Compensation Complexities in China

Challenges Corporates Operating in China Continue to Face

• Companies continue to see a shortage of skilled HR professionals (particularly Talent Acquisition and Staffing professionals at the senior manager and director level) while pay continues to trend up in 2012.
• Local talent is beginning to cost as much, or more than, foreign HR talent. Locals are often demanding higher base salaries and a “local plus” package. The expectation when transitioning jobs is high with often 20% increases to move.
• The estimated merit increase for 2012 is 9-10% not including promotional increment.
• The understanding of various pay structures including local package vs. expatriate vs. ‘local plus’. In the Executive HR space we have recently found a portion of organisations offering their key HR talent a “net tax package”. Attracting and retaining HR talent from well-developed cities to work in less developed /inland cities brings the issue of domestic vs. "expat" Chinese talent.
• The geographic position of a role impacts the compensation level significantly. When a company establishes their pay structure they will generally group tier one cities together i.e. Shanghai and Beijing, they will then set their tier 2 cities at approximately 80% of the salary of tier 1 cities.

Trends

• Many multinational employers are advising us that when conducting in-house and external surveys, they have been disconcerted to find that an increasingly high segment of HR professionals are showing a clear preference to join SOE’s over foreign multinationals — quite different to the situation five or ten years ago. Interestingly, contrary to the abovementioned, we find that where companies are seeking to expand into tier two, three or four cities it has been proven not easy to relocate people in China. It stands to reason that pay incentives are often offered as a premium.
• How the geographic location of a role can impact on pay in China is worth an additional mention. An issue worth considering is whether or not the definition of tier 1 cities is still limited to Shanghai and Beijing. One Executive HR VP suggests that geographic pay differences should be taken into account by company business strategy and with reference to cost of living in various locations as an important consideration. For example, executive pay in Shanghai and Suzhou and Hangzhou may be viewed as equal where Suzhou has been identified as a strategic site for business and taking into account the recent increased cost of living.
• There is a trend to convert and combine the 13th month pay (or year-end bonus) to base pay to mitigate the impact of income tax and to reduce administrative complications. In 2011, Beijing seems to be the location where pay is highest among multinationals, followed by Shanghai. Guangzhou is much lower because of the fact that there are fewer senior jobs available in that market.
• Compensation package components in China remain complicated, however we are noticing that companies are increasingly in favour of making the proportion of the variable bonus larger to motivate higher performance and reduce fixed compensation cost.
• Double digit salary increases have been the norm over the past five to six years.

Having considered the challenges and trends we are seeing in the China market in regards to HR talent, it brings us to consider some of the packages on offer in China. Local packages paid by local Chinese companies are driven by tax considerations due to the high marginal rates. The provision of housing has been the predominant tax effective vehicle. It is not uncommon for returning local Chinese HR hires from the U.S. or other foreign locations to be offered benefits typically reserved for expatriates i.e. education, home visits, net pay guarantees, etc. Local company packages may also include additional benefits for example; transportation allowances, meal allowances and business entertainment allowances. Variable pay components in the form of annual performance bonuses or stock options have been relatively limited, although some large state owned enterprises have been proactive about introducing these, especially when these companies have been listed on the Shanghai or Hong Kong stock exchanges. Local start-ups have also used stock and options to attract HR talent.

We continue to observe that many foreign multinational companies in China continue to simulate their home country compensation strategy. This flows through to and includes; performance salary increases, short term incentive bonuses, long term incentive sales compensation plans and stock. They generally compare their packages with multinational peers in their industry and don't reference to local companies in surveys. Local Chinese companies are less likely to participate in formal market surveys. We have witnessed foreign multinationals having particular success in securing top HR talent for their business in China where they are effective in offering flexibility in their packages and are able to show that they are not constrained by global policy.

2012 may bring some changes with the state of the global economy. We expect that where multinational companies have a substantial exposure to Europe in particular, they may be stringent on salary increases this year. In this case, they would run the risk of losing first-class HR people in China while competition remains high. Our view is that we will continue to witness compensation strategy high on the agenda of multinationals operating in China, especially given the importance and complexities of that market.