According to recently-released annual reports, the salaries of top executives in China’s listed companies, especially those in the financial sector, have soared. According to Shenzhen Daily, Shenzhen-based China Ping An insurance company pays the most of all A-share companies to its top executives.


Ping An augmented its top executives’ paychecks by 122%, to 282 million yuan (US$40 million), or 1.47% of the company’s net profit last year. At the same time, the company posted a 140% rise in net profit. As a result, Ma Mingzhe, chairman of Ping An; Louis Cheung, Ping An’s president and CFO; and Dominic Leung, Ping An’s CEO, each earned more than 25 million yuan after taxes in 2007.


The average income of Chinese citizens is on the rise, too, although not as fast. According to the National Bureau of Statistics, the disposable income per capita for Chinese urban citizens was RMB13,796 (US$1970) in 2007, an increase of 17.2% over 2006, the biggest rise in six years. If the current rate of increase continues, salaries in Chinese cities will double in four to five years.


According to the 2007 Shanghai Local Compensation & Benefits Total Compensation Measurement Report, conducted by global human resource consulting firm Hewitt Associates on mainly Shanghai area foreign invested companies, salaries increased 9.6% for managers and 9.1% for supervisor/senior professionals in the non-manufacturing sector in Shanghai in 2007, in contrast to 8.2% and 8.1% respectively in 2006. For professionals, salaries increased by 9.0% in 2007 as compared to 8.1% in 2006.


Another significant trend reported by the study is the increase in salaries in second tier cities in the Yangtze River Delta, with Shanghai manufacturing at 8.5%, Suzhou 8.8%, Wuxi 9.2% and Changzhou 10.2%.


External and Internal Factors

In an interview with China Knowledge at Wharton, Michael Song, head of Hewitt’s compensation and benefits consulting practice, says that overall, the average salary increase in Hewitt-surveyed companies was 8.7% across China. Hewitt also asked companies last year how they were reacting to the ever-climbing CPI level in China. They found that 50% of the surveyed 300 companies say they have taken this factor into account when preparing their 2008 budgets. After this survey, Song says, “we might need to upgrade the forecast for this year’s salary increase from 8.8% to 9.5%.


The overall payroll structure of a corporation, according to Song, largely depends on two factors. One includes external factors ranging from market pay level, industry pay level and competitor pay level to GDP and CPI Index of the country to the talent market dynamics. The internal factors include business performance and financial profitability. As to the question of internal allocation of compensation budget, according to another Hewitt survey, 94% of participants reported having a variable pay plan, with ‘Individual Performance Awards’ and ‘Special Recognition Awards’ remaining popular.


A human resource manager at an American Fortune 500 company, who asks to remain anonymous, says that the salary increase rate at his company closely follows the structure at similar companies in the Fortune 500. “If our pay is above the market level, that will impose big pressures on labor costs. And, according to what I have observed, even you are above the average level, your turnover rate will not necessarily come down. However, if your pay rise is lower than the market level, even by a few percentage points, you will see the turnover rate going up, and the first batch of people leaving are your best people.”


A human resource manager for a foreign shipping company, who also asks to be anonymous, says that “Our internal payroll structure is comprised of three aspects: individual performance, the importance of the position (which is determined by a confidential internal grading system) and the market average benchmark. Overall, there is a budget for the total increase of salaries. No matter what changes there are in the external environment, we will maintain a stable increase level, for example 7%-12%. I don’t think we will offer more than a 20% increase for employees. However, to respond to the climbing CPI level in China, I think there might be room to do adjustment in local benefits.”


He adds: “We don’t take external dynamics as the most important factor. We mainly look at the growth of company performance and individual performance. Internally, on average, 70%-80% people will get a salary increase based on the above variables.”


Michael Song acknowledges that the pay increase rate varies in different levels within the same company. “The higher the level goes, the faster the pay grows,” he says. The above-mentioned Hewitt survey says that in the manufacturing sector in Shanghai city over the last three years, the compound growth rate of salaries has increased to 54.5% for the top management level while it is only at 14.1% for manual workers.


Meanwhile, Song points out that the entry level salary for new college graduates has recently stabilized at around RMB3000 (US$428) in Shanghai, although some outstanding graduates from top universities in China could have monthly salaries at RMB 5000-7000 (US$415-$1000). Oversupply might be the reason behind the stagnated entry-level salary. There are too many fresh graduates every year, and most likely, they don’t possess the right skills that companies want to employ, Song notes.


The biggest salary increase in China last year was in the finance and investment sector, especially the funds industry, according to Song, who adds that he considers the strong market performance last year and fast growth in the finance sector as the driving forces behind the rise.


