With Stable Increase in Hong Kong Wages and Low Unemployment, How Will Employers Nurture the Right Talent?

HONG KONG, CHINA - Media OutReach - 29 October 2015 - Today Aon Hewitt, the global talent, retirement and health solutions business of Aon plc(NYSE: AON), shared the latest trends in compensation and total rewards at its Aon Hewitt Annual Rewards Conference -- 2015 Hong Kong.

Mr Matthew Cheung, Hong Kong SAR Government Secretary for Labour and Workforce provided the Opening Note and reminded the HR professional audience of the existing talent shortage in Hong Kong due to a number of demographic factors - an ageing population and a low birth rate, among others. He also recapped the government liberal measures designed to encourage diversity in the workforce by employing more women, the elderly, the disabled and various ethnic minorities as well as Mainland graduates and migrants in compensation for the ever deepening talent shortage in Hong Kong.

While the global economy has seen modest growth so far in 2015, global growth is projected to be slightly lower for the remaining of the year. Advanced economies have seen a small pick-up with the US in a generally good condition, but are experiencing temporary weakness. Europe enjoyed slightly improving growth despite turmoil in Greece, and Japan had a first quarter pickup but weaker underlying momentum in real wages and consumption. Meanwhile, emerging markets and developing economies have experienced a slowdown compared to recent years of turbo growth, due to lower commodity prices and tighter external financial conditions in Latin America and oil exporters, structural shifts combined with financial turmoil in China, and economic impact of geopolitical and economic factors such as in Russia. Overall though, 2015 is looking like it may usher a very slightly stronger growth in 2016.[1]

In Hong Kong, despite political instability earlier in the year and an economy relatively affected by the slowdown in world trade, the unemployment rate remains stably low with a seasonally adjusted unemployment rate at 3.3% in July-September 2015 for the third consecutive period, and a slightly reduced voluntary employee attrition of 12.6% in July 2014-June 2015 vs. 14% a year earlier. Wages increased at a stable momentum by 4.6% in June 2015 over a year earlier (i.e. basic wages, other regular and guaranteed allowances and bonuses).[2]

A closer look at Compensation Trends across industries and levels brings the following insights:

-       Driven by high growth in infrastructure planning and development (such as the Ten Major Infrastructure Projects), the Construction and Engineering sector enjoys the highest salary increases in 2015 (4.9% in 2015 and 5.1% projected in 2016).

-       Life Science (including pharmaceutical industry and medical devices) are unaffected by the global economic cycles, remain among the industries that delivered the highest average salary increases in Hong Kong in 2015 at 4.9%.

-       Although hit by reduced sales volumes, particularly in the luxury sector hit by decline in Mainland tourism and consumption, salaries in the Retail sector see a 4.9% increase in 2015.  Although the situation is predicted to further deteriorate, employers maintained competitive compensation in an effort to hold on to their existing sales force and talent.

-       The Hospitality and Travel sector, also impacted by lower inbound tourist arrivals, and the Transportation and Logistics industry, affected by decreasing world trade, see the lowest salary increases at respectively 4.1 and 3.9%.

[To note that Hong Kong new Competition Ordinance to come into effect on 14 December 2014, will impact how industry bodies, employers and HR collect and peruse salary data intelligence going forward, see attached*.]

Gary Chin, Aon Hewitt Rewards Practice Lead in Hong Kong said: "With wages and increases remaining stable since 2011 (average increase of 4.5% over the past 5 years) denoting employers' cautious approach to budgeting salaries, voluntary turnover is also slightly trending down this year at 12% from 14% in 2014 reflecting the 'wait & see' attitude of employees who hesitate a bit more before jumping ship".

When observing salary budget allocations and bonuses, overall salary increase is projected to remain relatively aligned across employee levels, whilevariable payouts (as a proportion of fixed pay) dropped slightly in 2015 over 2014, reflecting the relative lower business performance in 2015.

The biggest salary differential (+64%) exists between Senior Management and Directors reflecting the importance placed by companies in strategic roles. The difference with the rest of the workforce further increases when including bonuses as allocated more, proportionally, to Directors.

Gary Chin said: "Overall, variable pay has slightly gone down, due largely to weakened business performance. Given finite budgets, employers are still attempting to differentiate merit increases and bonuses by performance level, although the variance in terms of the amounts received by top performers and their average performing counterparts have narrowed. This poses motivational and retention challenges to employers "

With the salary increase differential based on performance narrowing and the variable pay differential following the same pattern:

What can employers do to ensure they attract the right talent and nurture their workforces to stay and strive on the job?

Aon Hewitt TCM Survey Hong Kong further shows that there exists in 2015 more and more alignment between turnover reasons and retention measures, the first three being: Accelerated career development opportunities, Pay above market and Attractive benefit packages, while key measures taken to attract employees reveal that employers consider all aspects of Total Rewards in combination.

Kelvin Lam, Managing Director of Aon Hewitt in Hong Kong said: "The Aon Hewitt's approach to Total Rewards advocates a combined attention given to all "4 Quadrants" namely: a competitive Compensation package, meaningful or flexible Benefits, a Work Environment conducive to higher engagement, and Learning & Development programs that facilitate career progression, all in synergy. While we are seeing more and more employers acquiring the sense that they can't compete without those, not all organisations and HR functions have yet the maturity to translate this into actions. Aon Hewitt research suggests that the best performing organisations3 in that regard, do not have a higher HR budget, but a better use of it".

