Reform pay system

Pay cuts should be the start of more employment system reform in State-owned enterprises (SOE), says a Beijing News article. The following is an excerpt:

Under pressure from the market, administration and public opinion, high-level management staff of SOEs chose to cut their salaries. Managers at nine big SOEs in Shanghai reportedly cut their salaries by 15 to 40 percent. They also tightened business travel and conference budgets. Many big non-government businesses followed suit. As the financial crisis hits the real economy, pay cuts may become a trend overseas and in China. Nine countries already plan to cap the salaries of high-level management at banks.

SOEs are supposed to shoulder social responsibility, so shedding employees is not encouraged. Pay cuts are the best option. In recent years SOE managers' salaries have spiked, igniting widespread criticism. The pay of employees in monopoly sectors, such as power, communications and banks, is high above the national average. People connected the high pay of SOE staff, especially management, with social justice and SOE efficiency.

But since the later half of last year, business profits, including those of SOEs, slid. For the whole year in 2008 both industrial added value and industrial enterprise profits were at record lows. Top managers were sure to face pressure from the administration and public opinion if they had continued enjoying high salaries. Voluntarily cutting pay was a wise choice.

Payment of high-level managers at financial institutions will also be contained. A notice by the Ministry of Finance asked State-controlled financial institutions to suspend stock option plans. The China Banking Regulatory Commission set a ceiling of an annual salary of 1.5 million yuan as reference for commercial banks.

The pay cut may pacify public opinion for a while. But connecting managers' pay to the performance of their businesses is a bigger issue. If the managers cut their salaries on the surface but get more income via stock options and other means, then the pay cut is just smoke and mirrors.

Another underlying issue is whether SOEs can adopt a market-oriented employment and payment system, and whether high-level managers will ever stop being both corporate managers and government officials. They should become real professional managers who are tested by the market.

(China Daily 02/16/2009 page2)