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PetroChina – performance within state-owned enterprises

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There is no doubt that all companies aim to increase their overall performance and boost their revenues, no matter if they sell dairy products, second-hand furniture or petroleum products. The solution lies in careful planning and resource allocation, which automatically involves setting targets, drafting objectives and imposing goals.

PetroChina Company Limited is part of the China National Petroleum Corporation (CNPC) and PRC’s biggest oil and gas producer. It is also one of the world’s leading companies, according to Forbes Magazine and even if it is currently suffering from recent corruption scandals and oil price declines, this state-owned company is highly appreciated for employing a very accurate and efficient performance evaluation system.

A very comprehensive article from Jiang, Lin and Yu,  describes how PetroChina uses KPIs to evaluate the performance within each regional company and for each product line company.  But what caught my attention is the following innovative document that the company uses for enhancing performance: the performance contract.

No, it’s not a contract like the one artists sign before a concert or event, even if these have the same label; this contract serves as a stimulus to ensure that the overall strategy is carried out. Basically, all managers in nationwide companies, regional companies, senior management and several functional departments are required to sign this document, which uses specific KPIs as key instruments and emphasizes meeting budget targets.

For nationwide companies, KPI targets are discussed and then set by the CEO, senior management and the company’s general manager before being sent for approval to the budget commission and the board of directors.

As predicted, the KPI target values for an individual regional company are later jointly determined by the general manager of the nationwide company and that particular company’s top management. All values are clearly mentioned in these performance contracts, which are first signed by the board of directors and then by managers from nationwide and regional companies.

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Based on these, you would expect to have a rigid decision-making hierarchy, with most of the power being consolidated at the very top, which admittedly is pretty common in the Chinese business environment.

However, PetroChina involves its middle and low management officials in the budgeting process – managers who submit the annual budget drafts to top level decision-makers, which include specific annual targets, goals and action programs for each product line company. It seems that top-down decision-making is not always the answer.

The budget implementation phase begins with distributing profit plans, continues with educating managers and other staff, and ends with execution. The control process plays a significant role here and includes results reporting, analyzing budget variances and measuring performance. For the latter to take place, the finance and accounting departments compile and analyze the achievement of the KPI targets per month and year-to-date, comparing current performance with the desired state.

When it comes to compensation, PetroChina proves to be pretty innovative again; besides their fixed salary, a senior manager is awarded a performance bonus, which is offered at the end of the year and depends on his/her performance evaluation.

The performance contract score for each unit has two components, namely contribution score and actual performance score, each having interesting calculation formulas. In brief, these two scores added together represent the performance contract score for a senior manager, 130 points being the maximum allowable score.

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If the manager scores 100 points, he will earn the standard bonus settled prior to deciding budgets. If the performance contract score is above 100, the bonus will increase by 2% for each additional point. In the same way, the bonus will decrease by the same percentage if the score is below 100, but if a company had a net loss that year, the bonus will be reduced by 3%.

For scoring below 80 points, the manager will get nothing; additionally, when this happens, higher-level senior managers will want to have a meeting in order to find ways of urgent improvement. A score below 60 points entails removal from that leadership position, while refusing to sign the performance contract will be regarded as resigning from the job.

 This scheme proves to be highly efficient and managers have substantially improved their work performance. Driven by the result of this KPI-based performance contract, PetroChina’s leaders plan to implement a Balanced Scorecard system, not only to monitor organizational performance, but also to align their business activities to the organization’s vision and strategy.

It remains to be seen if PetroChina’s efforts in this direction will deliver the expected outcome. However, the company has realized the importance of effective communication and top management involvement for employee engagement. In the same time, careful planning proves to be essential for this organization’s well-being and let’s admit it, proper motivation leads to benefits. For both parties, of course.

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