China's new weapon: Low executive pay

BEIJING--Will globalization someday stick it to the man?

Excessive executive pay has been a hot-button issue in American politics for years, but worldwide factors could one day make it a liability on the balance sheet.

As companies in countries like China and India move away from performing behind-the-scenes functions, they're selling products and services under their own brand names directly against U.S. and European counterparts.

Since high-level executives and other white collar professionals in Asian companies typically make less than their Western equivalents, these companies potentially will have a cost advantage.

How or even whether the differences in executive salary will impact the market remains unclear: multinational companies are hiring their own executives in these regions, too, after all. Nonetheless, the numbers are tough to ignore: engineers aren't the only "talent" that costs less in developing markets. Executives cost a lot less, too.

Shanghai's SunTech Holdings, for instance, has moved from being a bit player in solar panels to becoming one of the largest manufacturers in the world. Most of the company's panels end up overseas, and it can produce those panels more cheaply than American competitors for various reasons. Among them: the company isn't lavishing huge compensation packages on its executives.

"There aren't 10 executives in the company that make more than $200,000," said Steve Chan, vice president of business development at SunTech Power Holdings.

U.S. execs make far more. In a survey conducted by Forbes last year, the magazine found that the average big company CEO made $3.3 million in salary and bonuses.

It trickles down from there. Chinese engineers make about one-third to one-half the salary of their U.S. counterparts, said one executive who runs Asian operations for a U.S. high tech firm. Marketing execs can make about half as much as their stateside colleagues.

"If you have one (marketing manager) that makes about $100,000 in the U.S, you can hire one here for $50,000," he said.

"There aren't 10 executives in the company that make more than $200,000."

--Steve Chan, vice president of business development, SunTech Power Holdings

Professional services firms also pay less than U.S. counterparts, said Ted Dean, managing director of BDA, an analyst firm specializing in Asian markets. New college graduates hired by services firms might make $400 to $500 a month, or $4,800 to $6,000 annually. A well-regarded person with years of experience might make $30,000 to $50,000 annually. In the U.S., the same person can graze around the $100,000 mark.

While executive compensation can be absorbed somewhat in manufacturing companies, it can be pronounced in purely white-collar service operations. Panorama Media Holdings, based in Beijing, sells high-resolution photos to advertising agencies, similar to Getty Images and Corbis.

Panorama, though, can sell its products for an eighth the price, according to Wayne Shiong, a partner in venture firm WI Harper, an investor in Panorama. Wherever Getty charges $50,000 for services, Panorama can charge 50,000 RMB (China Yuan Renminbi), or about $6,600.

Panorama primarily sells its photos to Asian advertising agencies. Shiong, though, said that the multinational photo outfits have not reacted to lower their prices for the local market. Additionally, Panorama is contemplating taking out office space in New York to test out the international opportunities.

The Spartan start-up
The pay discrepancy starts during the start-up phase. Founding CEOs of some Chinese start-ups deliberately take low wages to keep costs down, according to Shiong and others. The CEO at a company that's just finished a Series A round of funding might pay himself 500,000 RMB a year, or about $67,000.

Documents filed by Chinese companies with the Securities and Exchange Commission back this up. Focus Media Holding, which specializes in outdoor advertising kiosks, paid $100,000 to its two executive officers in 2004 combined. In 2005, the year the company went public on Nasdaq, Focus had 13 executives and directors and the total pay for all of them for the year was $512,947.

In 2005, the company's four executives and directors pulled in $100,000 combined. The four executives and directors of Trina Solar Limited pulled in $128,039 in 2005. None had severance packages, the filing states.

Compare that to a pre-public U.S. company. DivX, which makes media software, paid its top five execs about $1 million in 2005, the year before it went public. Shutterfly paid its top five people $1.1 million the year before an IPO--only one made under $210,000.

Chinese executives make their wealth in stock options, which U.S. execs get, too. Suntech founder Shi Zhengrong is considered one of the richest individuals in China, with a net worth exceeding $2 billion, according to various studies. Focus awarded 22.5 million in options to executives and employees in 2005. Salaries also rise after an IPO, but generally not to U.S. levels. One reason, of course, is that the cost of living is lower. Someone making $50,000 in China will likely be able to retain a driver and other household help. That's not enough to rent a decent one-bedroom apartment in many American cities.

Conversely, to expand internationally, Chinese companies have to hire U.S. and European executives, who will command U.S. salaries. Suntech's Chan said that will be an issue for his company. In the first few years of the company's growth, the salespeople came out of China. Expanding internationally will also take quite some time.

