University challenge

A curious idea for linking executive pay to that of professors

University challenge

Ping An's Ma: "And this is how much I want to make next year"

Forbearance is in vogue in the boardroom in 2009. Hence chief executives at the Detroit automakers drive rather than jet to Washington for bailout hearings, and will join Vikram Pandit, chief executive at Citigroup, in swearing to work for no more than a dollar a year until their firms return to good health.

Executive pay in the financial services industry has been stirring up adverse comment in China too. Guotai Junan Securities has come in for particular flak, for its proposed Rmb3.2 billion ($465 million) payroll for 2008. Sections of the Chinese press estimate that this means Guotai’s three thousand employees must be earning a million renminbi each (the reality will likely be less egalitarian).

Ping An is another company in the firing line, especially following the disastrous performance of its investment in the asset management business of Fortis. In the good old days – in 2007, before the crisis – five executives’ made in excess of Rmb10 million but this year its chairman Ma Mingzhe has already announced that he will take no salary for the current financial year.

Then again, it isn’t easy to work out exactly what is being paid to China’s leading executives. But a study last year by Zhihong Chen and Yuyan Guan from the City University of Hong Kong, and Bin Ke of Pennsylvania State University, suggests that average executive pay is low by international standards. Their review – reported in the Economist newspaper – looked at ‘red chip’ companies listed in Hong Kong but operating in China. It estimated annual cash salaries averaged HK$1.39 million ($180,000).

Anecdotal evidence, like last year’s reports that Wall Street’s downturn would see overseas Chinese – nicknamed sea turtles or hai gui – flooding back from overseas assignments to positions in Shanghai back this up. In point of fact, there was little sign of hai gui washing up on Shanghai shores. A few newspapers even printed commentary from local recruitment firms saying that Chinese firms could not hope to match the financial rewards on offer in more developed markets.

Of course, firms that have taken state bailout funds in the US and in Europe are now finding that policymakers want a say in deciding salary levels. This should be an easier argument to win in China, where state ownership is much more prevalent. And some in Beijing are using policy pronouncements in Washington as evidence that formal curbs on pay are required at home too.

Yi Xianrong, a researcher at the Chinese Academy of Social Sciences is a good example. He reckons that Washington’s $500,000 pay limit – for executives at firms being bailed out – is a useful benchmark for China. But what figure does he arrive at? Yi reckons $500,000 is about five times a university professor’s annual income in the US. If you apply the same metric in China, the limit on executive pay should be set at Rmb500,000 ($73,000).

Chinese executives will be as reluctant as their American counterparts to have their pay prospects anchored to the salaries of local academics. But rumours are circulating that the Ministry of Finance will announce a scheme of its own. According to the Economic Observer Online, executives at state-owned enterprises will have their remuneration (including bonuses and other extras) capped at four times annual salary. This would see an annual ceiling of Rmb2.8 million applying to most top-level executives.

Keeping Track: In WiC5 we looked at the calls in China for curbs on executive pay. The Ministry of Finance thinks
that pay at state-owned banks has been “excessively high” and ordered that pre-tax income for top executives in 2008 should not exceed 90% of 2007’s level. Last week the official China Securities Journal reported that top executives at listed financial institutions had earned an average of $89,000 in 2008. (17 April 2009)

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.