August 22, 2012

Executive Pay In China Still Shrouded In Secrecy

Are Chinese Execs Really Paid A Fraction Of What Their American Counterparts Make?

Executive compensation is a complicated subject in China

This week, Knowledge@Wharton published a very interesting article on the mysteries surrounding executive compensation in China. How is it, the article asks, that Chinese executives are paid only a fraction of what their American counterparts — from companies of equal size in the same industries — make? And is this really the reality of the situation? Citing the example of Ma Mingzhe, chairman and CEO of Ping An Insurance Group, whose 66 million yuan (US$10.5 million) paycheck caused a public uproar in China in 2008 (even though his pay was dwarfed by the US$102 million made by UnitedHealth Group CEO Stephen J. Hemsley in 2011), the article notes that official pay is actually only the tip of the executive iceberg in China.

From the article:

The main source of income for top executives in China is not the disclosed annual compensation or bonuses and dividends, but hidden payments.

A typical executive in a state-owned enterprise can easily receive hidden income because the on-duty expense level has high elasticity. According to one executive interviewed by China Knowledge@Wharton, the cost of a normal business meal can range from a thousand yuan to tens of thousands of yuan. For overseas business trips, benefits can be obtained and transferred through flexible allocations and use of consumption rights, such as office expenses, travel expenses, entertainment expenses, communication expenses, overseas training fees, expenses of the board of directors and conference fees.

Top-level managers have even greater room to maneuver in than middle-level managers. According to the financial magazine Securities Markets Weekly, the giant petrochemical corporation Sinopec (Guangdong branch)spent millions of yuan on wine in April 2011 for its top executives. It is also common for state-owned enterprises to build housing for their employees.

These types of expenditures fall in the categories of on-duty consumption or incentives. In the United States, similar on-duty consumption accounts for only a small part of executive compensation and is explicitly provided for in employment contracts. In China, such consumption is not transparent and has become the major source of income for many top executives.

Besides on-duty consumption, under-the-table bonuses can sometimes be a major source of income for top executives as well. One interviewee noted that a securities company in China distributed 300 millionyuan in cash as bonuses at the end of 2008. The main beneficiaries were those in senior management. Such generous bonuses usually undergo special accounting treatment so that the public is unaware of them.

Read the whole article at Knowledge@Wharton.

Business & Finance / Market Trends / Policy
Tag: business, business culture, economics, economy... , More
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