Publications

Introduction

For western businesses seeking an Asian base of operations, Hong Kong has long been an attractive location. Hong Kongs proximity to China provides it with various resources, and its location in the heart of Asia makes it a Golden Gate to almost any Asian country.

With relatively low taxes, an economic growth rate of 6 percent annually and easy access by air to most other major Asian cities, Hong Kong is a major business center. More than 500 banks from 43 countries operate in the territory, its stock market is the eighth largest in the world, and its port the second busiest.

The Asian economic crisis, however, has had a deep effect on Hong Kongs economy. The economy shrank by 7 percent in the third quarter of 1998, and there are no signs that the situation will improve soon. Throughout the 1990s, unemployment was relatively stable (around 3.1 percent). It rose sharply due to the crisis and held steady at a record high of 5.8 percent as of January 1999. It is predicted to rise to 6.5 percent by mid-year, while some predict a figure as high as 7 percent.

On July 1, 1997, Hong Kong reverted to Chinese sovereignty after more than 150 years under British rule. After the transfer, Hong Kong was granted the status of a Special Administrative Region (SAR). The Sino-British Joint Declaration on Hong Kong's future created the Basic Law, a constitution that will govern the territory for this period of time. In theory, at least, the capitalist system that was in place in Hong Kong as a British colony will remain for another 50 years.

The Basic Law guarantees that freedoms of press, speech and democracy will remain intact. Hong Kong will retain its current political, economic and judicial systems and will continue to participate as a quasi-independent entity in international agreements and organizations for 50 years before coming under the total administrative control of China.

Essentially, China will function with two contrasting economic and social systems -- semi-communism in most of the country and capitalism in Hong Kong. However, for most international companies operating in Hong Kong, a big question is the effect the change will have on their employee hiring practices. Basically, companies can hire individuals educated and trained locally, "returnees" (locals educated and trained abroad who want to return home), or expatriates.

A shortage of skilled labor makes local recruiting difficult. The large annual growth rate of the Hong Kong economy is one cause of the problem. Another is the shortage of professional staff, spread thin as more foreign businesses establish operations in Hong Kong. Also, some managers and other professionals are leaving the territory because of uncertainty about the transfer of sovereignty.

As a response, the Hong Kong government in 1991 adopted a labor importation program that relaxed immigration laws and still allows employers to hire foreign workers on two-year contracts that can be renewed twice. The program covers workers at all skill levels.

Recruiting Locals

Hiring local residents has both benefits and drawbacks. One benefit is that they know the "local scene" -- the language and culture, and often have connections to local institutions or government agencies. It is usually less expensive to hire locals because they have lower salary requirements than returnees or expatriates and there are no relocation costs. On the other hand, locals may be unfamiliar with western business practices and unable to communicate well in English, thereby requiring extensive training.

There are several ways international companies can hire local Hong Kong citizens:

* Advertising in local newspapers. This method may be relatively inexpensive, but is bereft with problems. Ads must be translated correctly into Cantonese or Mandarin so readers will be able to understand them. Also, it may be a month or more before an ad is published in some papers because of a large backlog of advertising. Newspaper advertising is likely to bring many applications from unqualified candidates; sorting through their applications can be time consuming. Once a company identifies potential candidates, confirming their qualifications and checking references can be difficult because records often are incomplete and language barriers hinder communication.

* Job fairs. Similar problems arise when using job fairs to recruit local candidates. Additionally, job fairs tend to attract job seekers with a wide range of skills, often irrelevant to what companies want.

* Universities. Several universities have established internal employment centers to help their graduating students find jobs -- and also help employers. Verifying applicants' educational backgrounds and checking references are easier through a university. However, while universities are a good source of entry-level personnel, they do not help fill companies' needs for professionals experienced in management, finance, marketing and human resources.

* Personal connections. Guanxi is a Chinese term used to describe personal relationships between relatives, friends and close business contacts. Guanxi connections frequently lead to jobs within locally owned businesses as employees suggest individuals they know as job candidates. A foreign business that hires employees based solely on these connections may risk hiring incompetent personnel or persons who are difficult to fire without bruising sensitivities or creating conflicts among other employees. To avoid these complications, companies recruiting this way should carefully evaluate the qualifications and references of candidates suggested by current employees before offering to hire them.

