Salary cuts for senior managers: Is JD.com founder Richard Liu championing 'common prosperity'?

These days, Richard Liu (Liu Qiangdong) is a popular figure online.

On 22 November, the founder of e-commerce giant JD.com sent an email to all staff announcing salary cuts of between 10% and 20% for 2,000 senior managers in favour of strengthened benefits and insurance for rank-and-file employees.

In the email signed "your brother Dong", Liu announced that over 100,000 outsourced staff will become internal staff and the company will start paying social security for these "brothers" from 1 January 2023. JD.com will establish a ten billion RMB (US$1.4 billion) housing fund for all employees of the group and its subsidiaries. Liu will also personally donate 100 million RMB, which will be matched by the company and its subsidiaries, to a relief fund that will provide for the offspring of JD.com employees in the event of the employees' death or injury at work or outside work.

Chinese media summarised Liu's announcement as "up and down" - employee benefits up, and senior management salaries down. JD's moves will make sure employees have funds in their old age and healthcare when necessary, help them own homes, and ensure employees' children are taken care of until the age of 22 in the event of mishaps, through the relief fund. The internal email met with a wave of online approval, calling it the "JD version of common prosperity", and saying it set an example for entrepreneurs on how to encourage common prosperity.

It is not the first time this month that Liu made it to the top searches on social media due to philanthropy. In the 2022 Hurun Philanthropy List announced recently, Liu was lauded for donating stocks worth 14.9 billion RMB to a third-party foundation, making him China's top philanthropist this year.

The story goes that Liu started from scratch selling CDs from a street stall. Over the past four years, while he was among the top social media searches, it was because of his involvement in a sexual assault case in Minnesota in the US, dating back to August 2018. US investigators decided not to press criminal charges, but the woman involved launched a civil suit. After years of wrangling, the case was to have been heard in court in October this year, but was abruptly settled out of court instead. However, the case hurt Liu's reputation and the company's share price, and in April he resigned as CEO of JD.com and sold off a significant portion of his shares. Now, he has recovered some of his image through philanthropy.

But it should be noted that Liu has been known to be passionate about philanthropy since the early days of his business; he gave generous contributions of between 100 to 300 million RMB to various entities including his hometown of Suqian in Jiangsu, the Renmin University of China, and Tsinghua University just a few years before his sex scandal. Thus, it is unfair to assume that Liu only raised his philanthropy profile recently to rebuild his reputation or because he was pressured by the political climate of common prosperity. Perhaps he has other considerations as well.

While JD.com performed well in Q3, making a net profit of six billion RMB compared to a loss for the same period last year, growth in profits was generated mainly by reducing costs, that is, scrimping and saving. With the double whammy of an economic slowdown and fierce competition in the e-commerce industry, JD.com faces massive pressure and the headache of weak growth in the coming quarters.

Liu's successor, JD.com CEO Xu Lei, is candid about the company's improved profit margins coming mainly from reducing costs. During a conference call on 17 November, he said that logistics management has been most heavily hit this year out of the three years of the pandemic. Due to fulfilment difficulties and longer waiting times, there have been more order cancellations from the Singles' Day sales. In the current milieu, consumers are also more conservative and rational in their spending.

In fact, cutting executive pay and directing those savings towards employee benefits already reveals that JD.com is not making enough profit, at least not enough to cover such a huge increase in employee welfare. In the first half of the year, JD.com had also laid off a significant portion of its staff and went into "hibernation mode" like many other e-commerce giants. With its latest move, JD.com is essentially robbing the rich to help the poor. This is not a long-term plan for sustainable development. Enterprises should still seek to grow by improving performance, and expanding and developing market share.

But then again, Liu did say in the staff memo that if the company returned to high growth in the next two years, everyone's salary levels would be restored. Some analysts thus think that the policy kills many birds with one stone. While improving employee welfare and company cohesion, it also reinforces Liu's big-hearted personal image, adheres to what is politically correct in the country, and also pressures executives to improve their work performance. This is Liu's message: if the group does not return to a high level of growth, while employee benefits can still go up, executive pay may be slashed.

Amid a greater focus on China's rising rich-poor gap in recent years, some appropriate wealth transfers may be a good thing. However, enterprises cannot rely on cutting the pay of executives to do so. In the long run, the improvement of employee welfare not only depends on the business performance of the enterprise but also China's macroeconomy and the improvement of consumer climate. Among these two factors, the former is the mission and responsibility of Xu and the group's executives, while the latter can only be left up to fate, as one can only hope that things will turn around soon.

This article was first published in Lianhe Zaobao as "刘强东的"京东版共同富裕"".

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