Employee Incentives in Beijing: From Flexible Design to Front-Loaded Compliance and, Ultimately, Dispute Resolution

Beijing’s regulatory approach to employee incentives is evolving rapidly. On the one hand, regulators are strengthening supervision and raising compliance thresholds; on the other, they continue to seek a balance between improving employee remuneration, stabilising employment, promoting skills development and preserving capital vitality. At the enterprise level, whether domestic or foreign-invested, listed or unlisted, state-owned or private, any arrangement involving shares, bonuses or long-term incentives must now be more closely aligned with the latest legal and policy frameworks. At the same time, companies must pay closer attention to shifts in judicial practice. Questions around remuneration are no longer assessed solely through a narrow regulatory or adjudicative lens, but are increasingly influenced by the broader policy objective of advancing common prosperity. Advancing common prosperity requires improvements to the income distribution system, with primary distribution as its foundation, and with mechanisms that allow the market to assess the contribution of production factors and determine remuneration based on contribution. While this policy direction does not change the fundamental principle that incentive design remains a matter of corporate autonomy, it does reshape how incentive rules operate in practice.

Against the backdrop of China’s rapid economic growth over past decades, corporate discussions around employee incentives have long focused on design choices: whether to offer shares, options or cash bonuses; whether to prioritise long-term or short-term incentives; and how to balance tax efficiency and cost control. In Beijing, however, a subtle but critical shift is taking place. Employee incentives, particularly equity incentives, are increasingly being drawn back into the labour law analytical framework through judicial practice. As a result, incentives are no longer assessed merely in terms of whether and how much to grant, but are now also examined through questions such as whether they constitute labour remuneration and how they should be treated upon termination of employment. These developments do not stem from a single new policy, but rather from the cumulative effect of regulatory rules, corporate governance requirements and evolving judicial reasoning over time.

Regulatory scrutiny of equity and bonus incentives continues to intensify

For listed companies, the 2025 revision of the CSRC Measures for the Administration of Equity Incentives of Listed Companies has narrowed the range of permissible incentive structures, limiting them primarily to share options and restricted shares. Through a clearly defined negative list mechanism, the Measures prohibit the implementation of equity incentives in specified circumstances, such as where the company has received an adverse or disclaimed audit opinion in the most recent financial year or has engaged in non-compliant profit distribution. Any equity incentive plan must undergo rigorous scrutiny before implementation: the board of directors and the remuneration and appraisal committee are required to review and approve the plan in advance, and an external law firm must issue a legal opinion confirming that the plan complies with applicable laws and that the relevant vesting or exercise conditions have been satisfied. In practice, this front-loaded compliance design compels companies to complete their disclosure arrangements and internal control framework at the outset, before incentives are rolled out. While the revised Measures continue, in form, to focus on disclosure, approval procedures and quantitative limits, their underlying purpose is to place incentive plans firmly within a framework that is auditable, verifiable and subject to accountability.

For cash-based incentive arrangements (including annual bonus pools, profit-sharing or dividend-linked incentives), non-state-owned enterprises generally retain a high degree of autonomy. By contrast, state-owned enterprises must operate within the regulatory framework for the preservation and appreciation of state-owned assets. In addition to board or shareholder approval as required by law, incentive arrangements are subject to multi-layered oversight through mechanisms such as total wage bill control, “three majors and one large” decision-making procedures, and accountability regimes for business operators, ensuring that incentives remain supervised and constrained.

Procedural reforms: approvals, documentation and audit trails

Consistent with the foregoing trends, Beijing has imposed higher procedural requirements on all types of employee incentive plans, with the core objective of establishing a complete and traceable documentary evidence chain. Enterprises are expected to put in place an incentive management framework covering the entire life cycle of the plan, including: (i) the design and approval of the incentive scheme; (ii) the formulation of performance targets and vesting conditions; (iii) deliberation by the board of directors and relevant specialised committees; (iv) compliance endorsement by third-party professional institutions; and (v) audit-level review and verification. This closed-loop process has become a foundational safeguard for enterprises in responding to regulatory inspections and potential disputes.

