China Human Resource Environment - 2012 A Presentation for OESA Members by Steve Kueffner January 10, 2012 2010 Towers Watson. All rights reserved.
China 2012 Human Resource Environment Agenda Towers Watson China Trends in Mainland China's Talent Market 2011 Compensation and Benefit Trends The Keys to Engagement in China 2
Towers Watson Greater China In Greater China we dedicate to improving clients performance and financial results through our extensive experiences, top consulting team and strong industry expertise We entered China in 1984, this first wholly foreign owned international management consulting firm stepping into Mainland China. Ÿ Ÿ Beijing Shanghai In Greater China, we have 6 consulting offices located in Beijing, Shanghai, Shenzhen, Guangzhou, Taipei, and Hong Kong, also one research center in Wuhan. Ÿ ɐ Ÿ Wuhan Guangzhou Shenzhen In Mainland China, we have more than 250 associates to provide clients with value-added services. In Greater China, we have over 500 associates. Ÿ Ÿ Hong Kong Taipei 2011 Towers Watson. All rights reserved. 3
Human Capital Trends in China Agenda Introduction Trends in Mainland China's Talent Market 2011 Compensation and Benefit Trends The Keys to Engagement in China 4
Challenges of China s Labor Market China s Economy Continues to be hot China outperformed all other emerging economies during the financial crisis Starting 2 nd half of 2010, policymakers have had to adjust policy in response to an overheating economy Real GDP growth, % 2007 2008 2009 2010 2011 2012 China 14.2 9.6 9.2 10.3 9.0 8.7 India 9.6 5.1 9.1 9.1 8.9 8.8 Indonesia 6.3 6.0 4.6 6.1 6.1 6.3 PBOC has been taking measures since October 2010 to soak up excess liquidity to fight inflation As a result of rising cost of capital, dwindling orders and shortage of labor, SMEs are facing difficulties and some have declared bankruptcy China will calibrate policy to ensure the economy will grow by around 9% in 2011 Vietnam 8.5 6.3 5.3 6.8 6.4 7.0 Consumer price inflation (av), % 2007 2008 2009 2010 2011 2012 China 4.8 6.0-0.7 3.2 5.0 4.1 India 6.4 8.4 10.9 12.0 8.3 5.4 Indonesia 6.3 9.9 4.8 5.1 6.0 5.8 Vietnam 8.3 23.1 7.0 9.0 16.9 10.4 Source: Economist Intelligence Unit, June 2011 5
China Economic Review (Year 2001 Year 2011) Percentage 30.0 25.0 24.6 26.3 20.0 15.0 10.0 5.0 0.0 16.7 13.3 13.7 13.9 14.2 14.2 11.4 10.0 10.1 10.4 10.7 9.1 7.4 7.4 7.8 7.2 7.8 8.0 4.8 3.9 1.2 1.8 1.5-0.8 19.4 17.9 11.4 9.0 8.7 5.9 4.6-0.7 10.3 9.6 3.3 10.9 10.0 9.4 8.5 5.7 4.0-5.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GDP increase 9.1 10.0 10.1 10.4 10.7 11.4 9.0 8.7 10.3 9.4 8.5 CPI increase -0.8 1.2 3.9 1.8 1.5 4.8 5.9-0.7 3.3 5.7 4.0 Salary increase 7.4 7.2 7.4 7.8 7.8 8.0 11.4 4.6 9.6 10.9 10.0 Turnover 13.3 13.7 13.9 14.2 14.2 16.7 17.9 19.4 24.6 26.3 2012 Forecast Data Source: 1. GDP and CPI increase rate: the People s Bank of China and National Bureau of Statistic of China (Jan. Sep.) 2. Salary increase and turnover rate: 2011 Towers Watson General Industry Total Compensation Survey 3. 2012 Forecast GDP and CPI rate: Report of The Economist Intelligence Unit Estimates, September, 2011 6
Challenges of China s Labor Market China s Talent Supply can t keep up with the demand for talent in China China s R&D Boom Multinational Companies have more than 1,100 R&D centers in China, with a total workforce of 130,000. China s Talent in Financial Services: Shanghai in 2011 has 230,000 people in the financial service industry but only 600 (0.25%) of China s R&D Talent: them have international experience and credential Between 2003 2007, of all the new jobs in R&D across the world, 90% of them were in China. China s High Tech Talent Shortage: A shortage of 200,000 high-level talent in the next five years China s qualified accountant shortage: China has almost 10 million people in the accounting profession. Only 200,000 are mid to senior level financial talent. There is an urgent need for at least 300,000 of them as of today 7
Human Capital Trends in China Agenda Introduction Trends in Mainland China's Talent Market 2011 Compensation and Benefit Trends The Keys to Engagement in China 8
