Paid too much? Or too little?

Are executives of China’s Stateowned enterprises paid too much? It’s a question that often sparks heated, even emotional discussions.

The private sector has been critical of SOEs, which dominate their fields yet pay their managers huge sums. Then again, many studies and media reports compare the absolute salaries at Chinese SOEs against their overseas counterparts, leading to the conclusion that Chinese SOE managers are underpaid.

A research team led by Gao Minghua, director of the research institute on corporate management at Beijing Normal University, declined to offer a simple “yes” or “no” to the question.

Instead, the team turned to an ocean of data, analyzing more than 2,300 A-share companies and their senior managers’ salaries.

The conclusion is that the managers are paid both too much and too little.

Putting senior managers’ packages into three categories — excessive, moderate and insufficient — the research team found that nearly 30 percent of the sampled companies pay their managers either excessively or insufficiently.

The basic idea behind the assessment is, you deserve what you’ve earned. If you generated much profit for the company, it is fair for you to get more.

In this light, even though executives at listed financial institutions in 2012 earned 3.85 times as much as those at non-financial listed companies, it wasn’t unfair: The average profitability of public financial institutions was 9.04 times that of nonfinancial companies.

Another example is BP Plc and China Petroleum and Chemical Corp (Sinopec). Each generated about $380 billion in operating profit in 2012. But there was a large gap between their net profits, with $325.7 billion for BP, 2.72 times the $9.5 billion generated by Sinopec.

Moreover, BP is exposed to full competition without any government support. Sinopec, on the other hand, enjoys monopoly resources that private companies can’t dream of.

“A simple approach of comparing the absolute level of their managers’ compensation is meaningless,” said Gao.

Surprisingly, among the top 100 companies the team studied that had “excessive” incentives, 86 turned out to be private companies.

Hidden compensation

“Some of the compensation for SOE leaders is hidden,” explained Cai Jiming, professor of political economics at Tsinghua University. “Entertainment and transportation expenses aren’t publicly disclosed,” said Cai.

“The profits of SOEs are generated by four resources: policy privileges, natural resource monopolies, operationing income and risks,” said Liu Yingqiu, a professor at the Chinese Academy of Social Sciences, a central government think tank.

“The compensation of their leaders should come solely from operating income and risks. Returns attributable to policy privileges and natural resource monopolies should be reported as fiscal income.”

In another report measuring listed companies’ financial

A simple approach of comparing the absolute level of their managers’ compensation is meaningless.” GAO MINGHUA DIRECTOR OF THE RESEARCH INSTITUTE ON CORPORATE MANAGEMENT AT BEIJING NORMAL UNIVERSITY

governance, only 917, or 39.6 percent, had scores higher than 60 points.

Financial governance is an index covering 30 specific standards such as whether related transactions are approved by shareholders, whether the posts of chairman and chief executive officer are held by two different people, whether boards or shareholders’ meetings evaluate internal controls, and whether information on how special committees under the board are run is disclosed.

The report found that current financial governance of listed companies “emphasizes supervision” and “ignores incentives”.

Though “supervision” is emphasized, the “form” of supervision, rather than “substance” is emphasized, the report said.

“Most listed companies in China have a ‘pretty’ governance structure, which calls for shareholders’ meetings, a board of supervisors, executives and so on. But the relationships among them have many gray areas,” Gao said.

Worst ever

One example cited by the report is that of Xi’An Hongsheng Technology Co Ltd, an A-share company that was dubbed “the worst public company in history”.

At first glimpse, the company meets all the requirements of standard financial governance: independent board members, the separation of the chairman and CEO posts, regular information disclosure.

But there’s no substance, the report found. The CEO isn’t also the chairman, but he does work in another company established by the chairman; a major restructuring failed but the company’s report barely mentioned it and so on.

Gao’s team also examined the management of companies’ boards. The average board management quality index was just 51.95 on a scale of 100. Only 11.54 percent of companies achieved a score of more than 60.

“The boards of Chinese companies are structured according to the practice in developed countries. However, they function poorly in terms of clear incentives and penalties, transparency, the supervision of independent directors etc,” said the report.

The report suggested that the amount of shares held by the largest stakeholder should be kept to a reasonable level.

If the proportion is too small, the study found, share ownership will be diluted, subjecting the board to the control of the management. But an overly high stake for the largest shareholder may impair the interests of smaller stakeholders. Contact the writers at yangziman@chinadaily.com.cn and zhengyangpeng@chinadaily. com.cn