* Joint venture partners. The Hong Kong partner in a joint venture may be able to identify personnel with desired skills and qualifications. The risk is that individuals so recommended may be somebody's "favorites" and not necessarily the best qualified candidates. Additionally, these employees may turn out to be persons who did not perform satisfactorily for the partner, so they were "removed" from that side of the organization and placed in your company.

Recruiting "Returnees"

With a scarcity of qualified candidates for management, human resources, finance or marketing positions, international companies often hire away locals who have training or experience in these jobs at other companies. Such "poaching" is widespread. To get them to leave their current employers, however, companies must pay significantly more, either in salary or perks. This practice drives the wages of skilled local workers even higher.

Foreign companies often look outside Hong Kong to recruit "returnees" -- Hong Kong citizens who have worked or studied abroad and want to return home. They often prefer to join a foreign company or joint venture in Hong Kong because of higher salary and better career opportunities than they find in the U.S. or Europe.

Returnees can be desirable candidates because they are familiar with western business practices as well as the Hong Kong culture and business environment. A candidate who has studied in the U.S., Canada or England probably knows English better than locals do. Returnees might have connections with local government agencies or other organizations that could be helpful to employers. Also, through relatives or friends, they may be able to find relatively inexpensive housing without much difficulty.

In addition to the same recruiting options outlined above for locals, using an executive search firm might help find qualified locals, returnees, and expatriates.

Recruiting Expatriates

Expatriates -- westerners working in Hong Kong -- can be desirable job candidates. Skilled, with previous work experience abroad, they can be particularly useful to a company just establishing operations in Hong Kong. The "expat" may already be familiar with the organization and its business activities.

On the other hand, companies often must pay more to expatriates in salary, housing benefits and hardship allowances. A senior executive's compensation package can range from US$200,000 to US$500,000 annually. Also, there is no guarantee that an expatriate can function successfully in the Hong Kong business culture. Most foreign companies try to limit the number of expats they employ in Hong Kong to very senior, key positions.

Using an executive search firm, although expensive, might be the best way to recruit mid to upper-level expatriates.

There are no restrictions on the number of foreigners a company can employ in Hong Kong, but they must obtain visas from the Immigration Department before they can enter the territory. The visas are good for two years and may be renewed only twice.

Recent Changes in Labor Laws

Return to Chinese sovereignty has caused many changes in Hong Kong labor laws:

The amount of pay a woman receives while on maternity leave has been increased from 60% to 80% of her base salary.

New legislation has been enacted to end discrimination and harassment based on gender, marital status, pregnancy and disability.

Employers must register their retirement programs unless specifically exempted. Also, private employers may establish mandatory retirement plans.

New legislation increases the maximum amounts payable for long-term employment or severance.

It is important to note that while these new programs have been adopted, some have not yet been implemented. Also, although sex and disability discrimination have been outlawed, no such legislation has been passed for age and race.

Under another measure, the Labor Department must be notified before employees can begin working in factories, mines, quarries and other places considered dangerous. Also, employers must carry workers compensation insurance for job-related deaths or injuries, except for contract workers. The amount of compensation is based on the severity of the injury and the age of the affected worker (see Figure 1).

Figure 1

Source: Watson Wyatt Worldwide

As of 1996, minimum amounts to be paid for death or disability are HK$219,000 and HK$248,000 respectively, with additional compensation up to HK$297,000 for an injured employee who requires special care for daily living. For a worker who is temporarily incapacitated, an employer must pay two-thirds of that workers monthly salary for the duration of the injury. Employers also might have to pay for medical treatment needed for job injuries.

Wages and Benefits

Average salary levels in Hong Kong are slightly lower than those of the U.S., Japan and Germany but are similar to salary levels in the other Asian tigers of Singapore, Taiwan and Korea. Salaries for professionals and upper-level managers, however, typically are equal to those in other major cities around the world. Hong Kong salary levels also are increasing faster than the inflation rate.

The salary rate includes basic wages, cost-of-living allowances, guaranteed year-end bonuses, commissions and tips. More than 70 percent of companies in Hong Kong give all employees a bonus equal to about 15% of their annual salary. They also pay other bonuses for such things as good attendance. In addition, most companies provide a Chinese New Year bonus equal to about one month's salary.

Most employees expect to receive fringe benefits in addition to salary. Benefits usually include subsidized meals or food allowances, free medical treatment and transportation allowances. Higher-level employees also might receive free or subsidized housing and subsidized education for their children. Expatriates might receive free personal travel. Benefit costs for expats generally are higher than for senior local managers but are mostly tax-free.

