The Effect of Managerial Entropy and ManagerialDissipative on the Reconstruction of Incentive System for

State-Owned Enterprise in China

Zhongyou Tan, The George Washington University Peiyu Ren, The Sichuan University in China

National 863 Major project in China

Introduction of author

Managerial entropy and dissipative structure

Managerial entropy refers to diminishing interior management efficiency due to inadequate financial incentives for managers and workers.

Managerial dissipative structure means that enterprise organizational structures will develop from ineffective and disordered to effective and ordered.

competence and interaction of the two forces jointly influence the corporate structure and lead them to move forward contradictorily in a complicated pattern.

Managerial entropy and dissipative structure

This paper introduces the concepts of managerial entropy and dissipative structure theory into enterprise management, these ideas

also lead us to a new concept, that the goalgoal for management is

supervising and evaluatingsupervising and evaluating interior entropy and

interveningintervening in a timely manner according to changes in entropy value.

supervision evaluation intervention

The evolution of incentive systems and the necessity of their reconstruction in China

Four stages of China’s enterprise institution development

traditional planned economy

stage1978~1984

Decentralization stage

1984~1992

initial stage of modern enterprise

system

1993~2002

innovation stage of modern

enterprise system

2003-present

SASAC in China

In 2003 major changes took place in China's state-owned enterprise management system. China’s central government established a special agency named the State-owned Assets Supervision and Administration Commission (SASAC).

core task of reform

The SASAC stated that the core task of Chinese enterprise reform is improving corporate governance, it further stated that the emphasis in this process

should be on reconstructing enterprise incentive mechanisms

What difference between traditional system and the new which based on managerial entropy and dissipative structure?

TRADITIONAL

EMPHASI S ON:1.enhancing organizational control

2.internal factors’ structuralization andfunctionalization,

3.property structure reform

4.function of entrepreneurs and consummation of control mechanism.

RECONSTRUCTION

EMPHASI S ON:

1.interaction between external factors and internal factors

2.promoting the stucturalization and functionalization both for interal and exteral factors

3.the organic integration of orangnizational controling force and market force together

4.decreasing managerial entropy and making more dissipative structure

5.cultivating individuals’ ideas and entrepreneurial spirit.

theoretic analysis The second law of thermodynamics: energy runs along the direction of attenuation and can not be reversible

in a closed system.

:management efficiency :organizational structure constant :factors affecting the organization including: organizational structure, information, policies, culture and

others,

....... ........................ 1x

ey R （ ）

1 1 2 2( , ,....., , )................. 2n n tfx a x a x a x （ ）

R

y

x

theoretic analysis

“the dissipative structure”, ----- the common characteristics for all biological and social system

The symbols have the same meaning as the former

................ 3xey R （ ）

1 1 2 2( , ,....., , )......... 4n n tfx a x a x a x （ ）

Current situation of incentives in SOEs in China

Executive salaries and incentives in state-owned enterprises have been a key problem and a hot issue in Chinese society.

According to statistics, executives of state-owned enterprises earned about 60 thousand US dollars in 2008, This is far below the international level.

There is a lack of incentive methods, e.g. no “ESOP” for top managements in SOEs.

A consequence has been the “59 phenomenon”-- moral corruption before mandatory retirement at age 60.

Two typical cases Chu-Shijian case happened in 1997 when he was 59. Chu was appoin

ted by the government administration and his twenty years’ total legal income was 120 thousand US dollars.

Chen-Jiulin case occurred in 2003. Chen was selected by a marketing method, his annual salary reached to 3 million US dollars.

Chu and Chen were convicted of corruption. These two cases illustrate that:

1) China still lacks an entrepreneurs' human capital evaluation mechanism.

2) how to combine incentive plan with evaluation system is still a common topic both in academic research and enterprise practice.

Necessity of incentive system reconstruction

According to Maslow's Need Hierarchy theory, the individual’s desires always develop from a lower level to a higher level. Therefore the utility of an incentive system will decline while the executive’s desires increase, this is a gradual process of incentive entropy increasing.

The traditional incentive system doesn’t work well currently. Some managers lose interesting in work or maybe become more corrupt.

To lead the national economy on the way to globlization, Chinese enterprises need to restructure their incentive systems.

Effect on incentive system reconstruction (1)

Incentive systems as an important part of enterprise systems, abide by the laws of managerial entropy and dissipative structure.

At different stages of enterprise development, managerial entropy and dissipative structure plays a different leading role respectively.

Effect on incentive system reconstruction (2)

When managerial dissipative structure plays a leading role, incentive efficiency will give full play to the role of enterprise management and improve management efficiency.

Managerial entropy will increase gradually and will diminish incentive efficiency. When management entropy begins to take effect, the quality of management will decline.

Effect on incentive system reconstruction（ 3）

1.Establish the evaluation index system ----Management Behavior and Characteristic Index and Weight

----Management Performance Index and Weight

2. Establish mathematical equation

m 2 1m m m 1

=n

j

j jm r y

,

:performance

f :management behavior 2 1f f f 1

,m

i

i if w x

，

k :managerial entropy coefficient, the each unit for the cost of additional revenue.

Effect on incentive system reconstruction

（ 4） Making changes according to the calculation: ----In the enterprise management practice,

establishing scientific evaluation tools and methods

is a way to maintain incentive effectiveness.

----Management can judge the situation of

managerial entropy and dissipative structure

according to the calculation.

summary

The relationship between managerial entropy and management behavior as well as enterprise performance is a one-to-one correspondence.

the goal for management is supervising and evaluating interior entropy and intervening in a timely manner according to changes in the interior entropy value.

Management should increase negative entropy flows while declining positive entropy, strengthen the management dissipative structure power, maintain incentives effect constantly.

Contact Information Author : Zhongyou(Tammy) Tan Visiting scholar School of Business The George Washington University Washington, DC 20052 Tan.zhongyou@gmail.com

Peiyu Ren Professor and Ph.d. Sichuan University of China Chengdu, 610064

renpy.scu@163.com

Presented at the annual

Washington Business Research Forum

Washington DCJanuary 8-9, 2010

Questions?