Human Capital Management in CHINA 2007

Leading Practices for Human Capital Management in Today’s China

Clarence Kwan, Dick Kleinert, Jungle Wong

October 25, 2006

China Issues Presents:

Copyright © 2006 Deloitte Development LLC. All rights reserved.

Contents

1. Overview of HC market in China

2. Talent Management issues in China

3. Leading Practices in Human Capital Management


Overview of China’s Labor Market

City labor market in China

240

249

257

265

225230235240245250255260265270

The city labor market across China has seen a stable annual increase of approximately 3%. The market includes all types of companies in cities and towns.

2001 2002 2003 2004

Unit: Million

Among the city labor market, SOE’s have the largest share of the labor market. Employment at SOE’s has decreased while at MNC’s it has increased along with more and more foreign capital flowing into China.

76 72 69 68

3.5 3.9 4.5 5.6

0

20

40

60

80

2001 2002 2003 2004

SOE

MNC

Percentage

SOE vs. MNC in labor market

Sources: Ministry of Statistic Bureau1


The Trend of Labor Supply and Demand in China

DemandSupplyRatio of Demand over Supply

1stquarter 2001

2nd

quarter 2001

3rd

quarter 2001

4th

quarter 2001

1stquarter 2002

2nd

quarter 2002

3rd

quarter 2002

4th

quarter 2002

1stquarter 2003

2nd

quarter 2003

3rd

quarter 2003

4th

quarter 2003

1stquarter 2004

2nd

quarter 2004

3rd

quarter 2004

4th

quarter 2004

1stquarter 2005

2nd

quarter 2005

3rd

quarter 2005

4th

quarter 2005

Unit(00,000) The change of labor supply and demand from 2001 to 2005

Since 2001 the relationship between labor supply and demand has become more balanced. In 2006 the ratio of supply and demand is predicted to reach 1:1. China will no longer have an excess of labor supply.Additionally, in 2009 China may face labor shortage problems.

Source: Ministry of Labor and Social Security, and China Youth Newspaper

2


China is Facing Talent Shortage Problems

Despite China’s 1.3 billion population, pockets of talent shortage exist. The cause of this newly emerging phenomenon is that the job seekers’skill sets do not match the job requirements.

• Rapid economic and social change has spurred a skills shortage that is expected to escalate in the next few years.

• The shortage in management candidates is slowing the expansion of foreign businesses.

Rate

Rate is the ratio of demand and supply

Source: Ministry of Labor and Social Security, PRC

The fields that suffer labor shortage in China:

2

1.53

1.06

2.08

2.25

Engineer

SkilledTechnician

Technician

Sales

QualifiedManager

3


The Talent Market in China is Characterized by Shortage of Key Talent Segments

0

20000

40000

60000

80000

100000

120000

140000

0

1

2

3

4

5

6

7

8

9

10

China’s GDP (in RMB) The number of MNCs in China

• With the rapid growth of China’s economy, comes an increase in the number of MNCs entering China. This results in a growing demand for talent

• The demand for key talent segments exceeds the available supply

Sources: Ministry of Statistic Bureau

Volume of MNCs in China

2004

Unit (10 Thousand)14 T

12 T

10 T

8 T

6 T

4 T

2 T

4


It’s Harder for MNCs in China to Find Qualified TalentChina has a vast pool of labor supply, but only a small percentage of this pool is qualified to work in MNCs. According to a survey conducted by the McKinsey Global Institute, on average, fewer than 10% of Chinese job candidates possess the skills to work in a foreign company.

An intense competition for well-educated, English-speaking, professional staff who have experience working with MNCs

Skills Gap

Lack of English Speaking Capability:Most Chinese employees have low English-language skills.

Lack of pratical experience:

China's education system emphasizes theory rather than finding practical solutions.

Lack of qualified management skills:Older managers from China's Cultural Revolution lack the education needed for foreign-based companies, while recent university graduates lack experience

Skills Gap

Skills Gap

5


Polling Question 1

How much growth do you anticipate in your employee population in China over the next 2-3 years?

• None• Small increase (less than 10%)• Moderate increase (10-25%)• Large increase (25-50%)• Very large increase (more than 50%)• Not applicable


Labor Costs Continue to Increase in China

Annual Average Salary

32808

28348

24045

20728

0

5000

10000

15000

20000

25000

30000

35000

2005 2004 2003 2002

RMB

• China has seen a consistent salary rise with an annual increase of nearly 10%. The national average wage increase covers all industries

• Average wages at MNCs are 26% - 57%, higher than those at SOEs. For executives it may be between 50%-200% higher.

