-Analysis-

BEIJING – The government has made its intentions clear: it is time to trim the outrageous salaries of top executives of China's stated owned enterprise (SOE). Dubbed the "Wage-cutting order," the measure is regarded as the latest victory for the power of Chinese public opinion in the campaign for fairer distribution of wealth.

It has been clear from the outset that remuneration of executives of China's public companies, and in particular those owned by the central government, was not a simple economic issue. Indeed, it had been seen very much of a political symbol. Today, instead, it has become a social issue. Top Beijing SOE executives have regularly made it into the countries top income rankings, from millions to tens of millions of RMB (hundreds of thousands to millions of dollars).

With so much at stake, clarity on some key questions is imperative. For instance, are senior public executives administrative officials or business leaders? Who is to determine how much they should be paid, the market or the government? And how is their personal contribution to be measured, by their company's economic performace of its political contribution?

These seemingly simple remuneration management issues get to the core element of much needed SOE reform: whether a public company meets with Beijing's policy, whether their governance structure is efficient and whether the definition of executive responsibilities, rights and interests are clear and precise.

Pursuing interests

The reason why the existing system for compensating SOE executives is unreasonable is because no clear division exists between SOE businesses and the public interest, nor clarity about whether they should be competitive by nature or monopolistic.

In the financial, petrochemical and telecommunication sectors where the monopolistic SOEs enjoy the double advantages of access to resources and the government's preferential policies, high executive salaries are particularly unpopular.

It's also worth noting that numerous central government SOEs in more competitive sectors have failed, in part for a failure to institute modern corporate governance structures. The lack of a board of directors means that the representatives of shareholders and the heads of management are the same people. Since there is no clearly defined responsibility and authority over the executives, some actually increase their own salaries, even when their enterprises are performing very badly.

Unless institutional control is improved, SOEs’ external market position and internal governance structures will remain obscure. Since the executives are selected through the administrative appointment system, they owe their allegiance to the government. This often makes for bad corporate leadership, where we often see these managers trying to move in both political and business circles to promote their own career opportunities. This not only distracts those who possess real professional talents, but can also expose them to accusations of protecting their own vested interests rather than carry out their public charge.

Clearly, what China's public awaits is not just an official plan to trim the outrageous salaries of top public company executives but, even more importantly, a radical reform of the entire status of SOEs so they can be run like bonafide modern enterprises.