Facing high personnel turnover, many managers in China decide not to train their employees, believing they may leave without repaying the investment. This is like refusing to maintain a car because it may break down one day.
A company will fail if it does not develop its own people and just tries to poach trained talent from other organisations. In a rapidly changing environment, skills need to be upgraded continuously. A company that lacks the ability to grow competence on its own turf will always trail behind competitors in terms of innovation and the ability to create value.
Fear of turnover should not impede rational action. A highly trained person will constantly add significant value and his contribution will also create synergies with the work of his team members. He will act as a role model and coach his team mates, and thus initiate a virtuous circle of individual and collective upgrading.
Besides, the reputation for excellent human resource management, including the prospect of training and advancement, and a visible strong talent pool, attracts new people who care about personal growth and a stimulating working environment. Informal mouth-to-mouth propaganda quickly spreads the news to university campuses and competitors. This is more effective than any formal advertising campaign – especially among the Chinese, who often rely on informal linkages and information.
Most importantly, if you deliver training and other development opportunities continuously, it will be very difficult for a person to decide when to leave. A rational actor will not exit if the company remains consistently ahead of competition, and many new people will be attracted.
If an employee perceives the company as a lever to increase his own value and if his personal value would decrease significantly without the company, he is unlikely to leave. A company with a good reputation may afford access to clients he might otherwise not be able to capture himself or he might receive valuable insights through interaction with the best and brightest.
For example, a graduate is more likely to realise his full potential as a member of the consulting firm McKinsey & Co than if he had to compete alone with the thousands of individual consultants. Even if he takes with him all the confidential information and internal knowledge that McKinsey has accumulated, it will not help him for long. The invisible assets will become obsolete very soon. The individual lacks the systemic capability to continuously gather valuable intelligence and create new knowledge.
Companies therefore should strive to build a system without which an individual will lose significant value. A systemic magnetism based on invisible assets, such as reputation and the ability to learn, is a strong source of sustainable competitive advantage. This is especially true in China,, where talent is scarce, and in human resource-intensive industries, such as professional services. This type of competitive advantage can be held for a long time, since competitors who want to emulate it need to undergo different stages of reputation- and network-building. They cannot just leapfrog to the new stage.
Professional development entails more than training. The best development and greatest potential benefits can be realised on the job. Eastern Hope Group asks people to perform a myriad of different tasks in the same position. This broadens the employee's skill and bonds him to the company, since he finds the work exciting.
A wealth of internal opportunities convinces ambitious talent to stay at a company. They get the best of both worlds – plentiful resources and attractive expected payoffs with calculable risk. Shenzhen-based Zhongxing Corporation gives intrapreneurs the resources to pursue their own ventures within the company.
An employee with a project that promises great technological benefits receives the capital and resources needed to undertake the research and development. If the employee shows great marketing and sales potential, the company elevates him to a managerial position with the power to operate a team and lead his own budgetary unit. The third development stream is a career in administration. Thus, the company features technology centres, revenue or profit centres, and cost centres with intrapreneurs in charge. They can grow with the company, since everybody receives his personal development space according to his own strength.
I have to stress one caveat. A company that wants to act as internal venture capitalist and create internal business opportunities for intrapreneurs needs to structure incentives in a way that avoids over-investment. If people can expect significant returns but are not subject to the discipline that the risk of bankruptcy imposes, they may engage in overly risky projects. Cheap and easy credits to state-owned enterprises (SOEs) have demonstrated how serious the moral hazards are in China. The trick is to include a personal risk component into the system. For example, if the employee risks part of his own capital, he will behave like an entrepreneur even though he is the agent of a company.
Here is another example. China Vanke, a publicly listed conglomerate in Shenzhen, is a leader in China's real estate market. Its chief executive observed that many people stay with a company not out of a deeply engrained feeling of loyalty, but because they see opportunities for themselves. In a former human resource manual, Vanke emphasised life-long employment. A new version stresses the need to provide opportunities and space to develop continuously. The newly discovered rationalism is expressed in the following principle: ?Only if a person grows with the company, can he stay.?
The chief executive adjusts all other management practices to enable personal growth. Unusually for China, he delegates much responsibility to his subordinates, in order to train them for general management. Instead of doing everything himself, he puts into place a system that runs itself. For example, the company stresses constructive checks and balances that promote creativity and innovation. The journalists of the company newspaper, which acts a vehicle to supervise managers, are requested to report to the chief executive, particularly if they discover problems. They enjoy full ?immunity.?
Different opinions are encouraged and problems are discussed instead of remaining the secret of a small leadership team. Openness to criticism, even though it is a Confucian ideal, is rather unusual in China. In the past, imperial and corporate autocracy often led to the downfall of promising ventures. In contrast, a free corporate press helps to detect errors and generate ideas and promotes personal growth.
The results confirm the effectiveness of such measures. Employees who leave Vanke usually obtain very high positions elsewhere. That is why the company is called the Huangpu Military Academy (the equivalent of West Point) of real estate.
