Vicky Zhang – Finance Specialist
When a business enters China, it has to deal with aspects related to employment.
The Chinese labor law is very stringent and the risks of not being compliant are very high. One important aspect to consider is the one related to employees’ salaries.
This guide will help you to understand more about salaries and how to structure a compliant salary package in China.
Understanding the Chinese Salary Structure
A. Basic Salary Components in China
1. Fixed salary: A fixed salary, also known as a base salary, is a fundamental component of a salary package in China. It refers to the predetermined amount of money that an employee receives regularly, typically on a monthly basis, regardless of performance or external factors. The fixed salary serves as the foundation of an employee’s earnings and provides stability and predictability. It is negotiated and agreed upon between the employer and the employee, taking into consideration factors such as job responsibilities, qualifications, and market rates. While it forms the core of an employee’s compensation, it is often complemented by additional variable components such as bonuses, allowances, and benefits.
2. Bonuses and allowances: Bonuses and allowances are essential components of a salary package in China, providing additional financial incentives to employees. Bonuses are typically awarded based on performance, achievement of targets, or company profitability. They serve as a way to motivate and reward employees for their contributions. Allowances, on the other hand, are additional payments provided to cover specific expenses or provide certain benefits. Common types of allowances in China include housing allowance, transportation allowance, meal allowance, and education allowance. These bonuses and allowances enhance the overall compensation package, attract and retain talented employees, and contribute to employee satisfaction and loyalty. Employers carefully consider these components to create competitive and attractive salary packages in the Chinese job market.
3. Benefits and perks: Benefits and perks are important elements of a salary package in China, offering additional value and enhancing the overall employee experience. Benefits encompass a range of offerings, such as health insurance, retirement plans, and paid time off, which provide security, support, and work-life balance to employees. Perks, on the other hand, are extra privileges or advantages that go beyond standard benefits. These can include flexible work arrangements, employee discounts, wellness programs, professional development opportunities, and more. By providing comprehensive benefits and appealing perks, employers in China demonstrate their commitment to the well-being and satisfaction of their workforce, attracting top talent and fostering a positive work environment.
B. Variable Salary Components in China
1. Performance-based bonuses: Performance-based bonuses play a significant role in salary packages in China, rewarding employees based on their individual or team achievements. These bonuses are directly linked to performance metrics and goals established by the employer. Performance-based bonuses serve as powerful motivators, encouraging employees to excel in their roles and contribute to the overall success of the organization.
They promote a performance-driven culture and incentivize employees to surpass expectations. These bonuses can be tied to various factors such as sales targets, project completion, client satisfaction, or key performance indicators. By offering performance-based bonuses, employers in China not only recognize and reward outstanding performance but also foster a competitive and results-oriented work environment.
2. Commission structures: Commission structures are a prevalent feature of salary packages in China, particularly in sales and client-facing roles. This type of compensation is directly tied to the employee’s ability to generate revenue or secure sales. Commission structures provide employees with the opportunity to earn additional income based on their sales performance or the value of the deals they close.
The commission rate is typically a percentage of the total sales or transaction value. This structure incentivizes employees to actively pursue sales opportunities, meet targets, and maximize their earnings. Commission structures are commonly used in industries such as real estate, insurance, financial services, and retail, where sales performance is crucial to business success.
3. Profit-sharing options: Profit-sharing options are an attractive feature of salary packages in China, allowing employees to share in the financial success of the company. Under profit-sharing arrangements, a portion of the company’s profits is distributed among eligible employees. This can be done annually or at regular intervals. Profit-sharing options align the interests of employees with the company’s financial performance, motivating them to work towards the organization’s success.
By directly linking compensation to profits, employees have a vested interest in improving productivity, efficiency, and overall business outcomes. Profit-sharing can foster a sense of ownership and teamwork, driving employee engagement and loyalty. It is a valuable incentive for companies looking to reward and retain talented individuals in the competitive Chinese job market.
Importantance of structuring a salary package in China
The compensation system has two main purposes:
- ensure enterprises to control costs;
- help enterprises to effectively motivate employees.
In order to attract and retain the best talents, an enterprise must make its compensation system competitive among its peers, timely understand the compensation data of similar companies, and formulate its compensation system.
The internal meaning of the remuneration system is that it directly affects employees’ work enthusiasm and play a strong incentive role in the future development of personnel.
To structure the best salary package for employees, companies have to consider different elements. Below we analyze the most important ones:
- Gross salary
- Annual bonus
- Allowances (especially for foreigners)
Gross salary is the amount of money that comes before the deduction of the individual income tax and employee’s contribution to statutory benefits.
