During my two-hour-long interview with a senior Chinese banker recently, we covered a lot of topics, from the credit crisis in the U.S. to the emergence of consumerism in China. He was unusually open for a Chinese executive. But when I asked about his multi-million yuan ($1 is about seven yuan) compensation last year, he fell silent.
If you think executive pay is a controversial topic in the U.S., or that the tension between highly-paid CEOs and shareholders is high here, you should see China. Publicly-traded Chinese companies didn’t start disclosing executive-pay information until a couple of years ago, and it instantly became an explosive topic in proxy seasons. Many Chinese raised questions such as, “What do they base their pay on?” and “How could they make more than the state chairman?”
The senior banker said he would be more than happy if his name weren’t associated with the topic. On the one hand, he explained, top executives at public companies do make a lot more than executives at state-owned enterprises and government officials, not to mention the majority of ordinary Chinese. On the other hand, he said, people like him are make far less than their counterparts on Wall Street and in Hong Kong. To attract and retain talented people who are increasingly moving around globally, public Chinese companies need to offer comparable salaries and bonuses. So the pay of executives like him are more or less a compromise between China’s reality and market competition.
“But how can I say this to those who make very little?” he asked. “They won’t understand, and I don’t expect them to understand.”
I see his point. I can’t imagine China going back to the egalitarian society that we escaped 30 years ago, in which everybody received a salary based on their educational background and seniority, instead of their capabilities and achievements. Few people will work hard unless they know they will be rewarded, whether that reward is a bonus for a banker, power for a politician or a harvest for a farmer. That’s simply human nature, and China’s economic growth in the past three decades is the best evidence of it.
But I also understand why the unemployed, the middle class and lowly-paid government officials get angry at what they see as astronomical pay. The average annual income of urban workers in China last year was 24,932 yuan ($3,561), according to the National Bureau of State Statistics. Farmers and migrant workers make far less than that. Meanwhile, Shenzhen Development Bank Chairman and Chief Executive Frank Newman made roughly 23 million yuan ($3.3 million) in 2007, about 922 times the average urban pay [in an earlier version of this column, I mistakenly said 92 times], and Ping An Insurance Co. Chairman Ma Mingzhe made more than 66 million yuan ($9.3 million), or 2,647 times a regular worker’s pay. (He donated 20 million yuan to a charity.)
The executive-compensation figures have triggered a public backlash. In an online vote on Sina.com, one of China’s top portals, 93% of voters disapproved of the executive-pay practices at Ping An and Shenzhen Development Bank.
Mr. Ma of Ping An has also been made a villain in Internet chat rooms and on online forums since his pay information became public late last month. “Is the 66 Million Yuan Pay an April Fool’s Joke?” demands a post on the popular online forum Tianya.cn. Last week, 1,055 car owners petitioned the China Insurance Regulatory Commission to investigate Ping An’s executive-pay practices. They also asked the regulator to find out how much of the obligatory car-accident insurance fees they paid went to Ping An’s executive compensation. The petition has been cheered on by Internet posters, with a 7,000-word-long post depicting Mr. Ma and Ping An’s rise to fortune widely circulated between forums. The article includes many unverified details, and allegations that Mr. Ma used connections with powerful people to become one of the wealthiest people in China.
More importantly, some state-controlled public companies rely on monopolies and preferential government policies for their profits, so there’s an understandable debate about whether these firms’ government-appointed executives should get paid handsomely — and if their compensation should be linked to those “guaranteed” profits.
Ping An and Shenzhen Development Bank are no longer state-controlled, although they were started with funding from local governments. But CEOs at state-controlled mega-banks, such as Bank of China, Industrial and Commercial Bank of China and Construction Bank of China, are appointed by the government, and their positions are equivalent to vice ministers. Some company leaders have been called back to work as government officials. The Chinese government doesn’t disclose income for its officials, but vice ministers are believed to make less than 10,000 yuan a month (although they do get other benefits, such as housing and drivers). All CEOs at the nine publicly-traded banks received more than one million yuan in compensation in 2006.
As these banks are getting better at disclosing information about their executive pay, they also need to answer the questions raised on online forums again and again: Do these officials deserve more than 10 times their government pay once they are appointed as CEOs of public companies? Do they have the managerial talent to be retained with shareholders’ money? Is their loyalty to the government, or to their shareholders? If some of the bank’s income comes from its monopoly position and preferential government policies, should the CEO be rewarded for that?
There are no easy answers to these questions: While the U.S. and other industrial countries have been debating executive pay for many years, China has just started the discussion — and has to conduct it against the backdrop of a complex asset structure and political system. But it seems that the Chinese public is determined to ask these tough questions every proxy season. And that in itself is encouraging.
Write to Li Yuan at li.yuan@wsj.com.