Pay high, but not through the nose
How much is too much?
If you talk to a Ping An Insurance shareholder, you are likely to be told the 66 million yuan ($9.45 million) pay package for its chairman Ma Mingzhe is way too much. An executive headhunter might have a completely different take, pointing out that top execs of 500 of the largest US companies averaged $12.8 million last year. As China gets increasingly integrated into the global economy, the headhunter will reason, such apparently exorbitant salaries for top management are only natural.
This year saw a flurry of angry postings on Chinese websites by shareholders incensed at what they felt were obscenely high salaries for those running their companies. Not just Ma, the pre-tax package of three Ping An executives was over 45 million yuan each while that for another five was over 10 million yuan.
Shareholders of five domestic banks fumed at the pay disclosures that showed Shenzhen Development Bank Chairman Frank Newman’s pre-tax income rose to 22.9 million yuan in 2007 from 9.95 million yuan the previous year. That of China Minsheng Banking Corp President Dong Wenbiao surged to 17.5 million yuan compared with 4.5 million in 2006.
The annual reports of all 14 Shanghai-listed banks have also shown substantial raises for top managers. Employees complain the fruits of the 71.8 percent average profit rise in these banks last year were mostly devoured by the top bosses. While the banks’ average pay has spiraled, they say it’s mainly because top executives’ salaries have risen steeply, with no dramatic advances in salaries of the rank and file.
In the case of Ping An, particularly, what rankled with shareholders was that executive pay skyrocketed even as the company’s shares plummeted. Ping An shares fell from a peak of nearly 150 yuan in October to around 50 yuan in April. In a Sina.com survey, 93 percent of the respondents thus understandably said they did not approve of the company’s executive pay practices.
The controversy also comes amid widespread concern about rising income disparity in China. But executive pay is hardly an issue restricted to a socialist state used to egalitarian wages trying to come to grips with the rewards of individualism that capitalism institutes. The United States, the high priest of modern-day capitalism, has been similarly tormented by the vagaries of executive pay.
Individual shareholders and institutional investors alike have been campaigning this year for a “say on pay” at nearly 100 of the top US companies including Citigroup, Coca-Cola, Exxon Mobil, General Electric and Wal-Mart. The demand: a provision to allow shareholders to vote on top executives’ pay.
Across the Atlantic, where many countries have already institutionalized shareholders’ say on pay, a chunk of GlaxoSmithKline, Shell and HSBC investors refused to vote for the pay proposal for top bosses.
Both in the US and Europe, the issue has transcended the business sphere to become a hot-button political issue. EU finance ministers recently called excessive executive pay a “social scourge”, blaming it for unwarranted risk-taking causing the financial turmoil. In the US, presidential candidate Barack Obama has been railing against corporate fat cats and backing the demand for shareholder say in executive pay.
In Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Harvard professor Rakesh Khurana explains how the opacity of the process of hiring external CEOs and the misplaced priorities thereof – such as picking someone with “star power” rather than one with real knowledge of the industry – leads to excessive CEO compensation. As China sets about aligning its business practices with the industrialized West, it would do well to avoid such pitfalls.
But excessive restrictions on executive pay might at the same time weigh down the country in the quest for global talents, thus undermining its competitiveness. Institutional checks and balances like encouraging shareholder activism are a much safer bet. Moderation in policy must never be lost sight of in the pursuit of moderation in pay.