Insufficient Regulatory Mechanism Governing the Executive Remuneration under Chinese Labor Law
With the deepening of globalization, stockholding companies in China have seen a convergent tendency in term of designing executive remuneration regime. As was proven in previous research and practice, executive pay is regarded as an important regime to motivate executives to maximize shareholder wealth in the dispersed ownership context, especially concerning public company.
Empirical evidence has manifested that equity-based incentive contracts function effectively to stimulate executive performance in dispersed ownership companies. Such examples are typically found in the UK. In general, diversified structure and performance-based executive remuneration regime dominate the developing trend.
Stemming from corporate governance issues, the mechanism has shown its insufficiency in regulating the hybrid structure of executive remuneration under the Chinese labor law. Among all reasons, the ambiguous identity and scope of executives constitute a crucial one. In China, “executive” has not been differentiated and defined separately from “employee” in the labor law context. The labor laws are indiscriminately applied between executives and the other types of employee. That is to say, on the one hand, executives are protected at the same level as the other types of employee without considering its unique features; on the other hand, the legislative approach governing ordinary employee remuneration is applied to the executive remuneration of which the composition is relatively complicated. For the sake of broadening the way of thinking in the future practice and legislative activities, in this article, I will try to reveal the 2 predicaments reflected in judicial practice applying the current labor laws to settle the disputes revolving around executive pay: i) disadvantages to regulate executive remuneration without isolating executive identity from the other types of employee; ii) traditional legislative approach aiming at fixed remuneration does not fit in the combined structure of executive pay.
Predicament I: over- and deficient protection by single identity as employee
Executives’ dominant position in a company have been widely agreed among scholars and practitioners. Specifically, executives are superior than the other types of employee in terms of competitiveness in the job market, the amount of information in possession, bargaining position and capacities to withstand unemployment risks. Furthermore, executives’ interests are tightened with that of shareholder when stock options are designed into executive remuneration regime in stock company. Executives may even have dual identity as shareholder, which indicates executives’ nature of employer and the agency model of executive pay. Under these circumstances, the current labor laws, of which the legislative philosophy assumes “strong employer and vulnerable employee”, seem insufficient protecting the executives’ legitimate rights. On the one hand, it shows over-protection, such as claims of sky-high severance package and overtime pay when terminated labor relationships, which are no longer occasional cases. However, on the other hand, the protection also shows deficiency in practice. I will elaborate it through the following case.
Mr. W was both shareholder and legal representative to Company X. Mr. W signed a 2-year labor contract with Company X, which laid down W’s CEO position and RMB100,000 monthly salary. Following the rules and regulations of Company X, recruitment and remuneration package of W were passed via the board resolution. 6 months before expiration of this contract, W resigned from Company X and claimed that the company had never paid him salaries following the contract that the accumulated back pay reached RMB1,128,400. W then filed a case against Company X at the court after it was rejected by the Labor Arbitration Committee, claiming the aforementioned back pay.
Revolving around this claim, the court summarized 2 points among others: 1) W’s labor contract was backdated. Despite that the amount of his monthly salary as displayed on the contract was RMB100,000, W never received the agreed amount while the actual distributed amount every month was RMB30,000; 2) Company X declared that it confronted economic downturn and was in debt. As the legal representative, W must have known this fact. Therefore, the court considered that it was against the common sense that W had never raised any objection against the actual distributed salaries; And, under the circumstances of suffering losses and insufficient paid-up capital, the remuneration agreement between W and Company X essentially damaged the interests of debtors and the other shareholders; Additionally, W’s actual received amount of salary exceeded 3 times the local social average salary. Eventually, W’s claim was dismissed by the court.
The given case reflects the material predicament claiming executive pay with the indiscriminate identity as an “employee”. Initially, the judge was aware of executives’ dominate position that differed them from ordinary employees and pointed out in the verdict, “Because executives such as CEO tend to dominate and control all kinds of important matters and major resources, unlike ordinary employees, their ability of evidence adduction should be better than that of ordinary employees.
