Sep 25, 2014 01:51 PM

Gov't Again Tries Trimming the Fat by Slashing Pay of SOE Executives

(Beijing) – China's government has again taken the knife to executive pay at state-owned enterprises (SOEs), forcing deep cuts on many of them in an effort to the pave the way for further reforms of the state-backed firms.

The Politburo, the Communist Party's 25-member decision-making body, recently passed a policy that says the government will establish a system that pays executives of SOEs controlled by the central government based on the type of company they lead and how they got the position.

The official Xinhua News Agency broke the news on September 3, but it did not publish the policy.

A source close to people who drafted the policy said it will cut the pay of executives at centrally administered SOEs who also hold a bureaucratic rank by 60 percent. It also caps their annual pay at 900,000 yuan.

The policy was made by the Ministry of Finance and the Ministry of Human Resources and Social Security. It applies to executives at SOEs administered by the central government, including all 113 SOEs overseen by the State-owned Assets Supervision and Administration Commission (SASAC), Qiu Xiaoping, vice minister of the human resources regulator told Xinhua.

Reforms to executive pay at SOEs administered by local governments should follow the spirit of the policy as well, he said.

SOE executives in China are traditionally appointed by the government and the party. Recent reforms aimed at increasing the competitiveness of SOEs have permitted the hiring of talent through Western-style screening to fill certain posts. These professional managers do not carry any bureaucratic rank and often have a much more generous pay packet than those at similar positions.

The top decision-makers at the five state-owned banks, for example, are appointed by the party's personnel department. The chairman and the president of the Bank of China received pay last year of 777,100 and 996,900 yuan, respectively, the bank's annual report shows. Its chief director of risk management, hired from private contenders, made more than 9 million yuan.

But a bureaucratic rank comes with benefits and perks that a professional manager cannot have. They include subsidies, access to premium health care and rights to use government cars, among other things, which can be worth a lot but are hard to quantify.

A management position at a big SOE can also be a springboard to a higher position in the government. Jiang Chaoliang, former chairman of the Agricultural bank of China, has been transferred to Jilin to serve as the deputy general secretary of the northeastern province's party committee.

By forcing a deep cut to government-backed executives' pay, the policy aims to de-bureaucratize SOEs, said a source from the Ministry of Finance.

It is aimed to make SOE executives choose between "working for the government" or for "the enterprise," the source said.

The pay cut is only one of the measures the central government has planned to push forward the SOE reform, he said. "The next step of the reform will be very powerful."

Drawing the Line

The central government has taken measures to regulate SOE executive pay before, but the results were mixed.

In March 2009, the Ministry of Finance released a policy capping the annual base salary of all executives at financial SOEs at 700,000 yuan and their performance-related compensation at three times that amount. That means their total pay every year cannot exceed 2.8 million yuan.

Six months later, it and five other central government departments and commissions issued a regulation limiting the highest pay at SOEs to 30 times the firm's average.

Critics said the requirements were toothless; by either standard, executive pays at most large SOEs were not even close to the ceiling. The big five state-owned banks' top executives, for example, were generally paid around 1.5 million yuan at the time.

There were also worries that the one-size-fit-all solution would unfairly hurt many financial SOEs. Through share ownership reform, many subsidiaries of big financial SOEs especially securities firms have been fairly market-oriented. Citic Securities and Citic Bank, subsidiaries of state-owned conglomerate Citic Group, for example, pay their top executives far more than the ceilings imposed by the 2009 requirements.

The new policy passed in August aimed to solve the problem by targeting primarily government-appointed executives in SOEs in monopolized industries and not-for-profit SOEs, said Su Hainan, who helped draft the policy.

It is important to set SOEs apart according to the type of their main business, the proportion of state capital in their equity and whether their managers are assigned by the government or selected through competitions, Su said. These distinctions are the prerequisites for setting up a mechanism linking executive pay with the amount of risk they bear and their achievements.

In practice, he said, the pay of government-assigned managers in enterprises in monopolized industries or those working for public welfare should be decided by the government and the state assets regulator. Those in competitive fields should be left to the market.

To prevent SOE executives in a competitive market from abusing the leeway they have, the board of directors must live up to its name and exercise real supervision and checks over the management team, he said.

In 2005, SASAC started a pilot program to empower the boards at seven SOEs. Nine years have passed and the program now includes only about half of the SOEs it oversees. Even those in the pilot program cannot hire a chairman or president on their own. Instead, they must take whoever is assigned to them by the party's personnel department and SASAC.

Critics have questioned the new policy's strategy of dividing SOEs by whether they are in a competitive industry or not because it is hard to draw the line.

Chai Mingang, a former partner of Towers Watson, a consultancy advising firms on management, said there are no accepted standards to make that distinction because they vary across countries and industries and change at different stages of an economy's development.

The telecom industry, for example, is a fully open market in developed countries, he said. Even in Hong Kong, there are several telecom operators, but the market on the mainland has been monopolized by three service providers, he said.

Chai said the government should be more concerned with setting up a scientific and transparent system to evaluate the performance of SOE executives and leave the market and companies to decide how much to pay their managers.

Zhen Wei, an expert on corporate compensation schemes, said all discussions about how much an SOE executive should be paid missed the point.

Deciding the level of pays is not the key. The key is to figure out first what a person assigned by the state assets regulator to an SOE should do, he said. Is he supposed to serve the private sector or compete with it for profit? Without a clear answer to this question, it is hard to judge whether an SOE boss is overpaid or not, he said.

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