Taking equity incentives as an example, before any vesting or exercise occurs, the board of directors must expressly review and confirm whether the relevant financial and performance conditions have been satisfied. The company’s internal audit function or an external auditor is required to verify the consistency between the relevant performance indicators and the financial statements. Only after these procedures are completed may employees exercise options or acquire the corresponding shares. Throughout this process, legal opinions issued by a law firm are not only a mandatory component of the incentive plan itself, but also a compulsory element in each vesting or exercise determination.

These procedural requirements must not only be substantively fulfilled, but also contemporaneously documented and disclosed in accordance with law. Under current rules, prior to implementing an incentive plan, enterprises are required to disclose to shareholders a summary of the plan, the relevant board resolutions and key performance indicators. Where an incentive plan is adjusted or terminated, the board (and, where required, the shareholders’ meeting) must re-approve the changes, and a fresh legal opinion must be obtained for the revised arrangement. From a practical perspective, this significantly raises the bar for internal co-ordination: human resources, finance and legal teams must communicate closely at the design stage to ensure that performance targets are aligned with audit standards. For example, indicators such as revenue or profit should be consistent with the company’s financial budgets and audit logic, so as to avoid discrepancies in subsequent reviews. Overall, the central thrust of the new regulatory approach is to front-load compliance, and reliance on good-faith implementation or ex post remediation is no longer accepted in regulatory practice.

Sound and complete record-keeping is no longer a formalistic requirement, but a practical necessity. If regulators or auditors raise questions regarding a particular incentive payment, the enterprise must be able to present the entire path from plan formulation and approval to implementation and execution. Relevant Beijing policies have made it clear that even internal bonus distribution schemes are required to undergo board-level approval and to remain consistent with financial statements. In the state-owned enterprise context, the implementation of employee incentive plans must also be incorporated into routine Party supervision and audit review mechanisms. In short, regardless of the form of incentive adopted, strengthened documentation and audit-verifiability have become the default standard in Beijing’s employee incentive practice.

Rising emphasis on skill- and performance-based pay

This shift reflects a broader evolution in employment policy. Beyond traditional equity incentives, Beijing is actively promoting the development of skill-oriented remuneration systems. Municipal human resources authorities have established a socialised vocational skills framework that directly links job grades to pay levels. In particular, Beijing is advancing the “new eight-level skilled worker” performance-based pay system for technical and skilled roles, under which positions are classified into eight skill levels and employee remuneration increases progressively with each level attained. Relevant policies also encourage employers to determine compensation for key technical roles through negotiated mechanisms such as agreed salaries, project-based pay or annual salary arrangements, rather than relying solely on equity or bonus incentives.

From a practical perspective, this signals a clear move towards a composite incentive structure combining base pay, performance pay and long-term incentives. For example, companies may establish transparent career pathways in which a Level 1 engineer is associated with a defined starting salary and base bonus, while a Level 5 engineer receives substantially higher remuneration and performance-related rewards. At the policy level, authorities have explicitly called for tilting income distribution towards skilled talent, meaning that entry-level pay and salary adjustment ranges should be differentiated based on officially recognised skill levels. This approach is supported by corresponding adjustments to job classification, training systems and performance evaluation mechanisms. In fact, Beijing’s employment policies now clearly require vocational skill certificates to be directly linked to remuneration systems.

At the same time, state-owned enterprises are strengthening performance- and contribution-oriented pay models alongside equity incentives. Municipal state-owned enterprises are required to implement management principles such as “one position, one salary” and “position change leads to pay change and contract change”, and to increase the proportion of performance-based pay within overall remuneration. This means that even where equity or profit-sharing incentives exist, state-owned enterprises are increasingly using cash-based performance incentives to more directly align pay with role-specific contributions and performance metrics, while subjecting such arrangements to state asset supervision and management accountability requirements.