Accordingly, the benchmark for them to adduce evidence should be higher than that for ordinary employees during the process of settling labor disputes”. In this respect, as far as I am concerned, it shows a certain extent of progress in judicial practice to adjust the over-protecting legal devices regarding executives as vulnerable employees. Nevertheless, W played the roles of both executive and shareholder in Company X. The setting of high remuneration rewarded the responsibilities and risks he assumed. Furthermore, the standard of executive pay established by both the contract and the board resolution should be binding. However, the judge compared W’s remuneration with the level of social average salary and challenged the setting of high remuneration with the company’s suffering losses and paid-up capital. Such reasoning and logic seem to have overcorrected the deviation of legislation. It also displays that ignoring special features of executive identity may lead to deficient protection on their interests.
Predicament II: diversified structure, single approach
Regulations on Composition of Wage promulgated by the National Bureau of Statistics defined the major composing categories of wage, including bonus, allowance and subsidy; meanwhile, it excludes “the other kinds of remuneration that are not enumerated herein” from the scope of wage. One of the main features for wage is “fixed distribution”, which plays a key role in determining severance pay calculation, e.g. the fixed annual bonus is in general counted into the severance pay. As the degree of internalization deepens, the variable remuneration has been gradually taking up larger part in executive pay, compared with ordinary employees. Given special entitling conditions, strong link to performance and weak predictability (in the form of stock options, for example), regulations under traditional categorizing appeared incompatible governing variable remuneration. Once disputes raised from the variable part, problems with the single approach regulating executive pay would manifest themselves.
Ms. Z had been the General Manager of Business Unit in Company Y since the June of 2010. According to the relevant policy of Company Y, her remuneration was classified by Job Grades, which was composed of two parts – post wage and performance-based remuneration, RMB25,000 every month. Since 2012, the company put forward new policy to separate 40% of executive pay under “Category I” as the bonus subject to performance assessment. Therefore, between the January and the December of 2012, Ms. Z received her remuneration by 2 parts, post wage + performance bonus, separately. The total sum of each month varied. Since the January of 2013, Company Y delivered around RMB15,000 to Ms. Z’s bank account for her remuneration every month and stopped distributing performance pay. Ms. Z applied for labor arbitration in the October of 2014, claiming the unpaid remuneration between the January of 2013 and the September of 2014, RMB210,000 in total.
The Labor Arbitration Committee rejected the case, given that “performance assessment results in nothing, so the fact of arrears does not exist”. Ms. Z then filed a litigation case. One of the contentions is that although Ms. Z considered that her remuneration should be the fixed amount of RMB25,000 per month, she did not raise any objection against the structure and standard applied to her remuneration. In the prerequisite that Ms. Z recognized the 40% composition of her remuneration was set bonus subject to performance assessment, when no assessment result was provided by the company and the amount of performance pay was not concreted, the court cannot confirm whether Company Y had wage arrears of the plaintiff. Thus, the court did not support Ms. Z’s claim.
The above case provided a typical example of transformation in executive remuneration structure. During the process transforming 100% fixed remuneration to 60% fixed remuneration + 40% variable remuneration, there appeared a 40% “gray zone”. It seems not reasonable that the court invoked “enterprise enjoys autonomous management right” to justify the 40% evaporated remuneration. In other words, 40% variable remuneration has exceeded the boundary defined by the traditional benchmark of wage. When the company sets such composition of remuneration while does not conduct performance assessment, the issue can no longer be accommodated in the box of “wage arrears”. Under this circumstance, it shows insufficiency applying the same regulating approach to executive remuneration as for ordinary employees whose pay structure is relatively simple.
Executives, as the pathfinder for enterprises, need appropriate protection. And the diversified remuneration structure needs well-round regulatory mechanism. Through observation of a part one can recognize the whole. Based on analysis of the aforementioned two predicaments, to improve regulatory mechanism governing the executive remuneration needs labor law reform aiming at the group of executives. Meanwhile, it may be worth a consideration for future legislators to solve issues in relation to executive remuneration under the framework of corporate governance, designing the regulatory mechanism for cross-department legal issues comprehensively.