Making salary reform a success

China has decided to impose a cap on top executives' salaries in the State sector as part of its reform drive against the controversial group. Although it has not been decided how steep the cuts would be, it is certain that the actions and incomes of the fat cats would be more closely scrutinized.

The move is welcome, but to ensure its success the government has to establish a transparency mechanism so that the public can supervise the incomes of the top executives.

Some senior State sector managers' salaries can be more than 5 million yuan ($810,000) a year while the annual disposable income of an ordinary Chinese urbanite was only 27,000 yuan in 2013, according to documents released by listed State-owned enterprises. Given this huge income gap and the public complaints that have been pouring in, the central authorities have no choice but to impose a cap on the salaries of top State sector executives.

The dual status of some top State sector managers, especially those who manage central enterprises that are directly under the State Council, China's cabinet, is also a problem. While they are quasi government officials carrying vice-ministerial or minister-level ranks, they are also company executives who are paid by market rates and earn much more than their fellow officials.

To solve the problems, policymakers have reportedly drafted detailed plans on how to reform the reward system for top executives in the State sector. While across-the-board pay cuts are possible, it is also likely that the pay for those appointed by the government or those who serve the monopoly sectors would be put under strict control, and top executives hired from the market could be paid much higher in accordance with their performance and market levels. Moreover, long-term options could be introduced as incentives for top company executives.

Such a plan, if implemented, would ensure that State sector managers' morale is not affected even if the average salary of executives is reduced. The proposed pay cuts, however, are not enough to solve all the problems.

So far, discussions have mainly focused on how to put a cap on the salary of senior executives. What has been ignored is that, top executives are also entitled to various bonuses and other benefits, such as housing subsidy and/or low-cost housing. Since the public has also criticized such hidden benefits, they should be properly regulated.

Thanks to the lack of a proper internal control mechanism, many SOEs have failed to properly "manage" their top executives, which sometimes allow the latter to make favorable rules that help them to fill their pockets. If this continues, such top managers could devise new corporate rules to increase their benefits to make up for their loss from pay cuts.

A top-down reform plan, therefore, is not necessarily a recipe for success. A mechanism should be put in place to give the public access to information on top executives' incomes so that civil supervision can stop them from abusing their power to overpay themselves. A powerful trade union with more teeth, in particular, should be part of such a mechanism. People working in the State sector should be more knowledgeable about how much their managers should earn and thus more capable of playing a supervisory role.

Once the income of top State sector executives becomes transparent, it will be easier for the pay-cut plan to taste success.