The true cost of China labour

ONE OF THE major reasons for China's sustained economic boom has been the ready supply of low-cost labour. However, times are changing, with average urban salaries in China rising faster than anywhere in Asia and employers restructuring packages to reduce staff turnover. An early sign of this trend was in salaries for middle- to senior-level executives. A shortage of senior executives at multinational corporations over the past 10 years has been exacerbated by the entry of state-owned enterprises (SOEs) and private Chinese companies into the global marketplace. This has inevitably led to fierce competition for talent, with corporations paying 'aggressively' for experienced managers, according to Vincent Gauthier, general manager Hong Kong at Hewitt Associates, one of the world's foremost providers of human resources (HR) consulting and outsourcing services. In the past couple of years, as more multinationals and component manufacturers have either entered the market or expanded their China operations, competition for good staff has intensified. SOEs, in particular, have been forced to ramp up their HR practices and management processes, and step up their search for recruits with a college education, a few years' solid work experience and English skills good enough to foster easy interaction with business contacts worldwide. 'There is a relatively small pool of people like that,' said Mr Gauthier. 'You are mainly looking at 25- to 40-year-olds and, even though the Chinese education system is churning out graduates, there are few MBA programmes and the numbers matching the generally required criteria are still too few.' Inevitably, this has increased voluntary staff turnover rates. It has also led to average annual salary increases of 6 to 10 per cent for mid-ranking employees and more than 10 per cent for senior-level managers. These rises have come against a consumer price index that has remained flat, or increased only in small increments, over the past seven years. Mr Gauthier said salary and benefits packages on the mainland tended to be complex. Typically, staff are paid monthly, and guaranteed 13 months' pay and allowances to cover mobile phone expenses, meals, housing and travel. 'If you looked at overall pay practices in China in the past 10 to 15 years, you would see low base pay but up to 30 types of allowance,' Mr Gauthier said. 'A lot of that came from the impression that allowances are non-taxable - today that is not true - and as a legacy of the socialist system, when the company took care of staff's needs, sometimes even providing an allowance for warm clothing in winter.' Most multinationals operating in China have tried to break away from paying allowances because of the system's complexity and local variations, but they continue to pay some. For example, a remuneration package might be split into base pay of 70 per cent and three allowances each representing about 10 per cent of the total. 'There is still a psychological element in doing it this way. The western notion of employees saying 'give me the cash and I'll decide' is relatively new to China,' said Mr Gauthier. The other element in a standard package is the variable bonus or sales-related commission, which may be paid quarterly or yearly. With the gradual adoption of results-based business practices, these are increasingly being tied to performance and longer-term targets, which may even be assessed over a period longer than a year. Mr Gauthier described the scheme for calculating mandatory benefits determined by national labour law and local government bodies as 'an absolute nightmare, especially if you manage a business with several locations'. The scheme is based on a varying scale of employer and employee percentage contributions to social funds, which support pension, medical, unemployment, job-related injury and maternity benefits. The complexity derives from the fact that the levels of contributions required differ from city to city and are based on a 'city average wage' determined by the local authorities. In some cases contributions are capped. To complicate matters, some contributions are made by employers only and, depending on the category, are either for an individual's account or part of the social pool. Furthermore, some cities enforce the laws strictly while others do not. Employers unfamiliar with the system should research the applicable rules carefully and assume all mandatory contributions must be paid in full. At this point, however, with long-term demands likely to be placed on the social security system, it remains uncertain to what extent younger employees will benefit from payments made on their behalf. Because of this and the fierce competition for talent, many companies now recognise the need to provide something extra. 'The trend at multinationals, which need to hold on to talent, is to offer supplementary benefits, usually as pension, housing or savings plans,' Mr Gauthier said. Related to this, the Chinese government has come up with the idea of the enterprise annuity, set out in the State Council's Document 26, which spells out how companies can establish supplementary pension plans. This will make it possible for employers to invest with authorised fund management companies and receive tax breaks for doing so. The intention is not to replace the national system but develop a 'three-pillar' strategy of mandatory contributions, the enterprise annuity and individual savings. 'With the size and ageing of China's population, mandatory contributions will ultimately prove inadequate, so this is an attempt to shift some of the burden to the employers,' Mr Gauthier said. 'Companies already in China should be well aware of this, but those entering the market often don't understand the full issues until they start to hire staff. Then the complications and extra costs become clear. If multinationals don't do their homework, they can get into trouble.' In addition, it has become clear that pay and benefits form only one of the elements that drive retention in such a dynamic market. Qualified staff are well aware of their value and employers have responded by putting greater emphasis on opportunities for learning and development, wider job responsibilities and promotions. 'Components such as respect from superiors and the ability to influence also play a part in creating greater loyalty,' Mr Gauthier said. But he also said many employees in China had become incredibly demanding and expected an enormous amount from their employers. 'Sometimes the demands are so outrageous companies just have to tell them 'no' and accept they cannot be retained.' Other broad trends he sees in the China employment market, as overseas companies transfer more functions to offices there, include a greater demand for people in creative positions, engineering, research and development, and marketing. 'For cost reasons, there are also signs of a move away from first-tier cities to second- or third-tier and inland locations, so wage increases can be expected there,' he said. SECRETS OF SUCCESS To flourish a company needs: Quality leadership Motivated employees To acquire and retain good staff To develop and manage talent TOTAL REWARDS Remuneration Salary and allowances Salary sacrifice benefits Short-term incentives Long-term incentives Benefits Retirement plans Health and wellness benefits Company/third-party product discounts Non-cash recognition Cash recognition awards Work Environment Intrinsic motivation Opportunity and recognition Quality of life Relationships HR policies and procedures