• Salaries in tier I cities such as Beijing, Shanghai, Guangzhou are higher than other cities.

Source: Ministry of Social securitySource: National Salary Report of 2004

Monthly Salary Comparison

3820

2916 2789

0

500

1000

1500

2000

2500

3000

3500

4000

4500

MNC LNE SOE

RMB

6


Average Actual Salary Increases by Nearly 8% For All Industries in 2005

Source: Watson Wyatt “ salary survey report-2005”7


The Shortage of Talent has Pushed Up the Cost of Business • The shortage of talented labor is pushing up wages and swelling the ranks of the

country's middle class. According to a survey conducted of the salaries of China and India, labor costs in China has surpassed that of India:

Source from a survey by Mercer in 2005

• Rising labor costs are pinching the margins of overseas manufacturers operating in mainland China. Among members of the American Chamber of Commerce in China, 41 percent of companies and 48 percent of manufacturers report being negatively affected by increased salary and wage expenses.

Position China IndiaHR manager $32,000 $15,100

Marketing manager $25,800 $14,300

Project manager $23,400 $10,000

Software development engineer $13,400 $10,300

Financial analyst $13,200 $8,400

Accountant $9,000 $5,700

Senior customer service officer $8,300 $8,200

Sales representative $5,100 $4,700

Customer service assistant $2,400 $1,600

Production worker (skilled) $2,300 $1,900

8


Mandatory Social Insurance in Addition to Base Salaries

• All types of companies in China are required to pay social insurance for their employees. Ratios vary between cities, for example, in Beijing, the ratio for housing is 8% which is contributed by companies and 8% is contributed by employees, but in Shanghai it is 7% by individual and 7% by company.

• Any failure of payment for mandatory insurance could lead to a penalty.

• Total compensation will be around 138-145% of the total base salary.

Mandatory Social Insurance

Cities Total Total Unemployment

InsuranceMedical InsurancePensionHousing Fund

CompanyIndividualCompanyIndividual CompanyIndividual CompanyIndividual CompanyIndividual

1.50%

2%

2%

0.50%

1%

1%

10%

12%

8%

2%+3

1%

2%

20%

22.5%

20%

8%

8%

8%

8%

7%

8%

8%

7%

8%

39.5%18.5% +3Beijing

43.5%17%Shang

hai

38%19%GuangZhou

Source: Beijing Labor Ministry, Shanghai Labor Ministry, Guangzhou Labor Ministry

9


Contents





Employee Management Issues are the 2nd Largest Issues MNCs Face in China

83.7%

40.3%35.8% 32.4% 30.1% 26.7% 23.3% 20.4% 17.9%

10.1% 7.7%

Compe

titive

Mark

et

Emplo

yee M

anage

ment

Curre

ncy R

iskIP

Pro

tecti

on

Gover

nmen

t Rela

tions

hip

Accou

nts R

eceiv

able

sFina

ncing

Chang

e of T

axat

ion R

ules

Fraud

Suppli

ers

Politic

al Uns

tabilit

y

Source: Fortune (Chinese version 05/2006)

Response % ( Multiple Choices)

10


Enterprises in China are Facing Serious Employee Management Issues

The talent shortage at middle and senior management levels is proving a major problem for domestic and foreign-invested companies in China. Shortages are most severe among senior managers; two in every five companies are finding it difficult to fill senior management positions*

Talent issues have serious implications for both MNC

and Chinese companies with global ambitions.

High replacement cost

High replacement cost

Developing local leaders is a significant challenge

Developing local leaders is a significant challenge

Traditional retention methods no longer work.

Traditional retention methods no longer work.

The talent war is getting fierceThe talent war is getting fierce

It’s hard to recruit qualified talent

It’s hard to recruit qualified talent

* Source: Manpower China White Paper 11


The Talent Management Issues Have Negatively Impacted Business Operations

• Not able to react quickly to growth opportunities

• Facing higher attrition rates as candidates defect to other companies

• Having to replace people who possess significant intellectual capital about organization’s products and services.

