Compensation Policies for China SOX

C-SOX explicitly links executive compensation to effectiveness of internal controls. Chapter 1 Article 8 of the Basic Standard for Enterprise Internal Control says that companies should set clear policies on the rewards and disciplines related to the proper implementation of internal control. Effectiveness of internal control implementation should be treated as a key element of performance appraisals for department and staff levels. This is dramatic because it impacts managers where it counts – their wallet.

The implication is that compensation and rewards should be set according to achievement of company goals and effective business control. Therefore, companies in China need to be very clear in setting goals and metrics for measurement. If management’s bonus is going to depend on how well they enforce internal controls, they are going to want to have a lot of say in how they are measured, and make sure that they don’t pay for someone else’s mistakes.

One of the biggest challenges will be determining areas of responsibility and documenting who is in charge of what. Defining the organizational structure should be a centralized task, managed by top executives with the assistance of the HR department.

Furthermore, companies need to have the proper mechanisms to analyze and enforce enterprise control. This includes IT solutions and software tools, which have been widely deployed. However, more often than not, these tools are not integrated together and it is difficult for management to get a clear overall picture of the business. This represents a challenge because without hard data it will be difficult to measure performance (and therefore set variable compensation).

When implementing the compensation part of C-SOX, companies should look for performance appraisal and goal management tools allow for clear communication and implementation of reward policies. Goals should be set consistently across the enterprise, which improves transparency and highlights areas of risk or exposure. Also, because it is such a sensitive topic, companies should consider hiring external consultants and experts for this step.

Keep reading for more detail on how to start your China SOX implementation.