The gross salary is divided into fixed salary and flexible salary:
- Fixed salary – this is the fixed amount stated in the employment contract;
- Flexible salary – this refers to the commission, bonus, allowance, overtime payment or any other changeable amount that is not fixed and may vary from month to month.
In addition to the basic salary, companies can also pay annual bonuses.
The company can pay the bonus once a year, or it also can pay the bonus together with the monthly salary.
When companies choose to pay one time in one year, in this case, employees can use the special tax method of a one-time annual bonus to reduce their tax burden under China’s individual income tax law.
This provision will expire on January 1st, 2022.
The Chinese Tax Bureau allows foreign employees (including those from Hong Kong, Macau, and Taiwan) to deduct certain “allowances” before calculating the tax on their monthly salary.
Legally, the following expenses can exempt from individual income tax:
- Housing allowance
- Meal allowance
- Laundry expenses
- Relocation fee
- Home visitation
- Language training fee
- Children education expense
Housing allowance: rental fee can be claimed by the tax invoice. Property management fees and utility fees are not included. You should have a detailed rental address in the remarks area.
Meal allowance: foreign employees are allowed to deduct a certain amount that they spend on meals each month from their taxable income.
Home visitation: the cost of visiting relatives is limited to the cost of transportation by foreign individuals between their employment places in China and their home areas (including spouse or parents’ residence) and not more than 2 times per year.
Language training fees and children’s education expenses: foreigner’s language training and children’s schooling fee within China can be claimed by the official tax invoice issued by the identified education institutions.
It is not clearly specified by the law how much of a foreign employee’s salary can be used as an allowance. The tax law only mentions it should be a reasonable amount.
This provision will expire on January 1st, 2022.
Gross salary includes basic salary, meal allowance, transportation allowance, commission, and bonus which you can get before paying tax. For some companies sometimes the bonus is added.
The net salary is obtained deducting the individual income tax and the mandatory benefits (social insurance plus housing provident fund).
As said, the mandatory benefits are divided into two parts, one is the housing provident fund, the other is social insurance. Both parts are jointly paid by the enterprise and employees.
The rates vary from city to city. Taking Shanghai as an example, the mandatory benefits payment rate are as follows:
|Pension insurance fund
|Medical insurance fund
|Unemployment insurance fund
|Maternity insurance fund
|Employment injury insurance fun
|0.16% – 1.52%
|Housing provident fund
By the end of the year 2020, due to the COVID-19 epidemic, all enterprises are entitled to preferential social security policies, paying only 4.75 percent of the medical insurance fund and 0.5 percent of the maternity insurance fund.
The calculation method of China’s individual income tax is withholding and pre-payment.
That is, pre-payment of individual income tax every month, and the annual final settlement is adjusted according to the actual situation.
As we all know, high income means high personal income tax. Although the personal income tax threshold has been raised to 5,000 yuan, it is still a problem for high-income people to reasonably save tax.
Use the annual bonus to save tax
Bonus belongs to the category of salary and should be withheld and remitted by the withholding agent according to the tax rate applicable to salary.
However, whether a company pays bonuses on a monthly basis, quarterly, semi-annual, or annual basis, it varies under the individual income tax law:
- If the bonus is paid monthly, the bonus should be combined with the salary of the month to pay personal income tax;
- If it is a concentrated bonus (quarterly, semi-annual, annual), according to the provisions of the tax law, it cannot average to the monthly salary combined with the payment of individual income tax and should be done separately for a month of salary.
Employees can use the special tax method of a one-time annual bonus to reduce their tax burden under China’s individual income tax law.
In a tax year, for each taxpayer, this method is allowed to use only once. And this provision will expire on January 1st, 2022.
Make use of tax incentives to save tax
At the moment, the main forms of tax incentives are:
- Tax exemption
- Exemption amount
- Tax deduction
- Preferential tax rebate
- Accelerated depreciation
- Preferential tax rate
- Profit and loss offset
- Tax concession
- Deferred tax
One tax benefit that most people can use is the newly introduced “cumulative special additional deductions”.
Besides the mandatory benefits, children’s education, supporting the elderly, interest on housing loans, housing rent, and continuing education can also be deducted before paying tax.
Negotiating a Salary Package in China
A. Researching Salary Market Trends
Researching salary market trends is crucial when structuring a salary package in China. It involves gathering information on prevailing salary levels, compensation practices, and industry benchmarks. By staying informed about the current market rates, employers can ensure their salary offerings are competitive and attractive to potential candidates. Researching salary market trends also helps employers gauge the value of specific roles and skills in the market, enabling them to make informed decisions regarding compensation. It provides valuable insights into salary trends, emerging job roles, and areas of high demand. By conducting thorough research, employers can align their salary packages with market expectations, enhancing their ability to attract and retain top talent.
