High benefits and low wages: Employees as monitor of management in SOEs

Employees do play a role in corporate governance as important stakeholders of modern enterprises. In the absence of financial and managerial labor markets in centrally planned economies (CPE), the owner of state enterprises (SOEs) has no effective mechanisms to discipline management. Therefore, the role of employees in corporate governance becomes much more important in SOEs than in the typical capitalist private firm. We posit that low wages and generous benefits in SOEs provide incentives for employees to monitor management. Other employment arrangements, especially lifetime job security and centralized wage scale, are also conducive to the monitoring of management by employees. A formal model shows that benefits tied to firm performance, designed properly, induce employees to monitor management. It also suggests that the existence of a market for managers tends to undermine this mechanism.