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The performance of executives of publicly-listed companies is always under close scrutiny, particularly so during times of financial duress.
One factor guaranteed to interest investors keeping a beady eye on the value of their shares is the level of pay, especially in the higher echelons.
When senior staff members at loss-making companies reward themselves with huge compensation packages it inevitably raises hackles.
But, it seems, investors are also not too keen if executives forgo their salaries altogether when company results slide into the red.
Compensation at the top levels of Chinese enterprises has always been comfortable, to say the least. The annual income of the best rewarded executives working for Chinese listed companies last year averaged nearly 10 million yuan. That is 345 times the 29,000 yuan earned in a year by an average urban worker, according to a survey by Internet portal NetEase.
The company Ping An Insurance was widely criticized over the levels of pay awarded to executives: eight of them were on the list of the 10 most compensated among listed companies in 2007. The insurance giant’s profits in 2008 plunged by more than 97 percent from the year before. That staggering drop prompted Chairman Ma Mingzhe, who took home 66 million yuan in 2007, to make a high-profile announcement in February that he would forgo his entire pay for 2008. Nonetheless, four Ping An executives still figure in the 10 most compensated executives list for 2008.
Since Ma’s announcement, more than 100 top executives of publicly-listed companies have followed suit.
What might have been regarded by some as an appropriate gesture failed to make corporate heroes of them all. On the contrary, the move solicited a host of cynical comments in both print and electronic media by skeptical investors as well as market operators.
“It’s just a show,” said Pi Haizhou, a freelance stock analyst. To him and other self-styled market “gurus”, such apparent self-denial impresses no one.
As shareholders, Pi said, “we don’t want them (corporate executives) to work unpaid”. If they do, he added, “we can no longer hold them responsible for their mistakes”.
At the other end of the Chinese corporate spectrum, there are executives who have continued to reward themselves with extravagant pay packages in seeming disregard of investor sentiment.
Senior executives of companies in industries such as energy, metals, securities and real estate enjoyed hefty increases in compensation in 2008 while their net profits declined, according to a survey by the official Shanghai Securities News.
“Executive pay should be linked to company performance,” said Zheng Wei, managing director of Asia executive remuneration business Mercer.
In these trying times, big increases in compensation were unacceptable, but the other extreme of pay denial seemed equally bizarre, he said.
Zheng said that market-oriented compensation mechanisms and strong corporate governance would help better protect the minority shareholders’ rights, including the right to information, to participate in decision-making and, most importantly, to enjoy equitable distribution of gains. As it stands now, the rights of minority shareholders are quite limited because control of many Chinese listed companies is in the hands of the majority shareholders.
Indeed, the controversy surrounding executive pay was widely seen as an outburst of minority shareholders’ frustration about insufficient protection of their rights.
Of the top 100 companies based on market value, 77 are controlled by their top five shareholders. What’s more, 86 percent of the largest shareholders are State-owned entities, global risk management consultancy Protiviti said in a recent report.
In China, “the majority shareholders actually control the boards of directors, as they can nominate candidates for posts such as directors, supervisors and even independent directors”, said professor Lu Tong of the Chinese Academy of Social Sciences.
Corporate governance in Chinese listed companies has been lagging behind international standards, according to Protiviti.
The deficiencies in corporate governance also saw some listed companies skipping dividends, thus denying the minority shareholders a share of the profits.
According to the Chinese-language newspaper Beijing News, 732 listed companies, or nearly 46 percent of the 1,602 listed companies in China, did not pay any dividend to its shareholders. This is despite the fact that nearly 480 companies were profitable in 2008.
Shenyang Jinbei Automotive Company Ltd, which has not paid any dividend for 15 years, has become the butt of jokes on the Internet. According to Protiviti, only about 10 percent of the listed Chinese companies pay dividends regularly. The ratio of cash dividend to net profit of Chinese listed companies has remained at 29 percent in recent years, much lower than those in mature markets.
“The high executive compensation and low dividend payment reflects the fact that there is no effective market monitoring system to keep senior management remuneration in check,” said Christopher Low, president of Protiviti Greater China.
“Highly concentrated shareholdings remain a hindrance to effective corporate governance,” said Low. There is a need to hasten the progress of shareholding diversification and strengthen information disclosure and the responsibility of the board of directors to ensure the appropriate remuneration of senior management.”
Chinese executive pay is still modest when compared with Western standards. But seen in the context of the average workers’ income, executive compensation appears extraordinarily high.
In April, the Ministry of Finance directed executives of State-owned financial institutions to cut their salaries. Under the new directive, the total executive pay for 2008 at financial institutions must not surpass 90 percent of the 2007 levels.
“The government will soon release new standards for evaluating the performances of State-sector companies and link them to compensation schemes,” said Su Hainan, head of the Institute for Labor and Wage Studies with the Ministry of Human Resources and Social Security.
According to Su, certain supervision departments, rather than an approval from the board of directors would further review executive compensation. The independent directors should report their work to State-owned assets management and supervision departments and get paid by them instead of by listed companies.
“The new regulations are likely to be kicked off in the second half. It could be helpful in protecting the minority shareholders’ rights and strengthening the corporate governance of State-owned companies,” said Su.
