Pay cuts for State enterprise executives

The top leadership this week has decided to reform the pay system in the State-owned enterprises, many of which are industrial leaders and lifeline of the national economy. A number of provincial governments have toed the line and issued detailed rules for implementing the central reform plan. It is inevitable that senior managers of State enterprises would have to accept lower level of pay.

However, it does not mean they would be unable to afford a decent life. The authorities have decided to trim their salary simply because the public has become angry about their exceptionally high pay levels.

China’s State sector had encountered serious financial trouble in the 1990s, leading to revamping of the sector in late 1990s. After that, the financial balances of State enterprises have been improving steadily. Their revenues and profits have been on the rise and their role in the national economy has become ever more important. Meanwhile, the salaries of their senior executives have soared, with the annual income of some top managers even nearing 10 million yuan ($1.6 million). Their high income levels have aroused public complaints as China’s average annual disposable income for an urban resident is only 27,000 yuan in 2013.

The proposed salary-cutting initiative is part of the country’s overall State sector reform, but it is also a proper response to the demand of the public for a more reasonable income distribution system.

But the reform could be quite tricky. As many State enterprises face fierce market competition from private companies and multinationals, simply cutting the salary levels of their senior managers may make it difficult for them to hire and retain high-caliber professionals.

Therefore, the reform should be carried out in accordance with different situations.

For top managers that are appointed by the government and, as semi-government officials, still have access to the many benefits of government employees, their salary level should be strictly controlled by the State and should not be much higher than that of comparable government officials.

Salary of those who serve monopoly enterprises should also be subject to State control.

Pay for those who are hired by non-monopolistic State companies, however, should be determined in accordance with market demand-supply relations. It should be subject to assessment of corporate boards and human resource departments instead of government directives. In this way, those enterprises are likely to hire the competent professionals to help them survive and expand in market competition.

Since State enterprises are publicly owned, there should also be a corporate supervisory body in place to prevent irregularities in rewarding their senior managers. Moreover, information of how much those senior managers are paid should be made transparent to invite public supervision.

Those should be the core principles and rules in managing the pay system for senior State enterprise executives.

Regrettably, many State firms have paid their senior managers generously regardless of those principles and rules, which has incurred widespread public complaints. The personnel ministry and State asset management authorities should promptly devise detailed rules to implement the reform plan proposed by the top leadership to reduce public criticism.