We will discuss the managerial compensation background in China. Before the economic reforms all the organizations were under the control of state government. There were no incentives and mangers were paid the normal civil service pay. Economic reforms took place in 1978 and decision making responsibilities were changed from the government to the private firms. After that managers got some sense of authority in terms of decision making and they got some autonomy in the firms. But the control was still in the hands of government. So managers were still not that much motivated to increase the profits for the organization because they were still getting the same civil service pay without any incentives (Groves et al, 1994). There was a dilemma as the managers got some autonomy and control was still under state government. So, it created confusion to decide on the compensation of the managers.
In 1990 labour market reform happened and it changed so many things. The enterprises were given the freedom of recruiting new employees and they were allowed to start their own salary systems but the wages should have been within the range set by the government. Because of this the salary of top executives increased drastically. This was the starting point when Chinese firms started focusing of profit making and they related the incentives of the managers with the performance of the organization. The managers’ pay has been increasing continuously every year and this is one of the best motivational forces to align employees towards the growth of the organization. Average salary for top executives in 2002, 2004 and 2005 was RMB130.22 thousand, RMB208.10 thousand and RMB196.25 thousand respectively.