The need for foreign talent in China will not disappear anytime soon, with expatriate staff continuing to play a key role in the country’s growth, according to multinational corporations (MNCs) with operations in China.

As the country’s first-tier cities become increasingly livable and expatriates are more willing to accept longer term or even permanent assignments, MNCs are seeking strategies to control the costs of their China operations while retaining key talent. HR professionals looking to align employment practices with corporate strategy are increasingly exploring the trend of converting people on traditional expatriate packages to the more cost-effective benefits provided to locally-hired foreign talent instead – a process known as localisation.

By Ryan Metz

Pricoa Relocation Services

Renegotiating an employment contract

EXPAT TO CHINA HIRE

52 FAMILY MATTERS ASK THE EXPERTS

In the late 1990s, localisation was a common topic regarding expatriate

assignments in China and was defined as talent transfer – replacing an expatriate with a local Chinese employee. This was possible with the maturing of the HR market as a result of China’s economic development. At the time, the consensus was that expatriate populations in the country would slowly decline as local talent for management positions began to catch up. Fast forward to today, when the demand for skilled and experienced Chinese managers outstrips supply, with foreign professionals and expatriates continuing to fill the gap.Nevertheless, talk of localisation has not ceased and expatriate populations in China continue to grow. These days, however, localisation is defined as transitioning an expatriate assignment to a local China employment contract. Along with this change of employment contract, employment terms become aligned with local conditions, resulting mostly in changes to salary and eligible benefits. Moreover, this change of employment contract means the expatriate’s contract terms are now subject to Chinese labour laws, with no legal obligations to the home country.

costs, make up roughly 10 percent and 8 percent respectively of the total. Interestingly, relocation expenses – which can be viewed as the initial investment to bring the expatriate to China – account for only 8 percent of the cost of a three-year assignment, and that investment is lost once the expatriate returns home.

Regarding salary, a recent survey conducted by Hewitt found that “Western top executive packages averaged USD393,743 while China-hired (localised) foreigners landed USD331,693.” In addition, the average pay for top Chinese executives at foreign companies also averaged over USD300,000

per year. Chinese employees with top-level talent are increasingly being paid Western levels of compensation. Clearly, the base pay gap between expatriate, local-hire foreigners and top-level local talent in China is narrowing.

The intangible benefits of an expatriate hire also translate into real value for a company and shouldn’t be overlooked when considering the termination of an international assignment in China. Foreign talent improves the consistency of shared corporate values in a global organisation. There is improved communication between China operations and the home

Definition with a difference

Measureable costs, intangible benefits

According to the Society of Human Resources Management, the cost of hiring an expatriate can easily exceed 400 percent of the cost of a local employee in a similar role. Companies often cite housing allowances, international school support and benefit packages as high-cost elements of expatriate assignments, and thus the focus of a localisation strategy. Yet are these costs really the most expensive pieces of an expatriate assignment?

Although schooling and housing often receive much of the attention when scrutinising expatriate assignment costs, international tax preparation and filing fees in the home and host country easily comprise the largest expense of an expatriate assignment. The Society of Human Resources Management estimates international tax preparation fees can easily top USD100,000 a year for each expatriate and, in many cases, exceed the cost of the assignee’s yearly salary. According to many companies, housing and schooling expenses, compared to overall assignment

THESE DAYS LOCALISATION IS DEFINED AS

TRANSITIONING AN EXPATRIATE ASSIGNMENT

TO A LOCAL CHINA EMPLOYMENT CONTRACT

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© 2010 Pricoa Relocation, Inc. All rights reserved.

Take thepathto aRock SolidRelocation®

Benefit from the experienceof our unparalleled supplier

network.

Minimise operational riskwith our complete Relocation

Management Services.

Trust The Rock®,where promises havebeen kept for more

than 130 years.

When you choose Pricoa Real Estate and Relocation

Services, you do more than secure the most comprehensive

range of relocation services in the industry. You also

realise the value of an organisation that delivers satisfaction,

savings and security at every step. It all leads to a better

experience — for both you and your assignees.

Pricoa® Real Estate and RelocationServices

Increase transferee satisfactionwith our caring relocation

professionals.

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54 FAMILY MATTERS ASK THE EXPERTS

country. Moreover, expatriates bring increased awareness of global strategies to local operations and improve alignment of local operations with global strategies. These intangible benefits are often lost when expatriate talent returns home and is replaced with local hires. Expatriates stand to improve their position of negotiation by articulating these qualities and strengths they bring to their organisation.

be indefinite, and Chinese cities becoming increasingly comfortable for localised foreigners. Employers often state that localisation is necessary to keep operating costs within reason and maintain an edge in the fiercely competitive Chinese market. Employers often emphasise expatriate housing and schools in China as high-cost items that must be tailored to local terms. These foreign workers will be faced with a choice: return home or accept localised employment terms.

For foreign employees, when negotiating localised terms with employers, emphasise the savings and benefits to the company of placing you on a local contract. The company will have a significant savings in tax provider fees as the employment contract will only be in China and responsibility for tax filing will often become the employee’s responsibility. HR and line managers often do not emphasise the savings in no longer using the international tax provider, possibly because they do not understand these high costs. When companies offer arguments that local employees are

Prepare to negotiate

For an expatriate faced with the prospect of being localised, the reaction can be negative. Localisation is often associated with decreased housing allowances, restricted international schooling assistance, loss of employment benefits or even reduction of salary. The prospect of a decreased standard of living is difficult for many to accept.

When discussing localisation with expatriate employees, companies position international assignments as extremely expensive, expatriate assignments meant to

much less expensive then foreign talent, counter the argument with the intangible benefits foreign employees provide, such as improved communication between home country and local operations. In focusing on the savings to the company a local contract provides, the employee can provide a strong argument to retain key compensation components such as salary, housing and school assistance. Expatriates can reasonably aim to keep core compensation and benefits relatively unchanged when transferring from expatriate to local employee status.

Transitioning from expatriate to locally-hired foreign employee doesn’t have to mean a drastic change in living standards. When negotiating the terms of a local China contract, researching locally-hired foreigner employment terms, understanding hidden cost savings to the company and articulating your intangible benefits to the company will help put you and your family in a strong position to remain in China and continue to enjoy the same lifestyle as newly-arrived expatriates.§