Flexible Bonuses Gain Clout as One-Size-Fits-All ‘Iron Rice Bowl’ Approach Fades

This week’s column picks up where the last one left off, by looking at the evolving picture of year-end rewards for high-performing employees as China moves from its “iron rice bowl” roots to a more market-style economy. As many might expect, Chinese companies are increasingly adopting performance-based bonuses to motivate employees, something that would have been taboo just a couple of decades ago, when the socialist one-size-fits-all approach was more the norm.

Last week I touched on the traditional practice of giving money-filled red envelopes around the Lunar New Year, and how such a practice was largely a symbolic way to show appreciation to employees and spread holiday cheer. By comparison, bonuses can be much more serious business, adding half a year or more to a good worker’s annual compensation. That kind of big bonus is already quite common in the West, especially in sales jobs, underscoring a regular theme in this column that Chinese customs are increasingly coming in line with more mature economies.

In looking at the evolving role of bonuses, it’s helpful to use myself as an example by recounting my own experience over the last three decades. In the 1980s, when I first came to China, bonuses fell squarely into the one-size-fits-all category. Back then, I was earning 500 yuan a month (about $135 at the time) as an English teacher at a Beijing university. The salary was considered a small fortune by locals who typically earned 100 yuan or less.

Back then, money was in short supply, and giving out cash as bonuses probably would have been frowned on anyhow due to its capitalist overtones. In such a climate, our university and other work units usually doled out bags of practical items like packaged food, fruit and household goods as a sort of Lunar New Year bonus to their employees.

Holiday Boxes

That practice still exists at many state-owned entities, and big red boxes filled with food products like nuts and dried fungi were a staple New Year’s bonus at the university where I worked in Shanghai through the end of 2016. But by that time, monetary bonuses had also become a fixture based on a two-part system that has become widespread throughout the Chinese state-owned and private sectors these days.

That system sees nearly all employees guaranteed an extra month’s pay, often referred to as a “13th month,” as a standard bonus at the Lunar New Year. Of the people I talked to, all said their companies provide this 13th month, which is actually also standard practice in Hong Kong and Taiwan.

One country head at a major Western multinational told me the 13th month in China is a unique practice for his company, and added he technically reserves the right to give employees less than a full month or even nothing if he sees fit. But he was quick to add that the company has never actually exercised that right, and I expect doing so would be a major morale-killer. Another contact who has worked for several major multinationals said some of those employers have done away with the 13th month altogether, in what could perhaps be a sign of things to come.

After that, performance-based factors kick in at most companies. I was aware of that when I was teaching in Shanghai as recently as late 2016. During that time, I would typically receive the equivalent of around four months’ extra salary each Lunar New Year. After talking with one of the long-time administrators this week, I learned the university itself gives everyone the extra 13th month. After that, each department has its own pool of money to distribute as it sees fit for bonuses. In my department’s case, each worker is rated as “outstanding,” “good” or “adequate” and rewarded accordingly, with workload also considered.

Pretty much everyone I talked to said they use a similar hybrid of reward systems, sometimes combining a company’s and individual’s performance in determining final amounts. Several people noted that giving big bonuses is also advantageous for tax purposes, and my own human resources department confirmed that was the case and explained how it worked. Put simply, giving employees a large part of their pay as bonuses can sometimes keep them in lower tax brackets since regular pay and bonus are taxed as two separate incomes.

Western companies have traditionally realized the value of a good employee, and used bonuses as a way to encourage such workers to stay. My survey revealed that Chinese companies are increasingly joining this trend, which contrasts with an earlier approach that often saw them treat workers more like interchangeable commodities, with minimal concern for employee retention.

One contact at a publicly listed Chinese firm noted that such local companies in some cases have become even more aggressive than Western peers in their bonuses for top performers, often offering big amounts of equity-based compensation. That would certainly explain a mini-exodus over the last five or six years that has seen an increasing number of top-level Chinese talent leaving secure jobs at major Western firms like Microsoft and Google for positions at Chinese peers like Xiaomi and Baidu.

I would expect to see such back-and-forth movement between Chinese and Western companies increase in the years ahead, as bonuses and other standard foreign business practices further permeate the local corporate culture.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.