Spotlight on China: HR and Remuneration Challenges

By Olivier Meier, Mercer

This article discusses current HR and remuneration challenges in China, paying particular attention to the relationship between local and expatriate workers and the various categories in between. It also examines the impact for expatriates of a troubling and very visible issue: pollution.

Setting the Scene: China in 2017

While comparatively immune to the financial crisis that affected so many western countries in recent years, the Chinese economy has been slowing down in the past three years and GDP is forecasted to be around 6.5% in 2017. It is, however, undergoing a more fundamental transformation as it shifts from low cost manufacturing to high tech and from being purely an export-driven manufacturing market to being a fast-growing consumer market.

These changes will have implications for HR in that they will affect salary increase trends and turnover rates. Apart from a dip in 2009, salary rises have been in the region of 6–7% in recent years, and estimates put them at 6.5% in 2017.¹ When compared with the prevailing inflation rate of roughly 2%, it becomes clear why China has grown so quickly: consumers’ purchasing power is increasing steadily. At the same time, voluntary staff turnover is extremely high among local nationals at over 10% within the past few years, a rate that is comparable to other fast developing Asian countries but is roughly three times the European level and more than twice of the United States. A growing purchasing power and a wealth of career opportunities lead to higher employee expectations and talent retention issues.

The battle for talent is intense everywhere, but in China it has three principal types of contenders:

1. State-owned enterprises (SOEs). These well-established companies offer a secure, traditional career path as well as comprehensive benefits. They have attempted to expand globally in recent times, but success has been mixed. While some corporations have thrived, others have struggled to adapt to an international working culture and are often let down by underdeveloped HR provision.
2. Privately owned enterprises (POEs). With an entrepreneurial approach and aggressive, flexible salary structures, POEs are nimble and attract the best employees across industries.
3. Foreign multinational corporations (MNCs). Operating on a global platform, these businesses offer a diverse and inclusive working culture as well as training and development opportunities. MNCs sometimes struggle to adapt to the fast-paced pay and promotion culture in China, and local workers often fear of hitting a “bamboo ceiling,” where expatriates are likely to land roles ahead of them.

Despite increasingly feverish corporate searches for the best and brightest, Chinese businesses are facing a talent paradox, in which availability and employability clash. Despite a massive increase in the number of students graduating from Chinese universities over the past few years, almost half of the people who entered the job market were expected to have difficulties finding work as they lacked the key skills needed by employers. An aging workforce adds another layer of complexity and in the coming years it is expected that there will be significant talent shortages on both vocational and educational levels.

An Evolution in the Mobile Workforce

The composition of China’s mobile workforce is changing. While expatriates remain a significant part of the contingent of non-local workers there, the number of locally hired foreigners (LHFs) and returnees has been rising steadily over the years.² That trend is likely to continue in the medium term, as businesses seek to increase local expertise but also run more leanly. Expatriates are typically on expensive home balance-sheet packages and Local-remuneration approaches or Local Plus options; if operated correctly, these are often more cost-effective.

Local Workers

China is no longer a low cost location and it increasingly faces stiff competition from its neighbors for both market share and attractiveness as an offshoring destination. A recent Mercer Total Remuneration Survey revealed that for the lowest job levels, compensation levels in China, Thailand, and the Philippines are not too far apart. For more specialist roles, salaries increase across the board, making China more costly than several other developing markets in Asia and are particularly attractive at senior management level and beyond, when they reach or even exceed the salary levels in more mature economies such as the United States or Europe.

Pay progression in China is more fast-paced than in western countries. Local employees expect their salary to increase considerably every time they take on a new position, and as frequently done, they could enjoy pay raises 15–18 times over the course of their career, compared with just four or five times in Europe and the United States. Consequently, foreign companies must develop salary structures flexible enough to cope with these expectations if they want to retain local talent. Competitive benefit packages can be helpful in this regard, particularly if they complement state schemes (pension), are visible, and thus confer status (company cars or smartphones), or assist the family (school fees), but in general are no substitute for the vertical career progression Chinese staff demand and the ever increasing salary expectations.

MNCs must also consider the impact of these issues on outbound Chinese expatriates. At the lower position levels, Chinese expatriates relocated to high paying countries might be at a considerable disadvantage in comparison to their host country peers in terms of purchasing power, and employers may need to supplement the income of these junior workers. The picture looks much brighter for Chinese assignees on traditional home-based expatriate packages by managerial level, however, when their host spendable figure (comprised of spendable income plus cost of living allowance) increases considerably and can sometimes exceed what local nationals are earning even in relatively high paying countries. For their employers, the costs can be very high, a situation increasingly typical in many emerging markets. A Chinese expatriate, depending on his level, can be a low cost resource or on the contrary a very costly employee to relocate, which is prompting companies to explore different types of mobility remuneration approaches to address these different scenarios. 

Returnees and Locally Hired Foreigners

Given that western workers can find it challenging to integrate into local Chinese culture, particularly given the language barrier, returnees and locally hired foreigners tick many boxes for recruiters.

Returnees are particularly popular but are diverse as a group because most have been educated at western university but not all will have extensive work experience. They are likely to have expectations regarding pay, but only those with significant expertise will receive a premium (the average pay for these workers is only slightly higher than locals’, in fact).

Pay approaches for returnees and LHFs share some characteristics. A majority of returnees are on local policies with local salary and benefits, while the minority are employed on variations of Local Plus. While recent research shows that the ad hoc approaches to pay are common for LHFs, and that a local policy is sometimes viewed as a viable option, variations of Local Plus are commonly deployed. In these cases, “premium” benefits, such as assistance with education and housing costs, may form part of the package,³ but employers need to establish a clear logic for the “plus” components and apply that logic consistently in keeping with the principal aim of facilitating relocation.

“Traditional” Expatriates

Despite the rise of the returnees and LHFs, “traditional” expatriates still play an important role in China and are still commonly used for setting up new operations (particularly in the less expensive “tier 2” locations outside Beijing and Shanghai) and skills transfers, but the business case for deploying them needs to be watertight. The end goals of their assignments also need to be defined carefully. If, for example, their role will ultimately be localized, appropriate training and transition must be built in for their successors.

A majority of expats are paid on a home balance-sheet approach,4 but packages vary widely. The provision of a comprehensive set of allowances and benefits is still prevalent, particularly for issues such as housing, school fees, and home leave; but hardship premiums are decreasing due to improvements in local living standards. That said, this improvement in quality of living is being challenged by the worrying and unavoidable impact of pollution in Chinese cities. Pollution has been a hot-button issue in recent years. Local and expatriate workers are concerned about worsening air quality and in some cases, mobility is being affected; a recent Mercer Mini Survey revealed that 12% of companies report that their assignees are reluctant to complete their deployment and, more worryingly, that 24% have employees declining to relocate to China.5 65% of employers surveyed were yet to actively respond to pollution challenges and 17% were assessing the situation, but 18% were taking steps to lessen employee concern. A majority of these companies were providing additional practical benefits and services, such as air purifiers or filters at home, work, or school, as well as providing face masks. When compared with personal health and the safety of their family, money is not the silver bullet in this scenario for assignees and few companies were actually modifying allowances (4% of companies did so) or offering additional financial incentives. The most successful approach is to provide practical support, information, and proactive communication if assignees and their families are to finish their assignment in China successfully.

Contact the author: olivier.meier@mercer.com