Performance Assessment
of Chinese Central SOEs
By Mr. LIU Yuan
Bureau of General Affairs, SASAC
NOV 19, 2016
Outline
1. General Framework of Performance Assessment
2. Key Points of Performance Assessment
3. Effect of Performance Assessment
1.General Framework of Performance
Assessment
Brief Introduction
According to the requirement of management by
objectives, SASAC adopted performance assessment
method as follows:
1. Annual assessment ＆ tenure assessment
2. Result assessment ＆ process evaluation
3. Performance outcomes ＆ incentives
Bonus and penalty based on performance outcomes.
Yearly merit pay based on annual assessment result, and
appointment ＆ removal as well as long and medium-term
incentives based on tenure assessment result.
Basic Procedure
1. SOEs hand in suggestive targets for annual and tenure
performance report. SASAC reviews the suggestive
targets. Documents for annual or tenure operational
targets are signed by SASAC chairman and major
executives of SOEs.
2. SASAC makes dynamic monitoring to the
implementation of the documents, while SOEs should
hand in regular report on the implementation of the
documents.
3. SOEs hand in analysis report of their performance.
SASAC reviews the report (including the financial reports),
makes the evaluation results classified to 4 levels(A, B, C,
D) , and presents feedbacks to enterprises.
Performance Evaluation and Remuneration

Annual Performance salary=basic salary×coefficient of
annual evaluation results×coefficient of adjustment

Coefficient of annual evaluation results ≤2

D-level: 0-1

C-level: 1-1.3

B-level: 1.3-1.7

A-level: 1.7-2

Coefficient of adjustment ≤1.5, based on firm's function,
asset, revenue, profit, number of staff,etc.
Performance Evaluation and Remuneration
Tenure incentives: Grant maximum 30% of the total annual
pay as bonus according to the tenure assessment results.
For enterprises with D-level in tenure assessment, SASAC
will make adjustents to their executives.
Target Value

How to set the target ?

1. Vertical comparison: for annual assessment, no
less than the average value of the last 3 years or the
actual value of last year; for tenural assessment,
based on the actual value of the last tenure or the
average figure of the target value and the actual value
of the last tenure.

2. Horizontal comparison: benchmarking within the
same industry.
Annual Assessment

Total score = total profit score+ EVA score+
classification indicator A score+ classification
indicator B score
Tenure Assessment

Total score=preservation & increment ratio of
state-owned assets value score+ turnover rate of
total assets score+ classification indicator A
score+ classification indicator B score +annual
performance score.
2.Key Points of Performance
Assessment
Indicators

According to the principle of “simple but targeted” and
“universal and individual”, indicators for evaluation are
divided into 2 categories.

1. Two basic indicators for all enterprises.
1) For annual assessment: profit and economic valueadded(EVA)
2) For tenure assessment: ratio of value preservation &
increment of state-owned assets and turnover rate of total
assets

2. Two classification indicators for various enterpries,
which varies by characteristics of different industry or
management shorthand.
Indicators

EVA = net operating profit after tax (NOPAT) – cost of
capital

= NOPAT –capital after adjustment × the average rate of
capital cost

Capital Cost: cost of shareholder’s equity, cost of liability
Advantage of EVA
Problems with SOEs during their rapid development: excessive growth of capital
coefficient, declining ROI (return on investment) and increasing operational risk,
due to the impulsive scale expansion and aggressive investment increment.
Three core concepts are used to restrain SOEs’ investment behavior:
1. Capital has its own cost, especially for equity capital . Executives must adopt
full cost accounting in management in consideration of both liability cost and
equity cost.
2. Capital has “discipline”. Executives must be responsible for shareholders, and
cannot step into the field uncontrolled.
3.Profit is top priority for enterprises, however it is not the only pursuing.
Comparing with traditional financial indicators, EVA serves as a more
comprehensive value indicators which is more advantageous in performance
assessment and long-term value orientation.
New Modifications
1. Classified assessment based on different functions of
state economy: there will be some differences in both
indicators and weight between SOEs which are in fully
competitive industry and those in industries and sectors
that are vital to national security and national economy.
2.Improving target management: categorize the
assessment targets into different levels which correspond
to different results; self-imposed stress is encouraged.
3.Effect of Performance Assessment
Economic benefits is obviously improved
Year
2003
2015
Average annual
growth rate(%)
Revenue (trillion US $)
0.67
3.39
15.88
Profit (billion US $)
447.76
1872.09
13.89
Total assets(trillion US $)
1.24
7.01
17.06
Fine management is encouraged
By weighing EVA as a core assessment indicator, it drives the executives of
SOEs to control investment and debt as well as make good profits. This could
optimize enterprises' investment plan and cut down those unprofitable and
long-term investment.
Now SOEs attach great importance to analyzing value chain, cutting
operational cost and increasing investment efficiency instead of being
impulsive in scale expansion previously.
SOEs improve the efficiency of capital and the ability to create value through
adjusting investment strategy, minimizing capital coefficient and strengthening
management towards cost, accounts receivable and inventory.
Thank You!