Victor Canto, chairman of La Jolla Economics, added that many executives in Asian companies will also leap to U.S. competitors to get salary raises. "That will decrease the disparity," he said.

Still, in the end, multinationals of course have some of their higher-level people in more expensive countries, so a discrepancy should be expected.

"Foreign vendors might be able to achieve comparable manufacturing costs, but they still will have a huge R&D lab in Finland," said BDA's Dean.

[arluthier]

Trickles down... whatever!

Big US companies send jobs and plants overseas because they can get their product created cheaper, hire cheaper engineers, hire cheaper execs, no healthcare, etc... and then complain that US citizens wont do the jobs.

If this was the case, you would assume that the prices for the goods created would DROP. Which in turn would mean that US citizens could afford to make less (i.e. cost of living goes down). But NOOOOOooo the big companies just keep raising prices, and pocketing the difference. All the while telling the world that the US is complacent with overpaying jobs.

[wayne1231]

Go For it!

I say go for it! Outsource all of management. They all stand around on the unemployment line and tell each other it's for the best of the company.

Right now they all think that there's something unique about their positions that can't be filled overseas. Truth is that a Chinese MBA is probably just as good as an American one. As far as I know there's a good change they're in NYU like me.

[FutureGuy]

this is called shooting your own foot..

The CEO of company XYZ outsourced all manufacturing, know how and R&D to give a short term boost to their bottom line (and the CEO's bonus). They realized they don't really need XYZ or its greedy CEO, start competing directly against XYZ (now that they have the know how and expertise that the XYZ transfered to them), XYZ goes down and the CEO gets fired. This is how American enterprise will end.

[mossman07]

China and kick backs

The executives salaries are small but the kickback are huge!!! This article is poorly research, its known fact that if do business in China that suitcase full of cash is need to do business. Who gets that $$? hmmm,let's see, the low paid executives?

[theitdude]

Welcome to America

I've just been through a year where many of our USA jobs went to China. We pretty much offshored everything to save money, except the Exec pay.

Even though our sales suck this year, the Execs got big bonuses due to the cost savings to offshore.

All the jobs are in retail now, selling goods for Communist China at the Lowes, Home Depot and Walmart.

[ChrisLang]

You are comparing apples to oranges...

If most Chinese CEOs make no more than $200,000 it's because the it is equivilent to what it can buy in China.

200 grand is the minimum yearly allowance for a family of four in the US, but what is it worth in China?

[georgescott]

Greed at the top hurts the entire company

CEO's making mega-millions while companies are performing badly hurt the company and the United States further by sending American jobs overseas so they can maintain there high salary even while sales are falling.

[Commander_Spock]

When....

... will there be legislation outlawing the outsourcing of jobs from the United States to other countries just for the sake of outsourcing them; and, (since we are in an computing age...) when are there going to be some real economic figures to justify some of these actions by some American companies vis-a-vis--product, service quality et cetera, et cetera!

[DecliningUSDollar]

Politicians

It would also be a good idea to offshore Senators and Representatives as well.

Dealing with China is going to be very, very interesting in the coming decades. US high schools need to be teaching Chinese in addition to math and science.

Additionally, something has to be done about IP theft and open piracy of software. Imagine opening a "branch office" in China - steal IP, set up your office with $5 copies of Windows and Office - all while you have 12 year olds cranking out your widget for nothing, and with your currency having a "floating peg" set to be lower than the US dollar, such that your goods are always a bargain. Who wouldn't want to do business in China?

[asdf]

yes yes oh yes

PLEASE let it happen that the coke snorting dirtbags that run these companies finally get what's coming to them. As a shareholder, I DEMAND that the company find the CEO who will take the LOWEST salary and provide the MOST value.

Kiss your fat white ***** goodbye.. and that prostitute you call an executive secretary? She's going to be telling someone else they're the best she's ever had now....

[human4us]

Who will be on top in ten years?

Within human social corporate hierarchies, certain individuals residing at the top of the economic pyramids make millions of 'imperial power coupons' otherwise known as: dollars or Yen, etc, while those at the bottom do the heavy work.
Government leaders and top corporate executives use imperial power coupons to motivate other human beings to do the hard labor, but if human industrial greed continues to create planetary global warming, the only temporary survivers will be the few people who can do creative hard labor fast enough...for themselves.

[Quixotic115]

evading taxes?

How do we know that what they report as their income is really true? Isn't it more likely that they reported a lower income and hide a lot of it to keep it from being taxed? Plus the GDP is in the trillions...the money's gotta be going somewhere. Either a lot of them are lying or there are just way too many executives.