Category Comp, Salary & Benefit

Legal-Ease: Managing Payrolls in China

Optimizing your workforce’s salary structure
By CHRIS DEVONSHIRE-ELLIS

In an increasingly competitive market for skilled labor, foreign-invested companies are restructuring their salary packages as a means of hiring and retaining quality staff. We outline the fundamental components of salary in China and introduce some of the structures being used by companies to increase retention and motivation levels in their staff. We also introduce the relatively new concept of outsourcing of payroll management services in China-a business that is becoming more popular as the operations of foreign-invested enterprises in China become more diversified and complex.

Compensating your employees

Presumably because of its simplicity, a large number of employers still compensate their staff using the most straightforward salary package available to full-time workers in China-a fixed monthly salary with no extra incentives or tax-optimization strategy. Each month, mandatory social security contributions are deducted from each Chinese employee’s gross salary and individual income tax (IIT) levied on the balance. These contributions do not apply to foreigners. The employer is then required to make social security contributions on behalf of employees as well. Usually mandatory employer contributions total about 40-50 percent of an employee’s base salary. There are a lot of factors contributing to the exact proportion; these are examined in the accompanying article Social Security in China.

Annual bonuses

Many foreign-invested companies in China pay annual bonuses to staff. Sometimes these will be a pre-determined, fixed amount known as the 13th or 14th month salary. Other times they will take the form of individual or corporate performance bonuses. These kinds of bonus perform two main roles:

1. They provide staff with extra income. Bonuses are often paid before the Chinese Spring Festival, when local staff will traditionally spend more money than in an average month.

2. The Chinese tax system offers a special treatment for payment of annual bonuses. Once a year, a lump-sum payment to staff can be divided by 12 to derive the taxable percentage for payment of IIT. For employees, this can work out to be more tax-efficient than receiving a flat salary throughout the year. Here is an example:

An employee based in Dalian receives a monthly salary of 10,000 yuan, giving them an annual salary of 120,000 yuan. After deduction of mandatory social security, assuming it is an amount of 1,687 yuan, their monthly income is 8,313 yuan. A further deduction of 2,000 yuan gives a total on which to base their taxable income each month. According to IIT calculation rules, their monthly tax burden will be 888 yuan. Therefore, in the absence of any kind of bonus, their annual tax burden will be 10,656 yuan.

But if that employee receives a flat monthly salary of 9,000 yuan with an annual bonus of 12,000 yuan while still totaling an annual salary of 120,000 yuan, every month their taxable income will be calculated by subtracting the social security contribution of 1,687 yuan and the deduction of 2,000 yuan. Therefore their monthly tax burden will only be 688 yuan. This annualizes to 8,256 yuan. They will also have another IIT payment to make on their annual bonus. This will be calculated by dividing 12,000 yuan by 12, which equals 1,000 yuan. The percentage of tax payable on this annual bonus is set by referring to the monthly taxable bracket for employees earning 1,000 yuan, or 10 percent. After taking deductions into account, their tax burden is 1,175 yuan, and the total IIT contribution for the year will therefore be 9,431 yuan.

As you can see, by paying an annual bonus on top of a lower flat monthly salary the tax burden for the employee is reduced. In the example above, the amount of the reduction is 1,225 yuan, or 11.5 percent of the original tax burden. The company should balance this tax advantage with the downside-employees may leave the company immediately after receiving a large bonus. It is no coincidence that March is the peak time for job-hopping in China, and a large exodus around this time can cause operational problems in the following months.

Employers should note that this one-time annual bonus could be made up of several components: fixed bonus, individual bonus and corporate performance bonus. The critical factor is that the amount is reported to the tax bureau in one lump sum, and therefore it should be paid in the same month to receive this special treatment. Some companies combine a modest fixed bonus with an additional performance bonus. The individual bonus can be set high for employees that the company would like to retain and make lower for poor performers.

