Will a Pay Cap on SOE Executives Result in Fairness?

Since last year， 25 provinces across the country have revealed their payment reform schemes for state-owned enterprise （SOE） executives， aiming to impose certain limits on their salaries. In most areas， SOE executives basic annual salaries are set to be no more than two times those of ordinary workers. Meanwhile， the combined sum of an executives basic annual salary， performance-related pay， and incentive bonuses will be no more than eight times that of the salary of an ordinary SOE staff member.

On the whole， this round of pay cuts for executives in SOEs is quite necessary， as in recent years， it has been revealed that senior executives in SOEs earn much more than ordinary staff. Some of them earn as much as CEOs in private companies. This has provoked an increasing number of complaints from ordinary workers as well as throughout society. Some argue that this is unfair because SOE executives may have certain administrative rankings， just like government officials do， which makes it possible for them to enjoy civil servant-like privileges.

While these reforms are needed for the sake of fairness， there have been concerns that the cap on salaries might trigger an exodus of managerial talent.

Shu Shengxiang （www.gmw.cn）： High incomes for executives in SOEs have been a source of public discontent for many years. To a large extent， these grievances are caused because the salaries are decided by the bosses themselves. Their salaries seem to be excessively high， even in times of good economic performance. Today， due to slowing economic growth， their payments are declining in tandem with their companies performance. Even so， those salaries are still relatively high. Therefore， payment reform for executives in SOEs remains an urgent task.

A small cut from executives salaries and a small increase to ordinary staffs pay will help narrow the income gap within SOEs. This idea tends to be praised by the public. However， there is a risk of going from one extreme to another. Lets compare it to baking and dividing a cake. By restraining executives salaries， we mean to see a fairer distribution of the cake. However， if the pay cuts lead to a smaller cake， everyone in the company will get a reduced share.

Imagine if this were to occur in private companies. If bosses were allowed to earn just eight times as much as their staff， what would happen？ No one would want to start their own business and deal with the various hardships involved. Actually， if an executives contribution to a company was worth only eight times that of an ordinary staff member， that individual would probably be unfit for the role.

This is the same with SOEs. The fixed ceiling for executives pay is too rigid， and this might drive excellent managers away while simultaneously deterring potential applicants. As a result， either good managers quit， or some managers make big money through dealings under the table.

The result is unfavorable for SOEs. A limit that is too strict on salaries will damage executives enthusiasm for work and in turn affect a companys performance. Maybe we can pin our hopes on the high moral standards of these executives， believing that even if their salaries are cut by 50 percent， they would still be devoted to their work. We dont deny the existence of such people， but economic incentives are often the most effective way to boost peoples enthusiasm for their jobs.

Blindly limiting SOE executives salaries regardless of their performance may not be as effective as connecting ones salary with ones performance in a transparent way. Those who deserve the money should enjoy the benefits， while those who do not may choose to leave.

One thing should also be made clear： Are SOE executives business people or government officials？ If they are defined as civil servants， then the salary cap is too loose， but the limit doesnt make sense if they are to be seen as professional managers.

Niu Jiao （New Culture Daily）： In SOEs， executives salaries are provided by the state. In many cases， such enterprises hold monopolies over their respective sectors. In an environment short of market competition， its hard to prove whether or not any one CEO deserves such a high salary.

Executives in SOEs often handle the dual identities of entrepreneur and government official. They can therefore enjoy high salaries that ordinary civil servants cant attain and also have access to administrative privileges and government resources that elude ordinary entrepreneurs.

At the same time， as they do not have ownership of the enterprises， they are unlikely to devote themselves as much as they would if the enterprises were their own property. However， executives may find it easy to take advantage of a companys resources for their own private benefit， since the enterprise is under their control.

Given the above-mentioned reasons， the state has started reforming the payment system for SOE executives， focusing on balancing fairness and efficiency. The problem now emerges： Will the lowered salary be sufficient to attract and retain talent？ The new salary level is far less attractive than those offered by private companies. So it is possible that these executives may try to make up for the loss through under-thetable deals， or they may leave for a position that pays much more. Enterprises would therefore lose out in terms of competitiveness.

How can the government foster fair and competitive salaries for SOE executives？ It requires a reclassification of SOEs and their executives， with different policies affecting different areas of interest. We may turn to France for experience in reforms along these lines.

France has the largest number of SOEs of any state in Europe. SOE executives are selected through two channels： market employment and government appointment. Since Francois Hollande took office as president， payment reforms designed to cap SOE executives pay have led to salary cuts of almost two thirds for some executives， but there is an exception for those who are civil servants， because their salaries are not excessively high.

This way， professional managers are paid higher salaries， even though they may be capped under new reforms， while executives selected from among the civil servant pool have their salaries set in line with their peerspay levels. This method balances efficiency and fairness.

How can the government determine which posts require professional managers and which are better suited for officials？ In France， this is determined by the nature of a companys business. Enterprises that need to compete in the market for profits have professional managers， whose payments are decided with reference to payments made by private companies but are usually lower. Executives in SOEs established for public pur- poses have their salaries set with reference to those of civil servants but a bit higher.

Actually， this round of payment reforms in China has also touched on this issue. In Shanghai and Guangdong， professional managers are being hired as part of a pilot program. Meanwhile， the Central Government has made it clear SOE executives appointed by the government who have administrative rankings will not receive market-level payments. Instead， their salaries will be decided based on the standard rate of pay given to civil servants as well as their enterprises comprehensive performance.

In most cases， SOE executives salaries are only part of their annual incomes. Some local SOEs provide lifestyle subsidies to their executives according to their administrative rankings. In some cases， such subsidies can be even higher than normal salaries. For the sake of fairness， executives compensation should be made transparent， exposing not only basic salary but also all kinds of fringe benefits.

The reform of the SOE payment system is a complicated issue， and a balance between fairness and competitiveness is crucial. On the one hand， SOEs should not be utilized by top officials as a place to spend their late years away in idleness. On the other hand， its important to prevent low payments from discouraging or even driving away executives.

Wang Xueyi （www.bandao.cn）： This round

of reforms has presented an explicit scheme that treats SOE executives differently， with the aim of making it impossible for them to make big money while maintaining their identities as government officials.

Making executives salaries transparent and having their pay adhere to market rules formulate the core of the ongoing reforms. What is now in question is whether or not the new rules will force SOE executives in certain areas to leave. At present， there is a shortage of executives with professional expertise working in SOEs， particularly in sectors such as stateowned banks.

The payment reform is a significant measure， and relevant policies， including supervision， must also be followed up on. Meanwhile， SOE executives should be separated from their administrative ranks， especially those who work in enterprises set up to compete in the market. A welldesigned payment system will be good for the development of SOEs in the long run.