Executive pay in SOEs must reflect work

When it comes to executive pay, companies facing uncertainty and risks should have the salary of their executives' linked to performance. For corporations whose markets are decided, the major role for executives is simple management, and the compensation reflect this, says an article in Beijing News Daily. Excerpts:

The year 2004 was a turning point for executive pay in State-owned companies. Before 2004, their salary was comparable to the level of civil servants. After reforms in 2004, the annual salary system started to apply. Now, central enterprises' executive compensation is made up of two parts, one is basic salary that is fixed according to the position, and the other is performance payment depending on the performance of the business.

The annual salary system shows a right direction of reform has it has played an important role in encouraging executive performance and boosting the development of State-owned companies. However, the problem here is market risks should be taken into consideration when determining performance payment.

There are two kinds of State-owned companies. The first takes market risks as they are facing a changing market with big uncertainties, such as the COFCO Group and Baosteel; the second are those companies that do not need to take any risks as they are facing a reliable market with predictable price and quantity demand. What they do is maintaining a certain production capacity to meet the need, such as the State Grid, to provide power supply in China without any huge risks.

Considering the two types of companies, it is appropriate to differentiate their compensation. For those executives facing huge risks, their performance can be fully considered and reflected by their payment, while for the other kind of companies, we can still make their executive compensation comparable to the level of civil servants, which may be an option for further reform.