China Compensation Components Total Guaranteed Cash = Annual Base Salary + Annual Regular Allowances + 13 th th Month Salary + Annual Variable Cash Such as performance bonus, sales incentives that are paid on annual basis = Total Cash Pay Mix = Ratio of Total Guaranteed Cash (TGC) to Annual Variable Cash (VB) 9
Dramatic Increase in Minimum Wage Annual Minimum Wage in USD and Increase 2009 2010 2011 2011 vs 2009 % of Increase Beijing 1,480 1,770 2,140 45% Shanghai 1,770 2,070 2,360 33% Shenzhen 1,850 2,030 2,440 32% Wuhan 1,290 1,660 1,660 29% Chengdu 1,200 1,570 1,570 31% Zhengzhou 1,200 1,480 1,480 23% Source: China Statistical Bureau 10
Combating Perceptions of Pay Despite salary increases of 8-10% per year, Chinese employees are still highly dissatisfied with pay Key rewards items China vs Global/Asia Comparisons China Best Practices Item Overall, (relative to your job responsibilities) how satisfied are you with your pay (total guaranteed cash, allowances & variable pay) I think I am paid fairly compared with: Other people in my company who hold similar jobs I think I am paid fairly compared with: People in other companies who hold similar jobs 58 60 75 79 Work ASIA Work China 91 92 USA, 100 Create cash retention programs that vest over time, and are based on performance Provide more frequent salary adjustments, at slightly reduced levels Strengthen communication, especially related to Total rewards Train managers on how to communicate about pay Source: WorkChina, WorkAsia, and WorkUSA studies. Satisfaction levels have been converted into a percentage of WorkUSA levels. 11
Creating clear Line of sight in Performance Linked Pay Variable Pay Mix Manufacturing Companies Overall 73.9% 5.8% 6.2% 14.0% Top Mgnt. (GGS>=15) 75.6% 3.6% 4.5% 16.2% Mid. Mgnt. - Sales (11<=GGS<=14) 72.6% 3.8% 4.0% 19.5% Mid. Mgnt. - Non-sales (11<=GGS<=14) 76.4% 5.7% 5.4% 12.6% Prof. - Sales (7<=GGS<=10) 66.8% 3.3% 3.0% 26.9% Prof. - Non-sales (7<=GGS<=10) 74.0% 7.3% 5.6% 13.1% Staff (4<=GGS<=6) 74.0% 4.9% 6.2% 14.9% Operator (GGS<=3) 72.1% 6.3% 10.3% 11.2% Annual Base Salary Fixed Guaranteed Bonus Total Fixed Allowance Variable Compensation 12
Creating clear Line of sight in Performance linked Pay Chinese companies provide a significant portion of total cash in the form of variable pay. This includes operators and other non-exempt staff. But, MNCs struggle with linking variable pay with local business success. China Pay Mix by Level All Industries Overall Top Mgnt. (GGS>=15) Mid. Mgnt. - Sales (11<=GGS<=14) Mid. Mgnt. - Non-sales (11<=GGS<=14) Prof. - Sales (7<=GGS<=10) Prof. - Non-sales (7<=GGS<=10) Staff (4<=GGS<=6) Operator (GGS<=3) 56.7% 67.7% 68.1% 69.8% 65.4% 68.6% 69.9% 74.2% 2.5% 2.9% 3.4% 4.1% 2.2% 2.3% 2.4% 2.5% 3.3% 3.5% 4.0% 4.5% 3.5% 5.4% 5.2% 37.9% 8.6% 24.9% 27.4% 29.6% 23.4% 22.9% 21.1% Annual Base Salary Fixed Guaranteed Bonus Total Fixed Allow ance Variable Compensation 11.9% China Best Practices Design bonus pool funding with a higher percentage based on local China business results Link pay to individual performance, and differentiate pay-outs Design variable pay programs for non-exempt staff, including plant operators Source: Towers Watson Total Reward Survey China 13
Recent Survey Results In October 2011, TW conducted a survey among manufacturing companies in both 1st tier and 2nd tier cities Purpose of survey was to understand compensation practices, especially focus on operators 29 companies in 1st tier cities (e.g. Shanghai, Shenzhen) 33 companies in 2nd tier cities (e.g. Tianjin, Suzhou) 14
Tier One Cities Compensation Practice Operators without experience On Jul 1, 2011, The minimum wage of Shenzhen raised from RMB1100/month to RMB1320/month, increased by 20%. On Apr 1, 2011, the minimum wage of Shanghai raised from RMB1120/month to RMB1280/month, increased by 14%. P25 Average Median P75 Starting Salary Low (RMB/month) 1320 1428 1350 1500 Starting Salary High (RMB/month) 1358 1605 1450 1805 Monthly Salary Range Low (RMB/month) 1330 1568 1470 1885 Monthly Salary Range High (RMB/month) 1400 2046 2000 2500 Shift Allowance Morning Shift (RMB/shift) 7 8 8 10 Shift Allowance Afternoon Shift (RMB/shift) 5 6 8 18 Shift Allowance Night Shift (RMB/shift) 6 16 15 16 Position Subsidy (RMB/month) 58 89 100 138 Average Overtime per capita (hours/month) 20 44 40 64 High Temperature Allowance (RMB/year) 500 525 600 800 Attendance Bonus (RMB/year) 1200 1011 1200 1380 Quarterly Bonus (RMB/quarter) 200 334 300 435 Annual Bonus (RMB/year) 1200 1684 1330 2125 Other Allowances (RMB/year) 100 747 700 1000 15
