On the Use of Incentive Pay in Chinese State-Owned Enterprises : The Role of Hierarchy

This paper looks at the wage system in Chinese state-owned enterprises (SOEs) during the 1980s. While wages remained compressed, there is evidence for the use of incentive mechanisms. Wages were quite sensitive to firm performance, especially at higher levels of the hierarchy. One of the reform measures - the Internal Salary System, a system of intra-firm contracts - has contributed significantly to this sensitivity. There is also some direct evidence that it enhanced the effectiveness of the bonus system, and that it helped to increase productivity. This goes towards explaining how the Chinese bonus system was able to overcome the free-rider problems typical of team compensation