Retaining Chinese Employees

Retaining Chinese Employees

“How do you keep and maintain a stable and qualified workforce?” asked one expatriate general manager, citing his prime concerns for the joint venture he runs. “How can we attract and retain workers with new ideas?”

If these questions are prime concerns for a general manager, they dominate the working lives of human resources (HR) professionals. The three basic tasks of HR managers — recruitment (see Recruiting the Right People), retention, and compensation and benefits (CnB) — are as fundamental in China as anywhere. But HR managers in foreign-invested enterprises (FIEs) in China have had to devise creative ways to carry them out to remain competitive in China’s tight market for local managerial talent.

Retention in particular is the lynchpin of a company’s HR strategy and is crucial to building an effective workforce and a thriving business. It is vital to short- and long-term stability, efficient day-to-day functioning, and the achievement of long-term goals such as localization — the replacement of expatriates with local Chinese managers.

Career development and other concrete retention tools

Career development programs are key retention tools that may seem nebulous but are concrete in any company able to keep its best managers; in a Korn Ferry International study conducted in Beijing in early 2001, it ranked first on local managers’ lists of concerns.

“Career development is very important,” said one HR manager. “But usually the bigger the organization, the less attention is given to certain personnel. They start to feel neglected. Usually the biggest problem is with mid-level personnel — they are the biggest group you really want to retain.”

For many young Chinese managers, career development is a new and alien concept, and both manager and company benefit from regularly investing time and effort in it. The most effective career development plans are tailored to individuals. Just notifying employees that they have a lot of potential and will receive special training and attention is a valuable retention tool in itself.

Successful plans also spell out exactly how employees can fulfill the ambitions the company has for them. Vague assertions such as “I want you to be regional general manager in two years” won’t work, for instance. Instead, the company must tell targeted employees what it will do to support them in attaining such goals. The company must also provide regular feedback, from multiple sources, as to the progress employees are making toward their goals. The goals should be reachable but also challenging. Many HR managers argue that it is better to promote people before they are ready and give them the additional support they need in a new position than to wait until they are past ready, and perhaps getting restless.

Other elements of a sincere career development program for higher-echelon managers are training and overseas assignments. Several HR managers from US multinationals mentioned the HSBC training program as a comprehensive retention model. The program includes 10 weeks of training in Britain for new managers, with fol low-up training in Hong Kong over a three-year period. HSBC gives participants bonuses, spread out over a year, after they complete the program and return to China. HSBC also offers these employees the opportunity to borrow money to purchase homes at below-market interest rates.

“This is very good,” enthused one HR manager at a US oil company. “Everybody will want to be one of their trainees. It will make them think that the company really cares about them — they won’t want to leave.”

One US multinational with significant investments in China tracks employees with high potential by periodically evaluating them on the basis of job accomplishment, education, performance, competency, and the like. If they are performing well, they are given a three-month “professional development assignment” in an overseas office. The same multinational runs a second, longer program for promising Chinese managers that involves support for the development of a close working relationship with an expatriate in China and one or two years of work in an overseas offi ce.

Looking ahead, both Watson Wyatt Worldwide and Korn Ferry predict an increase in “personalized” retention efforts that include tailored employment packages, since what will retain different people varies greatly by age, gender, position, and personality, among other factors. To keep the packages fair and manageable, companies usually allocate them by grade levels. Executive MBAs are usually the major retention tool that companies give out exclusively on an individual basis. Designing and maintaining such tailored packages takes significant effort, but can save resources in the long run by keeping people with the company.

A look at the package

Last but not least of the tangible retention tools is, of course, financial compensation. The compensation portion of C&B includes salary, bonuses, stock options, incentive schemes, and deferred compensation plans. Competitive compensation is simply an assumed component of both recruitment and retention — to attract and retain the best workers, every company has to be within the same salary range. But competitive financial compensation is an effective retention tool only when used in combination with many other tangible — and intangible — retention techniques. High salary alone is simply not enough to retain employees in the increasingly sophisticated Chinese job market.

