Salary Structuring and Payment of Employees in China

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By Adam Livermore

June 9 – Foreign investors in China have become more ambitious over the years in terms of the kind of projects they are carrying out. We are seeing a gradual shift from low-value added manufacturing enterprises to high-value technology and service operations. One of the main challenges investors have to adapt to is the hiring and maintaining of skilled workers.

This was not a serious consideration when operating a factory with a staff of 90 percent blue-collar workers – there has been and will be (for the next few generations at least) a plentiful supply of such unskilled or semi-skilled labor. However the market for skilled, experienced white-collar workers in China is extremely competitive. Although the Chinese education system is producing millions of university graduates each year, most of them do not possess the skills or mindset to make an immediate contribution. Training is time consuming and expensive, while staff turnover is high as employees are headhunted or simply see better opportunities.

In such an environment foreign investors are faced with two dilemmas: paying employees too little will lead to high staff turnover, lack of business continuity and a knowledge drain from the company; paying employees too much will reduce competitiveness and encourage under-performing staff to stay with the company. This second problem has been exacerbated by the recently implemented labor contract law, which makes it much harder for an employer to terminate labor contracts for under-performing staff.

The solution for employers is to develop a more sophisticated, flexible salary structure. It should take into account that employers need to reward employees based on their differing kinds of contributions to the company. Salary structures should also be optimized so that employees do not pay unnecessarily high amounts of individual income tax. Offering various kinds of allowance in addition to base salary to meet the varying personal circumstances of employees should also be considered, as well as analyzing how critical it is to retain each employee for the next several years.

Designing such a compensation structure is not very difficult. What can be more challenging is to keep details of salary payments to individual employees confidential. When it becomes public knowledge within the company that certain employees are earning far more money than others of a similar rank, working relations can become “disharmonious.”

The best way of maintaining the confidentiality of employee salary information is to reduce the number of people involved in the processing to an absolute minimum. Outsourcing of payroll related work with just one contact in your HR division to handle information exchange is the best option. Payroll processing companies will maintain a secure server for the transfer of this confidential data and will have an automated processing system customizable to meet the salary structure designed by the company.

Such companies will provide payslips to employees on special paper which ensures no other employees will be able to open and reseal envelopes. They can make individual income tax returns on behalf of the company. They can even handle transfer of individual salary information in customized files to the bank so that the finance team simply sees the total payroll amount instead of the individual transactions. We recommend using a foreign bank for processing of payroll as they tend to have more sophisticated methods for handling these transactions. For instance Citibank requests a text file that can be loaded into its processing mainframe directly with very little manual input necessary. Domestic banks usually simply take an Excel sheet and the implication is that there will be manual re-input which could lead to information leaks and processing errors.

The structuring of salaries and handling of payments is only one aspect in the larger topic of workforce management in China. Subsequent articles will focus on issues relating to individual income tax, the labor contract law, outsourcing of non-core operations and mandatory benefit payments. All of these factors should be understood clearly by investors if they hope to build a strong, stable workforce that can effectively compete in the Chinese marketplace.

Dezan Shira & Associates provides payroll processing services to companies in China, with a specific payroll division in place to handle such work. This includes our specifically trained staff and customized Microsoft software capable of handling outsourced tax filings, mandatory welfare and payroll from 50 to 15,000 China based personnel. For more information please contact Adam Livermore.