Tier One Cities Compensation Practice Semi skilled operators P25 Average Median P75 Starting Salary Low (RMB/month) 1320 1525 1435 1600 Starting Salary High (RMB/month) 1425 1851 1725 2150 Monthly Salary Range Low (RMB/month) 1413 1636 1550 1876 Monthly Salary Range High (RMB/month) 1610 2288 2060 2915 Shift Allowance Morning Shift (RMB/shift) 7 8 8 10 Shift Allowance Afternoon Shift (RMB/shift) 5 6 8 18 Shift Allowance Night Shift (RMB/shift) 6 16 15 16 Position Subsidy (RMB/month) 100 198 175 209 Average Overtime per capita (hours/month) 25 47 36 67 High Temperature Allowance (RMB/year) 500 608 600 800 Attendance Bonus (RMB/year) 1200 1180 1200 1380 Quarterly Bonus (RMB/quarter) 200 469 300 742 Annual Bonus (RMB/year) 1350 2037 1663 2550 Other Allowances (RMB/year) 205 835 550 1005 16
China Overview of Employee Benefits Statutory Benefits Medical Occupational Injury Maternity Unemployment Retirement Housing Typical Supplementary Benefits Prevalence Life Insurance (AD&D, Disability) 90% Medical 90% Retirement 20% Housing 50% Retention 50% Car/car allowance to management 50% Education Assistance/Training 50% LTI (i.e. Stock plan) 20% 17
Benefit Trends In recent years the benefits package has become more than a needed to play requirement and increasingly a differentiator in the market Current trends include: Supplemental retirement/savings plans 20% of companies provide this benefit, almost all are DC plans Provide financial securities to employees, and build partnership with employees Often include features to allow employees to withdraw part of the account balance during employment (e.g. for housing, children education, financial hardship, etc.) Some companies offer this benefit as a retention plan to a selected group of employees Employee Health and Wellness Programs Health risk assessment, preventive care, EAP, and other programs have been introduced to employees 21% of companies provide wellness programs, with vaccinations being one of the most popular programs Most companies providing are multinationals which provide wellness program globally Flexible benefits and employee choice Employees get to choose the benefits they want within a budget Increase ROI of benefits spending and improve employee engagement An effective way for benefits harmonization and long-term cost control 18
Offer Benefits in a Holistic Structure - Provide Benefits Based on Total Available Budget Determine optimal compensation and benefits budget Prioritize costs by nature of benefits: mandatory, voluntary and incentives Itemize menu of optional benefits available for employee choice Layer 5: Menu of benefits choices Total employees Budget Layer 4: Incentive compensation and benefits Layer 3: Supplementary minimums Layer 2: Competitive pay Layer 1: Statutory minimums Assume you have met the statutory minimums and paid salaries competitively then benefits can be a differentiator 19
Human Capital Trends in China Agenda Introduction Trends in Mainland China's Talent Market 2011 Compensation and Benefit Trends The Keys to Engagement in China 20
Importance of Engagement Engagement is very different from satisfaction High Pay Satisfaction Easy Work Close to the office Lots of training Stay for the wrong reasons Engagement Believe in the company Know our future Know how to contribute Willing to work hard Stay for the right reasons 21
Fostering Engagement in China While looking at scores in all of our categories is important, more critical is understanding what areas have the highest impact on engagement. Then, we can understand what best practices there are in these areas. Leadership Company Image Training and Development Goals and Performance Management Increased Engagement Financial Returns 22
