The document discusses the changing demographics and economic drivers in mainland China and the implications for businesses and their talent strategies. Specifically: - Mainland China is witnessing shifts including an aging workforce, slowing economic growth rates, and a diminishing workforce due to the one-child policy. This will impact the available talent pool for companies. - Rapid urbanization and rising wages are drawing talent away from major business centers to second-tier cities. Companies must adapt their talent strategies to changing regional dynamics. - To attract and retain top talent amid these changes, companies need to closely link rewards to business strategy and focus on differentiation, perceived value of compensation, and cultivating a high-performance culture.

1. The Vital Signs
After three decades of astounding growth to
reshaped the global economy, mainland China is
witnessing another change. In the coming few
years, the world’s second largest economy and
the most populous nation will witness
fundamental shifts in its demographics and
economic drivers. These factors are intricately
linked, especially in mainland China which offers
a huge, upwardly-mobile customer base across
industries and is one of the most dynamic talent
pools in the world.
So, what is changing? With the shift in
government policy on fixed asset investment,
domestic consumption is being projected as the
new growth engine for mainland China1
. Coupled
with government-driven rapid urbanisation and
minimum wage raises present both new
opportunities and challenges to companies. If we
add to the mix the changing demographics due to
an aging workforce, talent migration away from
existing business centres and a demanding Gen Y,
the stage is set whereby HR managers need to
partner closely with business leaders and effect a
positive, supportive impact on business
performance.
Talent Trends
Although the Chinese economy is projected to
slow down in the next few years, this will not
necessarily translate into a slowdown in the talent
market. While most companies remain cautious
about increasing headcount for 2015, more than
70% of the industry sectors surveyed reported an
increase in employee turnover this year, as
compared to 2013. What are the causes of this
talent flow?
Diminishing Workforce
One of the biggest factors fueling this is the
diminishing workforce in mainland China, which
is a result of the now eased one-child policy. This
decade will witness a reduction in its workforce
for the first time. Organisations faced with a
diminishing supply of talent and increasing cost
pressures will now look towards increasing the
productivity of the current employee base. This
will also raise the bar on performance.
Table 1: Mainland China Economic Outlook
Key numbers 2012 2013 2014 2015 2016
GDP, real growth, % 7.7 7.7 7.4 6.7 6.0
Consumer 8.4 7.8 7.3 7.0 6.5
Fixed Investment 8.8 7.5 7.2 6.0 6.0
Manufacturing 7.6 7.5 7.0 6.1 5.7
Construction 9.3 9.5 5.0 5.5 5.0
Source: IMA Asia (Q3 2014 Outlook)
Gearing up
for Change Peter Zhang,
Partner, Head of Performance
and Rewards Practice,
Aon Hewitt, China
Rahul Chawla,
Senior Consultant,
Performance and Rewards
Practice, Aon Hewitt, China
Working Age Population (15-64 yrs)
Annual Change (mn)
20
Source: IMA Asia
15
10
5
0
-5
2015-20
2010-15
2005-10
2000-05
1995-00
1990-95
1985-90
1980-85
1975-80
1970-75
2020-252025-30
1
http://www.weforum.org/news/premier-li-keqiang-predicts-smooth-sailing-chinese-economy
16 CONNECT Winter Issue 2014
China Column

2. Rapid Urbanisation
Rapid urbanisation can be observed in central and
western of mainland China, which has attracted
many organisations to set up manufacturing and
sales operations in these formerly neglected
locations. These new operations offer
opportunities to local talent as well as former
residents who had previously migrated to the
East. Aon Hewitt 2014 Total Compensation
Management (TCM) Study (1) shows that this
‘reverse brain drain’ has certainly had an impact
on wage costs. If we look at the consumer goods
industry, the city index (salary levels compared to
a tier 1 city like Shanghai at 100) for the central
of mainland China that rose from 70 to 83 in
2014, in a space of just three years. The lure of
working with a reputed brand and the low cost of
living are enticing enough for talent to relocate
from tier 1 cities.
Business Transformation
Further investigation into different industries also
reveals interesting trends reflecting the
transformation in business models. For example,
functions like Medical Affairs in the
pharmaceutical industry have seen a dramatic
increase in headcount, with its median headcount
doubling in the last two years. 2013 was also a
watershed year for the pharmaceutical industry in
terms of compliance. The investigation and
subsequent penalties imposed on a British giant
alerted both local and foreign companies to the
need for stronger governance. Sweeping changes
in incentive plans have been proposed for the
sales force in this industry; such changes stress
the need for the right behaviours, while pushing
products in the market. Meanwhile, other sectors
like automotive and technology have seen a spurt
of home-grown brands like Tencent and Alibaba,
which continue to attract talent through creative
compensation, benefits and lifestyle offerings.
Rewards Outlook
Rewards, consisting of compensation & benefits,
continue to be one of the most important
attraction and retention levers in mainland China.
Companies are playing this game smartly. Driven
by the objective of raising the bar on talent and
productivity, progressive organisations are being
increasingly creative, though cautious, about how
and who of rewards. Initiatives like the recent
individual income tax breaks on enterprise
annuity have also given a fillip to such wealth
accumulation programmes. Such opportunities
are being lapped by organisations to increase the
‘perceived value’ of their total rewards.
-5.00%
0.00%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
5.00%
10.00%
15.00%
CPIGDP Salary Increases
20.00%
25.00%
30.00%
35.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
2013 Salary Increase 2014 Salary Increase
C
hina
O
verall
Auto
Vehicle
-1stTier
M
edicalDevice
Auto
Parts
-2nd
TierFIE
Pharm
a
RealEstate
-1stTier
Auto
Parts
-1stTier
C
hem
ical
Retail-Store
Auto
N
on
M
anu
C
onsum
erG
oods
M
achinery
-1st
Tier
M
achinery
-2nd
Tier
Auto
Vehicle
-2nd
Tier
Insurance
-Life
Insurance
-N
on
Life
Retail-O
fficeEngineering
Sourcing
Logistics
Data Sources:
1. National Bureau of Statistics, PRC
2. Aon Hewitt China Salary Increase Survey 1995-2014
3. International Monetary Fund, World Economic Outlook Database, July, 2014
11% 10% 9% 8% 8% 8% 8% 9% 10% 10% 11%
13% 14%
10% 9% 10% 9% 8% 8% 8%
Winter Issue 2014 CONNECT 17