It is important to bear in mind that details of bonuses paid to employees should be kept confidential. This is one key reason why outsourcing of payroll is becoming increasingly popular. Using this method, it is possible to restrict details relating to salaries and bonuses for senior employees to only the human resources (HR) manager. Some organizations even prefer to base their HR manager abroad, liaising with a professional third party provider to ensure maximum control and confidentiality over the process.

Chinese Goverment picks up $3.5m wage bill

More than 24 million yuan ($3.5 million) of public funds has been used to compensate 7,000 former employees of collapsed toy maker Smart Union Group, a senior local official said yesterday.

In an interview with the Xinhua News Agency, Xu Hongfei, deputy head of Zhangmutou in Guangdong province, where the Hong Kong listed firm operated two factories, said the town government had agreed to reimburse all those who lost their jobs on October 15.

“The boss is nowhere to be found, so the government is paying the wages owed to the workers,” he said.

Former employee He Ming said yesterday he had been given 1,800 yuan for the 13 days he had worked this month.

“My monthly pay was about 3,000 yuan, so the money I got from the government was about right. I’m satisfied,” he said.

While the government has agreed to cover back pay, it will not, however, finance any redundancy payments owed by the firm, Xu said.

About 1,000 former employees have hired lawyers to help them seek compensation from Smart Union, Xinhua said.

The Zhangmutou government will do all it can to help find new jobs for those who were made redundant, Xu said.

Meanwhile, in neighboring Shenzhen on Tuesday, the city government used 3.7 million yuan of pubic funds to cover back pay owed to some 800 workers left jobless with the demise of Chuangyi Toys Co Ltd, the boss of which has been missing since Oct 14.

A source with the Pingshan community office, where the Hong Kong funded firm was based, told Xinhua that local labor authorities had secured the company’s assets and will auction them off at a later date.

In another development, the government of the Longguan district of Shenzhen is currently deciding what action to take following the closure on Monday of the Hong Kong funded Gangsheng Electronic (Shenzhen) Co Ltd.

“A working group comprising representatives of the police, courts, and the labor and social security bureau, has been set up to investigate the case,” Peng Gang, an official with the district publicity department, told China Daily yesterday.

Also, on Tuesday, the Shenzhen labor and social security bureau publicized the names of 30 companies that owe in excess of 12 million yuan in back pay to their workers, and demanded their executives report to local labor authorities within 30 days.

Yang Baohua, deputy director of the Shenzhen labor bureau said that since June, the city government has paid out more than 10 million yuan to cover wages owed to laid off workers.

Salary Increases Low; High Performers Are the Focus

Hewitt’s latest survey shows some employers will be giving salary increases of about one percent smaller than they would have, had the economy been looking a little better.

Hewitt’s survey of 411 large companies revealed that 42 percent of companies “are revising their salary budgets and variable pay spending strategies related to the economic downturn or because of increasing cost pressures.” Of that 42%:

49 percent plan to reduce variable compensation payouts
66 percent will cut bonuses by more than 10 percent in 2008
Salary increases will be about 3.1 percent in 2009, or about 1 percent smaller than they would have been.
Thirty-eight percent of companies are reserving part of their salary-increase budget for their highest performers. And 23 percent are creating supplemental, discretionary incentive pools for high-performers. Another 20 percent are offering employees retention bonuses for them to stay a certain amount of time.

Emergency pay fund for unemployed considered

GUANGZHOU: Authorities in Guangdong will consider setting up an emergency fund to protect workers against losing their wages in the event of further factory closures, the provincial labor and social security department said on Monday.

Responding to a resolution put forward by a member of the provincial political consultative conference, the department said in a statement that the feasibility of such a fund will be considered and that financial departments at various levels will likely contribute to it.
The fund will primarily be used as insurance against firms going bust or unscrupulous bosses absconding, the statement said.

Zhang Xiang, director of the labor department, said in the statement: “From time to time, the boss of a company in financial trouble will flee and leave his debts behind, and that creates turmoil.

“In the current economic climate, there is a good chance that more companies, especially labor-intensive ones, will collapse.

“This fund would help protect against some of the financial and social problems caused by such closures.”

