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Best Practices: Human Resources: Strategies for Recruitment, Retention, and Compensation

October 2006

Large multinational corporations (MNCs), along with domestic Chinese companies, are finding that acquiring talented employees is, more than ever, one of their greatest challenges in China. US-China Business Council member companies surveyed in 2006 cited human resources (HR) as the top operating concern for their business in China.

China has long been known as a source of inexpensive labor. Although this may still be the case for the country's unskilled labor market, companies that are looking to hire for finance, technical, or managerial openings have a difficult time finding and retaining employees.

The competition for talent means turnover rates are high and wage levels are rising. From 2001 to 2005, average employee turnover rates in China rose from under 9 percent to around 14 percent. In 2006, according to Hewitt Associates, average salary rates increased by 7-9 percent in first-tier cities such as Beijing, Shanghai, and Guangzhou, and by 7.5-10.6 percent for second-tier cities such as Chengdu, Sichuan; Hangzhou, Zhejiang; and Wuhan, Hubei.

The pool of new university graduates is also smaller than is sometimes touted. The McKinsey Global Institute in a recent report estimated that between 2003 and 2008, China will have 15.7 million university graduates (excluding medical graduates) of which only 1.2 million will be suitable for employment in large MNCs because the majority lack the necessary mix of skills and experience.

Though the market for skilled managers is likely to be tight for some time to come, many companies employ the basic practices that follow when recruiting and working to retain their top employees. Although some of these practices are common to workplaces around the world, they have proven especially important in China.

These are also just the most basic practices companies tend to adopt. Specific practices vary by company and change according to labor market conditions. USCBC welcomes feedback from members on successful HR practices and plans to update this sheet regularly.

Recruitment

Focus on skills

For managerial and technical positions, cost differences between expatriates (expats) and local hires are shrinking (see p.3, "Compensation and Benefits"). When searching for potential recruits, companies should look for sets of skills rather than whether the ideal employee would be a local Chinese citizen, a foreigner, or a returned Chinese.

Verify employment history

For any senior hire, formal background checks by experienced external consultants should be standard practice. Due diligence is important for fraud prevention and intellectual property protection, among other reasons. It is important to look for such things as links to competitors, potentially conflicting ties to regulators, and whether the prospective employee has a history of switching jobs regularly.

Evaluate total work experience

Experience at a foreign firm does not automatically translate into deep knowledge of daily business operations. Evaluate the quality of a potential hire's total experience rather than whether or for how long a candidate has worked at a foreign firm.

Ask candidates about goals

Ask questions that give you a clear idea of the extent to which a candidate's five-year goals align with those of your company.

Consider a range of language abilities

For certain positions, do not assume that solid English skills translate into other necessary skills. Sometimes the most effective local hires speak little English.

Launch internship programs with universities

Establishing internship programs with local universities can be a great way to evaluate potential entry-level candidates early on. Many juniors, seniors, and graduate students in Chinese universities have light course loads. Though their status as students prohibits them from taking formal positions, they can work full-time or nearly full-time as interns.

Advertise in trade publications

Good employees can be found both in local enterprises and government agencies. Using trade publications to advertise for or identify these possible candidates can produce good results.

Consider third- and fourth-tier cities

Some companies are starting to recruit in third- and fourth-tier cities for positions in first-tier cities. Though not all employees wish to move, companies can attract qualified personnel from less-developed interior locations to major metropolitan areas.

Assess your brand reputation

Recent Chinese college graduates and younger employees tend to have a favorable bias toward Fortune 500 companies with brand-name recognition, which can help those companies when recruiting. Companies in promising and exciting new fields for China--such as high tech, Internet start-ups, and private equity firms--find it easier to recruit young employees. Companies without such brand recognition will have to focus more heavily on the other recruitment tools listed here.

Retention and Training

Talented employees frequently cite two reasons for their departure from a company: a higher salary or more career opportunities elsewhere. Certainly, salary levels are important, but recent surveys indicate that a better work environment or career opportunities are also heavily factored into a Chinese employee's decision to switch jobs--or, conversely, to stay in a current one.

Companies with successful retention programs focus on expanding training opportunities in house--and then tying these training opportunities back to compensation. Companies should also solicit employee input when devising career development and training programs.

