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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.   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.

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.   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.

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.   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.

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.