• The cost of replacing average-performing staff members is about 90% of their salary, while high performers can cost anywhere from 300% to 2,000%

• Distraction from core business operations while staff members must focus on training new employees

• Not able to react quickly to growth opportunities

• Facing higher attrition rates as candidates defect to other companies

• Having to replace people who possess significant intellectual capital about organization’s products and services.

• The cost of replacing average-performing staff members is about 90% of their salary, while high performers can cost anywhere from 300% to 2,000%

• Distraction from core business operations while staff members must focus on training new employees

• The talent war is getting fierce

• Companies find it hard to recruit qualified employees

• Developing local leaders is a significant challenge

• Traditional Retention Methods are not working any more

• High replacement Cost

1

2

3

4

5

ImpactsIssues

12


Polling Question 2

What is the top challenge you have experienced with human capital management in China?

• Difficulty finding and recruiting qualified candidates• Difficulty retaining qualified candidates• Performance management challenges• Communication challenges• Shortage of staff with technical / managerial skills• Not applicable


Turnover Rate has Improved Since 2002 (30%), but is Still High Especially for Management and Officers

Source: Watson Wyatt “ salary survey report-2005”13


Fierce Competition From Private and State-owned Firms

Private and State-owned Enterprises provide more opportunities for career advancement, which increases their attractiveness to talent.

Source: China Ministry of Statistics

The preferred companies

79%

59%

6.70%

29%

5.70% 11.20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004

PE 14


Generalizations about Cultural Differences

FastSlowAbility to Make Quick Response

DirectIndirectDealing with Business Counterparts

Individual authority Distributed decision making

Group decisionFinal word by the manager

Negotiation Style

OutspokenReservedBusiness Culture

ContractsPeopleSource of Trust

IndividualsRelationshipsEthnic Culture

North AmericaChina

15


Contents





23%

19%

7%

7%

3%

Company location

Unique organizationalculture

Meaningful and creativework

Opportunities for careerdevelopment

Attractive salary andbenefits package

Top Five Criteria for Attracting Talent

• Companies that retain the best employees offer competitive pay, promote flexible working environments and provide career advancements.

• High-profile multinational organizations with high retention rates typically provide more career opportunities as well as stronger training and mentoring programs. These organizations attract employees because of the future prospects they offer and the prestige associated with working for them.

Source: China Employee Attraction and Retention Survey 2006 conducted by Mercer16


Top Five Criteria for Attracting Talent (Cont.)

• The survey also found that 83 per cent of organizations offer healthcare and related insurance, while 41 per cent provide health and fitness plans and 24 per cent offer flexible working.;

• Just 21 per cent offer supplementary pension plans and 10 per cent provide subsidized loans.;

• Overseas assignments are felt to be the most effective tool for career development, but only 42 per cent of organizations offer such opportunities.

• Individual career development plans, offered by 51 per cent of companies, are also believed to be effective.

• In contrast, mentorship programmers are considered relatively ineffective and are offered by just one-quarter (26 per cent) of companies.

17


Polling Question 3

Which of the following do you think your employees in China value the most highly?

• Competitive wages and benefits• Advanced training• Clarity of performance expectations and metrics• Enhanced communications about business strategy, objectives, and operations• Job rotation and advancement opportunities• Not applicable


Traditional Talent Management Approaches Don’t Work

• Traditional approaches:• Do not allow individuals or organizations the flexibility they need to

grow• Are costly (firms spend 50 times more on recruiting than training)

• Focus on metrics and outcomes, rather than what really matters to talent

• Do not get to the heart of where value is created

• Are often divorced from broader business aims, such as strategicgoals and firm branding

Acquire Deploy Develop

The Traditional Talent Management Process

Retain

18


How Can One Successfully Attract and Retain Talent in China?

Select the right people...

Provide competitive compensation and

benefits…

Establish an appropriate culture for China…

Appoint competent leaders…

Create a learning organization...

Learning is a priority for employees because they areacutely aware of the limitations of their educationalsystem and are keen to acquire marketable skills.

Companies that employ leaders whomemployees believe are competent and who provideemployees with immediate feedback are likely tostrengthen employee engagement.

It is critical for companies to appreciate and respectChinese cultural norms and practices. Companies must align certain characteristics with management practices and organizational behavior.

Frequent salary reviews are essential to keep track of the market rate; employees themselves will be aware of what their market value is.

