High Education Costs, Low Executive Pay

Numerous blog posts have discussed the costs incurred by overseas and Chinese students of studying for a degree in the US or UK. Overseas education is expensive but if I land a high paying job then it is worth the initial investment.

A similar cost-benefit analysis applies to Western Executives paying large sums to take MBAs at the top European and US Universities.

This recent article on C/Net is another reason that Chinese student numbers are falling in the face of continued and rapid growth. On one level, the large increase in the Chinese middle class should result if more students coming to the UK and US. However, the existing large numbers of overseas and local graduates are keeping pay low and making it harder to justify the initial expense.

The fault of the argument below is to assume all executives are the same. Whilst technology can be backward engineered and copied Executive skills are one thing that will take much longer to understand and copy. That is not to say that the Chinese will not learn quickly. Do not expect a fall in US executive pay any time soon.

Moreover, once living costs are taken into account are US executives really on that much more?

My bold highlighting.

China's new weapon: Low executive pay

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.

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.