The Great Look Forward: China’s HR Evolution

The future of effective human resources management in China lies beyond the challenges of recruiting, training, and retaining qualified workers. The engine of international commerce is roaring in China, yet its enormous population belies the fact that the country lacks qualified talent to meet foreign employers’ demand. An often-quoted McKinsey Global Institute 2006 study notes that less than 10 percent of new Chinese university graduates—estimated at more than 4 million in 2006—have the skills required by foreign firms that operate in China.

As a result of acute talent shortages, high attrition rates, and the tremendous ease with which skilled workers can hop from one job to another, companies are struggling to attract, train, and retain the employees that they need to gain a competitive edge in human capital. Multinational corporations (MNCs) in China consistently cite this human resources (HR) challenge as their top concern.

Urgent as these issues are, firms doing business in China can no longer afford to settle for a short-term focus on the “talent crisis.” Instead, even as they seek to address today’s challenges efficiently, companies should consider building, and not merely buying, a sustainable and scalable workforce—one that can grow and evolve as their needs change. Over the next few years, MNCs in China must change their HR strategies to enable them to keep pace with surging market competition and with changing employee needs and profiles.

Steps to tackle today’s challenges

Adopt a total rewards strategy

Maintaining a strong focus on the talent crisis means more than addressing it as many China-based firms have thus far—that is, by throwing more money at the most desirable employees and, to retain them, resorting to quick fixes such as title inflation, by which employees are often promoted beyond their skill level. Many companies pay insufficient attention to training, career development, and pay for performance. In other words, companies too often “buy” talent for the short run rather than “build” talent for the long run.

Instead, companies should consider a total rewards strategy, which encompasses not only salaries and bonuses, but also benefit packages, training and career development opportunities, and other long- and short-term incentives. Such a strategy distinguishes itself by taking into account employees’ career development—the key and most effective retention factor in China, according to a 2006 survey by Mercer Human Resource Consulting LLC. Communicated effectively, a total rewards approach can help companies differentiate themselves in the competition for talent.

Understand employment brands and foster employee engagement

In fast-moving China, it is no longer enough for a company to be viewed merely as a leading producer of goods or as a top provider of services. Increasingly, the better a company defines its value proposition to its customers—for example, by emphasizing its quality control or its status as a global and not just a regional leader—the more its brand can attract desirable employees who, in turn, are more likely to remain and grow with the company.

Understanding and shaping a company’s employment image can boost employee engagement—an employee’s sense of personal connection and commitment to the company. The more employees view their company as a world-class organization and take pride in working for the company, the stronger their sense of engagement will be.

Improve HR effectiveness

China’s HR professionals are not always equipped to handle the complexities of China’s talent marketplace, and companies need to improve the effectiveness of their HR processes, programs, and leadership. Indeed, with cutting-edge HR concepts still relatively new to China’s HR managers, the need to boost HR competency is critical to business success. Chinese HR professionals must quickly learn the complexities of more strategic HR solutions, and not just the tactical implementation and execution of compensation and benefits strategies.

This improvement in HR effectiveness must also include alternative delivery of HR processes, through, for example, the use of technology, a shared-services arrangement with other functional units of the company, or an outsourcing or co-sourcing arrangement with HR service providers. Such alternative delivery arrangements often ensure higher and more consistent quality of administrative processes.

The future of HR management in China

The strategic landscape for HR management shifts as one looks beyond 2007, and companies would do well to focus on the following aspects of their long-term HR strategy.

Develop the next generation of leaders

For companies doing business in China, the great leap forward in HR effectiveness occurs when they can boast a truly scalable and sustainable workforce, which requires processes and practices that contribute to the development of future leaders. This concept is not new, of course, but the rapid growth and transformation of China creates challenges for even the most experienced expatriate managers, whose organizations need to be agile enough to enter markets rapidly and respond quickly to changes.

As the Asia-Pacific region becomes increasingly important in the global economy, companies must understand China to succeed. MNCs not only need to develop the skills of Chinese leaders and managers through training, development, and overseas rotations, but also cross-pollinate talent by rotating their talent through China to ensure that all future leaders and high-potential employees—not just those in China—know the Chinese market. This does not mean that MNCs should merely staff leadership and management roles in China with expatriate talent. Indeed, MNCs, particularly US firms, are seeking to ensure upward mobility for talented PRC nationals and are often dissatisfied with the pace of “localization” or their overreliance on expatriate leadership. As a result, MNCs are increasingly bringing expatriate talent into China at the professional and technical levels on short-term assignments of less than two years. This two-pronged approach allows all high-potential employees and future global leaders to gain a deeper understanding of China, leaving companies better equipped to deal with the changing global market and the emergence of the Middle Kingdom.

Segment talent successfully

A key practice that companies should carefully examine is talent segmentation—the manner in which companies organize, structure, and reward their talent to achieve specific business results. Rather than being driven by the need to fill particular job vacancies and other immediate factors, companies should take a broader, more strategic view and align their talent management strategies and rewards programs with their specific profit models (for example, a blockbluster profit model yields large global profits over time, while a local leadership profit model earns profits mainly from transactions in local markets). In other words, companies should ensure that the incentive structure and the corresponding rewards programs, such as pay, benefits, and career development, encourage the type of employee performance that supports their business structure and profit models (see Case Studies). As MNCs expand their operational structures in China and make them more complex, using profit models to design HR programs can help ensure a company’s future viability.

