Compliance Guide for Performance Pay and Commission Issuance: Incentives and Risks Coexist

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Are you troubled by how to balance performance incentives with legal risks? This is indeed a common challenge faced by many companies operating in mainland China.

The key to achieving effective incentives and salary issuance compliance lies in establishing a management system that is “clear in rules, legal in procedures, confirmed by both parties, and transparent in process.”

The cornerstone of this system is a clear and comprehensive written policy. It provides a solid legal basis for all subsequent operations.

Core Highlights

• Companies should establish clear written policies to ensure performance compensation rules are clear, procedures are legal, confirmed by both parties, and the process is transparent.
• Companies must avoid legal pitfalls such as verbal agreements, unilateral changes to compensation plans, non-payment of commissions to resigned employees, and wage deductions.
• When designing performance commission plans, clearly define the scope of application, assessment cycle, performance indicators, calculation formulas, and payment conditions, while adhering to the equal pay for equal work principle.
• When formulating or modifying compensation systems, companies must follow democratic procedures and public notification procedures and obtain written confirmation from employees.
• In performance management and salary payment processes, companies should ensure fair and impartial evaluations, provide clear pay slips, and properly retain payment vouchers.

Four Major Legal Pitfalls in Performance Compensation

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In pursuit of incentive effects, you may inadvertently step into legal minefields. Once these risks explode, they not only demoralize employees but can also plunge the company into legal disputes and financial losses. The following are the four most common legal pitfalls in performance compensation that you need to be particularly vigilant about.

Ambiguous Rules: Risks of Verbal Agreements

Do you habitually promise commission plans to employees verbally? This approach may seem flexible but is fraught with significant risks. Once a dispute arises, verbal agreements are difficult to clarify due to lack of evidence. In labor arbitration or litigation, when both parties insist on their own versions, the burden of proof usually falls on the company.

If you cannot provide valid written evidence to prove your compensation rules, the adjudication body is likely to adopt an interpretation favorable to the employee, leading you to bear adverse consequences.

Unilateral Changes: Consequences of Arbitrarily Adjusting Plans

When market conditions change, you may want to adjust performance or commission plans. Please note that under Chinese labor law, compensation is a core term of the employment contract. You cannot unilaterally change it without employee consent. Any modification must be negotiated and agreed upon in writing with the employee. If you forcibly make illegal adjustments, employees have the right to terminate the employment contract for this reason, and courts will support employees’ claims for economic compensation. This makes salary issuance compliance an indispensable part of company management.

Resignation Disputes: Should Commissions Be Paid

This is one of the most common disputes. A salesperson closes a big deal but resigns before the company receives payment or the commission issuance date—should this commission still be paid? The answer is usually: yes. The core principle of labor remuneration is “employees should be paid for their efforts.” As long as the employee has completed the vast majority of the work required to earn the commission, even if they resign afterward, you should pay the corresponding commission as agreed. It is crucial to clearly define the commission calculation and payment rules for resigned employees in the policy.

Negative Performance: Can Wages Be Withheld or Deducted

When an employee’s performance falls short or even results in “negative performance,” you can withhold performance pay, but you must never “deduct” the employee’s fixed or basic salary, nor allow it to fall below the local minimum wage standard. The essence of performance pay is a variable reward—it can be zero but cannot be negative. Although in specific cases such as employee incompetence, the law allows salary adjustments through legitimate position changes, this requires the company to have comprehensive internal rules and regulations for support, and the corresponding legal procedures must be followed.

Salary Issuance Compliance: Building an Effective Performance System

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After avoiding legal pitfalls, the next step is to take proactive action to build a performance compensation system that both unleashes employee potential and is fully compliant. This requires meticulous attention to every link from system design to issuance operations. A robust system is not only a shield against risks but also an engine driving business growth.

System Design: Clearly Define Performance Commission Plans

The starting point for all compliant operations is a written policy with clear content and logical structure. This document is the “game rule manual” between you and your employees and must eliminate all ambiguities.

A comprehensive performance and commission plan should include at least the following key elements:

• Scope of Application: Clearly state which departments and positions the plan applies to.
• Assessment Cycle: Define the frequency of performance assessments, such as monthly, quarterly, or annually.
• Performance Indicators: This is the core of the core. You need to set clear, measurable, and achievable indicators (KPIs). Indicators should be divided into quantitative and qualitative categories, for example:
  • Quantitative Indicators (for sales positions as an example):
    • Closing Rate: Measures the percentage of sales opportunities converted into actual sales.
    • Average Order Value: Represents the average revenue per transaction.
    • Trial Conversion Rate: Measures the proportion of trial users converted to paying customers.
  • Qualitative Indicators (applicable to multiple positions):
    • Customer Feedback: Understand customers’ true opinions through satisfaction surveys.
    • Team Collaboration: Evaluate employees’ contributions to achieving common goals within the team.
• Calculation Formula: Use simple and clear mathematical formulas to show how performance pay or commission amounts are calculated based on performance results. For example: Commission Amount = Received Payment * Commission Rate.
• Payment Conditions and Timing: Clearly state the prerequisites for commission payment (such as “after actual receipt of funds”) and specific payment dates.
• Handling Special Situations: Detail how performance and commissions are calculated and paid in cases such as employee resignation, transfer, or leave.

A special reminder: when designing the plan, you must adhere to the basic principle of “equal pay for equal work.” For identical or similar positions, you should apply uniform performance assessment standards and compensation calculation rules to avoid disputes over unfairness due to significant rule differences.