Zhang said that traditionally, companies paid a premium, on top of their rent, to the owners of the factory buildings they occupied.

In the event of a firm suffering financial difficulties, or the boss absconding, this money could then be used to cover wage payments for the workers.

“But the funds were seldom big enough to cover the total wage bill,” he said.

The labor department has also been urging firms to start paying their workers via bank transfer to enable closer monitoring, he said.

Furthermore, the department is currently seeking to work more closely with other local bodies, including the people’s bank, industrial and commercial administration, and the foreign trade and economic cooperation department, to develop a better picture of companies’ credit ratings.

Not everyone, however, believes the insurance fund is a good idea.

Li Qingqing, an associate professor of economics at South China Normal University, told China Daily yesterday: “Taxpayers’ money should not be used to support failing businesses.

“An infinite amount could be lost if firms continue to go out of business.

“Instead, companies should be made more responsible, perhaps by paying some form of premium when they apply for registration.”

Financial crisis spurs interest in civil service jobs

Civil service jobs have gradually become popular again with growing numbers of graduates nominating them as their “ideal jobs”.

Amid the current global financial crisis’ implications for the private sector, the website for national civil service exams crashed on its first live day on Monday, the Beijing Morning Post reported Tuesday.

A recent China Youth Daily survey on Netease.com shows around 86 percent of the 2,440 respondents considered taking the exam in a bid to join the public sector.

“The reason is simple,” a Ministry of Human Resources and Social Security official, who refused to be named, said. “In China, civil servant jobs means good payment, decent social status and permanent social welfare. There is low risk of being fired.”

People walk past the gate of the State Administration of Civil Service in Beijing in this August 30 file photo. [CFP]

China will recruit 13,566 civil servants this year, according to the newly released civil service enrollment brochure.

Among the 134 government agencies taking part in the recruitment campaign, the Ministry of Foreign Affairs alone plans to recruit 157 new staff.

For Dong Shu, a graduate of Peking University, a civil service job is at the top of her wish list.

“As a girl, I just want stability. The civil service sector can provide a comfortable and wealthy life. What’s more, most of my classmates are going to take the exam,” Dong said.

Things are more complicated for Wu Minggang, who will graduate from Beijing University of Posts and Telecommunications in March next year.

“Being a civil servant means a bright future. If you work for a foreign enterprise, you will still be an engineer in 20 years, but if I get a job as a civil servant, (the career development path will be different,)” Wu said.

For Wu’s classmate Wang Zhongxu, sitting the exam is just about increasing her chances of getting a job.

“I just want to grab any chance in front of me,” Wang said.

Li Pei, a post-graduate of the University of International Relations who became a civil servant last year, feels satisfied with her job.

“We enjoy a dormitory at a low price, about 200 yuan ($ 29) per month. We enjoy three meals for free in the dinning hall. Every month I can give at least 1,000 yuan to my parents,” Li said.
Compared with Li’s classmates in foreign enterprises, Li’s life was rather comfortable.

With a monthly salary of about 5,000 yuan, she also enjoys good insurance and pension coverage.

Hu Fengling, a professor at the University of International Relations, said at least 70 percent of the graduates in his school will take the national civil service exam, but only one in five will get a job.

Indian salaries likely to go up 16% in ’09

Salaries in India are expected to increase by 16 per cent in 2009, one of the highest in the Asia-Pacific region driven by strong economic growth and pressure on employers due to soaring inflation, a latest report says.

As per a report by the Hong Kong-based compensation firm HR Business Solutions pay increases in the Asia-Pacific region are likely grow even as the economies are expected to be impacted by the global slowdown.

“The forecast pay increase in India averaging 16 per cent is one of the highest among all the countries,” the report stated.

The HRBS 2009 pay increase forecast is based primarily on four economic factors — GDP growth, inflation, unemployment, manpower demand and past pay increase trends.

Elaborating further it said that the Indian economy is reported to be cooling, but still it is expected to achieve a growth rate of 7-8 per cent in 2008, which is among the strongest in the region after China.

