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Emerging from the Downturn |
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European study shows
dealing with
the downturn
leads HR's 2009 Agenda
Improving execution is top pre-condition for
strengthening the impact of HR on the business |
A Hewitt study designed and carried out for the European Club for
human resources (EChr) reveals that the economic downturn in Europe is
accelerating organizational change within HR departments. With 53 major
European organizations participating in the Study the key messages and
insights give a great view of the HR landscape in the "Old Continent".
Leonardo Sforza, author of the study, said:
"This year's HR Barometer is inevitably
influenced by the general deterioration of
the economic climate, with seven out of 10
respondents expecting a work force reduction
in 2009.
"However, the results show that leading
HR professionals are facing the downturn not
just by scaling down employment, but also by
thinking ahead to the ways they can help their
organization and its workforce to implement
structural changes and to prepare them for
economic recovery."
Leonardo Sforza added: "The on-going
crisis will have a transformational rather than
a cyclical impact on business and HR can be a
crucial contributor in this process. To make this
happen, HR needs to balance short term market
and operational needs with longer term strategic
people issues such as talent and leadership
development - and fix them promptly."
This year's HR Barometer covered 53
organisations, employing a total of 3.5 million
people and explored the emerging business
practices and priorities of the HR function
across countries and sectors in Europe. Key
findings of this year's edition include:
. Economic downturn hits HR
77% of respondents said that the impact of
the financial crisis and the slowdown of the
economy will be significant on business results
and on HR programs (47%).
All respondents have undertaken or
decided already on a wide range of measures
to cope with the downturn. The majority of
them are focusing on actions that scale down
production capacity and cost by reducing
overall headcount (72%); by looking for new
productivity gains (70%); and by closing down
interim work contracts.
A third of respondents have a more
comprehensive response that combines HR
budget cutting with opportunistic hiring of
top talent, targeted leadership development,
and new business acquisitions. Compensation
and benefit programs, including long-term
incentives are also under review in one out of
four of the participating companies. |
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. Reshaped HR drivers and needs
Improving execution emerges as the main
pre-condition for strengthening the impact
of HR on the business (mentioned by 42% of
respondents), followed by the need for a greater
and timelier involvement of HR in strategic
business decisions (40%), as well as the
opportunity to attract new talent within the HR
function itself (36%).
In terms of performance, in 11 out of 28
different HR specific activities, a majority of
respondents recognized the need to improve
their services to match business expectation.
The negative HR delivery gap is most notable
in relation to HR metrics, with 76% of
respondents assessing as "poor" or below
target their action in this area.
A majority of respondents expect significant
changes in HR capabilities and competencies
within the next three years. This will relate to:
processes and operations to gain HR efficiency
(58% think it will change the most); functional
HR expertise in change management (55%)
and leadership and talent development (47%);
Functional expertise related to compensation and
benefits is expected to change the least, with 75%
thinking it will remain mainly the same.
Since last year's Barometer, pressure on
cost reduction has become the most influential
factor of the HR agenda, jumping from seventh
to first position. Challenging productivity
targets, organizational change and also talent
shortages remain highly influential on HR policies.
The key priorities on the HR agenda have
become: leadership development (mentioned
by 38%), talent retention (34%), and employee
engagement (30%). The need to reduce labor
costs jumps from 12th position in last year's
priorities (only 7% of respondents mentioned
it as a priority in 2008) to fourth position this
year, indicated by 28% of HR professionals.
. Solid business partnership,
engagement and trust
HR leaders gave a high ranking to the quality
and level of cooperation they had established
with their own CEO. In the top partnership
ranking, this was followed by the CFO, Legal
Counsel and the line of business managers. By
contrast, the level of co-operation in place with
the investor relations department is considered
very poor by one third of respondents, and
for another third there is no relationship at
all. As in previous editions of the Barometer,
respondents gave their CEO the highest
confidence rating, just in front of their peers
and their company's employees.
While the majority of HR Directors continue to
express a high level of satisfaction with their
job, this measure has declined significantly
year on year (down from 80% to 60%), almost
certainly due to the increased cost pressure
and changing demands they are facing. This
declining satisfaction has driven an increase in
the percentage of respondents seeking a move
to a different function (up from 7 to 17%). |
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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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