A joint venture is likely to offer lower salaries and higher non-cash benefits than a wholly foreign-owned enterprise (WFOE) because of the influence of the Chinese partner, which is accustomed to this compensation structure (see Human resources and the Transition to Sole Foreign Ownership). Indeed, even in a WFOE, the benefits side of the C&B package for Chinese employees is much more than the faithful administration of insurance and other miscellaneous benefits regardless of investment structure. Joint ventures and WFOEs alike have to abide by all the statutory regulations concerning social insurance, whereas representative offices pay the Foreign Enterprise Service Corp. (FESCO) or a similar employment agency, which is then supposed to take care of their employees’ social insurance needs.

Companies must clearly articulate each and every C&B package and explain its benefits to recruits and current employees alike. Some HR departments make the mistake of assuming that employees read and understand the various e-mails or notices they send out regarding benefits. In fact, many young people, in particular, are so focused on cash that the mere mention of a pension fund is likely to make their eyes glaze over. A growing number of HR departments thus teach employees about the various aspects of compensation and explain, for instance, how the employee will ultimately benefit more from a total compensation package than from a package that is solely or primarily cash based. These HR departments also explain the company’s own reasons for preferring a total compensation philosophy. Some comparison to compensation packages at other companies in the industry is useful as a frame of reference, particularly given the fact that salary and benefits information is widely shared in China. C&B packages are likely to be complicated and continue to evolve, requiring creativity and responsiveness on the part of their designers and administrators.

Compensation

Some parts of a compensation package are more effective than others in retaining employees.

• Salary
  Salary, of course, is the portion of the compensation package to which employees look first. Salary levels vary substantially by region, company, position, and investment type, but representative office salaries are generally the highest and joint-venture salaries the lowest. Salary surveys are conducted regularly in major cities by management consulting, HR, and other organizations.

  Compensation naturally differs from place to place since the cost of living varies so much from a coastal city like Shanghai to an interior city such as Xi’an, Shaanxi Province, not to mention smaller, third-tier cities like Xuzhou, Jiangsu Province. Most companies either abide by the local market when setting salaries or establish a general compensation and pay structure that carves China into first-, second-, and third-tier cities. Under this system, workers in a first-tier city would receive 100 percent of the salary scale while those in a second-tier city would get 80 percent and those in a third-tier city, 60 percent.

  One aspect of salary about which it is possible to generalize is salary inflation, the bane of FIEs. Salary inflation ran at nearly 30 percent in the mid-1990s but leveled off considerably during the deflationary period at the end of the decade. Salaries are once again on the rise, however, and companies are likely to be grappling with the trend for the foreseeable future. Watson Wyatt estimates that salary increases in 2001 will hit 7.5-8 percent, much higher than the economy’s current inflation rate of 1.2 percent. Indeed, the company’s annual salary survey already shows that salaries are up in 2001, with the highest salaries in Beijing, Shanghai, and in Guangzhou and Shenzhen, Guangdong Province. The highest paid positions generally fall into the categories of information technology, sales, marketing, and finance. Staving off salary increases is an uphill battle, one that can be won only through comprehensive benefits, generous incentives, and a work environment that is both challenging and supportive enough that your best employees simply don’t want to leave.

  A final salary trend worth noting is a move toward decentralized payment decisions that give individual business units more authority and flexibility in determining employee salaries. This more flexible approach is being applied to both direct and variable pay and can be seen as part of the move toward individualizing compensation packages.

• Bonuses
  A movement is currently under way to tie many aspects of compensation to performance as an incentive for employees to meet certain goals. Getting employees to accept performance-based compensation has not been easy, since bonuses in the PRC have long been viewed as entitlements rather than as true rewards for individual or company achievement. As companies gradually ratchet up the percentage of compensation tied to performance, however, employees are adapting. In areas such as sales, bonuses are particularly effective and are sometimes tied to additional incentives, such as even higher bonuses if the sales manager is able to collect cash on delivery. Other companies have introduced bonus schemes to reward employee s if they come up with creative ideas to reduce costs, improve safety conditions, or increase efficiency.
• Stock options
  Even before the international markets began their decline last year, most HR managers argued that the jury was still out when it came to evaluating the effectiveness of stock options. Options were perceived as useful in high-technology firms whose stock prices were skyrocketing. Unsurprisingly, the recent steep declines have been accompanied by a diminished enthusiasm about the value of stock options in retaining employees.

