Why China's State-Owned Firms Can Still Succeed

by Knowledge@SMU, 01 June 2012

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topics:
Management

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SOEs in China talent management

Everyone has different motivations for working. But the primary incentive for slogging it out in the corporate jungle would be money — at least that is what employers believe. This helps explain why companies are often willing to shell out wads of cash to outbid one another for top executives.

Yet one country has shown that strong company profits can be achieved without having to pay top dollar. The CEOs of China’s state-owned enterprises (SOEs) are leading their companies to new heights despite being paid less than their counterparts in the private sector.

The Ministry of Finance in China reported in March 2011 that profits from SOEs reached RMB331.65 billion (US$52 billion) in the first two months of the year, up 29.4% from the same period in 2010.

It also said that the operating revenues of SOEs in January and February 2011 came to RMB5.14 trillion (US$815.5 billion), up 26.4%.

At the same time, the gulf between the salary of a CEO at a SOE and a private enterprise remains wide. China’s highest paid CEO, Yang Yuanqing of Lenovo Group, received an annual salary of RMB78.72 million (US$12.5 million) last year.

In contrast, the highest paid CEO at an SOE was Han Junliang, who was paid RMB8.58 million (US$1.4 million) by Sinovel Wind Group.

What motivates these CEOs when they do not stand to benefit substantially from their companies’ growth?

According to Jerry Cao, an assistant professor of finance at the Lee Kong Chian School of Business in Singapore, the driving force is the likelihood of a political career as the CEOs try to move up the rungs of the career ladder. Cao was co-author of the paper Political Promotion, CEO Incentives, and the Relationship between Pay and Performance.

Road to reform

China started the corporatisation and privatisation of its SOEs in 1978, when many decision rights associated with the operation of the firm, such as profit retention and profit-sharing schemes, were shifted from the state level to the firm level.

But the state retained control over personnel decision, keeping ultimate authority over the selection, appointment, and dismissal of SOE executives. It is also common practice for the ruling Communist Party to consider these executives in the selection and evaluation process for bureaucratic promotion.

As the CEOs in these companies have limited outside job opportunities, a political appointment, which brings with it higher salary and prestige, would make for an attractive career move.

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