Implications for Your China Business 1. Perceptions of Pay Create cash retention programs that vest over time, and are based on performance Provide more frequent salary adjustments, at slightly reduced levels Strengthen communication, especially related to Total rewards Train managers on how to communicate about pay 2. Employer Branding Re-define your EVP for the China market, understanding the local labor competition Demonstrate your long-term commitment to China and your contribution to its development Define clear messages, and constantly communicate them internally, as well as externally 3. Performance-linked Pay 2011 Towers Watson. All rights reserved. Design bonus pool funding with a higher percentage based on local China business results Link pay to individual performance, and differentiate pay-outs Design variable pay programs for non-exempt staff, including plant operators 23
Implications for Your China Business 4. Leadership Develop strong home-grown leadership programs Find ways of integrating Chinese leaders into global talent development programs Create expectations for managers emphasizing both the hard and the soft side of management 5. Satisfy Desire for Career Advancement Create sub-bands within broader global grading system Allow for localized titles for the China market Link training and development programs closely to their next job. Link training programs with retention through training bonds. 6. Benefits 2011 Towers Watson. All rights reserved. Conduct careful review of benefits programs and ensure their competitiveness over the long term Create flexible benefits programs to account for changing needs of employees Create Total Rewards Statements to clearly communicate the value of benefits programs 24
Thank you! For further questions or discussion, please feel free to contact: Steve Kueffner Phone: +248.936.7580 steve.kueffner@ 25
China: New Social Insurance Law, Effective October 15, 2011 Background The new Chinese Social Insurance Law was first introduced in October, 2010. A subsequent interim draft provisional measure mandates that foreigners participate in China s social insurance programs. Though both employers and employees have reacted negatively to the new law and are lobbying hard for an exemption, the Chinese government is determined to make it mandatory for foreigners to participate in China's social insurance programs. On September 6, 2011, the law was passed and will come into effect on October 15, 2011 Main Provisions The new law s goal is to move toward a more uniform nationwide system, expand coverage, and facilitate labor mobility within China Chinese nationals: the social insurance accounts are to be transferred when an employee changes job or moves to another province or city Foreign workers - the new law mandates, for the first time, that foreign workers have to participate in Social Security, i.e. pension, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance Implications For Your Organization Cost increase: the employment cost will increase for foreign workers and will vary by locations. For most cities (e.g. Beijing, Shanghai, etc), social security ceilings are in place to cap the social insurance costs, and many foreigners have pay that is higher than the social insurance ceiling. As such, the cost of social insurance contributions could be capped. For example, in Shanghai, the maximum annual extra cost per foreign worker is RMB51,895 (USD8,096) for the employer and RMB 15,428 (USD2,407) for the employee. If employers provide tax protection/equalization for their foreign workers and pay the employees' share of the social insurance, the annual cost could be even higher for the employer (i.e. ~USD10K per foreigner per year in Shanghai). Complex administration: the changes will also raise administrative issues. Foreign workers could be on a full spectrum of payroll arrangements (e.g. split payroll, fully paid in foreign currency, or in RMB). Employers will have to assess their payroll systems and process to assume compliance. Employers may be motivated to shift to local talent instead of more expensive foreign talent 26