Business management experts have observed that Chinese companies are reinventing management, leading to breakout industry dominance in everything from drones to EVs. (see Harvard Business Review). At the heart of the phenomenon is China’s differentiated approach to compensation structures.
In Chinese business culture, the compensation structure is a complex business policy for determining pay ranges and salary decisions. Employers design their compensation structures to drive performance in operations, strategy, financing, HR, and market benchmarks. It includes fixed salary and performance-based pay, sometimes deferred compensation, and balances equitable treatment, market competitiveness, and business feasibility.
How is this done differently in China than elsewhere? A Harvard Business School case study found the Trip.com Group used data science and other evidence-based management practices to measure performance and integrate it into worker activities. Now, the Shanghai-based company is the world’s second-largest travel agency.
Compensation structures reveal how roles and competencies are valued. They are organized into different grades based on differences in job responsibilities, skill requirements, and experience; with a narrower gap between grades correlating to greater internal equity, and a larger gap for senior or executive roles. These structures are carefully designed to utilize components that powerfully incentivize success for the business organization.
Components
A typical compensation structure in China consists of a base salary, employee benefits, bonuses, non-monetary compensation, and incentives. Base salary comprises either job-based or skill-based pay. Job-based uses graded job evaluations, while skill-based pay rates are determined by education, competence, and capabilities. Job and skill evaluations require a preexisting job analysis and classification, and an employer may implement a temporary pay-grade policy if one is not in place.
Company policies define employee benefits, including health, unemployment, and retirement insurance, which employers are required to provide under Chinese law. Bonuses are awarded on top of base salary for meeting defined performance criteria or exceptional contributions. Non-monetary compensation includes benefits that support employee development and health, such as training and education programs. Incentives are additional pay tied to specific performance targets. They align individual rewards with organizational goals and may be paid monthly, quarterly, or annually. There is solid evidence China’s rewards alignment approach changes behavior.
The World Economic Forum reports that Chinese workers spend more money on professional training than any other nationality in the world, and double the rate of Americans. In other words, aligning employee compensation structures with performance is motivating to learn knowledge and skills to succeed.
After a visit to China’s automated car factories, Ford’s CEO Jim Farley said that America is “far behind” China in knowledge and that the US “undervalues” key workers.
We talked to a China kitchen products maker, KitchenRaku, and they shared a fundamental part of their business culture is “get educated or get out.” Rather than incentivizing short-term business results, they reward long-term efforts into building skill and knowledge.
Applicable Law
Despite its performance-focused business culture, Chinese employment law continues to utilize its traditional socialist labor laws. Chinese policy sees that a compensation structure influences both employee financial interests and the employer’s ability to control labor costs and incentive effectiveness. Chinese employers use a mix of fixed and variable pay. Fixed pay, including base salary and job-based pay, remains constant during the pay period and is not affected by performance. Variable pay, including performance-based pay and bonuses, may fluctuate with company and individual performance to support differentiated compensation. An employer may not reduce fixed pay based solely on performance and must ensure that total compensation meets or exceeds the statutory minimum wage in China.
For example, in the Wang case, a doctrinal Supreme Court precedent, an employee successfully sued their employer because they were terminated due to poor performance. In the Jin case, the employer had to pay damages due to reducing Jin’s monthly salary due to performance. (See full article here) Thus, to unlock high business performance in China, legal counsel is necessary to avoid liability.
Minimum Wage & Union Wages
Employment disputes involving compensation structures have become common in the changing economy. Laws such as the China Employment Act, Wage Payment Temporary Rules, and Minimum Wage Rules regulate wage payment, equal pay, and minimum wage requirements. Employers must comply with applicable wage laws when adjusting compensation structures, negotiate the changes with employees, and ensure that the changes do not result in unlawful discrimination or unequal pay.
Chinese law requires employers to pay employees at least the local minimum wage and holds employers liable for underpayment. Under § 35 of the China Employment Contracts Act, any changes to employment contract terms must be negotiated by the employer and employee. Therefore, an employer must obtain the employee’s written consent for any adjustments to the agreed compensation structure that would reduce pay or otherwise impact the employee. Motivating strong performance while complying with minimum wage law must be done the Chinese way, thus foreign companies from industries with minimum wage exceptions are expected to localize their policies.
National and local regulations also require employers to enter into collective bargaining before making any changes to a compensation structure agreed upon in an effective collective bargaining agreement, and prohibit discrimination based on gender, ethnicity, religion, or Hukou location. China is currently expanding its anti-discrimination law to prohibit a number of previously common practices. (see full article here) Additionally, adjustments to compensation structures can be voided by failure to comply with statutory procedures.
Employment Lawsuits
Most compensation structure adjustment disputes arise due to lack of proper notice, or contractual or statutory violations. Consequently, cases turn on whether the employer’s changes to the compensation structure impaired employee earnings. Cases reported in Beijing, Shanghai, and Guangzhou reject compensation changes made without consulting their employees, ordering back pay or severance where earnings are impaired.
Chinese arbitrators and courts generally determine whether an adjustment has a negative impact by evaluating the evidence, business conditions, and the overall effect on the employee‘s earnings. Reducing fixed pay constitutes a negative impact. Reclassifying part of an employee’s fixed pay as variable pay, lowering the proportion of fixed pay, or modifying bonus criteria may also be deemed as impairing employee earnings.
Further Reading
Learn More about employee performance management, minimum wage, and employment discrimination in China.