Executive salary cuts key to reinvigorating SOEs

Experts advise letting performance determine pay

Editor's Note:

The central government recently rolled out a blueprint on reforming executive pay at centrally administrated State-owned enterprises (SOEs). Under the new rules, salaries of senior executives at central SOEs and financial institutions would be cut by as much as 70 percent, and their annual salaries would be capped at 600,000 yuan ($97,561). The Global Times interviewed three experts to get their views on the issue.

Cai Junyi, chief investment consultant at Shanghai Securities

The government has showed its determination to reform SOEs by sharply cutting the hefty salaries of their executives. The political significance of the salary reforms is expected to far outweigh their commercial impact. The central government has been devoted to promoting social justice and unity by fostering income distribution reform. Reforming SOE executive pay will help with these goals.

The advantages of executive pay reform outweigh the disadvantages. To begin with, the salary cuts will primarily affect senior managers who typically earn about 30 times the wage of the average employee. Narrowing this salary gap is crucial to maintaining social justice. Executive pay reform is also good news for middle managers, who might welcome a salary system based on performance.

Still, the government should not cut executive salaries across the board. A large and sudden salary cut might undermine the initiative. It would be more appropriate to assess SOE executives based on the profitability of their companies and the industries they work in. A performance-oriented assessment would serve as a positive incentive to improve efficiency and boost the moral of senior managers.

The government cannot expect to significantly improve SOE efficiency in a single step. It needs to do more. It should open more monopolistic industries to private investment, and let competition force SOEs to become more efficient.

Shen Ronghua, a research fellow with the Shanghai Public Administration and Human Resources Institute

The SOE salary reforms that the government has implemented are part of broader reforms in the State-run sector of the economy. As SOEs gradually bring in more private capital, a mixed-ownership economy will demand a modern governance system.

At present, SOE executives are appointed by the government. Their salaries are considerably higher than those of ordinary employees and civil servants, but their contribution to the SOEs does not justify their excessive salaries. In addition to high salaries, many top executives also hold administrative ranks. These ranks enable them to benefit from other forms of invisible income such as transportation and communication allowances.

To ensure SOE executive salary reforms succeed, the government should link salary to how an executive got his or her job. That is to say, if an SOE executive was appointed by the government, he or she should receive a salary based on administrative level. If executives were hired through a public and competitive selection process, then they can be paid based on their performance.

It may turn out that the government will revoke the administrative ranks of SOE executives to make SOEs even more market-oriented.

These large salary cuts won't necessarily lead to waves of executive resignations at SOEs. The executives will still earn relatively high salaries after the cuts. Moreover, they typically see their positions as iron rice bowls and will be reluctant to abandon them.

Qian Qimin, director of market research at Shenyin & Wanguo Securities

The SOEs must impose ceilings on the salaries of State-appointed senior managers. The unreasonably high and excessive incomes of SOE executives can be as much as 30 times the wages of ordinary employees, which can hurt the moral of the rank.

A great many SOEs generate huge profits due to protective government policies for certain industries, rather than through good management by government-appointed executives. There is no reason for these executives to earn such high salaries.

This kind of salary reform is an important component of SOE reform. The Chinese government is actively developing a diversified ownership economy that seeks to allow more SOEs to develop into mixed-ownership companies. Salary reform can help foster a modern corporate system and develop a mixed-ownership economy. Meanwhile, the government also needs to strictly audit and heavily regulate the expenses and other privileges of SOE executives.

Cutting the salaries of top SOE executives is just the beginning. The government also needs to take measures to reform SOE equity structures, allowing a portion of ordinary employees to hold shares. This can help boost the moral of employees.