Recruiting in China

SALARIES are soaring for top executives in China's listed companies, especially in the financial sector, according to recently released annual reports.

Shenzhen-based China Ping An insurance company pays the most of all A-share companies to its top executives, according to the Shenzhen Daily.

Ping An augmented its top executives' paychecks by 122 percent, to 282 million yuan (US$40 million), or 1.47 percent of the company's net profit last year.

At the same time, the company posted a 140 percent rise in net profits.

As a result, Ma Mingzhe, chairman of Ping An; Louis Cheung, Ping An's president and CFO; and Dominic Leung, Ping An's CEO, each earned more than 25 million yuan after taxes in 2007.

The average income of Chinese citizens is rising too, although not as fast.

According to the National Bureau of Statistics, the disposable income per capita for Chinese urbanites was 13,796 yuan in 2007, an increase of 17.2 percent over 2006, the biggest rise in six years.

If the current rate of increase continues, salaries in cities will double in four to five years.

Salaries increased 9.6 percent for managers and 9.1 percent for supervisor/senior professionals in the non-manufacturing sector in Shanghai in 2007, in contrast to 8.2 percent and 8.1 percent respectively in 2006. That's according to the 2007 Shanghai Local Compensation and Benefits Total Compensation Measurement Report, conducted by Hewitt Associates on mainly Shanghai-area foreign-invested firms.

Another trend is the salary increase in second-tier cities in the Yangtze River Delta, with Shanghai manufacturing at 8.5 percent, Suzhou 8.8 percent, Wuxi 9.2 percent and Changzhou 10.2 percent.

In an interview with China Knowledge@Wharton, Michael Song, head of Hewitt's compensation and benefits consulting practice, said the average salary increase in Hewitt-surveyed companies was 8.7 percent across China.

Companies were also asked how they were reacting to the ever-climbing CPI. Fifty percent of the 300 surveyed companies said they have factored CPI into their 2008 budgets.

A human resource manager at a US Fortune 500 company, who asked not to be named, said the salary increase rate at his company closely follows that of similar Fortune 500 companies.

"If our pay is above the market level, that will impose big pressures on labor costs. And ... even if you are above the average level, your turnover rate will not necessarily come down. However, if your pay rise is lower than the market level, even by a few percentage points, you will see the turnover rate going up. "

Song acknowledged that the pay increase rate varies atn different levels within the same company. "The higher the level goes, the faster the pay grows," he said.

The cited Hewitt survey says in the Shanghai city manufacturing sector over the last three years the compound growth rate of salaries has increased to 54.5 percent for the top management level while it is only at 14.1 percent for manual workers.

Meanwhile, Song pointed out the entry level salary for new college graduates has recently stabilized at around 3,000 yuan per month in Shanghai, although some outstanding graduates from top universities in China could earn 5,000-7,000 yuan.

Oversupply might account for the stagnant entry-level salary. There are too many fresh graduates every year, and most likely, they don't possess the right skills that companies seek, Song noted.

High turnover rates

The biggest salary increase last year was in the finance and investment sector, especially the funds industry, said Song.

Increasing labor costs are posing challenges to companies' margins.

However, even if companies continuously improve compensation and benefits levels, employee turnover rate shows no sign of decline.

The Hewitt study confirmed that turnover rates are still rising across most sectors, with average rates increasing from 8.3 percent in 2001 to 14.7 percent in 2007.

Some cities and industries see even higher turnover rates, said Song. The main reason is the gap between supply and demand, he said, pointing to the fast-growing economy in China as the fundamental cause of the gap.

"Most enterprises are continuously expanding. Last year, there was an average 10-20 percent increase (in company work forces). When companies are expanding, the whole market is recruiting but supply is not catching up fast enough. Demand for certain functions, like sales and marketing, is even bigger."

Kang Lan, client partner in the Shanghai office of Korn Ferry, the international executive search company, said: "For a function like marketing, which is relatively new in China, there was not much talent accumulation."

Ever-increasing pay hikes pose a significant problem for most organizations.