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No logic in capping pay for executives

By Hong Liang (China Daily)
Updated: 2009-02-10 07:49

The outbreak of the US sub-prime mortgage credit crisis, that has dragged the world into the worst economic recession since the Great Depression in the 1930s, has brought into sharp focus the controversy surrounding executive pay, especially in the financial sector.

Related readings:  Caps set for executive pay  China sets limit on executive pay

Many economists have blamed the excessive high pay packages that were tied to performance for driving senior executives of financial institutions to take unnecessarily high risks. A proposal to set statutory limits on the pay packages of senior corporate executives and bankers has received wide support in the US as well as in some other developed countries.

Unsurprisingly, press reports that a Shanghai brokerage has a plan to pay each of its senior executives an average compensation of one million yuan ($146,000) in 2008 has stirred heated debates in the media and on the Internet. The chat rooms in various websites were flooded by angry messages from disgruntled investors who claimed that they had all taken huge losses in the stock market.

To be sure, one million yuan is loose change compared to the multi-million dollar pay packages that were routinely awarded to corporate executives and bankers in the US and Europe.

In Hong Kong, a mid-level manager with 10 or more years of experience at a major bank can earn more than the equivalent of one million yuan a year.

But one million yuan is not an inconsiderable sum in the mainland stock market that is dominated by small investors, each of whom has much less than that kind of money to invest. Our reporters in Shanghai have interviewed many investors in their stock market reports. The highest amount anyone of them said they had invested in shares was no more than 500,000 yuan. Most of the investors interviewed had said they could only afford to put in less than 200,000 yuan.

Most of the investors interviewed were not willing to talk about their salaries. But those who did, mostly younger people with less than 3 years of working experience, said they were earning less than 5,000 yuan a month, or 60,000 yuan a year.

Put in that context, it is perfectly understandable why so many investors felt outraged, rightly or wrongly, by reports of the perceived fat paychecks stockbrokers were going to take home. It seems reasonable for the many investors who have taken huge losses in the stock market crash of 2008 to wonder if they were given the best advice from their stockbrokers who appeared to have continued to do very nicely indeed.

The many investors whose sensibility was offended by the report must bear in mind that most stockbrokerages are profit-oriented private-owned enterprises. Quite a few of them are publicly traded companies answerable to a board of directors elected by shareholders. It is not for anyone other than the shareholders to question how these companies choose to award their executives.

Brought up in the free-market environment in Hong Kong, I can't see the logic in legislating executive's maximum pay. The local media last week tried to make a case of the HK$10-million-a-year pay to Hong Kong Monetary Authority chief Joseph Yam. Good for him.

E-mail: jamesleung@chinadaily.com.cn