BEIJING/HONG KONG (Reuters) - China is set to impose a 1 million yuan ($137,309) cap on the annual income of staff at central government-owned financial institutions, three sources said, expanding a campaign against excess against a backdrop of economic slowdown.

Those whose income already exceeds 1 million yuan will have their payout cut, such as middle and senior managers whose income will as much as halve in an overhaul of the compensation structure at 27 financial giants including the "Big Five" banks, six leading insurers and four major bad debt managers.

The bulk of cuts will be made by shrinking bonuses, said two of the three people, who have direct knowledge of the plan but declined to be identified due to the sensitivity of the matter.

The most sweeping wage reduction exercise in the $67 trillion finance sector will begin as early as next month though staff are yet to be informed of reasons, the people said.

The cap is in line with the government's "common prosperity" drive launched in 2021 to address social and income inequality as growth slowed in the world's second-largest economy.

Both state-owned and private financial firms have since proactively lowered salaries and bonuses and discouraged the show of wealth such as by asking staff to avoid wearing expensive clothes and watches.

Income caps at state-owned financial institutions, however, could make it harder to retain top talent when private-sector rivals offer competitive compensation packages.

The pay cap at central government-owned financial firms was first reported by news outlet Caixin citing unidentified regulatory and banking sources.

Executive income at subsidiaries of the targeted firms, including investment banks and asset managers, will be capped at 3 million yuan, the three people also said.

Some senior executives at subsidiaries currently earn as much as 5 million yuan, stock exchange filings showed.

The Ministry of Finance - the targeted firms' biggest shareholder - and the Ministry of Human Resources and Social Security did not reply to Reuters' requests for comment.

PAY DISPARITY

China is also set to slash pay by about half at the central bank and two financial regulators as part of a revamp that began in 2023 to bring income closer to that of other civil servants, people with knowledge of the matter previously told Reuters.

The timing is at odds with government efforts to boost consumption to revive economic growth. Just this month, millions of government workers were given a surprise monthly increase of about 500 yuan on average, beneficiaries told Reuters.

Those most affected by the new cap at finance firms would be department heads who earn premium salaries for managing front-office operations and driving growth, two of the people said.

The income of some department heads exceeds that of chairs and presidents, who are already subject to compensation caps of 700,000 yuan to 900,000 yuan, the two people said.

To address this anomaly, a new rule will prohibit subordinates from receiving higher compensation than superiors at the target firms, the people said.

($1 = 7.2828 Chinese yuan renminbi)

(Reporting by Beijing newsroom and Hong Kong newsroom; Editing by Sumeet Chatterjee and Christopher Cushing)