3. Overall, despite mainland China’s high annual
salary increase rate (8.2% in 2014), it has been
on a downward trend since 2011. With the
exceptions of real estate, life insurance and retail
stores, none of the industries such as
pharmaceutical, auto vehicle and consumer goods
had higher salary increases in 2014 compared
with 2013. Although sectors like MNC
pharmaceuticals and auto vehicle (1st
tier city)
have scaled down their salary increases, they still
continue to lead the market with 2014 increments
of 8.9% and 9.8% respectively. Closely following
the macro-economic and industry trends, business
leaders are becoming increasingly cautious about
salary increase budgets. With a sharp focus on
cost efficiency and no big expansion plans in the
next few quarters, companies are taking time out
to rework their talent strategy.
Current reward portfolios consisting of
guaranteed pay, short-term incentives (STI),
long-term incentives, and benefits are being
redesigned to reward and retain high performers
and give a clear, transparent message of
‘meaningful’ (based on performance and
potential) differentiation to the employee base at
large. On the topic of variability and
differentiation, we find that local companies are
stealing the show over FIEs (foreign invested
enterprises). FIEs need to play a fine balancing
act between global mandates and local needs,
while countering the uninhibited ambitions of
local enterprises.
The differentiation in bonus payout levels
between top and average performers in local
companies is as high as 350%, while for FIEs is
around 160% for a similar job position. More and
more local companies are innovating on variable
pay by increasing the levels of variability,
offering LTIs, and most notably, maintaining a
stark difference in the total rewards of top and
average performers.
The Road Ahead
As the macro-economic and demographic factors
continue to shape businesses in mainland China,
it is important that HR Managers have a clear
action plan on supporting business leaders with
creative and impactful solutions. There are four
key aspects that need to be considered to arrive at
the ‘right’ rewards.
1. Linking rewards with business: As stated
before, reward is an important lever for talent,
and needs to be intricately linked with
business strategy and direction. This goes
beyond salary budgets and costs. Business
and HR leaders need to arrive at a rewards
philosophy that resonates with the business
direction in terms of overall market
positioning, critical jobs and business
expansion plans.
2. Enhancing employee perception:
Compensation and benefits are a direct
investment in people and companies need to
focus on maximising returns from this
investment. These returns are in the form of
low turnover rates, high engagement levels,
and an overall strong employer brand.
Employee perception plays an important role
in all of these. Thus, while managing a
rewards portfolio, companies should focus on
increasing the perceived value of their
rewards offerings. This need is even more
relevant in a rapidly growing, hugely
aspirational, but also rapidly aging, workforce
in mainland China economy.
18 CONNECT Winter Issue 2014
China Column

4. 3. Global standardisation and local
customisation: As FIEs expand in mainland
China and local companies openly express
ambitions of global expansion, it is pertinent
that there is standardisation on rewards
governance with enough room for
customisation per local needs, so that
companies have the right tools to compete in
a market like mainland China. This is key for
sustainability in rewards.
4. Building a high performance culture: Most
companies talk about this, but only a few
really put it into practice. Faced with a tough
business environment, companies need to start
walking their talk and encourage performance-
based differentiation in their rewards offerings.
As described above, the local companies have
taken the lead in sharp differentiation, while
rewarding for performance. Of course, this has
to be backed by a robust performance measure
system, meaningful analytics, and strong
people managers who make the best use of all
available information to make the right
decisions.
The next few quarters are expected to see a
lot of ‘war room’ action where businesses
will go back to the drawing board to review
their HR strategies. They will not only look to
course correct on actions taken during the
previous phase of rapid growth, but also
prepare themselves to a battle which will play
on a different field altogether comprising of
new competitors, changing economic policy
and a dynamic customer and employee base.
Companies can neither rest on their past
laurels nor rely on successful strategies
during this period of relative ‘calm’.
As growth stops being all pervasive, talent
will be more selective in the companies.
Mainland China’s explosive growth has been
one of the biggest defining factors of the last
two decades, and what turns it takes in the
next decade is the most discussed boardroom
topic. As the adage goes, this is just the quiet
before the storm.
About the Aon Hewitt China Total Compensation
Measurement Study
The Aon Hewitt Human Capital Intelligence Center, via
the Total Compensation Measurement Study, provides
an annual market intelligence update and data analysis
based on mainland China’s largest human capital
intelligence database which includes over 1,500,000
employees, serving more than 3,300 companies and
23 industries across 23 cities in mainland China.
Email: tcm.china@aonhewitt.com
Winter Issue 2014 CONNECT 19