China's evolving expatriate talent and rewards landscape |
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Due in large part to the impact of globalization,
China has transformed into a veritable economic
superpower in recent years. It is estimated to
become the world's largest economy by 2050.
Joining the World Trade Organization (WTO) was
an important event for the development of China, as was the
establishment of permanent, normal trade relations with the
United States in 2000.
These two events marked the coming of age of the Chinese
economy. Already a manufacturing power house, China is
seeing significant development in the outsourcing and service
sectors.
Armed with ambitious strategies and the capital to invest,
most foreign organizations are ready to capture the China
market. But what they face is an overall talent shortage and a
frustrating gap in leadership.
Although many local Chinese work in foreign-invested
enterprises (FIEs), this employee population still lacks
essential skills such as strong managerial backgrounds,
international exposure, strong command of the English
language and effective communication skills - all of which are
critical for a mature business environment.
Hence, organizations are forced to look beyond the
traditional Chinese business centers to find their managerial
talent. They search globally, and candidates must be
motivated, rewarded, engaged, and effectively retained in a
manner suited to this unique operating environment.
Ten to 15 years ago, China employed a single type of
expatriate: traditional Western expatriates who were typically
lured to China with lucrative packages to fill top executive
positions.
Today, there is further segmentation, with organizations
hiring "China-hired foreigners" or foreign nationals hired
in China (many western expatriates are transferred to this
category once they have completed two to three assignments
in China and do not want to return), as well as "China
returnees", those born in China and having, as Hewitt defines
them, at least three years of overseas working experience.
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Although China's education system is advancing,
delivering better-quality talent with each passing year,
research indicates that expatriates will be increasingly called
upon to fill China's senior-level positions.
In fact, according to the China Expatriate Compensation
and Benefits 2007 study, the country's expatriate population
is expected to grow in 2008. The study revealed that 55
percent of participating organizations plan to increase the
number of expatriates they employ by the end of 2008.
China's booming economic prowess has led to companies
expanding their operations. Organizations have evolved into
full-fledged manufacturing units or service centers. This has
created an acute shortage of skilled managers and senior
executives, and expatriates are specifically needed to support
these ambitious expansion plans. Also, more and more
regional headquarters are moving to China, bringing with
them more foreign nationals.
Traditionally, expatriates have moved to first-tier cities
such as Shanghai, Beijing, Guangzhou, and Shenzhen.
However, with hectic economic activity in second-and third-tier
cities, these cities are expected to become important
destinations for global talent, engendering a need for distinct
skill sets. For example, growth in China is likely to cause
a greater need for expatriates with local language skills
and cultural adaptability. This, in turn, will create more
opportunities for China returnees or expatriates from
Hong Kong, Taiwan, and other markets overseas.
The Hewitt study reveals that the profile of the expatriate
talent is fast changing in China. In 2005, nearly 31 percent
of expatriates were Western, whereas in 2007 this dropped
to 21.4 percent. organizations are increasingly recruiting
China-hired foreigners who now represent nearly half of all
expatriates, making them the largest expatriate group in China.
There is a continuous need to attract and retain the best of
expatriate talent. organizations are getting creative with their
reward packages to match the growing needs of this group,
while keeping a keen eye on the spiraling cost of talent. |
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Non-traditional expatriates lead the pack
China has a more diverse and rich pool of expatriate talent
spurred largely by the availability of strong foreign talent
already residing in China, the increasing interest among the
Chinese residing abroad to return home, and a general in-flow
of foreign talent.
The study reveals that "traditional expatriate", or Western
expatriates, are mostly hired for the top executive and senior
manager levels, whereas "non-traditional" expatriates, such
as China-hired foreigners and returnees (who traditionally
were not a part of the foreign talent pool in the 1980s when
China opened up its economy to the outside world) form a
majority at the lower levels. (see Figure 1)
This diversity has led to multiple reward packages being
designed for different groups of expatriates. Managing
multiple reward packages of the "non-traditional" expatriate
group has led to several challenges, and organizations are
struggling to streamline this.
However, despite the effort, a variety of market practices
still exist for this group.
Hire globally and pay locally
The study reports that most organizations feel it is essential to
send over senior leaders from the country of origin to extend
the company's vision and safeguard its philosophy.
This is a big change in direction from the trend a few years
ago in which organizations actively started hiring locals in
place of the expensive expatriate talent.
Organizations have returned to recruiting expatriates
but are doing so by "localizing" the compensation packages
offered - reducing the benefits and perquisites component in
traditional expatriate packages, and hiring "non-traditional"
expatriates at lower pay packages.
According to the study, 42 percent of participating
organizations in 2007 reported having a formal localization
plan in place or planned to implement one in the upcoming year.
The talent market for "non-traditional" expatriates is fairly
new and is still evolving.
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Foreign organizations that have been in China for a long
time tend to design compensation and benefits packages
that are more aligned to local packages in terms of size and
program features. Foreign organizations that are fairly new
to China or in a rapid-growth phase still tend to bring over
expatriates from overseas, while those organizations that are
more established, coupled with steady business growth (and
across more progressive industries like hi-tech), tend to seek
more "non-traditional" expatriates.
Higher increase for global experience and local skills
Despite "localization" of compensation packages, the annual
salary increases awarded in China have been high. In
Hewitt's salary Increase survey 2006-07, the overall local
salary increase in China has been the third highest in Asia at
8.3 percent.
