Linking Performance Reviews to Pay in China

For employers operating in China, performance appraisals are often seen as a practical way to manage pay increases, bonuses, and underperformance. In practice, however, linking performance outcomes to pay is one of the most legally sensitive areas of employment management.

Handled well, it can support accountability and fairness. Handled poorly, it can expose an employer to disputes, back pay claims, or findings of unlawful wage reduction.

This article explains how performance appraisals can be used in China, where the legal boundaries sit, and how employers can design systems that stand up to scrutiny.

Why performance-linked pay is legally sensitive in China

Chinese employment law places strong emphasis on income stability and employee protection. Salary is viewed as a core contractual right rather than a flexible management tool.

As a result:

• Base salary cannot be reduced unilaterally

• Changes to pay must be grounded in clear contractual terms

• Employers must demonstrate fairness, transparency, and due process

Performance systems are assessed not just on intention, but on how consistently and lawfully they are applied.

The difference between base salary and variable pay

A critical distinction in China is between fixed and variable remuneration.

Base salary

This is protected by the employment contract. Employers cannot reduce base salary based on performance unless there is an explicit contractual mechanism allowing adjustment, supported by lawful procedures.

Variable pay and bonuses

Discretionary bonuses, performance bonuses, and incentive payments offer more flexibility, provided the rules are clearly documented and communicated in advance.

Many disputes arise where employers treat base salary as if it were variable.

When performance appraisals can affect pay

Performance results can lawfully influence pay in the following ways:

• Determining eligibility for performance-based bonuses

• Affecting annual salary increases where these are not guaranteed

• Supporting decisions not to award discretionary incentives

• Informing promotion or role change decisions that lead to new pay levels

Each of these relies on clear internal rules and documented processes.

The role of contracts, policies, and employee handbooks

In China, performance-linked pay must be anchored in formal documentation.

Key documents include:

• Employment contracts

• Employee handbooks or company policies

• Bonus and incentive schemes

• Performance management guidelines

These documents should clearly state how performance is assessed, how outcomes affect pay, and how disputes are handled.

Changes to these rules usually require employee consultation and formal implementation procedures.

Performance appraisals and wage reductions

Reducing pay due to poor performance is where employers face the highest risk.

In most cases:

• Poor performance alone does not justify a pay cut

• Employers are expected to provide training, support, or role adjustment

• Persistent underperformance must be documented through a structured process

Where a role change or demotion is proposed, mutual agreement is usually required.

Fairness, consistency, and evidence

Authorities and labour arbitration panels focus heavily on process.

They will examine whether:

• Appraisal criteria are objective and measurable

• Managers apply standards consistently across employees

• Employees had the chance to understand and respond to results

• Decisions are supported by written records

Inconsistent scoring or undocumented decisions weaken an employer’s position quickly.

Managing bonuses and discretionary incentives

Discretionary bonuses are often misunderstood.

To remain discretionary in practice, employers should ensure:

• The scheme states clearly that payment is not guaranteed

• Performance metrics and eligibility rules are defined in advance

• Past payments do not create an implied entitlement

• Decisions are documented each year

Once a bonus is treated as automatic, it may be regarded as part of regular wages.

Common mistakes employers make

Foreign employers frequently run into trouble due to:

• Importing overseas appraisal systems without localisation

• Using vague or subjective performance criteria

• Linking pay outcomes to undocumented reviews

• Failing to update contracts and policies as systems evolve

These gaps are often exposed during disputes or audits.

Oversight and enforcement environment

Employment practices are overseen by local labour authorities under the direction of the Ministry of Human Resources and Social Security.

Disputes are typically resolved through labour arbitration, where written evidence and procedural compliance carry significant weight.

Practical steps for employers

Employers looking to link performance and pay lawfully should focus on:

• Separating base salary from variable pay clearly

• Documenting appraisal criteria and outcomes

• Training managers on consistent application

• Reviewing contracts and handbooks regularly

• Addressing performance issues early and formally

These steps reduce risk without limiting management flexibility.

How Woodburn supports employers in China

Woodburn works with international employers to design and implement performance management frameworks that align with Chinese employment law.

By building compliant structures from the outset, employers can manage performance confidently while protecting their legal position in China.

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Woodburn Accountants & Advisors is one of China and Hong Kong’s most trusted business setup advisory firms.

Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

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