Annual EBHS Conference, 39th Annual Economic and Business History Society Conference

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How did Chinese Shanxi piaohao solve the commitment problem in their long distance business? – an examination of piaohao’s management structure
Meng Wu

Last modified: 2014-03-10

Abstract


Shanxi piaohao was a type of Chinese indigenous financial institution which was established by Shanxi merchants in the 1820s in Shanxi province. As the Chinese largest and first remittance firms, Shanxi piaohao successfully set up nationwide and overseas branches. In an environment where there was no legislation protecting shareholders’ capital and deposit, an effective management mechanism to regulate distant employees’ behaviour is essential for piaohao success.

Against the backdrop of this background, my thesis examines how Shanxi piaohao solved the commitment problem in their long distance business. To do this, we investigate piaohao’s governance and incentive structure respectively. In terms of their governance mechanism, piaohao merchants designed a strict recruit system to ensure all their applicants were from Shanxi province, if applicants’ ancestors had immoral behaviours before, they would not be employed. Moreover, applicants needed two guarantors to ensure that if they were found cheating behaviours in the future, their guarantors would pay the loss employees caused to piaohao.

Besides a stringent recruit system, piaohao merchants also drafted comprehensive rules. These rules stated that employees need to live and dine in the office; they could not marry or bring their families to the branch office; and their salaries were paid directly to their families in Shanxi province. In addition, piaohao merchants applied a multilateral punishment mechanism, which means if any employee was found cheating behaviour and dismissed by one piaohao, other piaohao would not hire him in the future.

Although piaohao merchants designed an austere governance structure, they also invented an attractive incentive structure to encourage staff to work hard. Employees were paid in low salaries when they started to work, however, with the growth years of work and good performance, employees began to earn the expertise shares, these shares increased with the years employees worked in piaohao. If employees retired in good reputation, they got dead shares which paid them dividends continuously several years after retirement. The wage gap ratio between employees who had highest grade expertise shares and who only had salary could be as large as 1:300. In piaohao most profitable years, the income for employees who had highest grade expertise shares was equivalent to stipulated salaries for the first-rank Qing civil officials.

In a word, by creating a rigid recruit system and strict regulations, piaohao merchants lowered the risk of distant employees’ opportunistic behaviours. Employing a multilateral punishment mechanism further encouraged employees to be loyal to piaohao for their future career opportunities. By designing a competent income structure, piaohao merchants incentivised employees to make efforts to earn better and stable income.

Shanxi piaohao declined in the 1910s in the competition with foreign banks and government banks, but their management structure is unique in Chinese banking history and is intriguing in the study of human resource management. Employing comprehensive primary source and critical analysis, my study will be the first English empirical research on piaohao’s management structure and is the contribution to the scholarship.