State-owned Enterprises

Pay cuts for Chinese state enterprises seen as a partial solution to improve governance

PUBLISHED : Monday, 04 July, 2016, 4:54pm
UPDATED : Monday, 04 July, 2016, 10:15pm

The listed units of some major state-owned firms have substantially scaled backed their top executives’ pay packages after Beijing ordered them to slash compensation last year as part of its wider campaign against extravagance, decadence and corruption by officials appointed by the state.

But the drastic cut-back appeared to be limited only among those directly under the administration of the central government and those in nationally strategic industries dominated by one or a few players, giving rise to a huge pay gap between state enterprises of different ownership background.

Although the cutbacks may be a good gesture signalling Beijing’s resolve at addressing complaints that the state’s dominance in certain industries has created the environment for state enterprise bosses to abuse their positions for making personal gains, it has barely scratched the surface in necessary reforms, analysts said.

“One could argue slashing fat pay cheques to bosses in monopolistic industries is reasonable because chances are their companies may be making profits not because of their effort but rather thanks to their market dominance,” Beijing University of Technology economics professor Hu Xingdou told the Post.

“But cutting salaries is one thing, more importantly, we need to address the root cause that allowed certain senior managers to abuse their special positions and gain access to inside information to make personal gains [on top of their official remuneration].”

He said some state enterprise managers have reportedly reaped gains by directing their employers to buy equipment or assets from related parties at inflated prices, or selling company assets or products at lower than market prices in exchange for kickbacks.

“In reality, state enterprises are not really owned by the people because they are controlled by insiders, who can easily take advantage of inside information for personal benefits in the form of grey, black or unlawful income,” Hu said.

“What is needed is a much greater private ownership in state enterprises to drive effective scrutiny and corporate governance ... otherwise, relying on state enterprises to improve efficiency by themselves will not work.”

Although some pilot state enterprise reform experiments have been carried out, such as the spinning off of downstream pipeline and fuel marketing assets by oil and gas giants PetroChina and China Petroleum & Chemical (Sinopec) with stakes sold to state firms in other industries and private enterprises, Hu said the stakes held by external investors are still too small for them to exert any meaningful influence on corporate decisions and effectively improve corporate governance.

In some cases, strategic investors have business relationships with the state giants, which made it less likely for them to challenge their partners on their decisions and governance.

According to their annual reports, Chinese state firms in the oil and gas, coal, banking, telecommunications, airlines and automobiles have heeded the order from Beijing to slash top executives’ salaries.

Wang Dongjin, president of PetroChina, the nation’s largest oil and gas producer, saw his compensation slashed by 35.4 per cent last year to 734,000 yuan, while that of rival Sinopec president Li Chunguang was cut by 46 per cent to 525,000 yuan.

Similarly, emolument received by telecommunications giant China Mobile’s chief executive Li Yue shank by 71.1 per cent to 574,900 yuan, while that by China’s largest conglomerate Citic’s chairman Chang Zhenming deflated by two-thirds to 820,000 yuan, and that of the chairman of China Construction Bank and Industrial and Commercial Bank of China both fell by 62 per cent to a little under 600,000 yuan.

The compensation curtailment came after President Xi Jinping in August 2014 called for an adjustment to “overly high income” of state enterprises when he chaired a meeting of the Communist Party’s Central Leading Group for Comprehensively Deepening Reform.

So far, the pay cuts seem only to be have carried out by firms directly under the supervision of the central government, including those in strategically important industries with few market players.

Bosses at provincial or municipal government firms and those in competitive industries such as real estate, have not been affected.

Top managers at municipal conglomerates Beijing Enterprises and Shanghai Industrial Holdings, as well as state firms in competitive industries like China Overseas Land & Investment and logistics major China Merchants Holdings (International) continued to enjoy compensation of 2 million to 10 million yuan a year.

Li Daxiao, head of research at Shenzhen-based Yingda Securities, said there are effectively two kinds of top management compensation schemes: one for the “civil service-like administration-driven” central government enterprises, and another for “free-market based” state enterprises.

He would not be drawn on whether the pay cut and resulting widened pay gap may result in a brain drain from one type of state company to the other.

Top management compensation at Hong Kong-listed state enterprises has long been controversial, given bosses at so-called Hong Kong-incorporated “red chip” firms were paid much higher salaries and bonuses compared to mainland-incorporated “H shares”, even though both have most of their assets and operations in mainland China.

The most telling case was in the oil and gas industry, where red chip dominant offshore producer CNOOC’s chairman Fu Chengyu was paid as much as HK$12 million a year when he was at the helm, while his counterparts at H shares PetroChina and China Petroleum & Chemical (Sinopec) earns less than one tenth.

Fu in 2009 told reporters that CNOOC’s highest top management compensation packages were determined by independent directors based on the pay scale of international peers and Hong Kong firms of similar sizes, since overseas investors have expressed concern that “overly low” compensation would not provide sufficient incentives to perform, or even remain with the company.

He revealed at the time, all of the firm’s top management had “donated” all of their compensation (salary plus bonus) to its parent company, since their pay packages from CNOOC were “too high” and not in line with China’s “national characteristics” in view of the low incomes earned by the vast majority of their subordinates. The parent company would give them back an undisclosed salary and bonus for the year as their real compensation.

Prior to Fu’s public revelation, it was an unspoken practise privately admitted by red chip bosses that they can only take home a portion of their official “internationally aligned” pay packages, although their actual compensation at both the listed and parent companies are never made public.

Often, the differences between the official and actual pay were added to the bonus pool to be distributed to the firm’s other employees.

In 2011, the year Fu left CNOOC to take the helm at Sinopec, CNOOC’s board quietly slashed its directors’ compensation to levels similar to that of PetroChina and Sinopec.

Chinese listed state firms’ annual reports also show that some of the most senior executives — usually the chairman and sometimes also the deputy chairman — do not draw any compensation from the listed firms with which they have an executive directors’ roles.

These firms, including China Shenhua Energy, China Eastern Airlines and China Southern Airlines, explained in their reports that this is because their compensation is borne by their parent firms.

China Eastern Airlines, where three of its six executive directors did not draw any emolument, said: “It is impracticable to apportion [amounts] between their services to the [listed unit] and their services to [parent] CEA Holding.”