China's state-owned enterprises are not the rigid, top-down organizations of the past. In many industries today, they try to combine the benefits of both market competition and state coordination.
Kyle can you give some insight into income, salary and incentive structure of bosses and executives of SOEs. What drives them? In western corporations, executives are driven by rewards of bonuses, company shares and other incentives. What is the sort of corporate culture in SOEs?
Great questions. Executive compensation for Chinese SOEs is in the low six figures USD and nowhere near what CEOs make in the West. They get some performance bonus tied to some metrics that depend on industry and other variables. A major motivator is promotion to more powerful positions, even moving across industries.
The corporate culture of SOEs can vary, including within SOEs. For the railway sector, it tends to be more secretive and hierarchical. Some SOEs have a reputation for being not-customer-friendly like some of the airlines. Some are known for being quite innovative or at least have innovative subunits, like ones connected to renewable energy.
SOE leaders are cadets/officials/bureaucrats that may move up to powerful political positions like provincial party/government chiefs or ministers. While the posts do not compensate much in an aboveboard way, plenty of money can often be made while wieding immense power and allocating tremendous resources.
I’m kind of curious as to the general major differences between national-based SEOs in state-dominated non-consumer goods sectors like railroads vs. national/local-based SEOs/“collective enterprises”/etc. in consumer goods-oriented sectors (particularly those with substantial private sector competition) in terms of aspects like executive compensation, profit-orientation, etc.; I’m thinking of enterprises like Haier and Gree in appliances or Yili and Mengiu in dairy.
Also, how common is subcontracting to private businesses among Chinese SOEs?
I’m sure you are right, but the productivity measures only include private returns, correct. One of the points Kyle makes is that the SOEs support the wider economy, which is true, means there are spillover social benefits that are excluded
in conventional measures of productivity.
Spillover benefits are difficult to measure and it’s easy to be sceptical. But I think it’s the spillover benefits that make a long-term difference to China’s overall future productivity growth.
This applies to other developing economies too, and that’s what makes development so challenging. It’s harder when IMF / World Bank ignores the role of spillovers and so underestimate the role of SOEs in development.
The IMF and World Bank obviously understand the role of spillovers. The World Bank literally finances infrastructure. I'm just saying that role of spillovers of SOEs is just questionable. Imo the reason the Chinese reform the SOEs instead of simple privatisation is because of ideology and/or status quo bias. It isn't anything enlightened like spillovers.
Privatisation per se doesn’t make the economy more efficient. Private monopolies are no more efficient than public monopolies and worse, private monopolies tend to under-invest since they don’t take account of spillover benefits. Perhaps there are also ideological factors at play, but reforming SOEs (to make them more competitive) can be explained without resorting to ideology as an explanation.
Now they are even more counted upon to return profits because of pressures on public finances.
SOE governance reform is a fascinating topic, and one that we are looking into.
Kyle can you give some insight into income, salary and incentive structure of bosses and executives of SOEs. What drives them? In western corporations, executives are driven by rewards of bonuses, company shares and other incentives. What is the sort of corporate culture in SOEs?
Great questions. Executive compensation for Chinese SOEs is in the low six figures USD and nowhere near what CEOs make in the West. They get some performance bonus tied to some metrics that depend on industry and other variables. A major motivator is promotion to more powerful positions, even moving across industries.
The corporate culture of SOEs can vary, including within SOEs. For the railway sector, it tends to be more secretive and hierarchical. Some SOEs have a reputation for being not-customer-friendly like some of the airlines. Some are known for being quite innovative or at least have innovative subunits, like ones connected to renewable energy.
SOE leaders are cadets/officials/bureaucrats that may move up to powerful political positions like provincial party/government chiefs or ministers. While the posts do not compensate much in an aboveboard way, plenty of money can often be made while wieding immense power and allocating tremendous resources.
An excellent summary. I am currently working on a paper - could you recommend any articles on SOE consolidation and related policy developments?
Nice write up Kyle. Looking forward to your book.
Fascinating insights!
I’m kind of curious as to the general major differences between national-based SEOs in state-dominated non-consumer goods sectors like railroads vs. national/local-based SEOs/“collective enterprises”/etc. in consumer goods-oriented sectors (particularly those with substantial private sector competition) in terms of aspects like executive compensation, profit-orientation, etc.; I’m thinking of enterprises like Haier and Gree in appliances or Yili and Mengiu in dairy.
Also, how common is subcontracting to private businesses among Chinese SOEs?
Really enjoyed this article, thanks for posting!
Last I checked the productivity growth of SOEs is half of that in a private firm in China (in the same industry, for example, steel).
I’m sure you are right, but the productivity measures only include private returns, correct. One of the points Kyle makes is that the SOEs support the wider economy, which is true, means there are spillover social benefits that are excluded
in conventional measures of productivity.
Spillover benefits are difficult to measure and it’s easy to be sceptical. But I think it’s the spillover benefits that make a long-term difference to China’s overall future productivity growth.
This applies to other developing economies too, and that’s what makes development so challenging. It’s harder when IMF / World Bank ignores the role of spillovers and so underestimate the role of SOEs in development.
The IMF and World Bank obviously understand the role of spillovers. The World Bank literally finances infrastructure. I'm just saying that role of spillovers of SOEs is just questionable. Imo the reason the Chinese reform the SOEs instead of simple privatisation is because of ideology and/or status quo bias. It isn't anything enlightened like spillovers.
Privatisation per se doesn’t make the economy more efficient. Private monopolies are no more efficient than public monopolies and worse, private monopolies tend to under-invest since they don’t take account of spillover benefits. Perhaps there are also ideological factors at play, but reforming SOEs (to make them more competitive) can be explained without resorting to ideology as an explanation.
Whoa. What an amazing insight? I'm sure no mainstream economist has thought of this. You should give a lecture to the IMF mate.
Thanks for your complement.