Overall, a hybrid incentive model combining equity incentives with skill-based pay and performance bonuses is becoming the prevailing approach. Employee incentives are no longer synonymous with the grant of shares alone. For human resources teams, this requires a more systematic approach to remuneration design: embedding clear skill levels into pay structures, negotiating forward-looking salary or project-based remuneration for key roles, and positioning equity incentives as one component within a diversified incentive mix. Regulators generally view this model as conducive both to stabilising the workforce through skill- and contribution-based incentives and to sustaining the role of capital incentives in technological and industrial development.

Taxation of incentive income: key compliance signals

In Beijing, taxation has become one of the most binding constraints on employee incentive arrangements. The core issue for enterprises is no longer how incentive income is classified under statute, but whether its tax treatment is internally consistent, operationally workable and defensible under regulatory scrutiny.

In practice, tax authorities increasingly focus on substance rather than labels. Cash-based incentives are generally expected to be treated as salary income and included in unified payroll withholding, regardless of how they are described in internal policies. Recharacterisation of cash incentives as non-wage items carries rising compliance risk where payments are clearly linked to employment performance. For equity incentives, enforcement attention has shifted to the timing of taxable events, the accuracy of filings and consistency between incentive documentation, payroll records and annual individual income tax reconciliation.

The inclusion of Beijing-listed companies in the equity incentive tax deferral regime has added planning flexibility, but also heightened compliance expectations. Tax deferral is increasingly treated as a conditional benefit rather than a default entitlement. Inaccurate filings, weak documentation or misalignment between HR, payroll and tax systems may result in loss of deferral eligibility or retrospective tax exposure. Employee departure has also become a key risk trigger, as deferred tax liabilities typically crystallise immediately upon exit.

Overall, tax considerations in Beijing have moved decisively upstream. Incentive plans that are attractive in design but weak in tax-operational execution are increasingly unsustainable. Effective incentive planning now requires early co-ordination across legal, tax and HR functions to ensure that tax treatment, withholding mechanics and exit scenarios are fully aligned before incentives are implemented.

Long-term incentives: trust structures and IP rewards

Beyond traditional equity-based incentive arrangements, more structured long-term incentive tools are increasingly entering corporate practice. This shift is not driven by the introduction of a single new incentive policy, but rather by enhanced operability of trust structures in relation to non-cash assets. In April 2025, Beijing financial regulators further launched pilot initiatives requiring equity held through trust structures to complete statutory registration and filing. The advantages of a trust-based structure are twofold. First, it allows incentive assets – whether equity or intellectual property – to be relatively segregated from the company’s own balance sheet. Second, by clearly defining beneficiary arrangements, it provides a more robust legal basis for tax treatment and entitlement allocation. Against this backdrop, companies may establish employee shareholding trusts under which employees participate as beneficiaries rather than as direct shareholders, while the accompanying registration framework enhances transparency over the scope of trust property and the status of related rights.

Intellectual property-based incentives represent another area of growing importance. Beijing’s business environment policies expressly call for strengthened mechanisms for reporting, complaints, rights protection and legal assistance in the intellectual property field, as well as improved support for handling cross-border intellectual property disputes. In practice, this policy direction underpins the integration of patent and technology outcomes into employee incentive mechanisms. Some enterprises have begun to reward R&D personnel by linking incentives to patent licensing or technology commercialisation, for example through bonus allocations based on a percentage of intellectual property licensing income, or by granting special incentives upon the grant of patents to core researchers. Policy guidance explicitly encourages such arrangements, emphasising that enterprises should enhance their capabilities in intellectual property protection and utilisation and incorporate technological achievements into incentive and constraint mechanisms in a reasonable manner. From a broader international perspective, this also signals that where employees become involved in overseas disputes or litigation arising from intellectual property incentives, local authorities may provide a degree of co-ordination and support to help manage cross-border legal risks.