Plan for regulatory changes

As China develops, so too will rules and regulations that affect HR strategies. For example, demand is growing for better corporate governance and transparency, which can be key to a company’s employment image. More directly related to HR, the PRC government is also aggressively developing and adopting new laws and regulations, such as the PRC Labor Contract Law and the Employment Promotion Law, to better protect the labor force. Last year, many provinces raised their minimum wage and clarified tax provisions related to pension rules, and the PRC government adopted measures to raise social security contributions. This year, it issued foreign exchange rules that permit PRC nationals to officially participate in employer-sponsored stock plans and introduced new individual income tax filing requirements.

These and other moves may affect companies’ HR policies and strategies. Though MNCs may welcome more regulatory clarity and the adoption of global HR standards, such rules and regulations may also impose new administrative requirements and costs. Organizations must keep track of these changes to minimize surprises that may have financial and operational repercussions.

Link engagement to productivity

Given China’s importance, it is not surprising to see top executives increasingly involved in decisions related to talent and HR management. The talent crisis, compounded by the shortage of qualified HR staff, has led top executives to scramble for solutions and to consider alternative delivery models for HR processes, such as shared services and outsourcing arrangements. Executives are also demanding returns on HR investments by linking HR programs—including talent management, compensation, and benefits—to improvements in productivity.

A new approach

Businesses can take a number of steps to ensure that they meet the HR needs of tomorrow. Companies should use China as a training ground for future global leaders and take measures to build, not just buy, their workforce. A more rigorous approach to labor forecasting and business planning would take into account the changing regulatory environment, as well as the evolving needs and requirements of talent. Companies should also include talent segmentation in their total rewards strategy, a strategy that includes a strong focus on career development. By implementing these steps, companies can build a more effective employment brand and a scalable, sustainable workforce. Finally, companies can make the leap from today’s quick-fix attraction-and-retention tactics to an HR model that best serves the business by formally linking engagement to productivity and measuring returns on HR investments.

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China’s Shifting Labor Market

The emerging urban markets from which and to which skilled employees are drawn are changing China’s human resources (HR) landscape. So far, most skilled employees have flowed into the first-tier cities-Beijing, Guangzhou, and Shanghai-which have relatively high salary ranges, large populations, and strong GDP growth. But demographic shifts, such as the expected migration of 150 million rural Chinese into urban centers over the next decade, will likely blur the distinction between first-tier cities and the hundreds of second- to fifth-tier cities. The growth of these centers will undoubtedly influence the evolution of China’s mass markets and future recruitment and retention strategies by, for example, increasing the cost of talent. China’s rapidly aging workforce will also affect companies’ HR strategies. As companies set up or expand their operations, they should consider these and other long-term labor market issues.

—Jill Malila[/box]

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Case Studies: Improving HR Strategies

Several real-world examples illustrate the concept of measuring and improving returns on human resources (HR) investments and the importance of talent segmentation.

For instance, Mercer Human Resource Consulting LLC has worked with a leading auto company in China to increase the commitment of its sales professionals and to improve its performance. The company implemented several HR programs linked to quantitative improvements in sales and aimed at identifying, training, and retaining high-performing salespeople within the company. In particular, the company conducted surveys to assess employee engagement and developed tools to identify high performers within the company and to gauge employee perceptions. These tools demonstrated the connection between strong sales and high employee retention and allowed the company to hire the most suitable candidates by delineating the attributes of high performers. Over time, the dealers who implemented these processes reported double-digit improvements in monthly sales and a reduction in staff turnover and associated costs.

In another case, Mercer worked on talent segmentation with a global energy company doing business in China. Because the organization had several profit models that required different strategies for talent management, the challenge of reducing turnover and boosting sales was more complicated. The solution, in this case, involved separate talent-segmentation approaches for two profit models. One approach aligned with the company’s global strategy—a long lifecycle with significant profits over time (blockbuster profit). This approach applied to the company’s workforce and emphasized career-based rewards, which are tied to movement along a career path; undifferentiated performance awards, which are based on the company’s overall success in attaining specific profit and other targets; and learning and development. The second approach—keyed specifically to the local, retail organization and applied to the sales force (a local leadership profit model)—involved “buying” talent, spot rewards, and differentiated performance awards, which are paid based on the specific skills and achievements of the individual employee, rather than on the company’s overall performance. These two segmentation approaches were implemented together and helped the company boost employee retention and achieve its business objectives.

The above scenario illustrates one of the key differences between the common HR strategy that many companies use today and the one required for long-term sustainability. Today, companies in China often segment their talent based on ad hoc considerations and factors, particularly their ability to attract and retain certain talent. To ensure future success in China, companies should instead segment their talent based on their specific profit models, while striking a balance between company-wide workforce strategies and local realities. This requires companies to carefully assess which practices should be applied throughout the company and which should be implemented in specific business units.

—Jill Malila[/box]

Jill Malila is a principal and director of Client Management-China with Mercer Human Resource Consulting LLC. She is based in Shanghai.