Central State-owned enterprises launched a pilot pay reform at the beginning of this year. The pilot reform of the salary system for the executives of State-owned enterprises directly under the central government's supervision introduced at the beginning of this year will serve as an example for reform of the salary system for SOEs nationwide.

The salary system for SOE executives has long been criticized for its lack of transparency and its failure to reflect the performance of executives, with some executives receiving high salaries even though they don't show any capability to help a company prosper and the profits are mostly generated by the company's monopoly status. Some have gone away with their pockets full while laid-off workers struggle for their livelihoods after a SOE has gone bankrupt.

The new regulation issued by the State Council, or the Cabinet, signals the central government's determination to fix the problematic salary system. The top managers' salaries in those SOEs covered by the reform will be determined by the board under a uniform standard in order to be more market-oriented instead of being overseen by different governmental departments.

The regulation stipulates that the salaries of SOE managers consist of three parts - a basic annual salary, a performance-based salary, and bonus incentives. A manager's basic salary will be two times the average salary of an enterprise's employee. The performance-based salary will be determined by the comprehensive evaluation of the manager's performance in the past year, taking into account the situation in the industry concerned and the company's revenue, profit and other factors. It should not exceed two times the basic salary. Lastly, the bonus incentives shall be no more than 30 percent of the managers' average salary during their tenure.

The disclosure of these top executives' salaries has also been mentioned in the regulation. Their income has often been a mystery because some managers can conveniently use the company's money to cover their personal expenses. For instance, the company's automobiles are at their disposal; they can travel abroad ostensibly on business; and they are entitled to various extra benefits such as medical costs, houses and their children's education. In other words, many of these managers don't have to rely on their salary for a living.

With the new reform in place, all their salaries will be made public so that any hidden income can be rooted out. The regulation has also stipulated that SOE executives who hold part-time posts in the company's subsidiaries, holding enterprises or shareholding enterprises should not receive any kind of remuneration, salary, bonus or allowance. Retired executives should not continue to receive salaries from the companies they used to work for.

So far, 72, or roughly half of the total number of central SOEs are subject to the new salary policy. Although that number may seem very small, these companies hold very important positions in the national economy, for instance they include the China National Petroleum Corp, the Sinopec Group, and China Mobile Communications Corp. Even a single spark can start a prairie fire. The salary reform, if stringently implemented, will produce a ripple effect and can spread to cover the tens of thousands of SOEs across the country, so as to narrow the income gap by correcting these unjust parts of the income distribution mechanism.

The author is associate researcher of the salary research department of the Ministry of Human Resources and Social Security.