COMPENSATION, RETENTION & COMPETITIVE ADVANTAGE

Recent compensation and benefit trends in China

By Jim Leininger, General Manager of Watson Wyatt Beijing Office

China’s labor market is one of the most challenging in the world, and many companies list human resources as their top operating issue in China, largely because of rising labor costs and high turnover rates.

A motto Staples University (Staples U) has adopted is to “Tell them early, tell them often, tell them again.” Communication is important to not only the learning organization, but also the organization as a whole. This communication can be via email, a company newsletter, or on available web space.

When Mars was in the process of launching their corporate university, they used communications of all sorts – including meetings with managers and employees at all levels – to explain in detail what the new organization was going to mean to the company. Even though Mars U started with a clear mandate from its CEO and senior leaders, that wouldn’t guarantee acceptance of the new entity and its very different view of learning without the added targeted effort.

Indeed, mainland China’s turnover rate has remained one of the highest in Asia, and the figure for 2006—14.2 percent—is no exception. Only Hong Kong, recently emerging from an economic slump that bottled up turnover for several years, has a turnover rate higher than that of mainland China. In addition, over the last four years, salaries have risen around 8 percent annually. These increases, coupled with consistently low inflation, give China the highest wage inflation rate in the Asia-Pacific region.

Two trends drive the consistently large salary increases and high turnover rates. First, foreign companies continue to invest heavily in China, and demand for talent remains high. Second, as first-tier Chinese companies transform their businesses to compete on the global stage, their expectations for talent are beginning to match those of foreign companies. The result is a persistently tight labor market for first-tier multinational and domestic companies operating in China.

A related trend is increasing employee dissatisfaction with their work experience. Watson Wyatt Worldwide’s 2006–07 WorkChina Employee Attitude Survey, which polled employees in 100 companies in China, shows that employees’ views of their employers are becoming less favorable. The latest survey results indicate that only 23 percent of employees are satisfied with their compensation and benefits. Employees who intend to leave their company cite compensation as the top reason behind their decision (see Figure 1). Moreover, assessments of all major aspects of the workplace have deteriorated in the last four years (see Table 1).

Annual salary rises

Average annual salary hikes remain high for first-tier foreign and domestic companies in China. Most industries in China are forecasting 8–11 percent salary increases for 2007, with the financial services sector witnessing the biggest jumps (see Figure 2). As in previous years, raises for managers will be as high as, or even higher than, those for other employees.

Turnover rates

Turnover rates are expected to remain high in China’s major cities, with rates of 13–15 percent common, and even higher rates expected in financial services (see Figure 3). Once again, turnover at the management level will likely be higher than at lower levels.

Differences by Location

In the past, salary differences among the four largest labor markets—Beijing, Shanghai, Guangzhou, and Shenzhen—were significant. Currently, wages have reached virtual parity in these major cities. Multinational corporations typically unify compensation packages for employees in similar positions across firsttier cities. Wages are lower in second- and third-tier cities, however (see Map).

Position premiums

In line with trends over the last two to three years, certain jobs in China are paid a premium over other jobs at the same grade level. Research and development, sales, marketing, and business development positions currently command the highest pay (see Figure 4).

Increase in variable pay

The amount of variable pay—annual bonuses that reflect performance—has gradually increased in recent years. For most companies, the amount of variable pay at the senior level will be equivalent to nearly two months’ salary (see Figure 5). Variable pay in some industries, such as financial services, is much higher.

Benefits

In an effort to improve China’s social security system, the PRC government recently issued a regulation that encourages employers and employees to set up individual retirement accounts. In addition to retirement, typical supplementary benefits include medical, housing, and education assistance (see Table 2). Statutory benefit payments are capped at three times the average earnings in a particular city, which means that the cost of benefits as a percentage of salary is significantly higher for low-salary employees (see Table 3).