Foreign companies, too, are well advised to entrust their managers, especially if they are Chinese, with significant responsibility and support them with effective systems, which promote transparency, openness and debate. However, not all Western companies apply these enlightened political principles to China.
In view of the significant amount of uncertainty and complexity in China, especially in the early stages of a company's development, I recommend tying rewards to the attainment of strategic milestones, which should represent a combination of inputs and outputs, rather than just financial results. Rewards should be based strictly on merit. One key reason for the initial success of the traditional Chinese system was the objective evaluation of performance through the imperial exam, which decided over the advancement of people from all social backgrounds.
According to my research, rewards can serve either as ?hard locks? or as ?soft locks.? Let me discuss the first category of bonding devices, hard locks. Western economists view people as production functions – black boxes that magically transform inputs into outputs. Those engines must be fed by pecuniary incentives, in the guise of assets or income.
Distributing significant amounts of stocks to employees is very costly for a company. It is difficult to use this method beyond a small circle of top managers. The alternative, stock option, is also problematic, especially in China. For one thing, stock options require the company's shares to be tradable and, because of cumbersome procedures and favouritism, it is very difficult to go public in China.
Markets are also not very efficient, partly because the country lacks a well developed infrastructure of capable investment analysts and credit rating agencies. Besides, there are many irrational factors influencing share prices, including government intervention, speculation and insider trading. Minority shareholders enjoy little protection. Funds from newly listed companies are often transferred to loss-making SOEs – a modern form of policy lending previously undertaken by Chinese banks.
These problems stem from the investment culture and the lack of legislation and enforcement. Moreover, even if the stock market functioned perfectly, the individual performance of a manager may not influence the share price of the whole corporation. Yet effective incentives need to be tightly connected to individual performance.
As regards incentives tied to income, Western economists tend to advocate performance-dependent pay, such as income with a large variable component including year-end bonuses upon completion of objectives. This sounds like a good idea, but China often requires unconventional approaches.
Employees who become owners participating in the profit stream behave like owners, and that might produce dysfunctional effects. For example, Eastern Hope introduced high year-end bonuses, only for the successful managers to take their bonus and leave the company. The bonus served as the long-awaited start-up capital to run their own show and compete with their former bosses. To achieve their targets, employees are also more likely to manipulate numbers, such as inflating revenues through excessive trade credits or short-term cost-saving measures that undermine long-term prospects.
These results contradict the conventional wisdom that ownership and profit-sharing always improve performance. As a result of its experience, Eastern Hope re-introduced a policy of fixed wages and sought other ways of motivating its employees. The fixed-wage policy seems to work, producing better results than the bonus system.
Besides, most forms of ownership or extra income are taken for granted after a while. To stimulate extra effort, the rewards must be increased relative to previous levels, which might be very costly. Besides, people tend to demand the rewards, even if the company fails to deliver sound results (perhaps because of an economic downturn). They are happy to accept the upside risk of stock options, but are unwilling to tolerate the downside risk. Failure to achieve the expected individual payoff may actually diminish performance.
More sophisticated hard locks include mortgages that need to be repaid if the employee leaves. Otherwise the collateral will be confiscated. Another idea that so far has not yet been used is to sponsor an educational degree abroad (such as an MBA) and sign an agreement with the university that the degree will not be issued until a given time period during which the employee needs to serve at the company. If he leaves before the expiration, the degree will expire as well.
All of these devices may effectively lock employees to the company. But externally imposed constraints hold people back against their will and thus decrease motivation. A leader can buy more output, but needs to earn loyalty. The economist?s obsession with incentives ignores the most important driving factor of human effort – intrinsic motivation.
Instruments that stimulate intrinsic motivation can be called `soft locks.? According to my research, they are more powerful than hard locks. They sparkle an employee's wish to remain with the company and contribute towards its growth.
A compelling mission and vision bond the employee to the organisation. The Hope Group developed a slogan that made employees feel they serve a meaningful cause that promotes the benefit of various stakeholders in society: `Make peasants rich, satisfy city dwellers and let the government be at ease.?
A manager does not necessarily have to institute a great array of controls and rules to manage the difficult human relations in China. A corporate culture that emphasises caring and sharing will inspire employees to reciprocate through loyalty and commitment. The values should be reinforced through occasional celebrations and festivals, which bond employees with each other and with the leader. With the right values, employees will not manipulate numbers or engage in unethical behaviour.
Such implicit controls are important in situations of high uncertainty and complexity (when it is impossible to write complete contracts that specify every contingency) and when it is difficult to enforce contracts (due to an underdeveloped legal system and culture). Values thus serve as a safeguard against post-contractual opportunism.
In China, companies have to pay particular attention to the feelings of employees. This is especially important for foreign companies, which from the outset might be distrusted as heartless capitalists. Inconsiderate action can rapidly destroy valuable social capital. Like an Oxford college lawn, it takes decades to be developed, but only seconds to be destroyed. For example, Vanke in the past used Western textbook techniques designed for operating in a capitalist system. Once it fired 25 percent of its workforce, it became very difficult to retain the remainder who had lost faith and trust.