Careful attention to job placement increases retention by ensuring an optimal fit between the applicant and the skills and aptitude required for the job.

19


Creating a learning organization. If you can’t find it, Make it

Among the 50 enterprises preferred by universities between 2004-2005, the top enterprises are the ones that invest heavily on employee development and internal promotion.

• Among the 50, the ratio of MNCs and domestic companies is 33:17

• Those investing heavily on employee development enjoys higher reputation

20


The Need to Invest in Learning and Development

Learning Organization

Learning has to be embeddedinto daily activities

Create a culture of knowledge sharing.

Develop managementtraining courses

Bring curricula more in line with the needs of industry.

Give employees projects which go beyond their current job’s responsibilities

Participate in global tasks to learn about western culture business management.

21


Competent Leaders can Increase their Employees’Engagement By:

• Ensuring that their employees understand how their personal workgoals are linked to the business objectives of the organization

• Recognizing that communication in China is more diplomatic in order not to hurt employees’ face (Mian Zi). This is especially important when delivering the results of performance reviews.

• Building personal relationships with employees (Guan Xi) • Ensuring employees receive ongoing performance feedback from

immediate managers on a formal and informal environment• Developing career planning for talents

22


Establishing an Appropriate Culture is an Effective Way to Adapt to the Local Market

• Even if they have good qualifications and English language skills, Chinese employees are often cautious about taking initiative and can be risk averse. Therefore, HR professionals in China will need to regularly articulate the culture of the company to encourage open communication, allowing employees to make mistakes and show initiative

• It is the organization’s responsibility to communicate those values clearly and simply. Developing a strong brand that describes a company’s unique work culture will help attract and retain talent

• Leaders need to embody the values in their actions every day

23


Using Market-wise Compensation to Improve Retention

Though compensation isn’t top priority for many employees in China, a good compensation strategy will increase retention:

Strategy I

Strategy II

Strategy III

Strategies

Figure out what wages your industry is offering.

Examine internal pay disparities:Make sure that the pay for each job is equivalent to that of similar jobs across the organization.

Don’t assume you have to outspend your competitors.Making sure you can meet employees’ needs is most important.

Strategy IVPay “hot skills” premiums to employees with crucial, rare expertise and stop premiums when the skills become more available or less important to your business.

24


Compensation is Not Just About Money

• Although a good compensation package is important to employees, they may also be looking for tuition reimbursement, staff outings and team building activities that should be viewed as an opportunity to reinforce the company’s values

• A housing allowance or fund can also be included in companies’benefit schemes. This is popular among mid-level employees who want to set up a home for their family

• Senior Chinese managers will expect their benefits to be the same as their associates in the company headquarters, including stock options and a retirement plan. Thus, a long-term incentive plan can become part of the package.

• Supplemental insurance and medical programs are influential while China continues to reform its benefits system

• Offer Performance Based Pay. Talent doesn’t want to be normalized• Ready to lose some people because you cannot offer highest salary

25


Careful Attention to Job Placement Increases Retention

Employers need to anticipate what will be expected from future employees so that they may create realistic job descriptions1

Consider internal promotion before external recruitment. A loyal employee is key.

2

Employers need to understand employee job satisfaction. This is possible through the use of employee satisfaction surveys.

3

Conducting interviews with both Western and Chinese managers will ensure a balance of Western and Chinese interviewing styles.

4

Many companies are considering developing their own assessment center.5

Create a strong training and recruiting program.6

26


Polling Question 4

Overall, how satisfied have you been with the quality of talent you have been able to hire in China?

•Very unsatisfactory•Satisfactory•Mixed experience•Very satisfactory•Not applicable


Conclusion

• As the Chinese economy grows and moves into more value-added work, the challenge of attracting and retaining staff is rising with skill levels, as demand outstrips supply.

• MNCs need to rethink their working practices, taking Chinese culture into account, and resist the urge to impose Western management processes and thinking on their Chinese employees.

• All organizations need to take into account the multiple factors at play that affect employee attraction and retention.

• Organizations must also focus on employee engagement to ensure that their workforce is committed to the long-term success of their organization and want to stay with the organization to honor this commitment.

• Companies operating in China need to develop an integrated, strategic approach to attracting and retaining talent and ensuring their employees are fully engaged.


Questions & Contact Info

Clarence [email protected]

Dick [email protected]

Jungle [email protected] (10) 8520 7807


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