  “Stock options don’t really work with young people,” explained one HR manager. “Saying we’ll give it to you in five years doesn’t fly. They want options and cash.” Ongoing education about the value of stock options will likely increase their usefulness as a retention tool, particularly in the case of employees who have remained with a company for a few years and have seen the value of their stocks appreciate.
  Their efficacy as a retention tool aside, stock options increasingly form part of compensation packages at major multinationals. Corporate policy often dictates who receives stock options; in some companies all employees get options, no matter their level, while in other companies options are reserved for upper-level management. Most companies that give options award them according to position and performance.

  Awarding stock options to Chinese employees is complicated since foreign exchange restrictions prohibit PRC citizens from owning stocks listed overseas. However, companies have devised ways to issue stock shares to Chinese employees while technically abiding by PRC law. Under most plans — usually called “shadow” or “phantom” stock plans — employees never actually take possession of the stock and do not legally own it. Instead, the company issues employees a letter confirming the number of shares and the prices at which they were issued. The stocks are held in the United States, perhaps by a professional broker. After a specified vesting period, if employees should choose to cash in their options, the company or broker makes the transaction on the ir behalf and the company gives them the renminbi equivalent of profits from the sale. Taxes are deducted before employees receive the money and paid to the local tax bureau at a rate negotiated by the company.

• Golden handcuffs
  Golden handcuffs, or deferred compensation plans, are financial incentives given to employees if they stay with the company for a contractually specified length of time, such as an extra year’s salary after two years of employment. A few companies also extend golden handcuffs to employees who leave to earn an advanced degree at a top international university. The reasoning here is that no retention package can compete with a Harvard MBA, and young employees should not be discouraged from pursuing higher education. Rather than try to stop them, companies offer support by promising to reimburse their tuition if they return to the company for a specified number of years after completing their degree. This is a relatively new policy at most co mpanies and its effectiveness in bringing people back has yet to be measured. Other companies try to combat the problem of losing valued young managers to overseas study by sending them to school themselves, at established company programs or at universities with which the company has made special arrangements.
• Iron handcuffs
  Iron handcuffs are punitive fines levied on employees if they leave before their contracts expire. The terms of iron handcuffs are included in labor contracts or in training agreements appended to labor contracts. For instance, a company might require managers embarking on extended overseas training assignments to agree to reimburse the company for the cost of the training should they leave before the contract expires or, in the case of open contracts, before a specified amount of time. Or, a company that has helped employees obtain mortgages and is paying the interest may require them to repay the interest, plus penalty, if they leave the company before th e contract expires.

  The enforceability of such agreements used to be a major question but most HR managers report that in cities such as Beijing, Shanghai, and Guangzhou, employees are generally willing to abide by the terms, albeit with a bit of negotiation over, for instance, the amount of time they are given to reimburse funds or pay penalties. “If they refuse to [abide by the terms] you take them to court,” explained one HR manager. “But usually they won’t do this, they will — pay it will influence their future if they don’t.”

• Other incentives
  Incentive schemes are generally designed to spur productivity and encourage employees to remain with the company. They may involve cash, savings plans, travel, gift certificates, or in-kind rewards and may be given for anything from exceeding a sales target to coming up with a creative idea to working well as a team member. Incentive schemes that work best involve recognition as well as rewards and are tailored to individual preferences. Some HR managers tie the plans to business goals and design them i n consultation with the company’s business units.

Benefits

Although employees may not consider benefits to be a significant part of their total compensation, at a joint venture or a WFOE they may add up to as much as 50-70 percent of salary. Benefits are lower at representative offices, partly because their pay scales tend to be higher. At a state-owned enterprise (SOE), on the other hand, non-cash benefits may be triple an employee’s cash compensation. Benefits can be divided into two categories: social benefits and commercial benefits.

