Negotiating Employment Contracts in China

Nov 19 • Management and Leadership, Morry Morgan Articles, Sales and Negotiations, Trainer Articles • 9039 Views • No Comments on Negotiating Employment Contracts in China

Source: danielmoyle

THE 13th MONTH BONUS has a nasty side effect. It compounds attrition to a narrow window, between both Western and Chinese New Year’s. This is a result of Chinese employees receiving their bonuses en mass and one-year contracts expiring at equal volume. Consequently, post CNY recruitment advertisements escalate as resumes are scanned, line managers prepped, and positions quickly filled – often with less than perfect candidates. And then there are the negotiations.

In a January of 2012, a survey conducted by ClarkMorgan with human resource professionals from Beijing, Shanghai, Shenzhen and Hong Kong, found that 46.2% of respondents were involved in negotiating employment contracts in some capacity, but had never received any formal negotiation training.

46.2% of respondents were involved in negotiating employment contracts in some capacity, but had never received any formal negotiation training.

 That should come as a shock, considering a large part of any company’s overhead is comprised of employees’ salaries, and obtaining ‘talent’ is of strategic importance in China. Yet, in the months around February and March each year, human resource professionals are tasked with fighting the ‘War for Talent’ with the goal of keeping or obtaining the best staff at the best price, all while being under-skilled.

Furthermore, Hays reports that in their 2012 Salary Guide, Mainland China led Asia in providing salary increases, with 72 percent of companies providing a 6 percent or more salary increase, ahead of Hong Kong and Singapore, where only 21 percent of companies plan to give more than a 6 percent pay rise.

And this war is not letting up. According to the Michael Page Employment Index report for 2011 Q1, China is leading Asia for companies intending to increase headcount, with 49 percent of employers planning to increase headcount during the first quarter of 2011. So with so few human resource professionals formally trained in the field of negotiations, let’s start with the basics:

– Needs,
– Trust, and
– Leverage

While it takes years to become a seasoned negotiator, these three words will get you started, and prevent you, and your company, from getting burnt when you need to negotiate the next round of employment contracts.


Needs: What are your candidates’?

“Money,” I hear you say.
Well first, ‘money’ is not actually a ‘need’ since it is tangible – you can touch money, and a need is intangible; subjective; an opinion. To uncover a need, you should ask “why does someone need money? What is the underlying reason, beyond just simple survival, that someone needs a raise?” Aon Hewitt believes ‘learning & development’, ‘company reputation’ and ‘career opportunities’ (see graph 1) are more important to Chinese employees, at least in the high-tech industry than money (2010-2011 Talent Sourcing Report for the High Tech Industry). These findings are also supported by MRI, which undertook a survey of 3,000 mid to senior level candidates in 2010 looking for work, of which 2,265 were based in China. One of the questions asked in the survey was ‘what makes you stay in your current job?’ of which the three top responses were:

– New challenges (ie. Personal development),
– The bonds of their team, and
– A work-life balance.

Graph 1: Source AonHewitt

Graph 1: Source AonHewitt

Again, no mention of ‘money’. At least not in the top three.

Of course, that doesn’t mean money isn’t an important factor influencing a job move. An average year-on-year increase in salary within a company is approximately 10 to 15 percent, according to Simon Wan, President of China Team, so any offer by a recruiter needs to be higher, otherwise there is no advantage in simply sitting put. Although, Wan does add that there are exceptions to that rule. He recounts a case where a Shanghainese man, who was working in Hong Kong, took a job with no increase in salary, because it allowed him to move his family back to Shanghai where he owned an apartment and could reduce his monthly expenses. In this case, the need to reduce expenses, while being closer to his extended family, was the major motivator – not an increase in pay.

It is for this reason that Richard Ni, Associate Director at Robert Walters, warns, “Don’t put salary up front. The focus should be the engagement and motivation of that manager. They need to be able to share the vision. If you don’t understand the candidate’s real non-monetary needs then three months later they might get another more attractive offer.”