In these cautious times, where employers in Hong Kong need to revisit data and budgeting almost month to month as the economy outlook fluctuates fast, a total rewards approach, and not only a monetary one, is what differentiate employers' attractiveness and ultimately their business performance.

Competing in Hong Kong -- What HR Should Expect

By Kelvin Lam, Managing Director, Aon Hewitt Hong Kong and Tzeitel Fernandes, Associate Partner, Aon Hewitt

The Competition Ordinance (Commencement) (no 2.) Notice 2015 was published in the Gazette on 17 July 2015, which appoints 14 December 2015 as the date for the Competition Ordinance to come into force. This Ordinance (which was first outlined as early as 2012) restricts four types of conduct which are described as anti-competition -- pricing fixing, output restriction, market sharing and bid rigging. Though not specifically targeted at employment matters, it is clear that the Competition Ordinance (CO) restricts practices like wage-fixing, exchange of wage or benefits-related information, industry-wide negotiations that impact wages and similar employment terms, and non-solicitation agreements.

From December 14, 2015, job fairs, networking events and professional seminars will be added to the Compliance Department's watch list as the new Competition Ordinance comes into effect in Hong Kong. This new legislation will have subtle but definite implications for the HR profession.

Overview

There are specific conducts which are classified as anti-competitive and are prohibited (Chap 619, S 2, "Interpretation"). These are:

1.             Price Manipulation

2.             Market Division / Allocation

3.             Restriction or Control of Output

4.             Bid Rigging

It is important to note that the existence of any one or more of the conducts mentioned above could be sufficient for a firm to be in violation of the CO. Therefore, mere presence at a conversation at which sensitive information has been disclosed by a competitor, or being party to a non-binding wage-fixing agreement with competitors, could be a violation of the CO.

The Competition Tribunal has the power to take action against both individuals and companies who have contravened the CO. Potential penalties include fines, damages, voiding of agreements, director disqualifications, etc.

Immediate Next Steps for HR

1.             Review benchmarking practices

The Competition Commission has acknowledged that market benchmarking is one of the legitimate reasons for firms to share sensitive information. However, the Competition Commission advises that the information be shared with a disinterested third party, who would then disclose the information to the competitors in an anonymized and aggregated format.

While most firms participate in market benchmarking surveys for information related to base or cash compensation, many firms rely fairly heavily on 'informal sources' for information on salary increase projections, allowances & benefits, and trends. Collecting sensitive information from these informal sources would be a violation of the CO and firms should therefore ensure that this information is collected through a disinterested third party going forward.

2.             Review association and networking group memberships

Very often, firms are part of industry associations or networking groups, which meet periodically to discuss topics of interest. Sometimes, the purpose of these may be to share information that could be classified as sensitive information by the CO, eg. Employer associations which suggest reference wages or commission rates.

Firms should review all formal and informal association and networking group memberships, especially those attended by senior members of the HR team. Charters of formal associations need to be examined for compliance and modified, if necessary.  Networking groups also need to agree on a list of topics that are 'off limits' in light of the CO.

3.             Review internal wage-determination policies

While the CO does not apply to collective bargaining between an employer and a group of employees, any union / association which represents employees of more than one employer and which negotiates with more than one employer on wages and other employment terms, could be considered anti-competitive. Unlike some other jurisdictions with anti-competitive laws, the HK CO has not issued a blanket exemption for collective bargaining agreements. Firms need to obtain legal advice on any collective bargaining agreements and make alternative arrangements where the current ones may not be permitted. Also, any wages / commission rates, etc., which are set with reference to an 'industry norm' need to be audited to ensure that the method used to determine the industry norm did not involve anti-competitive activity.

4.             Agreements which restrict hiring

Agreements which restrict hiring from a particular competitor or a group of competitors (eg. no-poaching agreements) are considered anti-competitive, except when arising out of an M&A transaction and are only in force for a finite period. In the case that such agreements are already in place, firms would need to terminate them in light of the new regulations.

5.             Training and policy formulation

Firms will need to invest heavily in training their HR teams on the implementation of the CO. It is important for HR professionals to be able to:

a.             Identify sensitive information

b.             Guard against providing sensitive information to competitors

c.             Recuse themselves from discussions where competitors may be disclosing sensitive information

d.             Neither confirm nor deny 'market information' from unauthorized, non-public sources

e.             Use reliable, third-party sources when referencing market information in documents.

The CO is clear that disclosure of competitive information does not have to be in written form or in an official setting -- it can be at a social occasion, over drinks, in an elevator, or even over instant messaging services. In addition to price-related information, quantity-related information like hiring strategies, headcount growth plans, etc., could also be classified as sensitive information.

Firms should also consider putting in place formal policies and guidelines that are specifically targeted at compliance with the Competition Ordinance.

In Conclusion

The Competition Commission has publically stated that it will make every effort to partner with trade associations and industry bodies to assist in compliance. The Commission will also inform organizations if they are under investigation and rapid corrective action on the part of the organization will be viewed in a favorable light.

This is the first time that legislation like this will be enacted in Hong Kong and the CO is expected to radically change the way that business is conducted within the Special Administrative Region. As implementation of the CO proceeds, it is expected that the Competition Commission will issue further guidelines and clarifications on the CO. It is important that firms take immediate steps to ensure that they comply with the CO, as non-compliance could result in penalties for both individuals and organizations, as well as significant reputational damage, which could have far-reaching repercussions for the firm.

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About Aon Hewitt

Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt in Asia Pacific, please visit www.aonhewitt.com/apac  

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