Executive Compensation in China

September 9th, 2008 | Sources: Economist

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As China’s economy morphs from state-controlled to consumer-driven and its companies play increasingly important roles in international commerce, people naturally start to wonder about executive compensation in these companies.

An article in this week’s The Economist summarizes the results of a new study of the matter by investigators at the University of Hong Kong and Penn State. It provides enticing, though narrow insights.

The investigators studied “red chip” companies-those which operate in China, are incorporated abroad and are listed in Hong Kong. Until recently this was the traditional method by which state-controlled companies related to capital markets, and even today red chips comprise more than half the total market cap of all Chinese firms.

In these companies, executive salaries were found to average $180,000-low by international standards. Nearly every company offered stock options (valued at $140,000), but surprisingly, more than half the Chinese executives never exercised these options.

What forces cause Chinese executives to leave money on the table like this? At red chip companies, executive tenures are relatively short-only 3 years. Those who perform ably often find their way to higher positions in other state-controlled companies. There may be cultural reasons why executives prefer not to have conspicuously high pay, or it may be that their rewards include more than salary and options, and thus might be threatened by signs of wealth. We hope to know more soon.


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