Options for keeping mainland workers happy
For many foreign companies in mainland China, human-resources management is one of the most challenging issues they face. While fresh university graduates are plentiful, good middle managers are hard to find and getting ever more expensive to hire.
Meanwhile, in certain sectors such as financial services, near-double-digit annual wage rises have had little effect in improving workers' performance.
The fundamental reason behind this talent gap is the combination of a booming economy and a mismatch between jobs and skills. Unsurprisingly, foreign companies are looking at every possible means to foster staff loyalty and raise their retention rates - including granting stock options to all employees. According to media reports, the US coffee shop chain Starbucks is about to offer share options to every one of its 4,000 mainland Chinese workers. As generous as this may sound, however, Chinese employees may not find stock options to be the ultimate reward.
Heightened competition among businesses in China is exacerbating the skills-mismatch predicament at many multinational corporations, not unlike in Southeast Asian countries in the 1990s.
But China's unique history and demographic factors also play a significant role. Universities were shut during the Cultural Revolution, meaning no educated people entered the workforce for a whole decade. In contrast, employers complain that many young people today take China's economic progress for granted and lack a strong work ethic. Universities and their state paymasters also place more emphasis on the quantity rather than the quality of graduates.
According to Mercer, a human-resources consulting firm, the salaries of Chinese staff working for multinationals have grown at an annual rate of 7 to 9 per cent since 2002. Apart from the high demand for talent, an often-ignored factor behind steep pay rises is tax: progressive personal tax rates are the highest in Asia. So it is only rational for employees to focus more on their after-tax, rather than gross, incomes. Share options seem to make particularly good sense because deferred income is preferable to any earnings that current taxes can bite into. Meanwhile, options could be used by state-owned enterprises as a tool to give workers more sense of ownership, and hasten corporate restructuring by aligning the interests of employees and shareholders.
Employee stock options, however, should not be seen as a silver bullet. For example, Chinese staff who are risk-averse would not welcome them unless they are working at rapidly growing companies.
Formulating options on the mainland is also more complicated than in western countries. Multinationals must take into account the fact that employees' exercising of their share options will entail purchases of the underlying securities in overseas stock markets. This is problematic, given the capital controls and tax laws. For now, multinationals will have to devise complicated methods to avoid violating the draconian capital-account restrictions.
The most effective way to retain employees would be to localise Chinese operations more rapidly. This means not just moving more parts of the supply chain to China and refraining from hiring only English speakers. It also means smashing the glass ceiling of promotion facing local staff.
A great number of Chinese staff in foreign companies want the chance to rise up the corporate hierarchy more quickly and more transparently. If multinationals treat local talent as second class, reserving the best jobs for expatriates, no self-respecting Chinese worker with marketable skills will stick around simply waiting for their share options.
Steven Sitao Xu is the Economist Intelligence Unit Corporate Network's director of advisory services in China