B. Identifying Key Negotiation Points
Identifying key negotiation points is essential when structuring a salary package in China. It involves understanding the needs and expectations of both the employer and the employee. By identifying these points, employers can tailor their offers to meet the desires of the candidate while ensuring the company’s objectives are also fulfilled. Key negotiation points may include salary expectations, benefits and perks, work-life balance, career development opportunities, and flexibility in work arrangements. By proactively identifying these points, employers can engage in productive negotiations that lead to mutually beneficial outcomes. It allows for open communication, compromises, and the creation of a salary package that satisfies both parties involved.
C. Tips for Successful Salary Negotiations
Tips for successful salary negotiations in China can greatly influence the outcome of the negotiation process. Firstly, conducting thorough research on industry standards and salary ranges will provide a solid foundation for negotiation. Secondly, clearly articulating and highlighting one’s qualifications, achievements, and unique skills can strengthen the negotiation position.
Additionally, being prepared to present a strong case for why a salary increase is justified is important. Active listening and effective communication skills are vital during the negotiation process. Maintaining a professional and respectful attitude, being open to compromises, and understanding the employer’s perspective can lead to a successful negotiation outcome. Finally, considering the overall package, including benefits and opportunities for growth, can also contribute to a satisfactory result.
Evaluating Non-Monetary Benefits
A. Healthcare Benefits
Healthcare benefits are an essential component of a comprehensive salary package in China. These benefits provide employees with access to medical services, ensuring their health and well-being. Common healthcare benefits include medical insurance coverage, which covers expenses related to hospitalization, consultations, medications, and treatments.
Employers may offer supplementary medical insurance to provide enhanced coverage or access to specialized healthcare services. Healthcare benefits not only demonstrate an employer’s commitment to the health of their workforce but also contribute to employee satisfaction, retention, and productivity. By offering robust healthcare benefits, employers in China can attract and retain top talent while promoting a healthy and supportive work environment.
B. Annual Leave and Public Holidays
Annual leave and public holidays are important components of a well-rounded salary package in China. Annual leave refers to the paid time off that employees are entitled to take each year for personal reasons, such as vacations or personal commitments. Public holidays, on the other hand, are specific days designated by the government for all employees to have a day off work.
These holidays often include national holidays, traditional festivals, and important cultural events. Providing generous annual leave and observing public holidays not only promotes work-life balance but also recognizes the importance of rest and relaxation for employee well-being. It contributes to higher job satisfaction, employee morale, and overall work productivity.
C. Housing and Transportation Assistance
Housing and transportation assistance are valuable perks that can enhance a salary package in China. Housing assistance may include subsidies or allowances to help employees with the cost of accommodation. This can be in the form of a housing allowance, company-provided housing, or assistance with renting or purchasing a home. Transportation assistance, on the other hand, may involve subsidies for commuting expenses or company-provided transportation services.
These benefits help employees manage the costs associated with housing and transportation, improving their quality of life and reducing financial burdens. By offering housing and transportation assistance, employers in China can attract and retain talent, promote employee satisfaction, and alleviate some of the challenges associated with living and commuting in urban areas.
Tips for Employers
A. Ensuring Compliance with Chinese Labor Laws
Ensuring compliance with Chinese labor laws is crucial when structuring a salary package. Employers must adhere to regulations related to minimum wage, social insurance contributions, and other mandatory salary components. By complying with these laws, employers can avoid legal issues and create a fair and transparent salary package for their employees.
B. Establishing Transparent Salary Policies
Establishing transparent salary policies is essential for a well-structured salary package. Employers should clearly communicate their salary policies, including the components, calculation methods, and any performance-based or variable elements. Transparent policies promote fairness, build trust, and ensure employees understand how their salary package is determined.
C. Retaining Top Talent through Competitive Salary Packages
Retaining top talent can be achieved through competitive salary packages. Offering attractive and market-competitive salary packages helps employers retain skilled and high-performing employees. A well-structured salary package, including competitive salaries, bonuses, benefits, and perks, demonstrates the organization’s commitment to rewarding and valuing its top talent.
How HROne can help you to structure a compliant salary package in China
Structuring a clear salary package is a fundamental aspect when you want to hire employees. This, together with salary transparency, is the best approach to attract qualified talents.
Our service can handle the complete employee payroll for your company in China in compliance with the local policies. As a non-state-owned consulting firm, we can directly hire employees for a company not having a legal entity in China by our specialized Employee Leasing / Talent dispatching services.