Blog Article

With salaries shooting up, could China be losing its luster?

Posted by Wendy Nicholls

Wendy Nicholls

Each week, we examine the economic context of an emerging market and the implications for multinationals’ reward policies. This week, Wendy Nicholls looks at China.

China’s economy may have cooled down in recent years, but it’s still expanding at an enviable rate: The 12th Five Year Plan (2011-2015) issued by the China Government states the objective to achieve an average real GDP growth rate of 7% and ensuring that incomes rise at least as fast as GDP.

But while such rapid growth is great news for multinationals with ambitious plans of their own, it’s also pushing pay up. China now has one of the world’s highest rates of real wage inflation, and socio-economic factors – such as increased competition from both local and foreign-owned firms, a management talent shortage, and government plans to shift the focus from manufacturing to services and knowledge industries – look set to heat up the market even further.

So with pay under pressure, could China lose its luster as a centre for cost control? My colleague David Shen, who heads up our local reward practice, thinks not – but cautions that multinationals will need to work harder and smarter, and find more creative ways to reward their people, if they’re to succeed in what is still one of the most exciting and fast-moving markets in the world.

Here are three major pay trends David and I have noticed in China, and what we think multinationals can do about them.

1) A steep management pay curve
Multinationals often need to hire bilingual individuals with international management experience. In China, these people are thin on the ground, so to recruit them, you have to pay a premium.

This has created a steep pay curve: according to our PayNet database, senior management pay rose by a factor of 3.5 in China during the ten years to 2011, compared to just 1.4 in the US. And senior managers are now paid almost 80 percent of what their American counterparts earn.

How to tackle it
When filling management positions, companies either recruit from outside or develop people from within. We’ve increasingly seen clients opt for the second option, and focus on putting people development programs in place that will give them the talent pipeline they need.

2) Job-hopping managers 
China is currently experiencing the fastest pay progression in Asia, driving expectations that frequent career moves will mean lucrative pay rises.

Chinese managers typically stay with a company for just three years, and turnover is highest among younger managers. With just a few years’ experience under their belts, 25-30 year-old professionals are finding themselves highly marketable.

How to tackle it
We’ve seen firms create ‘mid-steps’ in their hierarchies and pay bands, to give more internal opportunities for promotions and pay rises. But another trend is to look beyond pay to intangibles, such as career development programs, positive working environments and good managers. These factors can help to offset the pressure on pay by creating a workplace that people don’t want to leave, but remember: this will only apply if employees are aware of what they get for working at a company. So it’s crucial to get reward communication right.

3) Big regional variations
China’s too large and economically diverse a market for a single, national pay policy. So firms operate a tiered regional reward system, with the east coast of the country enjoying markedly higher pay.

The major conurbations of Beijing, Shanghai, Guangzhou and Shenzhen are considered ‘first tier’ cities; salaries here can be 20-30 percent higher than elsewhere. Other cities are considered ‘non first tier’ locations. These tend to have less infrastructure, lower overheads, a smaller talent pool, fewer English-speakers and, as a result, have had lower levels of pay to date.

How to tackle it
Multinationals have been increasingly cutting costs by moving their low-cost manufacturing to these non first tier cities. But if everyone’s doing that, it’s harder to stand out and it is pushing up the pay. We’ve seen good results from companies that invest in intangibles as a way of differentiating themselves as employers.

To find out more about current reward trends, watch our webinar recording Pay trends in China on demand.

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