China’s HR Challenges

Managing Chinese - Relationships

Nation

Friends

Family

Company

Self

Managing Chinese - The Negative Stereotypes

• Strict adherence to hierarchy is still prevalent

• Value systems are gradually fixing themselves

• Attention to Details is often lacking Work ethic does not encourage pride in work as it does in other countriesLeftover mentality of the ‘Iron Rice bowl’ where everything was provided by the State

Managing Chinese - The Negative Stereotypes

Being reactive rather than proactiveEducation system relies heavily on rote memory and less on logical and critical thinkingCreativity is stymied in strictly controlled classrooms where the authority of the professor is paramount

Shuanghuan CEO or BMW X5?

Managing Chinese - The Reality

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China's GDP Growth (RMB Billion)

Managing Chinese - The Reality

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FDI Utilized (USD Billion)

Managing Chinese - The Positive Stereotypes

Pudong, Shanghai 1990• Incredible ability to organize

en mass

• Strong sense of National Identity and Pride

• High level of resiliency and resourcefulness

The ability to wake from decades of self-imposed isolation…

Managing Chinese - The Positive Stereotypes

…to become one of the world’s most promising economies

Pudong, Shanghai Today

Managing Chinese – Solutions

• Never accept: “That’s how its done in China”Often used to deflect foreign criticism or excuse improper behaviorIf it does not make sense then it probably doesn’t belong in your organization

• Chinese are capable of accepting and adopting to new behaviorsChina is in a constant state of flux: it’s not just the economy that is developing Flat Organizations, cooperative working environments, empowering junior and middle management

• Adapt your company culture to your China operationsThere is a reason why your firm is successful and part of that is the company cultureJust as your business model needs to be adjusted to regional preferences so too does your management style

Not just Foreign Companies introducing new management concepts

HR Trends - Recruitment

• The cost of replacing a senior manager can cost a firm twice the annual salary of the position

• Localization is increasingly more common

• Most severe talent shortages:

Leadership / P&L experience

Project management skills

Marketing

Sales

Specialized technical skills

Staff Recruitment Methods % Respondents

Attractive Salary & Benefits 23

Opportunities for Career Development 19

Meaningful & Creative Work 7

Unique Company Culture 7

Company Location 3

Source: Mercer Employee and Attraction Survey

HR Trends - Retention

• #1 concern for American companies operating in China is retention of staff

• Years of services of 25-35 year olds have dropped on average from 3 to 5 year to 1 to 2 years in 2005

• Key mistakes that foreign companies make:Two-tier payment systemGlass Ceiling Training and career development Work-life balance

Effective Retention Tools Year of Service

Training, Education Reimbursement, career development, Housing Benefits

Up to 5 years

Exposure to Senior Management, Training, Career development, Housing Benefits

5 – 10 years

Retirement Benefits, Medical Benefits, Work/Life Balance, Long-term incentives, External Recognition

Over 10 Years

Source: Hewitt Associates

Labor Compliance - Employment

• Rep Offices are not allowed to sign employment contracts with local employees directly.

• Official version of employment contract must be in Chinese

• Only two fixed-term contracts allowed

• Severance compensation applies for expired contracts that are not renewed

• No standard contract form, but should include:Term of contract & probation periodJob TitleLabor protection and working conditionsCompensationTermination ConditionsBreach of contract provisions & disciplinary rules, NDA’s, Non-Competes

Consult with a Lawyer specialized in the Labor Law

Labor Compliance - Severance Pay

• Amount based on the number of years worked with employer

• 1 month salary for each full year

• In case the employee works less than 6 months, severance pay of ½ month salary

• Any period of not less than 6 months but less than 1 year shall be regarded as 1 year

• Severance cap:If the monthly wage ≥ 3 x (average monthly wage*)

- and -No more than12 years of work (i.e. 12 months severance max)

* The average wage of Shanghai, 2008: RMB 2,892/mth (3*2,892=8,676)

Labor Compliance - Termination

• Contract terminated by employee / employee does not agree to renew the contract if the employer provides better offer