• Social benefits
  Social benefits consist of government-mandated payments into the government-run social insurance funds that currently include housing, pension, medical, unemployment, accident/disability, and maternity (see The CBR , May-June 2001, p.18). Regulations governing these funds, which were started on a local basis in 1995, vary widely from city to city, creating nightmares for HR and payroll divisions. Though the funds were created to alleviate the social welfare burden borne by enterprises, in reality most money for the new funds still comes from enterprises, with FIEs contributing a disproportionately high share. Contributions to the funds are split between employer and employee, with the local government setting the contribution percentages as well as the wage floors and ceilings upon which contribution levels are based. Many localities are phasing in contributions and will raise them in small increments every few years until they reach a final percentage.

  In Shanghai, for example, companies and employees each pay a percentage of their salary — with contribution percentages based on 300 percent of the average local wage — into four funds, with 7 percent from each going to housing, 2 percent from each going to medical, and 1 percent from each going to unemployment. Employees in Shanghai currently pay 6 percent into the pension fund; employers pay 25.5 percent. All of the individual’s contribution goes into an individu al account, which receives 11 percent of the total contribution. The corporate contribution is scheduled to decline as the individual contribution rises to 8 percent. The remainder of the corporate contribution goes into a social pooling fund. Employees’ contributions to the funds are deducted from their taxable income.

  Pension funds, which place the largest burden on both employers and employees, are supposed to be unified nationwide, and the individual accounts are intended to be transferable should an account holder move to another city. Unification of the many local regulations has proved extremely difficult, however. Also, there is considerable question about the mobility of these funds, which in fact are simply numbers on paper, as the actual contributions are funding payments to today’s retirees. As a result, some FIEs in Shanghai supplement pension funds with additional contributions or insurance. For example, one major US company in Shanghai contributes to its employees’ pension funds based on their true salaries rather than the 300 percent of average monthly wage that the government requires. This extra contribution — 25.5 percent of the difference between 300 percent of average wage and the emplo yee’s true salary — goes into the employee’s individual account. However, a portion of this difference is actually taken by the Shanghai government and put into the pooled fund rather than the employee’s individual account; the government announces the percentage it will take only at year’s end.
  “They say that if you want to do more for your employees, you have to do more for the government, too,” explained the HR director at the company with this scheme.

  This company offers life, accident, and hospitalization insurance to employees as supplementary benefits, with life insurance equal to 52 times the employee’s monthly salary. The firm also provides travel insurance, but only for business trips. Some companies put an additional percentage of the employee’s salary into the housing fund, rather than just the mandated 6 percent.

• Commercial benefits
  HR managers design many commercial benefits perks to retain valued employees. Like compensation, benefits packages for senior managers are complicated and spread out over a period of time to encourage them to stay. Commercial benefits may include housing plans or mortgage assistance, including loans or the payment of interest on bank loans; car plans; additional accident and medical benefits, including partial coverage for one child; supplementary pension plans; child care and elder care; cell phones; health club memberships; extra vacation time; and tuition assistance programs.

  Commercial benefits programs tend to change with China’s evolving economy and to follow social trends. Five years ago, purchasing a home was still a difficult enough endeavor that many companies offered extensive housing plans to senior managers, and some even built homes and sold them to employees at highly preferential rates. In the past two years, however, the stock of housing available for purchase in major cities has increased considerably, and banks have begun to make mortgage loans to individual buyers. Housing plans now more frequently take the form of mortgage assistance programs.

Important intangibles

Though all companies grapple with the retention issue using more or less the same set of tools, some are consistently more successful at it. The reasons cannot always be fully explained; one company may lose valued workers even while another retains them with a virtually identical C&B package. The reasons why may have much to do with intangible factors.

• Identifying retention goals
  At the top of the list of intangibles is how a company defines highly valued employees and subsequently determines its retention goals. Turnover is inevitable; companies that acknowledge this are least likely to suffer seriously when it happens. Indeed, the best way to avoid turnover is by anticipating and planning for it. Rather than trying to keep everyone equally happy, a company must target those employees who are most essential to its current functioning and future growth. While doing everything within reason to retain targeted employees, companies should keep possible successors in the p ipeline.

  Companies that suffer from high turnover rates should not let the fear that they have become virtual training schools for other FIEs limit development programs that could ultimately help with retention. “There will always be people who leave; that’s life, you have to deal with it,” summed up one HR manager. “You still have to train.”