“In addition, it has the fourth highest inflation rate of over 12 per cent in 2008 which increases pay rise pressures on employers. Labour demand is still robust and there is a lack of sufficient supply of the skills-set required by India’s rapidly growing services, manufacturing, construction and retail industries to boot,” the HRBS report added.

Economic growth rates in Asia are mostly forecast to be moderately lower in 2008 relative to 2007, while inflation rate across the Asia-Pacific region has soared to an all-time high.

“In many of the Asian countries, demand for manpower continues and in some cases, while general unemployment rate remains high, the labour market is extremely tight for qualified employees, for example, India, China and Vietnam,” it stated.

Besides, in some developed economies such as Hong Kong, Singapore and Australia, while the unemployment rate is low, the demand for people has been strong.

Meanwhile, Sri Lanka is the other country which is forecast to see a higher double-digit rise in salaries of about 17 per cent in 2009.

The country’s inflation rate of more than 16 per cent is the next highest in Asia after Vietnam and firms in Sri Lanka are hiring and facing challenges in recruiting and retaining skilled human capital.

Most of the neighbouring countries of India – Pakistan, China and Bangladesh are forecast to post around 11 per cent of expected pay increase.

In 2008, the salary increase in India had averaged at 14.9 per cent.

Other Asia-Pacific countries like China, Vietnam and Indonesia are forecast to see a rise of 11 per cent, 12.4 per cent and 12.7 per cent, respectively in 2009.

Earlier, in a separate report on Asian compensations, global HR consultancy Mercer had forecast that India was likely to witness over 14 per cent increase in salaries annually for the next three years as the corporates were facing shortage of talent.

The Mercer report had also stated that India, Vietnam and Indonesia were the only three countries in the Asia-Pacific region which are likely to see a double-digit increase in salaries until 2011.

Shortage of talent pushes up salaries

EMPLOYERS on the Chinese mainland are facing the highest salary inflation in Asia due to the country’s rising demand for professionals, according to a human resources report released in Shanghai yesterday.

Hudson Recruitment, a Nasdaq-listed headhunting firm, asked more than 2,600 multinational organizations on the Chinese mainland, Hong Kong, Japan and Singapore about their hiring intentions over the next three months.

Of the 708 respondents from the mainland, only 8 percent of employers said they could negotiate lower salaries for new managerial hires, the lowest proportion in Asia.

In Singapore, about 10 percent said they were able to negotiate. The figure was 11 percent in Japan and 13 percent in Hong Kong.

“The lowest figure in Asia indicates that employers have little scope to negotiate lower new hire salaries and salary inflation is the most prevalent issue for them,” said Angie Eagan, Hudson’s general manager in Shanghai.

“The Chinese mainland is still a talent-short market, the ongoing competition for strong candidates means that employers are not able to effectively combat the increases in asking salaries for new hires,” Eagan said.

The mainland is the only region in Asia surveyed which reported an increased hiring expectation. The survey reported that about 55 percent employers were planning to add to their headcount in the next three months, compared with the 52 percent in the second quarter this year.

Expansion in the retail, tourism and hospitality segments and the approaching Beijing Olympics was driving the growth, analysts said.

Chinese employers are still suffering from the highest turnover rates, with 71 percent respondents in mainland and Hong Kong reporting an equal or even higher turnover rate over the past year.

Survey respondents said performance-related bonuses, training and development programs as well as substantial pay increases were the most effective measures companies could take to retain staff.

Beijing raises minimum salary amid rising prices

The Beijing government announced Friday a plan to raise the minimum salary by 10 percent, as well as to increase subsidies paid to families living below the poverty line to combat the jump in utility costs.

From July 1, the minimum salary for city employees will rise from 730 yuan ($106) to 800 yuan, or 4.6 yuan per hour.

The monthly allowance for families living under the poverty line will climb 60 yuan to 390 yuan, the sharpest increase in the past nine years.

Also increasing is the city’s employment insurance, job-related injury insurance and pension.

The move aimed to offset price increases in rice, vegetable oil and pork, an unnamed Beijing Municipal Civil Affairs Bureau official was quoted by Beijing News.

