China’s Compensation Complications

China’s Compensation Complications

As manufacturing employees in China agitate for higher wages and benefits, the Wall Street Journal reports that the Chinese government, which exerts a lot of influence over the economy, is struggling to strike a balance between appeasing workers’ demands and keeping labor costs low enough to discourage manufacturers from relocating to cheaper markets elsewhere in Asia:

Fearing more job losses, Beijing has urged local authorities to be “steady and cautious” about approving wage increases. Guangdong province responded with a two-year freeze on minimum wage increases in February. Yet at the same time, authorities are more strictly enforcing manufacturers’ payment of workers’ pension and other social-security benefits, highlighting the delicate balancing act that China’s central and local governments face as they seek to ease business costs while trying to avoid further social unrest that could undermine the Communist Party.

Upward wage pressure has also spurred a drive toward automation in Chinese manufacturing, as well as “reshoring” by American and European manufacturers. But there’s another, broader trend affecting the Chinese labor market: namely, the shift from manufacturing to services, which the Journal took a look at in January, when Beijing revealed that the service sector had accounted for slightly more than half of the economy last year. That sea change is bound to have effects on how (and how much) Chinese employees are rewarded. At the Harvard Business Review, David De Cremer and Jason D. Shaw explore what China’s managers need to know about successfully incenting service workers as opposed to manufacturing workers:

A manufacturing model motivates employees through tangible financial means, often a one-to-one relationship: the more you get paid, the better you will perform and thus produce. This approach often prioritizes quantity over quality. In the past, this belief was very much reflected in China’s customers’ preference for lower-quality but cheap products. Moreover, this type of incentive system to motivate employees also aligned well with the more traditional management structures in Chinese companies where decision-making is centralized and leadership is equated to a large extent with adhering to quotas and other pre-established criteria.

A service-driven economy, however, faces different demands and requires a different approach to incentive systems. In a service-driven economy, customers cannot be lured in with cheap, low-quality offerings. Now, customers will demand high-quality products, and for that they are willing to pay more. To differentiate your company, it thus becomes necessary to communicate to customers why you are in the business of selling this particular product and what value it brings to the customer. This shift changes the kind of incentives required.

Simply motivating employees by paying them more when they perform better only installs a calculative type of thinking. Research has demonstrated that a consequence of such a mindset is that employees will pursue more their own self-interest, rather than the interests of other stakeholders including the customer’s interests. Workers simply try to sell as many units of the most profitable products as they can. This is a problem, because for obvious reasons, in a service-oriented economy, companies need employees motivated to create not only short-term financial gains, but also long-term non-tangible outcomes for both the company and customers. It is exactly this dilemma between using tangible versus non-tangible incentives that Chinese companies are facing today.