Surveys, like that of Aon Hewitt, Michael Page or MRI, can help provide a guide to those potential needs, but ultimately to truly uncover what drives a candidate it takes the ability to ask questions, dig deeper, and understand candidates don’t come in one shape and size.


Different shapes and sizes = needs

In 2011 the Chinese Academy of Social Sciences published the ‘2011 China Comprehensive Social Conditions Survey’ and found health care availability to be the second most important social issue facing Chinese, second only to “soaring commodity prices” (see table 1).

Table 1: Source Chinese Academy of Social Sciences

Table 1: Source Chinese Academy of Social Sciences

This need for better healthcare is growing as white collar workers realise that there is a better and affordable world, without long queues, often lousy facilities, and apathetic medical staff at hospitals and medical clinics. And this need is finding its way onto the negotiation table.Click to zoom in According to a 2009 survey by Mercer, approximately 83 percent of multinational companies surveyed now offer supplementary medical plans to key Chinese staff, to allow these staff to bypass the general patients’ line and use VIP services, such as Huashan or Peking Union Hospitals. Chris Hughes, of Panoramic Insurance Brokerage (Beijing), or PIBB for short, says that supplementary insurance, can cost as little as 240 CNY a month per employee, and can have an enormous impact on both retention of staff and attractiveness from potential candidates, and yet “less than 10 percent of companies have a strategic HR plan including insurance as a staff attraction and retention tool.” Aon Hewitt believes that will grow to 16.9 percent of companies within the next two years, highlighting a growing trend for better health care.


Reducing loss (aka the Signing Bonus)

Another need is reducing loss. As humans, we love to gain, but we hate more to lose, and this is the purpose of the signing bonus – a lump sum that offsets any bonus from a previous employer lost due to a move. In China, signing bonuses have become more common in recent years and today, executive bonuses can include 15 to 25 percent of annual cash pay, 20 to 35 percent vesting options, below-market stock, a retirement annuity, and other considerations. For senior positions hired outside of the post-CNY ‘employment migration’, a signing bonus is the norm.

Understanding the possible needs of the candidate (and we have only named a few) means that a company is able to match those needs, making a company attractive. In the field of negotiations, ‘attractive’ implies that there is a benefit to move. But a benefit is only the first part of the decision making process. Since high performers are often pursued by companies simultaneously, what matters now is ‘trust’ – and who has the most.


Trust: Do have have it, and how can you build it?

Two main components build trust – goodwill and reputation. Goodwill is linked to an individual’s personality – his or her ability to built comfort with someone they have only just met. It’s not surprising that successful sales people rely heavily on goodwill.

Table 2: Source CRF

Table 2: Source CRF

Reputation comes from both the staff of the company, but also from the marketing and PR efforts of the company. In China Mercedes, Louis Vuitton, and Shangri-La have great reputations, and rightly so. However, that doesn’t necessarily mean that they are great companies for which to work. In fact, in 2011 none of these companies featured in the Corporate Research Foundation’s (CRF) ‘China’s Best Employers’ top 30 (see Table 2). A customer brand in one thing, but in HR customer brand comes second to the employer brand.


Employer brand to build trust

In 2006 the Corporate Leadership Council found that “strong employer brands provided access to 20% more of the potential talent market than weak or unmanaged employer brands” which is supported by Aon Hewitt research (see graph 1) which found ‘company reputation’ to be a ‘selling point’ by 75 percent of respondents. And the better the reputation, the more candidates will apply for any vacant position. In negotiation terms this is a BATNA – or Best Alternative To a Negotiable Agreement – which will be covered later. But right now, understand that goodwill and reputation builds trust. And trust is why someone would consider leaving their safe job, and work for your company.


Leverage: Understand the other ‘L-word’

Leverage, not ‘love’, is one of the most important words in the field of negotiations. Any seasoned negotiator understands the importance of building one’s own leverage and stripping it from an opponent. But what is it?

