executivecompensationinChina.doc

The economist ( September 6th, 2008)
Business section (page 78)
Executive compensation in China
False options
Hong Kong
A study of share options reveals a vast amount of untouched wealth

HOW executives are rewarded is one of the many mysteries of China’s increasingly powerful companies. Unravelling it is important, not least because it should help to explain corporate China’s transformation from a state-controlled to a consumer-driven creature.
Research on this question has been surprisingly sparse. A new study by Zhihong Chen and Yuyan Guan, of the City University of Hong Kong, and Bin Ke, of Pennsylvania State University, casts a rare beam of light. However, its main achievement is to reveal how little is understood about the incentive structure of Chinese business.
The authors examine “red chips”—companies operating in China but incorporated abroad and listed in Hong Kong. For many years this was the main way in which big Chinese companies interacted with the capital markets. The 83 mostly state-controlled companies covered by the study’s final year of data, 2005, account for more than half of the stockmarket value of all Chinese firms and more than one-third of the capitalisation of the Hong Kong Stock Exchange.
Senior executives’ cash pay was low by global standards: $180,000 a year on average. Almost every firm awarded stock options, worth an average of $140,000, giving bosses healthy top-ups as well as equity stakes—if those options were exercised. Remarkably, a lot never were. At more than half of the firms, no options were exercised within four years of vesting.
Share options are intended to address one of the great schisms in the structure of publicly owned companies: the divergent interests of managers and owners. In developed markets, especially America, share options have been used a lot—but it is not at all clear that they have worked as intended. Clever consultants, whose immediate incentive is to please managers rather than shareholders, have devised ingenious compensation schemes allowing bosses to reap handsome rewards even if they foul things up. Among the deposed chief executives of both Wall Street and Main Street there are plenty of examples.
In America researchers have been looking into why these schemes were so skewed. They have been aided by a wealth of data and a fair understanding of the underlying incentives. The merits of stock options elsewhere have received little attention. In China they would seem to be a good way of fostering the profit incentive, and there is evidence that they have been used since 1990. But the study questions the point of this. “If executives in general do not exercise stock options, how can the option scheme align executives with the interest in shareholders?” asks Mr. Chen. “What forces make them throw away money on the table?”
There are many possible reasons. Cultural pressure may explain why bosses do not want visible income. Companies may meet the cost of cars, housing and school fees in other ways. And state-controlled companies’ bosses may be compensated in a different fashion. Executives’ tenure at red-chip companies is brief: only three years, against five at big Western firms. Managers who do a good job are often “promoted” from one company to another by the largest shareholder—the state. Their rewards are more opaque than salary and options, and could even be imperilled by overt signs of affluence. All Mr. Chen and his colleagues can conclude is that there is ample room for further study.

Comment
I strongly agree. Today, in order to seek those opaque rewards, many executives in the state-owned enterprises play trick on financial report. For example, the executive of an automobile-producing company often forces the suppliers sell their products at a price which sometimes may be lower than the costs, promising the suppliers with a bigger profit in later years. Of course, there would be a good looking on the financial report during his term which usually only lasts three years. However, it would leave an unsolved problem in the company. As time goes by, the problem would become bigger and bigger; eventually it would likely to result in the collapse of the enterprise.
Comment by Zhang Rui — September 21, 2008 @ 4:42 am

Mr.YY wrote:
September 18, 2008 01:21
State-controlled companies are special because these companies are very important for this country, which means these companies can share and hold many advantages that other ones even can't expect. This policy had itself work in many years but become more and more uncomfortable for Chinese society now. Therefore, Chinese government keeps carrying out new measures to change it, until now, we don't see much effect.
wordsworth1983 wrote:
September 15, 2008 05:04
This gives me a broader understanding of the Chinese red-chip companies.
puppyzhou wrote:
September 11, 2008 00:11
State-controlled companies are special. These companies backed by whole nation and can enjoy many policies. These wealth don't fit for contribution to economics. If you can enter into one of the "red-chips" companies, your family's life will be affluent forever without hard-work even no work. There are many chinese working very hard day after day, however, then just live on the bottom of society. The executives reward could be more. This is pretty unfair.
Fortunately, China's government have found this problem and been thinking how to solve it. There is only one resolution-improve the formula of politics and economics. Nevertheless, we do this peacefully, not violently. I hope in the future all chinese will live happily together.
Leon HAHA wrote:
September 07, 2008 17:26
Old Chinese saying of "big tree gets more wind" probably applies here. In a society that trumpets the selflessness for the great good of motherland, it pays to keep a low profile in the public arena when you're an executive of the state-own firms. One needs to be as good a politician as business executive.
There are more than one way to skin the cat- plenty of ways to generate income that is less offensive and equally important, tax free.