BEIJING — Over the past several months, China's central government has implemented substantial salary cuts for the executives of state-owned enterprises (SOEs). The moves are part of an overall effort to revamp the SOE pay system so as to make salaries more dependent on company profits and efficiency.

The first round of salary cuts involved senior managers of 72 centrally-owned corporations, including PetroChina and State Grid, energy giants long criticized for gaining high profits through their monopoly positions. Total wages among their senior executives have been reduced by approximately 15%, one anonymous source at PetroChina told the Economic Observer.

China Mobile has announced even larger pay cuts. During its recent mid-year review meeting, the company said the salary decreases (of up to 50%) primarily target senior managers and will not, therefore, affect all employees. One insider at China Mobile said the company began implementing the changes in February, and that the salary package cuts have prompted a wave of departures.

SOE employees used to earn considerably lower than their peers working for foreign companies or in the private sector. But starting in 2003, when China founded the State-owned Assets Supervision and Administration Commission (SASAC) and introduced economic reforms to restructure the SOEs, salary packages dramatically improved — to the point that in some cases, top level managers actually earn more than their private sector counterparts.

"In the SOE petrochemical industry, for example, top managers earn 80% more than their peers working for multinationals," says Cai Feng, a former SOE executive who is now the president of a privately listed company.

Distorted salaries, privileged positions

The pay increases and growing employee numbers, according to Cai Feng, have had a negative effect with regards to the profitability, vitality and operational efficiency of the large SOEs.

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PetroChina Biejing HQ — Photo: Charlie Fong

Liu Xiangli, and SOE expert at the Academy of Social Sciences, says that state-owned companies have benefited from advantages in scale, resources and performance that are based on an historical and institutional context rather than market competition.

Senior SOE managers, furthermore, have unsupervised control over the companies' revenue distribution, incentive schemes, welfare programs and professional expenses. There is always the temptation, therefore, to engage in "self-enrichment."

And since top SOE executive posts are administratively appointed by the SASAC, there is basically no selective elimination mechanism. As one SASAC official said, "In theory the SASAC has to rearrange posts when a party in question is unsuitable or incompetent, but in practice reallocating an executive is very hard because of the limited available posts which would satisfy the concerned party."

Li Jin, vice-president of China Enterprise Reform and Development Society, says the direct cause of the current pay cuts is the temporary business downturn of the SOEs. But there is more to these efforts, he says, than just cutting costs. The larger goal is to restructure the system by making salaries more dependent on performance — so that the case of "a poor temple with a rich abbot no longer happens."

Liu Junhai, director at the Business Law Institute of Renmin University, says that a corporation's vitality comes from its employees. Associating regulation and incentive is indispensable, he says, for generating enthusiasm and encouraging creativity.

"Neither rewards without merits nor excessive rewards are appropriate," he says. "This pay cut is not in itself the goal. The important thing is to form a market regulation mechanism so that eventually people earn what they really deserve."