• Contract terminated during probationary period:1 month / 6 months – 1 year contract2 months /1-3 year contract6 months / 3 years and above

• Employee breaches contract / commits a civil crime

• The employer faces substantial difficulties in business operations

• Dramatic change in macroeconomic circumstances

• Missing or death of employee

Limited situations where severance is not paid for termination

Labor Compliance - Work Hours

• Legal Weekly Working Duration: 40 hoursOvertime arrangements:

• Weekdays: 1.5x normal salary• Weekends: 2x normal salary• National Holidays: 3x normal

salaryOvertime during weekdays and weekends can be replaced by time off during working days

• Intern/Part Time Employees: 20 hours or less

• Flexible working hours

• Retail & Services

• Comprehensive working hours

• MFG

Name of Holiday Duration Period

New Year’s Day 1 day 1 Jan

Spring Festival 3 days Lunar calendar01/01 - 03/01

Tomb-Sweeping Day 1 day 4 Apr

Labor Day 1 day 1 May

Dragon Boat Festival 1 day Lunar calendar05/05

Mid Autumn Festival 1 day Lunar calendar15/08

National Day 3 days 1 Oct – 3 Oct

Labor Compliance - Contributions

Social BenefitsUrban Scheme Township Scheme

Company Employee Company Employee

Pension 22% 8% 17%

0%

Unemployment Fund 2% 1% 2%

Medical Coverage 12% 2% 5%

Workplace Insurance 0.5% 0% 0.5%

Maternity Leave 0.5% 0% 0.5%

Public Housing Fund 7% 7% 7% 7%

Total 44% 18% 32% 7%

Maximum base 8,676 RMB (~3,800)

Minimum base 1,735 RMB (~760)

• For Shanghai Residents

Additional coverage in each category is available to employees depending on individual agreements reached with employers

• For non-Shanghai Residents: RMB 216.90 per month

Labor Compliance - Tax Rate

Taxable Amount Tax RateQuick

Deduction

Less than 500 5% 0

501 – 2,000 10% 25

2,001 – 5000 15% 125

5,001 – 20,000 20% 375

20,001 – 40,000 25% 1,375

40,001 – 60,000 30% 3,375

60,001 – 80,000 35% 6,375

80,001 – 100,000 40% 10,375

Over 100,000 45% 15,375

• Full tax amount deducted from employee’s salary

• Employer submits the amount to tax bureau

• For Local EmployeesIIT = [Gross Salary – Social Benefits – 2,000 RMB] x Tax Rate – Quick Deduction

• For Foreigners liable to tax contributionsIIT = [Gross Salary – Allowances – 4,800 RMB] x Tax Rate – Quick Deduction

Tax rate for Foreign and Chinese employees identical nationwide

Labor Compliance - Example

Employer’s Share of Social Benefits

Employee’s Soc. Benefits

Employee’s Taxes

Net Salary

Employer's Total Expense

Gross Salary

Net Salary

0

Add 1,310=44%

3,000

2,437

Subtract 540=18%

Subtract 23

Components Example

Employer’s and Employee’s Share of Social Benefits and ITT

4,310

The Expat – Work Permit & Residence Visa

• Qualifications:Established Entity within ChinaTwo- year DegreeTwo-years working experienceReasonably Good Health

• Work Permit Process (Shanghai) Apply for Z Visa abroad

• (Chief Rep., Legal Rep may apply in China) Health Examination in ShanghaiApply for the Work Permit (1-2 years)Finally the Residence Permit (1-2 years, multi-entry)

The Expat – Tax Liability

New Zealand has a Double Taxation Treaty with China

A few last points…• China is not a mystical land of dragons and forbidden cities

The Chinese have the same desires and needs as all of usIt is possible to understand China and the Chinese, but…

• There is no such thing as the “China Expert”The more that you know about China the more questions you will haveEven the Chinese cannot grasp, in its entirety, the socioeconomic changes that are occurring within their own country

• Foreign Invested Enterprises should not behave like locally owned companiesForeign firms are scrutinized more closely and held to stricter standardsTrain your staff to understand the difference