As Chinese firms restructure along Western lines, people in the compensation business will tell you that packages for the so-called O-level ranks – the CEOs, CFOs and the like – have started to catch up with those in the West. But below that, in the great swell of the middle and lower ranks, the compensation gulf remains – and thank goodness for that, shareholders might say.
So what is the difference between an expat divisional manager's compensation package and his local counterpart's? One PricewaterhouseCoopers insider, who spoke on condition of anonymity, said the question depended on too many variables – home-base salary, family situation and other factors – to suggest a ballpark number. "But it could well be over triple."
PricewaterhouseCoopers should have an idea, though. "We never go into compensation details," the voice said sternly. Certainly, PwC seemed a good place to find out the answer. It just recently surveyed 40 firms – one, a large Chinese enterprise, the others all foreign – and found that companies find it tough to replace expensive expatriates with local staff.
"Only 12% of the organizations in this study have been able to do so," the study said. And then, the jobs filled tend to be restricted to accounting, HR, sales and manufacturing roles.
The survey, while small, the source said, covered only Fortune 500 companies and at least two in any given industry. Roughly 40% were US-based, 35% European and the remainder Asian.
The survey covered several sectors – pharma, telecom and IT, industrial areas such as engineering, financial and other services.
Two routes to going local
By PwC's lights, localizing expats happens in one of two ways in China: one, "local-plus" expats are hired on local contract terms right from the start – with a premium thrown in on top of that. How big is the premium? That varies from 20% to 70% of local salary. So a local salary of RMB10,000, to pull a hypothetical number from the hat, could be bumped up to RMB17,000 at the top end of that scale.
According to PricewaterhouseCoopers Expatriate Localization Survey 2004, 58% of firms in their small sample took this route to localization.
The other route: moving expatriates from full expatriate status to local/local plus status. "Organizations practicing this more radical form of localization generally use a transition period of one to three years." PwC said, adding that it found less than a third of its sample followed this course.
Asked an obvious question – how many expats quit before the unhappy day local terms really kick in – the source said no firm in the sample had actually downscaled a full expat to local terms so it was difficult to say. Indeed, the source said, that was why most firms avoided the problem by hiring expatriates on local-plus terms to begin with.
Another dimension of the localization story concerns the Asian expatriate who is getting a very high profile in expat ranks. "In recent years, Asian expatriates and Chinese returnees [have been] fast replacing traditionally held Western expatriate positions," PwC said. "Fifty-one percent of the organizations in the study are staffed with more than 50% Asian expatriates." ABCs, BBCs, and CBCs (American-, British-, Canadian-) and other "Western" born Chinese didn't, one gathered, offer the same potential as Asian expats for localization, the sources suggested. The bottom line: while "they look Chinese" their cultural orientation was more Western than Asian.
"Cultural similarities between some Asian countries and China and the long- term career development opportunities offered in this market makes localization of Asian expatriates over non-Asian expatriates easier for 75% of the organizations in this study."
What holds expats back
What held back expats from going local? PwC found concerns ranged from the quality of local medical and educational facilities, and resistance from family members, to issues related to social security and insurance contributions – not to mention the large gap between expatriate and local compensation.
According to the survey, 64% of organizations expressed satisfaction with their post localization experience – and 56% said they did not expect localized expatriates to increase as a percentage of total headcount in the next 5 years.
PwC drew lessons from the data, suggesting that full localization in China will only be possible when HR focuses on local talent development and matches investment in recruiting with programs to retain high performing local talent.
In sum, it meant employers had to develop a strategic approach to what PwC called "talent management" – something few companies in the survey had going at the moment.
A bit shocking, given the fear and trepidation many foreign firms have about setting up in China, only 30% of the organizations surveyed had a documented localization program – and 53% said further that localization initiatives were not currently linked to their overall HR strategies.
"Implementing sound human capital programs that are linked to the organization's business strategy becomes even more imperative in the current business environment," said Nora Wu, PwC's Mainland-born, US-trained Greater China partner for HR services.