Special Topic: Finding and Keeping Jobs in China

On May 11, under the flagrantly melodramatic and overblown headline 'The Wages of Sin', China Daily explored one of the most controversial issues in the current Chinese business world, executive compensation. The theme of the article was one of overwhelming indignance towards executives working for some of the largest companies listed on the Chinese markets who have been lavishly rewarded despite - in many cases - presiding over a period of unprecedented disruption and decline. Despite the overt hyperbole, the piece got me thinking about the impact that such a performance to compensation disparity could have on a company.

Obviously, compensating executives who are just not cutting the mustard is bad business sense and poor HR practice. In such tight financial times, overpaying underperforming employees – especially ones in such crucial roles - is a surefire way to set a company on the road to ruin. However, as crucial as the financial aspects of executive pay are, this was not the area that truly interested me. And, several commentators – including Bi Xiaoning， who wrote the article – have commented on this at length already. I was focused more on the impact that low executive performance coupled with excessive compensation could have on the morale of a company.

TDIndustries headquarters, 1987, Photo TDIndustries

This instantly set me thinking of the example set by American construction company TDIndustries – I know this is not a Chinese example, but please stick with me as it is particularly pertinent in terms of business and HR. The Dallas-based company has been voted to the Fortune 500 100 best employers for twelve straight years. One of the major reasons it has featured so regularly is its pledge to ensure that no employee’s base salary is ten times that of the company average. In layman’s terms this means that whilst senior management earns more than the rest of the company, the gap is by no means as wide as other corporate salary chasms. This may sound like no big deal – a salary ten times higher than the company average is still pretty emphatic, right? However, compare this to a couple of examples here in China.

The first is software giant Lenovo. As I am sure you may recall from my column last week, in the wake of its worst year in over a decade, Lenovo underwent some dramatic changes. The company had been losing money, and morale around Lenovo’s China operations was at rock bottom. Therefore, out went CEO William Armelio in a major management reshuffle, and the company’s co-founder, Liu Chuanxin, announced a raft of sweeping changes whilst decrying the collapse of the company’s corporate culture. One of the reasons behind the collapse of corporate culture and decline in morale was the chasm between senior management – including Armelio – and the average Lenovo employee. In January of this year, the company announced global job-cuts amounting to 2,500 global employees. Whilst employees worried about their uncertain futures, Armelio was being compensated lavishly. According to Business Week, he took home a basic salary of $750,000 (5.1million RMB), a bonus of $1million (6.8million RMB) and share options amounting to around $5million (34million RMB). Totaling-up that loot would amount to significantly more than ten times the salary of the average Lenovo employee – more than 1,000 times the average employee even. This would certainly not help morale.

Photo: Daylife

Another company that experienced a checkered 2008 was Ping An Insurance. Some of the numbers it released to the Hong Kong Stock Exchange in April were truly alarming. Net profits dropped 94% from 2007. Earnings per share dropped from 2.57rmb in 2007 to 0.04 last year. However, despite the poor performance, some of the compensation on offer for top executives was eye-watering. Chief Finance Business Officer, Frank Newman, took home 15.9million RMB. General Manager, Louis Cheung, made 9.5million RMB. And, Executive Deputy General Manager Dominic Leung made 7.9million RMB. The disparity between compensation and performance was such that Chairman, Ma Mingzhe, who took home 66million RMB in 2007, waived his salary in 2008.

So, what are the savvy companies doing to address compensation chasms? Since Ma’s salary announcement, a further 100 senior executives around China have made similar gestures. In the short-term, this type of reactive thinking will help address morale issues and reduce employee disillusionment. However, in the longer term, companies need to formulate more viable proactive strategies. For example, Zheng Wei of remuneration gurus Mercer believes that pay should be linked to performance. He told China Daily, “Executive pay should be linked to company performance.” He added, “In these trying times, big increases in compensation are unacceptable.” Such a plan would mean that companies like Lenovo would need to take less drastic measures to improve morale and fix their corporate culture. Getting a better handle on corporate compensation will work as prevention rather than cure.

Special Topic: Finding and Keeping Jobs in China

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