All these benefits, with worker's compensation coverage and a retirement plan, usually amount to at least 15% to 20% of an employer's payroll. For top-level employees, fringe benefits can represent a significant expense.

Although employers are not required to contribute to health and retirement plans, they are increasingly doing so as workers move away from the traditional Chinese practice of providing care within the family. Also, employers usually provide private medical plan benefits because government-subsidized hospitals are of poor quality.

Hospitalization benefits are on three levels -- a bed in a ward, a semi-private room, or a private room. Outpatient benefits are usually based on an employee's rank in an organization. Employers usually do not provide dental benefits, but when they do, they also correspond to rank.

The government provides some unemployment compensation, mostly for the poorest individuals. Required employer expenses for worker's compensation insurance are minimal.

Under the government's Occupational Retirement Scheme Ordinance, employers must provide managers and clerical staff with benefit plans registered with and approved by the Hong Kong government. Depending on the size of the organization, there are typically two types of benefit plans.

Larger companies usually adopt a defined benefit plan that bases benefits on average monthly salary and years of service. Smaller companies -- and, increasingly, more larger ones -- use a "provident fund" that is a defined contribution plan.

The Mandatory Provident Fund Ordinance, enacted in 1995, requires employers to provide a minimum level of retirement benefits to all employees. The employer pays a minimum of 3% of wages with the employee paying the rest of the 10% contribution if the employee earns more than HK$4000 per month.

Frequently, companies establish different categories of retirement plans depending on employee benefit levels. Retirement usually is at age 60, although many older plans, particularly for expats, set the age at 55. Retirement benefits usually are paid in a lump sum; some pension plans exist but are being phased out.

Labor Relations

Only 18% of Hong Kongs labor force is unionized. The unions function mostly to promote information sharing and self-help among their members; they are not militant.

Hong Kong has a history of peaceful labor relations with relatively few work days lost because of labor disputes. When disputes develop, they are usually resolved quickly because communication between employers and employees is easy in the typically small Hong Kong business. Due to the current crisis, the union leaders have urged the Hong Kong government to prepare comprehensive human resources policies to cope with the problem of high unemployment, and the government has taken adequate action in response.

Retention Strategies

Retaining skilled employees is critical because there are so few qualified candidates in Hong Kong. International companies stand a better chance of retaining employees and guarding against "poaching" by other employers if they demonstrate concern for their workers' well-being and career development. It is important to provide additional incentives like higher wages, improved housing benefits, defined career paths, training, travel abroad, and evaluations and pay reviews at least twice-a-year. It is also important to respond quickly to employee complaints and concerns.

After 1997

Apprehension about the future of Hong Kong is demonstrated by the fact that more than 500,000 Hong Kong citizens have left the territory during the past decade. Most of the emigrants in this "brain drain" are the educated, skilled and affluent workers who are most in demand in Hong Kong.

On the positive side, Hong Kong voters recently elected pro-democracy candidates to 16 of 20 open seats in the Legislative Council (Legco). This means supporters of democracy will be in power during the crucial next two years of transition.

Other recent developments, however, cause concern. Many foreign investors doing business with Hong Kong companies now stipulate in contracts that disputes will be settled through arbitration outside the territory, to avoid the involvement of Chinese courts. Companies with interests in Hong Kong will probably encounter more difficulties with changes in legal systems. Instead of the "rule of law," the Chinese system is built on personal relations, business connections and the influence of criminal gangs. For Hong Kong to prosper, these influences must be less important than they are in China today. However, China has made it clear that in the future, it will award government contracts only to companies loyal to the Peoples Republic.

A Preliminary Working Committee (PWC) of Hong Kong residents has been formed to aid in the transition to Chinese control. However, many other citizens believe this group and its 700 "advisors" do not represent most Hong Kong residents. Most of its members are conservative, pro-business, prominent individuals concerned about their own interests in Hong Kong after the shift of control.

What will happen to the monetary system also is of concern. It is considered unlikely that the Chinese government will allow the Hong Kong dollar, which is pegged to the U.S. dollar, to remain in circulation.

Conclusion

China has much at stake in the well being and continued prosperity of Hong Kong. The Chinese government is Hong Kong's largest investor with a stake of more than US$25 billion. Many Hong Kong residents believe China will do little to upset the Hong Kong economy, which continues to grow even in the face of an uncertain future. They suggest that although China may institute some dramatic changes soon after taking control, in large part China will allow Hong Kong to continue operating as it does now.

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