Executive pay needs reform, not just crackdown

PUBLISHED : Wednesday, 13 March, 2013, 12:00am
UPDATED : Wednesday, 13 March, 2013, 3:00am

It's no fun being a top executive these days. Whether it's Europe, China or even the United States, increasingly tough limits are being placed on executive compensation, sometimes with the full force of new legislation. While the details are technical and some measures may not be as effective as billed, the global drive to force the corporate elite to face its own comeuppance has widespread public support.

For a while, after the worst phases of the global financial crisis were past, it appeared this elite had gotten away without any real punishment. Banking reforms in the European Union have been delayed and watered down. Those in the US are bogged down by lobbyists and their politicians in Congress, as well as regulatory confusion.

But the tide seems to have turned. This month, Swiss citizens voted in a referendum to impose some of the world's strictest controls on executive pay, forcing public companies to give shareholders a binding vote on compensation.

EU finance ministers have just struck a deal to ban bonuses that are more than twice bankers' fixed salaries. It is expected to be ratified by member states of the European Union and its full parliament, despite vocal opposition from Britain. The City of London is home to many global firms and financial institutions most directly affected by such pay caps

In China, executive pay is a hot-button issue, especially the earnings of top executives at state-owned enterprises. While the pay of senior SOE executives is still far less than their counterparts' in the West, it is 20 times more than the average salary of their own staff, according to the Assets Supervision and Administration Commission. The average SOE staff in turn earns more than private-sector workers. Since most SOEs enjoy virtual monopolies in their industry sectors and cheap financing from state-run banks, profits are not necessarily a reflection of skill and leadership.

Corruption is also not an uncommon way to boost remuneration in some industries. As the trial of former China Railway Container Transport chairman Luo Jinbao showed in December, about half of the bribes he took came from other state-owned railway firms. So the crackdown on corruption by party chief Xi Jinping can be seen as a tough way to cap executive pay. But as China aims to turn more of its SOEs into global players, it needs smarter compensation methods to encourage performance, not just a crackdown.