Thursday 11 September 2014

Cutting executive pay at state-owned firms only part of Beijing’s plan

Hu Shuli says the reform will rationalise the roles of the many employees who are both official and executive, amid overall restructuring

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Guanyu said...

Cutting executive pay at state-owned firms only part of Beijing’s plan

Hu Shuli says the reform will rationalise the roles of the many employees who are both official and executive, amid overall restructuring

Hu Shuli
11 September 2014

The distorted salary structure for the top executives of China’s state-owned enterprises is undergoing major surgery. On August 18, the Central Leading Group for Comprehensively Deepening Reform announced a plan aimed at slashing their pay, among other reforms. Eleven days later, the Politburo approved these measures.

State-owned enterprises, especially the major ones directly under the control of the central government, are notorious for their fat-cat incomes. Top executives at these companies double as civil servants and enjoy generous perks along with the high pay. Some are paid over 10 million yuan (HK$12.6 million) a year.

Worse, the structure that determines the sums is itself problematic, and the supervision lax. This encourages greed, corruption and waste. The Politburo’s decision to regulate executive pay is long overdue.

As the government puts it, the overhaul is an important part of bigger plans to modernise the management of state-owned enterprises, and of efforts to improve income distribution.

It’s far too early to tell if the plan will succeed - most of its details remain under wraps. But it’s a pity that much of the attention has been focused on the scale of cuts to executive pay, as the scope of the entire plan is much wider. Besides regulating pay, the blueprint also sets out to improve and restructure operations, strengthen oversight and raise standards.

The reform is targeted at the executives appointed by the Organisation Department of the Communist Party’s Central Committee. These include the State Council representatives stationed at the state firms, as well as the chairmen, party secretaries, general managers, chief executives and others who are similarly both official and executive.

Cuts aside, the government will also adjust the components of their pay. On top of the basic salary and a performance-related element, there will be a part tied to length of service, in an attempt to deter short-term decision-making.

The reform blueprint unveiled at the party’s third plenum last year makes clear China will encourage a more diverse economy with companies of different ownership structures. It will also adapt the private sector’s modern management methods for use in state-owned companies. Further, the nation will seek to invest in industries that serve its national strategic interests, with a focus on providing public services, protecting the environment, supporting technology and innovation, and safeguarding national security, among other goals.

Accordingly, there should be two broad types of executive: one group comprising officials appointed to the state firms, and the other, professional managers hired to run the company. The former may be more commonly found in state firms that provide public goods or are natural monopolies, while the latter are needed in state firms that operate in competitive industries. This distinction will ensure state-owned enterprises are managed differently, according to their needs.

Practically, what will be considered reasonable executive pay? According to a government spokesman, the level of pay will depend on the importance of the executive’s role in the restructuring of the company, and the responsibility he or she bears, with an eye to the pay for comparable jobs in other sectors.

According to the reform plan, the basic salary will be a multiple of the company’s average pay in the previous year. The performance-related component will be limited to a certain multiple of the basic salary, while the part linked to length of service will be a percentage of the executive’s average annual pay.

Guanyu said...

But how will all these multiples and percentages be determined? How do we decide the executive’s contribution to the company’s results, stripping out the impact of the wider economy? And when do we pay out the salary component linked to length of service?

Top executives at the major state-owned firms are in charge of massive assets, and wield considerable influence on the wider economy. How their pay can be reduced without harming their initiative and drive is a key question.

The reform this time will be spearheaded by officials in charge of human resources and social security.

But, of course, the State Council’s state assets committee and the Ministry of Finance have overall charge of state-owned enterprises. The success of any reform will depend on the cooperation of these various departments.

In fact, it is fair to say that all reforms are linked. At the end of the day, the attempt to cut executive pay at state-owned enterprises is one piece within the overall restructuring of state-owned giants, and is linked to reform of social security and fiscal budgets, among other sectors.

Change in one link will hopefully create a chain reaction of improvements.