The China Expatriate Compensation and Benefits 2007
study further revealed that expatriate salary increases were
highest among "China returnees", who received an average
increase of 7.3 percent (see Figure 2). "China returnees"
often have strong technical skills, especially in research and
development, which, when coupled with their language and
cultural skills, make them highly valuable.
It is interesting to note that in the "China returnee" group,
employees at the senior professional, supervisor and director
levels received the highest salary increase. This is due to the
shortage of leadership and technical skills in China.
Reaping the benefits.or not?
According to the study, fewer organizations are offering
costly expatriate benefits packages as in previous years.
Traditionally, organizations in China used to award three
types of premiums to expatriates: foreign-service premiums,
hardship premiums, and cost-of-living adjustments (COLA).
COLA packages can vary, but they are offered as a fixed
percentage of base pay. COLA is the most common expatriate
premium.
In 2007, of those companies that offered premiums,
traditional expatriates hired with a global package were
offered 15.5 percent of base pay as COLA, 12.6 percent of
base pay as hardship, and 13.6 percent of base pay as a
foreign-service premium.
Expatriates on regional packages were offered 13.4
percent of base pay as COLA, 10.5 percent of base pay as
hardship and 9.0 percent of base pay as a foreign-service
premium.
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However, expatriates are not necessarily offered all three
of these amounts, as companies offered a nearly 24 percent
average aggregate premium to global packages and nearly
23.7 percent to regional packages.
Of the various types of premiums, hardship premiums
are disappearing the fastest, followed by the foreign-service
premium. China's explosive growth of suburban villas and
other high-end real estate is one reason why China can no
longer be considered a hardship posting. Adverse pollution
levels and cultural differences, however, can still justify a
need for this premium in some cases. COLAS have been
consistently maintained by organizations.
Although the prevalence of premiums has experienced little
change in global and regional packages, the value of these
premiums has reported a dip. However, China-hired foreigners
and China returnees experienced a drop in both the prevalence
and value of the total premiums offered. (see Figure 3)
Housing continues to be one of the largest components
in expatriate pay. Consistent with findings from previous
years, the majority of organizations still provide housing
assistance to expatriates. |
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However, the budget varies quite significantly. Expatriates
who enjoy global packages have the highest housing budget,
ranging from US$4,000 to $7,000 (median) per month, while
the housing budget for China-hired foreigners and China
returnees ranges from US$1,000 to $3,000 (median) per
month.
During the past few years, there has been no significant
change in housing assistance practices. However, housing
assistance is most likely to be reduced significantly if
"localization" of packages continues to become more
widespread.
Organizations will, at some point, be inclined to do
away with direct housing reimbursement and offer a fixed
housing allowance, which may well be lower than the housing
reimbursement currently offered.
Tax equalization is the most popular tax assistance
practice for expatriates who are hired by regional or global
headquarters. However, organizations do not provide tax
assistance for China-hired foreigners and China returnees.
Most organizations expect them to bear the individual income
tax themselves. (see Figure 4)
Education assistance is a very popular benefit for
expatriates assigned by global/corporate or regional/ Asia-
Pacific headquarters. This factor alone can sometimes be a
deal breaker, especially if the expatriate has a large family.
Private international education in China does not come
cheap, and can sometimes equal the tuition fees of U.S.
universities. Options for education for foreign children
are limited. Also, in most cases, the prevailing medium of
instruction is Mandarin Chinese. As a result, the majority of
organizations provide private education assistance to help
cover the tuition fees of international schools for expatriate
children across all expatriate categories. The policies are
flexible enough to accommodate different kinds of school fees,
especially tuition and transportation, as long as the costs are
within a reasonable amount. |
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While benefits such as educational assistance continue
to be offered to mostly all assigned expatriates, more than
half of the organizations surveyed said they do not offer this
to all China-hired foreigners. Only top executives within this
group are eligible to receive this. For PRC returnees, most
organizations do not include education assistance as a critical
part of the benefits package because their children are more
likely to adapt to the local education system.
Some of the benefits that are being phased out include
home leave and Rest and Relaxation (R&R) leave assistance.
Fully reimbursed R&R trips to Phuket or Bali no longer form a
part of the benefits package. R&R leave is a thing of the past,
and special home leave is less common, too; most companies
offer only standard annual leave. |
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A world of opportunity has opened up for talent in China.
Although immediate shortages of talent pose a threat,
organizations are making continuous changes in their people
processes to more effectively attract, engage, and retain
talent.
The projected economic growth is going to make
overcoming people issues even more challenging in the future
if the right steps are not immediately taken by organizations.
The changing face of expatriate pay is a testimony to
China's efforts in realigning current talent strategies. |
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Lindsay (Oliver) Klump
is a senior consultant in
Hewitt's compensation
and benefits practice in
Shanghai. To learn more
about Hewitt's upcoming
2008 expatriate, China
Hire and Returnee
Compensation and
Benefits study that was
released in November,
please contact Lindsay.
oliver@hewitt.com or
+86 21 2306 6916. |
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Hewitt Quarterly Asia Pacific
is made possible through the combined skills and experience of Hewitt consultants from across the Asia-Pacific region.
For further information please contact:
Hewitt Associates
2601-05 Shell Tower
Times Square
Causeway Bay
Hong Kong
Tel: (852) 2877-8600
Fax: (852) 2877-2701
editor-hqap@hewitt.com |
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