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Payroll Outsourcing: A Developed Practice In China

Payroll outsourcing is going to be even more common among the companies, in particular in some complex environment, difficult to understand. The most companies that are doing so, are that ones that are pursuing international strategies.

Entry in new markets, particularly complex in terms of values, culture and legislation aspects, could make the Human Resource Management particularly expensive relatively to time and resources.Outsourcing this important organizative function to experts that know deeply the target job market, could be an advantage leading to save money. Even more companies, attracting by growing Countries and low labor cost, decide to penetrate in them, without knowing deeply what are the values, the culture and the problems that they will face.

China is one of the most explicative example. A Country with an impressive GDP growth rate but even very complex in terms of organizational perspective, politics and legislation aspects. China has culture and values very different from the common ones in the West Country, and those need a profound understand of the environment and a different approach.

One of the first problem that the companies will have to face relatively to the Human Resource Management is the labor contract. There are no formal requirements, but some elements should be defined among the parties. Some of those are: Term of contract & Probation period, Job title and description, Labor protection and working conditions, Compensation, Termination conditions, Breach of contract provisions & disciplinary rules. All the companies are required to sign employment contracts with their employees, and this could be done directly in the case in which the employer is a limited company, but in the case in which the employer is a Representative Office, it must engage authorized service providers to hire and dispatch the representative office's local employees. Companies must also provide monthly benefits, withhold and pay individual income tax on behalf of their employees and maintain employees' personnel file. The last one is a an unique Chinese document that records all academic and employment history of the employee, the employer have to maintain it and transfer it if the employee change his job.

Another complexity comes from the hiring process, that has different features linked to the different permitted legal entity in China. Four legal entities are allowed for the companies entering in China: Representative Office, Wholly Foreign Owned Enterprise, Equity Joint Venture and Cooperative Joint Ventures. Representative Offices are not allowed to hire local staff directly, they have to involve a service provider and HR specialists to guide them through these HR administrations. Relating also to the hiring and recruitment process, firms have also to face skilled professionals shortage, indeed talents tend to be even more rare with the increasing demand by foreigner companies. Recruitment and retention represent thus a very important challenge for the firms. The most effective drivers for a retention policy are: salary, benefits and career opportunities. Despite so, a 25 - 30 year old employee would work in a company until 1 - 2 years, his switching cost take into account about 25% - 50% of the annual salary, reaching 200% in the case of a senior executive substitution. 

Talent Spot suggests that compensation there are four elements: base pay (that are different according to the cities), incentives as profit sharing, individual performance plans, comprehensive performance plans and sales bonus plans, allowances as transportation, meals, clothing and child care, and at the end benefits. Mandatory benefits contributions by both employers and employees are stipulated according to the the China Labor Law and comprise a significant portion of the total compensation. Those are mainly social benefits as for: pensions, unemployment, Workplace, Medical and Public Housing Fund. The participation rate between employer and employee changes city by city and account as a big party of the entire retribution.

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