Eastern Hope achieves an optimal balance between economic and organisational imperatives on the one side, and human feeling on the other side. It adopted the maxim: `Principles without feeling, execution with feeling.' The principles cannot be changed because of compassion for an individual employee, but companies enjoy wide discretion in how to implement them.
Various forms of recognition, such as titles and prizes, are powerful motivating devices, especially in a hierarchical society like China. They boost face. Such forms of recognition are external stimuli but, if honour is at stake, may also stimulate intrinsic motivation.
In the reward process, it is necessary to avoid subversive struggles for positions that replace healthy competition. The main concern should be with beating the external competitor, not the colleague. Corporate growth, to some extent, shields against undercover action. Political behaviour usually gets stronger when resources are limited.
Finally, I believe that it is better to reward both loyalty and performance. If loyalty alone is rewarded, it may lead to the `adverse selection' of reliable people with little concern for performance.
Managing talent exit
Most managers I met do not understand that managing the flow of talent out of the organisation is a critical part of the human resource management process and crucial for promoting loyalty. Paradoxically, opening the possibility of exit can increase retention, since it strengthens belief in the system. For example, a country such as Eastern Germany, which needed to erect a wall to prevent emigration, stimulated a strong desire among its citizens to leave the closed system.
The business system of McKinsey & Co serves is a brilliant illustration. McKinsey invests heavily in its management consultants only to force many of them to leave after just two years on average. Besides, it fails to retain high fliers who want to become ?stars? – a status not provided at the firm. But the people who leave the firm usually obtain very high positions afterwards. The first position is often brokered by the firm. Since alumni are likely to hire McKinsey and also influence the decisions of other people, the firm reaps exponential returns. If the McKinsey alumni also spreads the word that the firm is a unique place to work and grow, talent exit promotes exponential talent entry.
Such networking effects are crucial in relationship-intensive China. Engaging in trade and real estate, Hainan-based Xingbao Company emerged as the fourth largest Chinese private enterprise in a ranking of assets published by Forbes. It wants people either to stay with their full heart, or, if they are no longer committed, helps them to leave. It offers middle and top managers who intend to leave the sum of Yn200,000 to start up their own company. By doing so, Xingbao builds up a web of friendly partners, a crucial advantage in China's network economy. Besides, the alumni disseminate positive propaganda, strengthening Xingbao's reputation.
Lower barriers to exit
In my analysis, the offer of significant departure aid actually increases retention. Lower barriers to exit increase talent capture and loyalty. Taoists know that action usually achieves the opposite of the stated result, especially when human beings are involved.
People who can fall back on a guarantee are more likely to engage in transactions in the first place. If you can return a good you purchased, risk is eliminated and you are more willing to make the deal. Besides, as in the case of purchasing goods, people will be attracted by the confidence that is implicit in the ?money-back guarantee.'
Whereas Xingbao is proactive in its exit management, Eastern Hope uses deterrence. It supplies clear and detailed information about the risk of starting an enterprise and spreads failure stories. The chief executive reiterates that people who leave the Hope Group lose a formidable engine, because they cannot take away its goodwill, strength, system and corporate culture. They lose a lever that transforms the small efforts of an individual into great collective output.
The chief executive also initiated a policy of allowing people to leave, but never letting them come back. Thus, the stakes are very high. Nevertheless, the exit is on friendly terms. The leader usually shares words of wisdom. Leavers cherish memories of their special time at China's most successful private enterprise.
Selecting the right approach
Different approaches can lead to the same results, so managers must decide which approach is right for their company. To resolve this question, they need to ensure that their human resource practices will actually work in practice, in China.
The Chinese environment sometimes requires innovative, even counterintuitive approaches. Managers need to recognise that China is very different, not only because of its culture, but also because of a different system environment and stage of development. In the absence of outside institutions in such an emerging market, a company often has to build its own institutions.
The personal charisma of the leader serves as the glue that holds things together and inspires unconditional loyalty. But what is the essence of charisma? I think I found the answer in China. The director of the office of Liu Yong-hao, the chief executive of New Hope, remarked: "How can we not succeed with Liu Yong-hao?"
The essence of talent capture and retention is to transform companies into vehicles that instill confidence in followers and make others' dreams come true which without the company could not be realized.
The first part of this article appeared in the August edition of CER. Prof Dr. Kai-4lexander Schlevogt (Ph.D Oxford) is a leading expert in international strategic studies. After serving at McKinsey & Co and Harvard University, he became the first permanent foreign professor in the PRC (at Peking University) and a senior faculty member at the Australian Graduate School of Management (UNSW). He frequently leads education programmes for top managers and government officials in China and overseas. Website: www.schlevogt.com Email: firstname.lastname@example.org.