Government fixes pay ceiling for managers of state-owned enterprises

In July 2006, the government adopted draft amendments to the statute implementing a ceiling on the earnings of managers working in state-owned enterprises. In its proposed form, the law would provide for more flexible remuneration policies, as well as eliminating certain irregular practices. Although the proposed amendments have been welcomed, employer organisations believe that they are not extensive enough and that the existing act should in fact be declared illegal under EU law.

Background

The legislative Act regarding the remuneration of persons managing certain business entities, adopted in 2000, stipulates certain maximum limits on the remuneration of managers working in state-owned enterprises. At present, managers in such positions can earn no more than a gross salary of about PLN 15,000 (approximately €3,830) per month. Representatives of the employer organisations – most notably the Confederation of Polish Employers (Konfederacja Pracodawców Polskich, KPP), whose members include many state enterprises – have repeatedly argued that the act violates EU law and that it is the source of a number of problems in employment relations and, indirectly, in industrial relations (PL0409107F). In early 2005, President of KPP, Andrzej Malinowski, lodged an official complaint on the act to the EU ambassador to Poland, Bruno Dethomas, alleging that Poland was in breach of Article 86.1 of the European Treaty.

Negative aspects of existing legislation

Polish employers maintain that the act has proved to be unfair and ineffective, and that its consequences have been largely negative for state-owned companies. They are most critical of the fact that the act discriminates against state-owned enterprises, as compliance with the law precludes directors of these enterprises from competing with private sector companies in attracting managerial talent. This threat, they argue, has become even more pronounced given the fact that many highly qualified Polish professionals are increasingly looking for new employment opportunities in other EU countries.

KPP also questions the effectiveness of the act, pointing out that it is frequently bypassed; the most popular means of doing this is by apparently offering managers of state-owned companies a range of job perks, such as extra pension insurance, luxury travel – ostensibly for training purposes – and company credit cards. Another method used to counteract the effects of the act involves the absence of competition agreements that are binding for managers once they leave the company, and the provision of high compensation for protracted periods (12 months or more) after the termination of employment. A manager may receive this compensation only after leaving a state-owned enterprise; however, the net effect of such a measure is that the managers still earn considerably more than the maximum amount stipulated under the act.

Another reported negative effect of the existing act is related to the fact that managers in state-owned companies often sit on the supervisory boards of other state-owned enterprises and/or are involved in drawing up analyses for subsidiaries. In this way, an informal network develops, enabling managers of state-owned enterprises to exchange services and favours – a practice that goes against the considerations of healthy competition and, indeed, of good economics.

The employers consider that these irregular practices – and presumably legislation that necessitates such practices – perpetuate among trade unions the stereotype of self-serving chief executive officer who exploits the state-owned enterprise for their own benefit. It has also been argued that the irregular practices engendered by the act have also reduced even further the already low level of unionisation among white-collar workers in Poland.

New government proposals

The draft amendments to the act, adopted by the government in early July 2006, are not the first initiative of this kind. Nevertheless, in comparison with the previous attempt to introduce changes to the act, the latest amendments seem to stand a greater chance of success.

Under the government proposal, managers of subsidiaries in which the State Treasury holds a stake of over 50% will still be allowed to earn up to six times the average salary – as is currently the case. However, managers of companies employing more than 500 workers and achieving revenues of at least €100 million will be entitled to receive higher remuneration. The presidents of such companies (currently totalling 71 people) could receive up to 10 times the average salary. The possibility of giving managers a 2% share of the company’s profits is also being debated.

Commentary

The proposed amendments to the legislative Act regarding the remuneration of persons managing certain business entities is not likely to eliminate the measures used by companies to ensure that managers of state-owned enterprises receive higher remuneration levels. Nonetheless, the proposal to introduce two variants of the pay ceiling – namely six and 10 times the average salary – is a welcome development. In this way, the Polish state in its capacity as business owner could pursue a more flexible remuneration policy when hiring managers to run state entities.

However, the employer organisations seem to be as dissatisfied with the proposed amendments as they are with the existing legislation. As a result, they are proposing to intensify their efforts at European level to have the act declared illegal under EU law. Thus, an escalation in the conflict between the employers and the government seems imminent; such a development might influence tripartite relations at central and sectoral levels in the future.

Jacek Sroka, Institute of Public Affairs (ISP)