it may deter talent from the industry as China seeks to bolster its financial markets.
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Kumar says that China’s plan to slash fund manager pay for underperformance sounds bold, but it’s a tricky beast for open-ended funds with daily NAVs.
Here’s how they might pull it off:
Benchmark Check: If a fund lags its benchmark by, say, 10% over a set period, the manager’s paycheck will suffer.
Longer Time Frames: No knee-jerk reactions to short-term dips; they’ll likely use rolling 1-, 3-, or 5-year performance windows.
Clawback Clause: Fund houses could demand refunds on past bonuses if managers consistently underperform.
Expense Ratio Tweaks: Make salaries a moving target. When NAVs drop, so does the manager’s cut.
Bonus Caps & Profit Sharing: Outperformance? Extra pay. Underperformance? Base salary, no bonus.
Regulator Watchdog: The CSRC could force firms to publish manager salaries tied to fund performance. This is already done in India, through salary disclosure and compulsory investment in their funds.
Industry-Wide Rules: Standardised pay policies to keep everyone in check.
“Let’s see how it plays out!” Kumar writes.
Lessons for India’s mutual fund industry and fund managers:
According to industry experts, this decision by China can also offer important lessons to the Indian mutual fund industry and its fund managers. The biggest lesson is that it is important to give priority to long-term performance instead of short-term returns. To protect the interests of investors in India too, a performance-linked incentive model can be considered. It will encourage fund managers to focus on creating value for investors instead of just increasing the numbers.
The second important thing is to fix the accountability of fund managers. At present, fund managers in India are not directly accountable for their poor performance, but like China, if salaries and bonuses are linked to the actual returns of investors, then it can bring more discipline and transparency. This will make fund houses work to give real beneficial returns to investors instead of focusing only on increasing AUM.