Mystery shrouds CEO wages with many hidden payments
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E-mail Shanghai Daily, May 15, 2012
![[By Zhou Tao/Shanghai Daily]](http://images.china.cn/attachement/jpg/site1007/20120515/001ec949c22b111c4ebe08.jpg "[By Zhou Tao/Shanghai Daily]") |
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[By Zhou Tao/Shanghai Daily] |
Since China opened up to the world with its sweeping economic reforms in the late 1970s, and especially in the past decade as private-sector enterprises have mushroomed, the model of executive compensation in the country has increasingly mirrored ones in the United States and Europe.
How is it, then, that Chinese executives are paid only a fraction of the compensation earned by their American counterparts in companies of equal size in the same industries? Or are they?
In China, executive compensation above tens of millions of yuan would be seen as astronomical and would cause an uproar.
In 2007, the latest year studied, China Stone Management Consulting Group used compensation disclosures in companies' annual reports to analyze data on executive compensation at China's 200 largest public companies by market capitalization. They found that 64.8 percent of executives received compensation ranging from 100,000 to 500,000 yuan (around US$16,000-US$80,000), and 19.5 percent between 500,000 and one million yuan.
On the other hand, executive compensation in China has always been shrouded in mystery. The majority of Chinese public companies - those listed in Shanghai and Shenzhen - disclose only the individual executive's aggregate compensation.
This number does not usually reflect actual aggregate compensation because it omits such things as hidden payments and extra bonuses. As such, it can represent just the tip of the compensation iceberg.
Are the figures disclosed in the annual reports of public companies in China accurate? What is the true picture of executive compensation in China?
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.
Using "administrative expenses," as disclosed in annual reports, Gao Minghua, director of the Research Center for Corporate Governance and Enterprise Development at the Beijing Normal University, compared on-duty consumption and annual revenue, and listed the top 100 public companies in China in 2010 in terms of on-duty consumption as a percentage of annual revenue for the year. In 10 of the companies, the on-duty expenses exceeded the revenues.
On-duty consumption
A study conducted in 2011 by professor Yang Rong of East China Normal University showed that the average on-duty consumption of all individual companies in the dataset - the research was based on 1,320 listed companies examined between 2002 and 2009 - exceeded average executive compensation by two to 50 times, and has been growing over the years.
Analyses by a number of researchers, including professor Chen Donghua in the business school at Nanjing University, show that such covert on-duty consumption has no correlation with company earnings, or has a negative correlation.
In state-owned enterprises, on-duty consumption has a significant negative correlation with company earnings.
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 million yuan 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.
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