China to Regulate Executive Pay at State-Owned Enterprises

By Wang Biqiang, Jiang Lei and Zhao Yuxin
Published: 2009-06-25

News, cover
Translated by Zhou Yuning
Original article: [Chinese]

Just as the US Treasury was setting limits on executive pay at some firms earlier this month, China's State Council was also giving in-principle approval to new regulations aimed at standardizing executive pay within state-owned enterprises (SOE).

The new rules were discussed at an executive meeting of the national cabinet on June 10 and are expected to come into effect in July or August this year.

Although the draft regulations are still subject to amendment and have not yet been released, a source at the Ministry of Human Resource and Social Security (MOHRSS), noted that the basic structure and major elements of the reform were unlikely to change.

The regulations aim to standardize executives' pay at SOEs. They included a requirement that compensation for senior managers consist of three parts: annual basic salary, performance-related payments and medium- and long-term bonuses or incentives. The performance-related pay benefits can be no more than three times the amount of the basic salary.

The regulations only apply to state-owned or controlled enterprises liked oil and gas giant China National Petroleum Corporation (CNPC) and do not effect mixed-ownership enterprises like finance and insurance conglomerate Ping An.

Executive Pay Structure Under New System

The new measures were drawn up by MOHRSS with input from related authorities like the Stated-owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance.
According to the above-mentioned source, "after the new regulations take effect, executive's salary won't necessarily decline."
Those currently earning excessive remuneration will see their pay drop while an increase in the remuneration of those executives at the lower end of the spectrum is likely. The rules state that SASAC will calculate salaries for each enterprise separately.

The new regulations aim to provide a common set of criteria for evaluating executive remuneration. It will standardize criteria for comparing the level of pay, performance evaluation, insurance, costs incurred at work and other elements of the pay structure.

As mentioned above, the rules require that the annual salary of executives be divided into three portions: basic salary, performance-related payments and medium and long-term bonuses or incentives.

Of these elements, the basic salary is to be calculated by multiplying the regional average salary by a certain factor and then multiplying that number by another factor determined by the scale of the enterprise.

Performance pay will be limited to three times that of the base salary. The regulations will also outline a series of criteria for assessing performance, with the aim of making sure non-administrative factors are removed from the process of evaluating performance.

The make up of the mid- and long-term incentive bonuses will depend on the enterprise and current regulations covering listed companies. They will also be restricted to a certain proportion of the total salary. The majority of bonuses will come from ownership incentives, which will be strictly controlled and can only be taken up after a manager has met all their mid- and long-term performance criteria.

Similar regulations have been introduced in the past. In June 2004, the Stated-owned Assets Supervision and Administration Commission issued the "Interim Measures for Pay of the Executives in Central Enterprises" legislation.

On April 7 this year, the Ministry of Finance issued a circular in relation to the management of executive pay at state-owned financial enterprises. The notification limited executive's 2008 pay to 90% of that received in 2007 .

The new regulations will have priority over existing rules in regard to a few small areas of disagreement. The system for determining the pay of executives in state-owned financial enterprises will be basically the same as the one that applies to other SOEs.

Background Facts

There are currently approximately 9.6 million enterprises in China which can be classified into three broad categories:
* Stated-own enterprises, including those owned or controlled by the state either wholly or partially.
* Mixed ownership enterprises, including corporations and listed companies whose equities are held by private individuals and the state.
* Private-funded enterprises, which are owned by domestic investors or those from overseas and Hong Kong, Macau and Taiwan.

According to Article 22 of the Enterprise Law of State-owned Assets, executives in SOEs refer to the following people:
* Managers and deputy managers, chief financial officers (CFO) and the other senior management in wholly state-funded enterprises.
*   Chairmen and vice chairmen and directors of the board, directors and supervisors of the supervision committee in the wholly state-funded companies;
* Directors and supervisors in companies which the state is a major shareholder.

The new regulations aim at standardizing the pay of executives in central enterprises. Local SOEs will be regulated by further rules established on the basis of these new regulations. It will serve as a guideline for related ministries and local governments when they draw up their own specific enforcement rules.

Links and Sources
Ministry of Human Resource and Social Security Official Website (MOHRSS)
Stated-owned Assets Supervision and Administration Commission Official Website (SASAC)
Ministry of Finance: 关于国有金融机构2008年度高管人员薪酬分配有关问题的通知
Ministry of Finance: 财政部规范国有金融机构高管人员薪酬分配秩序

Background Reading
Economic Observer: Wave of Compensation Cuts in Shanghai Finance Industry
The Economist:
Executive compensation in China - False options
The Economist: Executive pay in America - Principles, not pitchforks
New York Times:
Treasury to Set Executives’ Pay at 7 Ailing Firms
Wall Street Journal: China Limits Executive Pay