• Managing employee expectations
  Just as a company must honestly evaluate its own expectations when it comes to retention, so must it manage the expectations of its employees. Though it is important to keep people motivated and enthusiastic, it is equally important to dispel unrealistic expectations for fast promotion or rapidly increasing responsibility. And, just as employees need honest evaluations of their probable paths in the company, so do they need to have a sense of the company’s own growth plans and goals.

  The importance that personal relationships play in retention in China should not be underes timated. Indeed, the Korn Ferry study mentioned above found that local managers listed relationships with their bosses second behind career development in a list of factors motivating them, more important even than salary.

  As the HR manager of one major US multinational explained it, “The personal relationship of the manager and employee is very important. The sense of loyalty is to the person — the company is nothing, it’s a building. You need to move beyond work, to family. You have to invest some time in getting to know your employees.” This opinion was echoed by another HR director who noted, “Superiors are very important. Most people leave companies because they lose confidence or interest in their boss.”

  Employees who feel personally appreciated, respected, and cared for by their superiors are far more likely to stick with a job than those who do not. HR managers repeatedly stress that bosses must strive to show interest in and concern for their employees by asking after their families, organizing and participating in company outings and other social activities, visiting staff when they are sick, and expressing concern in other ways. This personal interest must start from the general manager and radiate down through the various levels of management. Naturally, the more genuine the interest and concern, the more effective it is likely to be, but even just going through the motions is better than ignoring this basic desire to humanize a corporate relationship.

• Welcoming newcomers
  One of the most important elements in a company’s retention strategy is a commitment to ensure that the newcomers feel welcome. “Companies should pay more attention to bringing people into the organization,” says Helen Tantau of Korn Ferry. “It’s like a guest coming to your home, you need to take care of them from the beginning. Help them settle in, find their feet, see where they are going.”

  The FIE environment is demanding for all concerned, but the effort it takes to integrate new employees — especially managers — into the company will be worthwhile in the long run. A smooth start and a thorough introduction to the workings and goals of the company can help make new employees feel like valued team members, encourage them in their work, and build their loyalty to their new company.

Some retention tools straddle the line between tangible and intangible. These include autonomy, empowerment, recognition, and credit. Upper-level managers are far more likely to stay if they are given the independence they need to make a mark and if they receive public recognition for their successes. Firms should also make clear to everyone that top-level Chinese managers will have the opportunity to move on to senior management positions; if a glass ceiling seems to exist, with all of the top positions staffed by expatriates, the turnover rate is likely to be higher. One way of making the possibility of promotion clear is to identify high-potential employee s and put them on an accelerated career track. Another, of course, is to staff top positions with local managers.

Measuring effectiveness
One aspect of retention policy that should be tangible — but often isn’t — is the success or failure of various retention tools. Most companies can quote their turnover rate in an instant, but have a much harder time explaining why turnover continues at that rate or how retention tactics affect it. Since companies invest a considerable amount of time and money in retention tools, an analysis of their effectiveness is certainly worth the effort. Of course, when conducting an analysis, companies must consider such factors as the age of their workforce and the structure of the company. FIEs that hire a large percentage of recent college graduates will inevitably have a higher turnover rate than those that employ more people in their 30s or 40s. Similarly, FIEs that have flat organizations in China will have higher turnover rates than those that have deeper hierarchies and more opportunities for promotion.

HR bread and butter
For the near future, China will suffer a dearth of educated, experienced, and self-motivated men and women capable of managing in a global economy. Competition to hire managers with the most desirable qualifications therefore will remain stiff, with pervasive poaching, salary inflation, and localization efforts hobbled by problems with recruitment and retention. While China’s impending WTO entry will eventually benefit HR development, in the short term the arrival of new foreign companies into the China market will likely heighten rivalry among FIEs to attract and retain talented and experienced managers. Finding, retaining, compensating, and training workers will thus still be the bread-and-butter work of most HR departments in foreign firms in China.

Sheila Melvin
http://www.chinabusinessreview.com/public/0111/melvin.html