China Mulling Higher Pay for State-Owned Company Executives, Source SaysKeith Zhai
Premier says government rethinking strict compensation caps
Seeking to retain talent to lead overhaul of bloated sector
China is considering increasing executive compensation at big banks and other state-owned enterprises, according to a person with knowledge of the plan, as the government seeks to retain talent needed to overhaul the bloated state sector.
Premier Li Keqiang told a meeting of more than 100 top executives in Beijing last month the government was rethinking a 2015 policy capping their pay at a fraction of their overseas peers, said the person, who asked not to be named because the meeting was private. Li promised a system with more competitive rates, probably tied to performance, the person said, in an effort to hold onto their managers.
The discussions show the challenges facing President Xi Jinping as he pushes China’s almost $20 trillion state sector to embrace structural reform while cracking down on perceived excesses that have fueled public anger at the Communist Party. While the cap saw the earnings of China Construction Bank Corp. Chairman Wang Hongzhang halve to 600,000 yuan ($87,000) in 2015, the salaries of some overseas executives have stayed high: JPMorgan Chase & Co.’s Jamie Dimon received $28 million last year.
The stakes are high as Xi seeks to prove his stewardship of the economy ahead of a midterm party leadership reshuffle later this year, which will determine the strength of his influence going forward. The party has sought to reorganize the state sector without so many layoffs it leads to unrest.
China is set to kick off another round of state-enterprise reform, with as many as 10 companies preparing proposals to sell stakes in their units, people with knowledge of the plans have separately said.
Still, while China quickly reined in executive pay under Xi, efforts to force consolidation and increase profitability among state companies have progressed slowly. International Monetary Fund First Deputy Managing Director David Lipton last year recommended China establish a special to group to oversee “uneven” state-enterprise reforms.
“The depressing pace of the state-sector reform process reflects a wider belief that the current SOE-compensation system is unsustainable,” said Zhu Weiqun, an administration professor at Shanghai University of Finance and Economics. “It is obvious to even the most cursory observer that the pay cut was a hasty decision and it’s good to fix it earlier than never.”
Neither the State Council, which is led by Li, nor the State-owned Assets Supervision and Administration Commission immediately responded to faxed requests for comment.
Although executives at state companies, who ultimately answer to Xi’s party, have publicly supported the compensation caps, there have been signs of strain. For instance, Chim Wai Kin, the former chief credit officer of Bank of China Ltd., left his job in 2015 amid pay cuts being imposed on senior managers at Chinese lenders.
Such departures risk draining companies of the talent Xi needs to enact a 2015 plan that aims to group similar state-owned companies under asset managers. That plan calls for selling shares of some and consolidating others, reforming unproductive “zombie enterprises” and introducing private capital.
SOEs still account for about 30 percent of China’s industrial output and investment and remain the dominant borrowers in the country’s financial markets, Goldman Sachs Group Inc. economists including M.K. Tang in Hong Kong wrote in August. Better access to state funds helps them crowd out competitors, while returning an average of just 4 percent on assets, or less than half their private peers.
Andrew Batson, China research director for Gavekal Dragonomics, said he was skeptical of the government’s commitment to reform because its goals differ from what most Western investors have in mind.
“Reform of state enterprises has been slow in China because the current government is not fundamentally interested in market-oriented reforms to the state sector,” said Batson, who authored a March report on the state-sector overhaul. “Instead, the government is interested in making state-owned enterprises more effective instruments of state policy and projectors of Chinese influence abroad.”
Former China Petrochemical Corp. Chairman Fu Chengyu told Bloomberg News in March that centralized leadership was needed to steer the country through the reform effort.
“China is in a special phase,” said Fu, who led an effort to reform Asia’s largest oil refiner, better known as Sinopec, from 2011 to 2015. “If we don’t have a strong effort like the current government of President Xi Jinping, I think eventually we will break up politically and economically.”
While China’s state media covered Li’s April 27 meeting promoting innovation by SOEs, reports made no mention of compensation. Executives from companies including China Mobile Ltd., China Merchants Bank Co. and Potevio Group attended with Li, who also toured the offices of China Aerospace Science and Industry Corp., according to the official Xinhua News Agency.
The party congress provides Xi’s next big chance to underscore reform goals. Fu -- now a member of the government’s top advisory body, the Chinese People’s Political Consultative Conference -- proposed in March giving SOE executives more leeway to make mistakes while experimenting with reform. China must develop a “system that accepts failure,” he said.
“The real enemy to reform is here," Fu said, tapping at his head. “It’s our culture, our mindset.”