Diagram 1: Source ClarkMorgan

Diagram 1: Source ClarkMorgan

Leverage is the combination of ‘neediness’ and ‘BATNA’ (see diagram 2), and is the indicator of true strength in a negotiation. Neediness is related to the ‘level’ of need (think love and hate, as two ends of the neediness spectrum), and BATNA, in layman’s terms, is a plan B, or C, or D. The more plans the better. Just knowing this breakdown, however, isn’t enough, since leverage is also linked to psychology. Much like poker players don’t necessarily have to have the highest hand to win a round, top employment contract negotiators can bluff their way to better conditions. Played ethically, an upper-hand by the candidate with respect to leverage will secure a larger end-of-year bonus, add an extra 10 percent to a monthly salary, or ensure the candidate’s family is covered by extended health insurance. Played unethically, a company might discover that they have their own Tang Jun ‘Fake Credentials Gate’ on their hands, years later. Just remember that “Reputation,” as the billionaire media magnate Rupert Murdoch once said, “is worth more than the last hundred million dollars”. He was right, made evident by the implosion of his 168 year old newspaper, ‘News of the World’ when it lost its reputation. So understand that while leverage is power, this should not be abused.


Neediness vs. Needs

Leverage relates directly to ‘needs’, because simply put, a need is a feeling or subjective desire, and ‘neediness’ is the level of that desire. This desire is based on emotion and time. In relation to emotion, neediness extends right along the scale into ‘interest’, ‘like’, ‘desire’ and then ‘love’. Moving left along the neediness scale would be ‘disregard’, ‘dislike’, ‘loath’ and ‘hate’ (see diagram 1). What’s most import is to understanding that both ‘love’ and ‘hate’ are extreme emotions of neediness – a high neediness to obtain, and a high neediness to avoid – and either end of the scale is a weakness. Your goal is to be in the middle – neutral. Uncaring. Or at least to appear that way.

Diagram 2: ClarkMorgan

Diagram 2: ClarkMorgan

To demonstrate the neediness scale, take a recent trip that I took from Beijing to Shanghai. While I fly this route approximately 20 times a year, one time I decided to upgrade from economy to first-class. My reason? I was exhausted, feeling ill and did not want to be squashed for the duration of a two-hour flight. My neediness was high – but not because I love first-class, but because, in this one case, I hated feeling uncomfortable. That neediness cost me 16,000 frequent flyer points.

Now, returning to the HR context, imagine that you are negotiating with a candidate who currently loathes or hates their current boss. Their neediness to leave is high, which is bad for the candidate, but good for you, because as a candidate’s neediness goes up, your leverage goes up too.

Time is the other component of ‘neediness’. A standard collapsible umbrella costs 20 RMB in the store. But at the exit of a subway station, with the rain pelting down, customers are willing to pay double. The more time we have, the less needy we are, and this ultimately improves our leverage. If a recruiter wasn’t measured by their ‘time to onboard’ and had all the time in the world to satisfy a line manager’s request, then their time would be low, and therefore so too their neediness, which ultimately improves leverage in a negotiation. Sadly, life as a recruiter isn’t like this at all. However, the good news is that time works in the same way with the candidate, however, be aware that time is not infinite. Richard Ni, Associate Director of Robert Walters, explains.

“A luxury based company was recruiting for a general manager, but they simply waited too long to make the final offer,” says Ni. “At the time of the interview the candidate had huge motivation to join, but there was a three month delay when the company finally came back and said, “you have the job”. Unfortunately, the candidate declined.” Ni’s example highlights how a candidate’s need, or needs, can change in as little as three months and how ‘holding out’ to increase the neediness of a candidate can backfire. Not even a more generous salary could win the candidate over. As Ni reports, the “luxury company tried to increase the initial salary by 50 percent, then to 60 percent and finally to 70 percent.” The morale of the story, says Ni, is that salary is not the main feature. It is timing. That candidate is still happily in their present company.
Simon Wan, of China Team, adds some advice. “An offer should have a time line, say 5 pm by Friday. And after that, the offer should be removed,” says Wan.


