Relocating and Retaining Key Staff in China

July 27, 2011 Posted by China Briefing Reading Time: 6 minutes

By Jonathan Tse

Jul. 27 – Over the last decade, less developed regions in China have experienced massive brain drain as workers seeking new opportunities have traditionally flocked to richer coastal cities. More recently however, as companies have been drawn inland towards smaller cities where operational costs are generally lower, these smaller inland cities can now offer attractive opportunities when compared with some of the coastal first tier cities. And with inflation causing the price of goods and resources to surge, many of China’s first tier cities are seeing a reverse brain drain effect whereby skilled workers are returning to their hometowns. Further adding to the problem is the growing trend of young Chinese employees constantly job hopping just for a small pay rise. As such, companies all over China are struggling to attract and retain talented individuals in locations where they are most needed. In response, many employers keen on staff retention are now starting to offer highly competitive remuneration packages with extensive fringe benefits to compensate their staff for relocating.

Fringe benefits refer to compensation provided to employees on top of base salaries and can include anything from a take-home computer to a serviced apartment. Traditionally, it was expatriates who enjoyed generous compensation packages with various allowances and benefits. However, due to a growing demand for skilled local workers, more and more Chinese employees have gained greater bargaining power and are demanding more fringe benefits.

Although it is often simpler for both the employer and the employee to forgo fringe benefits in exchange for a higher base salary, it is not always financially feasible for the employer to do so. Fringe benefits offer a form of compensation that is appealing to the employee and practical for the employer. Many fringe benefits such as insurance indemnities and housing funds are deductible in the calculation of corporate income tax (CIT) and individual income tax (IIT), details of which will be discussed later in the article. But perhaps more importantly, and particularly in China, the offer of fringe benefits is a gesture that shows employees they are valued and looked after by the company.

So how can employers ensure their benefit packages are competitively structured? The U.S.-China Business Council recommends that employers should try to understand the employees’ concerns, so that benefit packages can be tailored to meet their needs.

In general, Chinese workers tend to prefer short-term cash compensation, as many of them work in cities only temporarily and plan to return to their hometowns once they have saved some money. Therefore, cash-based benefits on top of base salaries such as bonuses and allowances can be particularly attractive to Chinese employees.

For instance, most Chinese employers make an annual bonus payment around the time of Chinese New Year as a show of gratitude. Performance-related bonuses are also growing in popularity, especially among younger Chinese workers, as they are an effective way of motivating staff without adding to the company’s financial burden.

Employers based in larger cities can attract migrant Chinese workers by offering them assistance in their hukou applications. The current hukou system distinguishes Chinese citizens as either urban or rural residents, entitling or restricting the holder from state benefits such as subsidized public housing, healthcare or education for their children. Certain cities even restrict non-locals from registering their vehicles and purchasing property. In effect, the hukou system restricts individuals from relocating freely and affects the welfare of the employee’s whole family. As such, hukous from larger cities such as Shanghai are highly desirable and employers can address the Chinese employees’ concerns by assisting them in obtaining an urban hukou.

In the past, foreign employees were offered a hardship allowance for relocating to China. These are now uncommon, as the quality of life in China has improved significantly in recent years. However, relocation still causes many inconveniences for the foreign employee, and employers should try to address these when structuring benefit packages. Foreign employees usually seek a standard of living that is comparable to that of their home country. In particular, they will be concerned with their children’s education in China. Therefore, many employers offer their foreign employees a relocation bonus and various allowances such as accommodation and education, to compensate them for adapting to such a different environment.

Although recent changes have been made to the Social Insurance Law to now include foreign employees, local and foreign employees alike remain concerned with the quality and accessibility of China’s healthcare system. In response, some employers now supplement mandatory social insurance payments with private insurance schemes. Similarly, employers are required to contribute to a mandatory housing fund for Chinese employees. When the employee wishes to purchase a house, the money is used to cover the initial down payment, and upon retirement any remaining balance can be withdrawn. Since purchasing a property plays an important role in Chinese culture, some employers now contribute above the minimum payment.

Private insurance and housing funds, although appealing to the employee, will inevitably add to the employer’s operating costs. There are various types of benefits available that give employers an opportunity to minimize these costs. For example, stock options are prevalent in the West as a form of non-cash compensation, which gives employees the right to purchase company stock at a discounted price. But perhaps due to the Chinese’s preference for cash incentives, stock options are rarely offered in China. Stock options do not affect the company’s cash flow as they avoid the need for additional cash payments. On the other hand, employees welcome stock options as there is the possibility of future dividend payments and capital growth. Furthermore, since the employees are also shareholders of the company, stock options may increase morale and the productivity of the company.

Flexible benefits are another alternative that ensures the employees’ needs are met. Flexible benefits, known as cafeteria benefits in the United States, allow employees to choose from a variety of different benefits, hence ensuring the benefit package fits each individual’s needs. In the West, there has been a growing trend for employers to outsource such schemes to online benefit providers, which allow employees to access and manage flexible benefits via the Internet. This trend may be catching on in China. YiCai Human Resource Consulting Co., one of the leading HR outsourcing companies, launched the IF Club web site in June 2011, which allows employees from participating companies to choose from rewards that cater to the employee’s everyday needs – ranging from supermarket vouchers to weekend getaways. Online benefit providers may also be a cost-effective solution for employers, as they sometimes offer discounts through bulk buying.

The provision of training can also be used as a benefit to attract and retain staff. Many companies offer external training programs, which equip employees with skills that can be used throughout their careers. However, employers are often reluctant to spend large sums of money on training staff who, before long, switch to a different company. Some employers avoid this by asking employees to sign a contract prior to participating in a training program, which requires them to reimburse the costs should they decide to leave the company before a specified date.

Employee welfare expenses are tax deductible for both the employer and the employee. Specifically, these refer to expenses that contribute towards the employee’s wellbeing, such as social security contributions, housing funds, cafeteria allowances, and nursery fees. Employee welfare expenses are deductible from CIT calculations up to 14 percent of the employee’s total salary. Educational expenses are CIT deductible up to 2.5 percent of the employee’s total salary. Insurance and housing fund payments and withdrawals are also exempt from the computation of IIT up to a certain limit depending on location. However, it should be noted that all benefits must be declared on the employment contract in order to be tax deductible.

There are many cost-effective ways of attracting employees to relocate in China. But in order to attract the most suitable individuals to locations where they are needed the most, employers must be prepared to provide competitive remuneration packages with benefits that address the needs of individual employees. With an ever-growing demand for skilled, local workers, employers should be careful not to view fringe benefits as an extra financial burden, but rather as a necessary cost of retaining a reliable and loyal workforce.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. For more information on employee fringe benefit packages, and their associated tax aspects, you can contact the firm at info@dezshira.com or visit www.dezshira.com. The firm’s brochure can also be downloaded here.

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