Specific strategies for retention include the following:

Use global resources

Draw upon the company's global resources to promote in-house advancement opportunities.

Training seminars that take place in other cities or countries can be great ways for employees to build skills while staying with the company.

For employees that do not have this opportunity, training or certification classes can be held in house. Awarding certificates and holding acknowledgement ceremonies are important recognition tools in China.

Offer job rotation

Job rotation can keep employees interested in their work and expose them to all aspects of the company's operation. This is one way to "re-recruit" employees.

Link career and promotion

Establish a career development path that is integrated with a track for merit-based promotion.

Be aware of reluctance to relocate

Be careful with programs that require employees to move to another city within China for long periods of time. Chinese employees often have close ties to their hometowns and may be unwilling to relocate. And Chinese residents of first-tier cities like Beijing and Shanghai may not want to move to smaller, more remote locations. Some companies even provide hardship allowances to Chinese employees who move from major cities to smaller ones.

Consider your office space and location

Be careful in selecting locations for office space, whether for expanding operations or new facilities. Traffic conditions in major Chinese cities are worsening each year, and the length and difficulty of the daily commute will be a major consideration for employees.

Office locations in prestigious buildings or commercial districts can help attract and keep employees, while locations far from the city center can be a disadvantage.

Invest in working conditions

Making small investments in working conditions, such as keeping air-conditioners in good working order, or providing showers, can go a long way toward maintaining employee satisfaction.

Establish community service programs

Building the company's brand and reputation within China through community service projects or corporate social responsibility programs may help strengthen employee loyalty toward and pride in the organization.

Keep HR communication channels open

Because the traditional employer-employee relationship in China tends to discourage employees from speaking up, it is particularly important to establish channels of communication on HR issues.

Use noncompete agreements

One important retention tool that can act as a disincentive for an employee to leave--and can be important to protect a company's trade secrets and competitive position in China--are employee noncompete and confidentiality agreements. Noncompete agreements are enforceable in China.

On a related note, if employees are considering working for a year prior to attending an MBA or other graduate degree program overseas, offering a "Golden Handcuffs" program may be worth consideration. Under such a program, a company can offer to subsidize a portion of the manager's education in exchange for a certain number of years of service following graduation.

Should the employee nonetheless break the contract and switch to another company, companies in China can and have successfully sued former employees to reimburse training expenses incurred by the employer. (For many companies, however, this is small consolation for the loss of a valued employee in whom they have invested significant resources.)

Plan social gatherings

Social gatherings, sports competition outings, company trips, and other "extras" deemed important by local hires that were traditionally provided by the work units in China can prove helpful in retaining local hires.

Compensation & Benefits

Gone are the days when companies seeking skilled managers could save substantial costs by hiring local Chinese employees. This is particularly true of compensation for employees that possess technical talent. Best practices regarding compensation and benefits include the following:

Link compensation to retention

Institute transparent, performance-based incentive structures, such as bonuses or savings plans that, in turn, encourage retention (see Recruitment and Retention sections above).

Design pay packages and raises according to a mix of both performance and skill development. Clearly communicate opportunities for skill development and how taking advantage of those opportunities is linked to compensation.

To the extent possible, avoid having different pay scales for local, foreign, overseas Chinese, and returning Chinese employees doing the same job. Salary levels should be based on specific skill sets, levels of experience, and performance once on the job, regardless of what passport the employee carries.

Monitor compensation trends in other cities

Observe trends and regional specifics in cities other than those in which your operations are located to anticipate rising wage levels in your city.

Make sure benefits reflect employee concerns

China's mandatory social insurance system, while requiring that between 30 and 40 percent of payroll be paid to the state, is far from adequate. In particular, state health insurance for urban residents remains underdeveloped and does not cover significant expenses.

Take the time to understand the primary concerns of employees and examine how best to structure benefits packages to assist them. For example, for urban residents in China, the primary concerns are

• Health care costs for aging parents;
• Education opportunities and costs for children; and
• Housing prices.

Consider supplementing insurance plans

Many employers have moved to supplement state health insurance with voluntary plans, funded by contributions from both employer and employee and managed by reputable private health insurance companies. These types of benefits are particularly important in attracting and retaining senior local hires.