SERBIA: GOVERNMENT REIGNS IN EXECUTIVE SALARIES AT STATE

UNCLAS BELGRADE 001303

SIPDIS
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EINV ETRD EFIN SR

SUBJECT: SERBIA: GOVERNMENT REIGNS IN EXECUTIVE SALARIES AT STATE
COMPANIES

Reftel: Belgrade 1243

SUMMARY
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1. The Serbian government recommended a cap on state-owned
companies (SOC) managing board members' salaries and the public
disclosure of SOC executive salaries in response to two high profile
scandals in which general managers of SOCs received high salaries
and bonuses. On November 6, the government approved a
recommendation that would cap board members' salaries at $500 (the
average salary in Serbia in October 2008) and at $750 and $600 for
board presidents and vice-presidents, respectively. The government
plans a similar recommendation for SOC managers. The
recommendations were positive steps toward reducing state
expenditures during the financial crisis and increased transparency.
The attempt at transparency notwithstanding, cronyism and misuse of
SOC monies for party interests are still prevalent. End Summary.

SALARY SCANDALS PROMPTS GOVERNMENT INVOLVEMENT
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2. Weeks before the November scandal and resignation of Belgrade
Airport General Manager Bojan Kristo hit the press and brought
public scorn against high paid executives of state-owned companies
(SOC),the government had already approved a recommendation to reign
in SOC executive salaries (Reftel). The recommendation came amid
public pressure after Milenko Sarancic, the recently dismissed
director of SOC Zeleznice Srbije (Railroads of Serbia),raised his
last salary payment in October from $1,700 to $9,000. Zeleznice
Srbije is a heavily subsidized and highly indebted SOC. On November
6, the government approve a recommendation to cap monthly salaries
of SOC board of directors (BoD) members at the October 2008 net
average of $500. Presidents and vice-presidents of the BoD would
receive $750 and $600, respectively, plus an eight percent
adjustment for projected inflation. As a comparison, the BoD
president of state-owned oil company NIS earns $9,900 while the
Prime Minister reportedly earns only $1,700. The government's
recommendation would go into effect January 2009. Immediately after
the airport scandal, the government called for another
recommendation that would require SOCs to disclose salary
information to the government. Currently salary information is
classified as an "official secret." Several SOCs including Telekom
Srbija announced they would lower board member and executive
salaries in response to the recommendation. The government plans to
approve a similar recommendation for SOC managers' salaries.


3. On the other hand, the salaries of government ministers are
transparent and are three times higher than the average net salary
in Serbia. The prime minister has the highest salary of $1,700,
followed by the deputy prime ministers with $1,500 and ministers
with $1,450. Although ministers' salaries are relatively high by
Serbian standards, in most cases their public salaries are not their
main source of income. Most ministers have side businesses that
often carry conflicts of interest.


4. Sasa Mogic, Cabinet Chief at the Ministry of State
Administration and Self Government, told us on December 3 that the
government legally did not have the power to set SOC board or
executive salaries, but had the authority to approve or reject
companies' annual budgets. Therefore, the government could only
indirectly affect salaries. The recommendations, however, sent the
message to SOC executives to act responsibly during this difficult
financial period. Mogic estimated that savings from lower BoD
salaries could reach $14 million annually. Mogic also said the
government would suggest that SOCs adopted internal regulations on
official phone, car, and apartment use. Companies would be required
to submit regular reports on operations to the government for budget
adjustment.




SOCs HELP FUND POLITICAL PARTY
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5. Transparency International Program Director Nemanja Nenadic told
us on December 4 that the government's reactions were positive steps
toward reducing spending during the financial crisis. However,
Nenadic believed these reactions did not provide a solution to the
lack of professionalization of these companies, which should be the
long-term goal. He confirmed speculation that politically appointed
directors and BoD members were required to tithe, on average, 10% of
their salaries to their party as membership fee. Nenadic also said
cronyism, misuse of SOC funds, and abuse of company benefits for
party interests remained unaddressed.

Comment
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6. The government's attempt to cap executive salaries and introduce
more controls in SOC is a positive step toward more transparency and
state savings, especially during the current economic crisis. As
the reality and consequences of the crisis sets in, the government
may target controversial wasteful spending as low hanging fruit, in
a show of solidarity with the public. In the short-term, amid
public pressure, the recommendation will reduce SOC costs. In the
long-run, however, low executive compensation will make it hard to
attract high-quality management talent to run state firms. End
Comment.

MUNTER