Carrots and sticks need to be considered
(China Daily)
Updated: 2005-08-24 10:13

The first performance appraisal the State-owned Assets Supervision and Administration Commission (SASAC) released covering the 179 key enterprises under its charge was a welcome step in the prolonged reform of State-owned enterprises (SOEs).

By matching corporate performance with the management's pay scale, the evaluation scheme, initially built on a market-oriented incentive mechanism, is indispensable to a modern enterprise system.

But to make these giant SOEs capable competitors at home and abroad, the authorities should be ready to come up with bigger carrots as well as heavier sticks for managers.

The SASAC announced last Friday that 172 of the 179 SOEs under its supervision passed their performance evaluation for 2004.

Based on each company's profits, return on net assets and other factors, the evaluation system assesses management personnel annually, awarding a grade from A to E during a three-year tenure.

In this first round of appraisals, 25 outstanding performers achieved A grades, while four firms failed with E grades because of faked financial reports and poor management.

The prize for the top players was generous a bonus of up to three times their basic salary, which could be hundreds of thousands of yuan. Failures were punished by receiving no bonus at all.

Compared to the old payment system at SOEs during the years of the planned economy, which largely mirrored the hierarchical salary pyramid applied to government officials, the new incentive scheme represents remarkable progress pricing entrepreneurs according to their performance.

As China steadily shifts from central planning to a market economy, a smart payment system has become crucial to the development of all enterprises.

As a whole, the SASAC's evaluation has helped raise management personnel's awareness of their responsibilities while encouraging them to perform efficiently.

But in view of the country's economic reality, the current incentive mechanism needs to be further improved to better reward the top managers and punish incapable bosses.

Scrapping a worker's bonus is hardly a stiff punishment. Lower profits because of economic fluctuations may be accepted as an excuse for an enterprise's poor performance, but faking financial reports should not be taken lightly. Given the State's huge stake in key SOEs, the authorities should not let wrongdoers off the hook.

On the other hand, the current bonus-only compensation scheme is not enough to attract the best management talent that is so desperately needed.

As top managers in the private sector reap much fatter rewards in cash, shares and options, their counterparts at SOEs deserve similar compensation.

Some say as giant SOEs usually enjoy more government favour or even administrative monopoly, their management should not be paid as much as peers in the private sector.

This is a factor the SASAC needs to consider when evaluating SOEs. But it is not a reason to refuse to reward top managers according to the market. Rather it is a call for further market-oriented reform of SOEs. After all, in the long run, only competitive enterprises can ensure the appreciation of State assets.

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