Building your BATNA

As mentioned above, BATNA stands for ‘Best Alternative To a Negotiated Agreement’ and was first coined by Roger Fisher and William Ury in their Book ‘Getting to Yes’. Since then, BATNA has become ubiquitous in the vocabulary of top negotiators – but what does it really mean?

Put simply, a BATNA is an alternative to a failed negotiation. If the negotiation with this candidate fails, as do 15 percent of all offers in China according to Aon Hewitt, then who is your alternative? If you have no alternative, if this candidate is your best and only choice, then you are said to have no BATNA at all. If you only have one other candidate, but they are poor in comparison to your first choice, then your BATNA is also poor. A BATNA that is zero to poor will greatly reduce your leverage in a negotiation, but again, only if the other side knows that your BATNA is poor. If your reception waiting area is full of suited individuals when the candidate arrives for their job interview, it is likely that the candidate will assume that your choice of candidates is large, your BATNA high and therefore so too your leverage. Whether the suited candidates are authentic or hired bodies from another department is up to you. Perception in negotiation is everything.


Foreigners now cheaper than locals!

Perception is also changing when it comes to hiring foreigners. Even as little as five years ago, foreign employees were unaffordable to consider for the middle ranks, but thanks to the Global Financial Crisis, the continued stagnation of economies in Europe and the United States, and the pull of China as the ‘place to be in business’, foreigners are eager to take up jobs at local wages.
Says Chris Hughes of PIBB, “It’s possible to hire 20 foreign insurance experts for around 25K to 30K. But for every 20 experts there’s only one Chinese expert, and so the local talent expects 80K or more.” This opinion was also voiced by the COO of Bayer Healthcare, who stated that he was struggling to hire senior Chinese managers, as their wage requests were too high, and therefore, while Bayer wanted to hire locally, they still had to bring Europeans in to fill the senior positions.
With this in mind, increase your BATNA by considering extending your talent search overseas. But what if money is the only option?

“If you are a native Mandarin speaker who has studied overseas, worked for a multinational company for two to three years overseas, have worked in China for another four to five years and understand the FMCG or retail industry then you can practically write your own contract!” says Simon Wan. “You are a golden child at the moment.” Wan highlights a problem for many recruiters, the fact that China is desperate for talent and that in some critical roles where the market is booming, salaries are the only competitive advantage. What do you do if the candidate of your dreams says “show me the money”, but you don’t have it?


Tax-favoured salary

Wan might have a solution. “Many Asia-Pacific executives spend part of their work commitment in mainland China, and another part in, say, Singapore or Hong Kong. In this case, it is possible to split an employee’s salary across both countries, and therefore reduce the mainland China tax burden,” says Wan. “Personal income tax can be as low as 8 to 10 percent in Singapore, whereas in China it can be over 40 percent.”

If this is the case, says Wan, a contract can be created that allows for two separate payments into two separate bank accounts in two separate countries. He adds that if an employee spends less than 183 days in a year in China, then they do not have to pay any tax to the PRC.


Breaking through the glass ceiling – with stock options

Richard Ni of Robert Walters says that people over the age of 40 who are working for a Fortune 500 company reach a glass ceiling due to company policies and set salary tiers. Shares, as an outright gift, or an opportunity to purchase, are therefore a way of getting around limits to salaries, particularly if the candidate is joining a company that is going to IPO.

“When people are on a C-level they want to exit with stock,” says Ni, “since salaries are often bound by policy. It’s often the only way to get a bigger salary.” Stock or options comparable to industry standards, made even more valuable by the offer of a ‘full rights’ package for the executive stakeholder, can include anti-dilution, registration and cash-out protections, vesting and change of control protections, and extended exercise of options on employment termination. Usually, executives gain these protections in advance, but these packages can develop over time as executives prove their worth, so keep that in mind at the negotiation table. Either way, both split contracts and stock options do allow for more flexibility in salaries, when you have found the perfect candidate but lack the cash to get a signature.

And armed with this knowledge, you are now less likely to get burnt this year.

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