The unequal and chaotic salary system in State owned enterprises (SOE) has triggered arguments on how to control and regulate salaries of senior management there.

 

One employee in an SOE complained that after adding up all his salary items, he makes no more than 3,000 yuan a month, while his SOE's general manager is awarded over 500,000 yuan a year. Furthermore, because managers can find income in other channels, the number could be even bigger.

 

A survey in 2002 showed that average salary ratio between executives and other employees stood at 12.7 to 1. That ratio increased to 13.6 to 1 in 2003, while in some extreme cases, it was as high as 27.6 to 1.

 

The argument is that managers in SOEs are mainly appointed rather than selected through open voting, and the performance of SOEs in most cases reflects little of their management skills because SOEs are essentially invincible. As a result, ordinary employees find it unfair that the appointed executives are getting such incredibly high salaries.

 

The State-owned Assets Supervision and Administration Commission of the Sate Council suggested in a circular that SOEs should focus on efficiency as much as on equality. Furthermore, it said salary differences between executives and workers should not be too large, so as to motivate the management and ordinary employees alike.

 

According to current law, executive salaries should not exceed 14 times of those of workers. Su Hainan, head of Institute for Labor and Wage Studies, said we can even drop the 14 times cap for SOE executives once SOEs embrace open selection for its management and institute management appraisal systems.

 

Presently, most SOE executives decide their own salaries, which is strange but convenient for the management to award themselves high salaries.

 

Lack of oversight has caused a lot of problems. To cope with the problem, experts suggest setting up a pay and appraisal commission under the director board to design salary schemes and evaluate performance. SOEs should give a copy of their salary schemes to the State-owned Assets Supervision and Administration Commission of the Sate Council and also diversify the members of the commission. The members should include people ranging from independent board members and employee representatives to experts outside the companies and exclude management.

 

Many suggest that the current salary system is also unfair because right now there is no connection between company performance and executive salaries in SOEs, which gives rise to strange situations in which executives are receiving bonuses and benefits while companies are losing money.

 

In spite of existing laws requiring SOEs to link their salary to company performances, company managers are not under any scrutiny. The law is not enforced well because executives are able to judge their own performance.

 

To deal with the problem, experts also suggest establishing a long-term motivation mechanism, on the one hand by lowering basic salary and increasing performance salary and on the other, by raising the ratio of equity incentive to total salary.

 

(China Daily July 25, 2007)