Legal Procedures: Fulfill Democratic and Public Notification Steps

No matter how perfect the policy content is, if the formulation procedure is illegal, its legal effect will be greatly discounted. According to relevant Chinese laws and regulations, when formulating or modifying rules and systems involving employees’ vital interests (such as compensation systems), you must follow “democratic procedures” and “public notification procedures.”

The specific operational steps are as follows:

1. Draft Discussion: You need to submit the draft of the performance compensation plan to the workers’ congress or all employees for discussion.
2. Gather Opinions: Carefully collect opinions and suggestions from the union (if any) and employees. According to Article 17 of the 2023 Company Law, this is a legal obligation when companies formulate important rules and systems.
3. Negotiate and Finalize: Engage in equal negotiation with the union or employee representatives to reach consensus on the plan content.
4. Public Notification: Publicize the finalized plan to all employees through company bulletin boards, internal emails, employee handbooks, etc., ensuring every employee is aware of its content.

Legal Perspective

Especially in regions like Shanghai, regulations clearly require companies with over 100 employees to establish a workers’ congress. Even if your company is smaller, you should fulfill democratic procedures by holding a general employee meeting. This is not only a legal requirement but also a key step in building mutual trust and reducing subsequent disputes.

Written Confirmation: Obtain Employee Signatures and Consent

After the policy is publicized, the most critical step is to obtain written confirmation from each applicable employee. This is the strongest evidence proving that employees are aware of and agree to the plan.

You can include the performance compensation plan as an attachment to the employment contract for employees to sign upon onboarding. For plan changes affecting current employees, you need to sign a separate 《Compensation Confirmation Letter》 or 《Employment Contract Amendment Agreement》 with them.

You may ask: “What if an employee refuses to sign?” According to the spirit of Chinese labor law, if the company can prove that a reasonable compensation agreement was provided to the employee and the employee refuses to sign without justifiable reason, the company can use this as a defense in disputes to mitigate or exempt part of the legal liability.

In the era of digital office work, you can also adopt more efficient methods. Electronic signatures that comply with China’s Electronic Signature Law, using the SM2 algorithm and supported by certification authorities, have the same legal effect as handwritten signatures. This provides great convenience for obtaining employee confirmations in bulk.

Process Management: Compliant Operations in Assessment and Issuance

Policy implementation is key to execution. In daily performance management and salary issuance processes, every operational step must leave clear written records.

Performance Assessment Stage: You must ensure the fairness and impartiality of the performance evaluation process. According to the Labor Contract Law’s requirements for equal treatment, evaluations should be based on objective facts and data, avoiding any form of discrimination. All performance evaluation results should have written records and be jointly signed and confirmed by the employee and their direct supervisor. This document is an important basis for salary calculation, position adjustments, or even termination of employment contracts in extreme cases.

Salary Payment Stage: This is the final checkpoint for salary issuance compliance, and operations must be precise and error-free.

• Provide Pay Slips: You must provide each employee with a personal pay slip (i.e., “payslip”) at the time of payment. The slip must clearly list:
  • Total salary
  • Performance and commission amounts
  • Overtime pay (if applicable)
  • Various allowances and bonuses
  • Deductions for personal income tax, social insurance, and housing provident fund
  • Net pay
• Retain Payment Vouchers: You must create and properly keep salary payment records, such as payroll rosters confirmed by employee signatures. These vouchers must be retained for at least two years by law for inspection by labor supervision authorities at any time.
• Flexibly Set Payment Dates: To avoid being deemed “unreasonably delaying” due to unexpected situations like bank transfer delays, it is recommended to set the salary payment date as a range in the policy, such as “between the 10th and 15th of each month.” This provides necessary operational flexibility and effectively reduces salary issuance compliance risks.
• Choose Reliable Payment Tools: For companies with cross-regional or global payment needs, selecting a secure and efficient payment tool is crucial. For example, global payroll payment platforms like Biyapay on the market can help you handle complex currency conversions and compliant payment processes, ensuring funds reach employees on time and accurately.

Through the refined management of the above four steps, you can build an impregnable performance compensation compliance system.

Please remember that salary issuance compliance is not a constraint on incentives but the cornerstone of their success. A well-designed and transparently executed system can transform legal risks into management momentum, ultimately achieving a win-win for the company and employees.

The benefits of doing so are obvious:

• Avoid negative publicity and legal litigation.
• Enhance employee engagement and productivity.
• Attract diverse talent and drive business success.

Therefore, we urge you to actively review and optimize your existing compensation system, integrate compliance concepts into daily management, and create a flexible and sustainable incentive model.

FAQ

Do commissions need to be paid to employees during the probation period?

Of course they do. You must pay commissions to probationary employees as agreed. The probation period is part of the employment contract, and employees enjoy equal labor remuneration rights. You cannot refuse or deduct their deserved commissions on the grounds that they are in the probation period.

What if an employee does not accept the performance results and refuses to sign?

You should establish an appeal channel to allow employees to express objections. If the employee still refuses to sign after communication, you should record the fact and may invite the union or a third party to witness. As long as your assessment procedure is fair and evidence is sufficient, it can still serve as the basis for salary issuance.

Key Tip

A sound appeal and communication mechanism is an important part of proving the fairness of your management procedures.

The project payment cycle is very long; can commissions be paid after receipt of funds?

Yes, but the premise is that you must clearly stipulate it in the compensation policy.

You need to clearly state in the policy:

• Commission payment is linked to “actual receipt of funds by the company.”
• Specify the exact payment timeline or calculation cycle.

Do verbal commission promises have legal effect?

Verbal promises carry huge risks. In judicial practice in mainland China, without other supporting evidence, companies usually bear the burden of proof. If unable to prove, adjudication bodies are likely to adopt an interpretation favorable to the employee and order you to pay the corresponding amount.