Saturday 11 April 2009

Beijing clips the wings of high-flying earners


As workers suffer, government acts against top executive pay

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Beijing clips the wings of high-flying earners

As workers suffer, government acts against top executive pay

Jane Cai in Beijing
11 April 2009

While the economic downturn is eroding jobs and income of ordinary people, Beijing is targeting top earners in financial institutions to prevent a widening income gap amid concerns of social unrest.

The Ministry of Finance issued a circular on Thursday asking state-owned banks, insurers and securities firms to cut pre-tax income by at least 10 per cent for top executives from levels in 2007 if the companies saw increased profits last year.

Executives at companies reporting profit declines would see their salary levels cut by at least 20 per cent.

The circular followed an announcement by the ministry last month that proposed an annual income cap of 2.8 million yuan (HK$3.18 million) for high-flyers under a pay scheme to be introduced at a later date.

“Over the past few years, salaries have increased rapidly in the sector with the restructuring and public listing of major financial institutions,” the ministry said. “Some firms overpaid top managers, resulting in an obvious widening of income gap compared with the nation’s average and with their ordinary employees.”

Last year, the average annual disposable income for urban residents was 15,781 yuan while for rural residents it was 4,761 yuan.

Top executives’ income, by contrast, was measured in millions of yuan in the financial sector.

“The salary reduction is aimed to maintain social equality, protect rights and interests of the nation and shareholders and improve corporate governance,” the ministry said.

State-owned financial firms, supervised by the finance ministry, had been given a relatively freer rein on remuneration matters, compared with their industrial counterparts controlled by the State-owned Assets Supervision and Administration Commission.

However, as the global economic turmoil deepened and discontent over financial institutions rose, Beijing has also become more mindful of the pay scales for the country’s leading bankers and financial chiefs.

Guotai Junan Securities, one of the mainland’s three largest brokerages, has come under fire for the high salaries it pays when most stock investors are bemoaning their losses.

Reports that the company paid its employees an average of 1 million yuan each last year provoked the ire of the media and investors in February, and sparked a heated debate on whether state-owned companies should distribute such lavish perks during a financial crisis.

In an apparent response, Beijing made clear its stance on the income gap by attempting to address the problem in the financial sector.

“The top executives are state cadres because the firms are state-controlled. They have to follow the instructions of the ministry, which is the major shareholder of the firms representing the central government,” said Guo Tianyong, a professor with the Central University of Finance and Economics.

“Individual contribution alone can’t drive the firms to accomplish profit growth; China’s policies facilitate the sectoral monopoly that benefits these [state-owned] players.”

The co-operation from the state institutions has largely come about because they concede that their sizeable profits were achieved in markets with inadequate competition where government policies provide a safeguard for lucrative profits.

Regulators have imposed various restrictions on foreign financial institutions on the mainland and thresholds for investments for the domestic private sector, in a bid to maintain financial security.

Unlike the company opposition that western governments encountered when they tried to cut the salaries of their top financial executives, most mainland financial institutions had “voluntarily” cut key executives’ pay before Thursday’s circular.

Having received the instruction before the circular’s official release, some institutions reported the pay cut in their 2008 annual results announced over the past few weeks.

Despite an average 30 per cent rise in net profit, the income of key managers at the nation’s four biggest lenders dropped about 10 per cent last year.

Jiang Jianqing, the chairman of Industrial and Commercial Bank of China, the country’s biggest lender, saw his annual pay drop to 1.61 million yuan last year from 1.79 million yuan in 2007. The bank’s net profit was up 35.2 per cent year on year.

Speaking on the sidelines of the National People’s Congress meeting last month, senior bankers at state lenders generally expressed understanding and support for the pay restriction efforts.

However, the cuts have not appeased some elements in the market, where complaints continue to mount in private.

An independent board director at one leading bank said the managers were unhappy.

“Their pay did not match their international peers’ in the good times. What’s the rationale for the cuts now in tandem with their overseas counterparts, even when they achieved annual profit goals?” the director said.

The incomes of top managers in state-owned financial institutions are also generally lower than non-state firms in the sector.

China Minsheng Banking Corp, the nation’s first lender founded by private companies, paid chairman Dong Wenbiao more than 17 million yuan in pre-tax income in 2007, many times higher than the 1 million yuan to 2 million yuan most key managers in state banks received that year.

Furthermore, the strong administrative flavour behind the decision to cut pay will be a step backward in forming a sound corporate compensation and motivation system for financial institutions that have global ambitions, analysts said.

Andy Xie, an independent economist, said it was more important to set up a sound salary appraisal mechanism and adopt scientific measurements that would be more convincing in judging whether incomes were reasonable or not.

“For example, performance-based salaries should be decided after some period. If the bank’s profit growth is achieved on blind loan expansion, which may result in soured assets years later, the executive should not receive a high salary,” Mr. Xie said.

Using this approach might ultimately solve the problem and save many administrative orders as well, he said.