Taken together, incentive mechanisms based on trust structures and intellectual property significantly expand the toolkit available for long-term incentives. A key practical implication for enterprises is the need to assess whether long-term incentive objectives can be implemented through equity or asset trusts. For example, equity incentives may be placed into a trust with lock-up arrangements, to be released only upon satisfaction of service periods, performance targets or listing conditions; similarly, R&D teams may participate in forward-looking incentive schemes through the sharing of future intellectual property licensing income. Beijing’s current policy and regulatory orientation clearly indicates that such structured incentive tools are not only permissible, but are increasingly supported by clearer legal and institutional frameworks.

Incentive governance in state-owned enterprises: audit oversight and clawback mechanisms

State-owned enterprises (including Beijing municipal SOEs) are subject to multi-layered governance requirements in relation to employee incentive arrangements. Within the SOE framework, employee incentives are not merely matters of internal management, but are treated as governance issues carrying a public responsibility dimension. Beijing’s state-owned assets regulators have made this position explicit: any form of equity incentive or profit-sharing incentive must be incorporated into routine internal audit and Party disciplinary oversight systems. In practice, incentive plans are expressly placed under the supervision of internal audit departments and discipline inspection bodies. The relevant guidance also specifies strict consequences. For example, where an SOE’s financial statements or internal control reports receive adverse audit opinions, or where violations are identified through inspection, incentive plans for the relevant year must be cancelled or terminated. Where incentive arrangements are modified or implemented without approval, or execution deviates from the approved plan, implementation must be suspended immediately and responsible management personnel held accountable, with serious cases potentially affecting their future career progression.

Substantively, these rules introduce a clear clawback and accountability logic into SOE incentive mechanisms. In practice, SOEs are expected to incorporate explicit clawback triggers into incentive agreements at the outset. For example, agreements may provide that where the enterprise is subject to regulatory sanctions due to violations, or fails to pass an audit, unvested incentive interests automatically lapse, while vested interests may be subject to repurchase or recovery. At the same time, regulators have made clear their expectation that variable remuneration structures in SOEs will tilt further toward performance-based pay. Beijing policies expressly require an increased proportion of remuneration to be directly linked to actual output and performance. As a result, within the SOE system, equity or dividend-based incentives increasingly coexist with high-weight performance bonuses, with both forms subject to stringent supervision.

Overall, any employee incentive arrangement in an SOE must be duly reported and incorporated into audit and Party oversight frameworks. Performance metrics and vesting conditions should be reviewed by the board of directors and the audit committee and aligned with external audit conclusions. Incentive plans should also clearly specify termination scenarios (such as failure to meet performance targets) and repurchase or exit mechanisms upon employee departure. Where audits are failed or violations arise, enterprises are expected to promptly rectify incentive payments for the relevant year and refer the matter to internal discipline or supervisory bodies. The regulatory direction is clear: risk control and traceable accountability are the core requirements of incentive governance in Beijing SOEs, and any incentive payment must simultaneously satisfy both financial compliance standards and Party and governmental oversight requirements.

Legal risks and judicial trends

Beijing courts have continued to refine and clarify their approach to disputes arising from such arrangements. One particularly significant trend is the increasing tendency to bring equity incentive disputes within the scope of labour dispute adjudication. In recent Beijing case law and judicial opinions, courts have commonly treated shares or stock options granted to employees as part of labour remuneration. For example, the court has expressly held that equity incentives granted to employees are, in substance, consideration provided in return for their labour performance, and that disputes arising from such incentives should therefore be governed by labour law principles.

This judicial approach has two direct and important consequences. First, labour arbitration becomes a mandatory precondition. Claims by employees in relation to incentive entitlements are generally required to go through labour arbitration before court proceedings, as they are characterised as labour disputes. Second, there is an increased risk that choice-of-law and dispute resolution clauses selecting foreign law or offshore forums will not be upheld. Where such clauses involve the protection of employees’ fundamental rights, Beijing courts are often unwilling to give effect to them and will instead apply the mandatory protective rules of PRC labour law, regardless of the parties’ contractual agreement.