Turnover Rate on Rise, Too

The increasing labor costs in China are posing challenges to companies’ margins. However, even if companies are continuously improving their compensation and benefits levels, the employee turnover rate doesn’t show any sign of decline. The Hewitt study confirms that turnover rates are still moving upwards across most sectors in China, with average employee turnover rates in the surveyed companies increasing from 8.3% in 2001 to 14.7% in 2007.


This number has continued to rise in recent years, says Song, noting that some cities and some industries see even higher turnover rates. The reason, he concludes, is mainly the gap between supply and demand.


He points to the fast growing economy in China as the fundamental cause for the gap. “Most enterprises are continuously expanding in China. Last year, there was, on average, a 10% to 20% increase in [company workforces]. When companies are expanding, the whole market is recruiting but supply is not catching up fast enough. Demand for certain functions, like sales and marketing, is even bigger. For people in some key positions, the opportunities are huge, and there might be headhunters chasing after them every day.”


The human resource manager of the shipping company says that it’s easy to find entry level employees, operators or bill processors, but more difficult to find experienced managers. He cited the same reason as Song. “The current headcount of our company has tripped the number at 2003. Although the shipping industry has its peak and down cycles, overall the market is developing fast and other shipping companies are recruiting people, too. This talent gap is caused by market growth.”


Kang Lan, client partner at Korn Ferry’s Shanghai Office, the international executive search company, says that compensation inflation varies in different functions. “For a function like marketing, which is relatively new in China, there was not very much talent accumulation, [but] all of a sudden,” there have been new companies coming on the scene and expanding to second or third tier cities. These companies are now in need of marketers. “Where can you find marketing directors?” she asks.


Meanwhile, Kang adds, “The more professional the position, the faster the pay grows, and the smaller the talent pool is, the faster the pay grows. For example, there are not many people who are familiar with pharmaceutical regulations in China. If a new foreign company comes [here], it will need experienced people to deal with regulators immediately. However, the talent pool for this function is very small and therefore the pay for these people will surge.”


How Companies React


Ever increasing pay hikes are posing a significant problem for most organizations. Nishchae Suri, head of Hewitt’s talent and organization consulting analytics practice in Asia, says: “A salary increase is the most perceptible way of enhancing the employment deal but, of course, not the complete deal itself.


“Pay-for-Performance is clearly the next generation mantra for companies in Asia. Increasingly, more companies are trying to further reinforce the pay and performance relationship through variable pay plans. On the other hand, organizations will use consumer marketing technologies to customize total rewards packages. Through personalized web portals, organizations will offer compensation menus that are tailored to both groups and even individual workers. Options offered will go beyond the traditional flexible benefits fare to include choice in work assignments and location, time and money for training, and working time flexibility,” says Suri.


According to Kang of Korn Ferry, companies must have an overall estimation of their labor cost increases. Compensation is one means to retain talent, she says, “but if it’s not effective enough, you probably has to review compensation for key employees more frequently or, you might have to develop other approaches — for example, long-term incentives and non-salary motivations.”


Song of Hewitt says that for companies to achieve success in China, it’s important to plan for the long term. He cites many leading multinationals’ human resource management strategies as an example of good planning. They recruit a big portion of fresh graduates every year and train them gradually. This approach has helped the company build up a dynamic talent pipeline which has resulted in huge cost savings.  But of course, “it could only happen if your company is able to endure the hardest times and is willing to spend time and efforts to train people…. It takes investment either you train people internally or you buy talent from the market, but the former strategy” is more long-term based, Song notes.


Managing pay expectations is a balancing act, considering both internal and external equity, Song adds, “Yes, in China, cash is king, but it’s not enough to focus solely on pay. We learned from our research that a good career development plan and training system are very important incentives for employee engagement. Some big companies in China don’t have the highest pay in the market, but they have the best training system, which also attracts a lot of good talent.”


Song also says that management skills, a positive organizational culture and effective brand alignment with employees are among the strongest indicators of whether an organization will succeed in China today.


According to the human resource manager of the shipping company, it’s important for companies to have a long-term business strategy and plan for a talent reserve. These plans, he says, “will help managers … reserve and retain key talent for the company’s future development.”


Suggestions for Individuals


It’s not unusual to see pay rise at a fast pace in emerging markets, notes Song, who says that India and Vietnam outpaced China in salary increases last year.


“In a fast growing economy, you still have to do your work solidly and polish your professional skills,” suggests Kang, who has seen, in some cases, that people are not capable enough to handle their new positions. “In China today, the temptation for people to hop jobs for title and salary inflation is huge. However, I would suggest you don’t follow the compensation too frequently. It will actually hamper your long-term career development. Only when you work hard in a certain position and in a certain company, can you accumulate relevant experience and improve your professional skills,” she says.

“Now is a good time, so people are not worried, but as soon as the economy slows down or even goes into recession, employers will be much more picky,” Kang cautions. “Only the really capable and experienced people will survive.”