Although China’s consumer price index (CPI), a main gauge of inflation, eased to 7.7 percent in May with the falling food prices, about 45 percent of people polled in a central bank survey conducted nationwide in June still thought prices were “unacceptably high.”

Unemployment rate plummets

HONG Kong’s unemployment rate unexpectedly fell to 3.3 percent, matching the lowest in a decade, helping to boost consumer spending and sustain growth in the city as global demand fades.

The seasonally adjusted jobless rate was for the three months ended April, the government said yesterday on its Website. Economists surveyed by Bloomberg News had expected the rate to stay at 3.4 percent.

An improved labor market, lower interest rates and tax relief may support domestic household consumption and shield the city from weaker overseas demand.

“Export, visitor and capital flows from Chinese mainland have created most of the jobs for Hong Kong in the past few years,” said Kevin Lai, senior economist at Daiwa Institute of Research in Hong Kong. “Domestic demand will remain robust amid a solid labor sector, negative real interest rates and fiscal stimulus.”

Deutsche Bank AG, Germany’s largest bank, plans to triple its office capacity in Hong Kong by 2010. The expansion will allow employing as many as 4,000 workers, up from 1,500 currently, the company said on May 6.

Last month’s jobless rate matched February’s as the lowest in 10 years. The government calculates Hong Kong’s unemployment on a rolling three-month basis to smooth out seasonal factors.

Hong Kong’s economy grew 7.1 percent in the first quarter from a year earlier, the fastest pace in two years. Household spending jumped 7.9 percent.

Rising incomes are spurring consumption. The average wage rose 2.7 percent in December from a year earlier.

The increase in wages may also escalate inflation as companies pass on higher labor costs to buyers.

China officials hike wages, threatening boost to inflation: economists

South China’s Guangdong province is the latest area in the nation to unveil plans to raise wages, state media said Wednesday, a move economists worry runs counter to efforts to rein in inflation.

Guangdong provincial labour authorities said in a 2008 plan that they aimed to establish a regular salary increase system and raise wages of all employees in the region by 12 percent or more this year, the China Youth Daily reported.

Other areas in China have announced similar polices, including the financial hub of Shanghai, where a salary rise guideline for this year has called on companies to lift employee wages by five to 16 percent.

This is meant to help households, especially low-income families, cope with the country’s surging inflation, which has fuelled government fears of potential social unrest.

China’s consumer price index rose 8.0 percent in the first quarter of the year. In February, it climbed to 8.7 percent, the highest in nearly 12 years, before easing slightly to 8.3 percent in March.

But analysts have voiced concern that salary hikes risk exacerbating the inflation problem that they are supposed to alleviate.

“Salary rises are certainly contributing to inflation,” said Chen Xingdong, an economist with BNP Paribas in Beijing.

If companies are told to pay higher wages, they may have to raise their prices to stay out of the red, the economists argued, warning this could be the beginning of a vicious cycle.

“The problem will get worse if salaries and price rises take turns,” said Ma Qing, a Beijing-based analyst with the think tank CEB Monitor Group.

They argued that it could also add an extra burden on companies that are already under big pressure of soaring upstream raw material prices and might even put them out of business.

“If the requirement goes beyond what companies can afford and therefore forces them to cut jobs or stop production, then the losses may be bigger than the gains,” said Shen Minggao with Citigroup.

The Chinese government has signalled growing concern about the ways in which rising prices might adversely affect the poorest in society.

Since January, it has resorted to freezing price hikes on key consumer items like grain, edible oil, meat, milk and liquefied petroleum gas in order to keep them affordable for most families.

Wage rises may be meant to do the same, but economists warned they could actually lead to more social tensions by widening income disparities.

This is because wage rises by decree are likely to benefit mainly government employees, while blue-collar workers in private companies may get left behind.

“I doubt who will benefit from a policy where the government directs salary increases,” CEB Monitor Group’s Ma said.

“In the final analysis, I think it will only raise government employees’ wages. This is what happened in 2006 and 2007.”