That said, Beijing courts do not adopt a uniform approach in all cases and have developed a more nuanced analytical framework. According to adjudication guidance issued by the Beijing High People’s Court, the key factors in determining the nature of an incentive dispute include whether the incentive recipient has an employment relationship with the enterprise, and whether the incentive in substance constitutes remuneration for labour. Where the incentive recipient is not an employee – such as an independent consultant, or a director or senior executive who has not entered into an employment contract with the company – the court is more likely to characterise the dispute as an ordinary civil contract dispute. In practice, however, most incentive recipients are employees or employed managers, and the presumption in favour of classification as a labour dispute continues to prevail. By comparison, judicial practice in some other regions, such as Shanghai, has at times shown greater divergence on this issue.

Beyond the classification of disputes, Beijing courts also pay close attention to contractual enforceability and fairness. As a general principle, courts will recognise the validity of employee incentive agreements as reflecting the parties’ true intent, provided that they do not violate mandatory legal provisions. However, where contractual obligations are objectively impossible to perform, courts will assess the matter from an enforceability perspective. For example, if an incentive agreement provides for the delivery of shares that cannot legally be issued or transferred due to lock-up restrictions, trading suspensions, insolvency proceedings or missing regulatory approvals, courts will typically not order specific performance and may instead award reasonable cash compensation as a substitute. Similarly, where vesting or payout is tied to a specific transaction price that cannot objectively be determined due to circumstances such as a prolonged trading suspension, courts often adjust the calculation method based on principles of fairness rather than rigidly adhering to the original formula.

Taken as a whole, enterprises should assume that most equity incentive disputes in Beijing will be treated as labour disputes. This requires preparedness for labour arbitration and caution in using choice-of-law or offshore dispute resolution clauses that may be disregarded. Incentive arrangements should therefore be drafted on the basis of PRC labour law, with clear vesting, forfeiture and repurchase terms supported by proper documentation. Where the link to the employment relationship is ambiguous, courts are likely to interpret the arrangement in favour of the employee.

Practical insights and key takeaways

As policies continue to evolve, companies designing employee incentive mechanisms should focus less on the choice of tools and more on risk allocation and dispute outcomes. In practice, several points are critical.

First, incentive structures should be diversified. Over-reliance on equity incentives should be avoided. Skill-based and performance-based pay should form the core of the remuneration framework, with equity incentives positioned as a supplementary tool rather than a substitute for base pay and cash bonuses.

Second, approvals and documentation should be front-loaded. Incentive plans should be reviewed and approved in advance by the board of directors (and, where applicable, the remuneration and appraisal committee). Before any grant or vesting, legal opinions from PRC counsel should be obtained, and written records covering vesting conditions, approvals and employee acknowledgements should be properly retained, with ongoing involvement of audit and compliance functions.

Third, tax compliance must be handled with precision. Incentive income should be correctly classified for individual income tax purposes, with proper withholding and filings completed. Equity incentives should complete required tax filings to preserve eligibility for deferral where available, and multiple incentive payments within the same year should be consolidated. Payroll and tax systems must be closely co-ordinated, particularly upon employee departure or share disposal.

Fourth, clawback and oversight mechanisms should be built into incentive arrangements. Incentive agreements should clearly provide for forfeiture or recovery of benefits where performance targets are not met, misconduct occurs or key personnel exit improperly. These mechanisms should be aligned with internal and external audit processes, especially for state-owned enterprises.

Finally, labour law considerations must be fully respected. Employee incentives should be treated as part of the remuneration system, with disputes expected to follow the labour arbitration route. Incentive agreements should avoid clauses that exclude PRC labour law and should clearly address incentive treatment upon resignation, termination or retirement, as courts generally uphold reasonable and well-defined forfeiture or repurchase provisions.

Overall, Beijing is moving toward a more balanced and institutionalised employee incentive model, one that supports long-term retention and skills development within a strict compliance framework. Companies that integrate incentive design with robust governance – through clear decision-making, enforceable structures and consistent tax treatment – will be better positioned to manage risk and reduce disputes. In practice, this requires close co-ordination among management, HR and legal teams throughout design, approval and implementation. Ultimately, effective incentive arrangements must both motivate employees and align with Beijing’s policy priorities of innovation-driven growth and employment stability.