Design, Development and Implementation of an Incentive System for Local Employees in Subsidiaries of Western Companies in China

Diplomarbeit von Sebastian Haupt

Introduction:

1.1, The challenge of attracting, motivating and retaining Chinese employees:

In the last decade, as a result of the advancing globalization, the People’s Republic of China (PRC) has become a focus of interest for Western companies. The country is home of 25 % of the world’s population and has maintained an economic growth rate of 8 % during the last twenty five years. How can companies position themselves best to profit from this fast-growing economy and prevail against an increasing competition? Along with a massive inflow of foreign investment, Western management practices and philosophies have been brought into China. Thus, every day, foreign managers in subsidiaries of Western companies have to confront decisions about money, benefits and other different forms of incentives that can be used for attracting, motivating and retaining the local Chinese employees to ensure the competitive advantages. The introduction of Western incentive systems in China can be problematic as some Western incentive practices may contradict the norms of Chinese culture and the socialist ideology. Unsurprising that issues of human resource management, particularly in the attraction of employees, the performance motivation and the staff retention, are seen as the main difficulties in the Chinese operations of Western companies. Consequently, the question arises if customary incentive practices that have been proved useful back home can be transplanted to the Chinese subsidiaries of Western companies and if so, how? It is common knowledge that the compensation packages offered by companies to their employees have a great influence on the profitability. The better the foreign managers are able to align decisions about motivational incentives with the challenges presented by the values and the motives of the employees, the likelier it is for the organization to achieve competitive advantages. Thus, especially in the international context the ‘major limitation of contemporary pay systems is the degree to which individual attitudes and preferences are ignored.’.

1.2, Conceptual design of Incentive systems for Chinese employees: Objectives and methodology of the thesis:

The aim of this thesis results directly from the mentioned problem. On the basis of a literature review that is combined with an analysis of applied incentive systems, it sets out to explore why Western approaches may or may not be applicable in the Chinese context and how foreign firms in China can configure the incentive components for their local employees in order to attract, retain and motivate them. The focus lies on subsidiaries of Western companies in China which comprise both fully foreign owned operations and joint ventures and represent the most popular investment form of foreign companies in China.

In order to provide comprehensive insights on the topic it is necessary to first approach the necessary theoretical fundamentals. Thus, chapter 2 deals with the basic considerations on incentive systems and their application to influence the behavior of employees in an international work environment. The principles of incentive systems within organizations, a classification of possible components as well as their use as behavior influencing stimuli is going to be presented. Subsequently, essential reflections on Incentives Systems in an international work context are made. Chapter three investigates and provides a theoretical design of an incentive system for local employees in China. The framework rests upon a literature review looking at relevant issues of the Chinese cultural background as influencing variables. Based on existing elements of Western incentive practices in China the concept for the design of the core components will be created. For this purpose, a short explanation on each individual incentive is given, the motivational effects from the Western literatures’ point of view are outlined and an evaluation of the importance of the individual components is made by means of existing scientific research. Using qualitative interviews, an empirical field investigation has been conducted in 14 subsidiaries in Western companies in China. The objective was to analyze the incentive elements applied in practice in the Chinese work environment in order to further develop the previously designed framework. The corresponding results are presented in chapter four. Finally, chapter five shall give corresponding recommendations for a successful implementation of the incentive system.

Table of Contents:

Text Sample:

Chapter 3, Literature review on Incentive systems for local employees in Western companies in China: Design of a theoretical research framework:

3.1, Incentive systems in Chinese work environments:

3.1.1, The design of incentives in China: Status-quo analysis of existing systems:

In the course of the literature review for this diploma thesis, it has become apparent that very little research seems to have been conducted to investigate the various incentive systems and the importance of the individual components employed by Western companies on their employees in the People’s Republic of China. As mentioned before, the salaries in China were mostly egalitarian with a narrow range of variation in times before the economic reform. Today, especially Western companies seem to operate differential salary systems. Additionally, performance-related bonuses are offered in Western influenced enterprises, even on a monthly basis. The wage level of the foreign company in China is approximately 120 % to 150 % compared to that of a similar local state-owned firm operating in the same line of business sector and same locality.

In China, the social welfare benefits of the enterprises mainly seem to resemble those in most Western countries. It is difficult to provide a comprehensive overview of welfare provision in China since it lacks uniform national provision as regions today have been required to implement their own systems. The system encompasses different insurances for health care, unemployment and maternity as well as various pension schemes and funds for social assistance, activities, staff quarters and housing. Foreign enterprises acting in China are obliged to train their staff in vocational skills. Hence, most foreign firms have formalized training programs in place, either internal or external. The measures comprise class-room based forms or on-the-job styles of training as well as training assignments abroad. In contrast, no information on personnel training in local Chinese enterprises was found during the literature research, whereas in Western companies in China a great emphasis is often placed on promotion especially of non-management workers. However, no insights on the design of promotion methods in particular were available. Likewise, the literature does not enclosure information about corresponding methods in Chinese enterprises.

Further, foreign companies use staff outings and company organized sport activities as motivators but there was no such evidence for local Chinese enterprises. In the past, the appointment of role model workers has been traditionally used as a spiritual incentive and public acclaim for outstanding performance. Those performance awards became even more popular when they were regularly combined with a team approach. Thus, such group awards, for example for excellent teams or enterprises, have been used in China as an instrument of praise for work groups or firm organizations with a good performance. Within the limits of the literature research that was conducted for this paper thesis, no other reliable information have been found on existing incentive systems in China either on their application in local enterprises or foreign-invested companies.

3.1.2, Elements of Western incentive practices in China as a guiding research framework:

As the last section revealed, the scientific literature appears to be a rather empty field of research concerning the design of incentive systems for Chinese employees. Consequently, it seems to be useful to follow existing organizational approaches and focus directly on organizational incentives and motivational methods that are taken into Western subsidiaries in China by the foreign managers. Many different forms of incentives systems are utilized around the world to attract, motivate and retain employees in order to achieve the company’s objectives. Hence, the literature holds several suggestions of important incentives that would have to be considered for the qualitative research in the course of this thesis.

An earlier study on Western approaches on motivating Chinese employees in foreign companies in China has been conducted by Jackson/Bak. Different from other studies, which have been found during the literature research ahead of this paper, it focuses on a rather comprehensive collection of motivational techniques and methods that are actually employed in practice in China. Therefore, typical elements of Western incentive systems in China identified by Jackson/Bak, are able to provide a suitable framework guiding the investigation for the present thesis. Figure 5 illustrates the relevant incentive components separated into the groups that were classified earlier in Chapter two. (Figure 5: Incentive components relevant for the theoretical research).

It becomes apparent that the compensation incentives cover the majority of the incentive components which are used in China according to the literature. Before regarding the specific elements it has to be dealt with the previously mentioned impact of cultural issues on the incentive system.