By Carl Redondo, Practice Leader, Health & Benefits, Asia Pacific

Flexible benefits (flex) is not a new concept in China. When flex was a hot topic in the US and Europe, many multinational firms encouraged their management teams to look at its feasibility in China and the rest of Asia. The message that was sent back to the West in the late '90s and early '00s was that the flex concept didn't make a whole lot of sense in Asian markets. China and Asia have obviously moved on since then, and there is now increasing interest in the "flex concept" from leading companies looking to differentiate themselves in extremely tight (but no longer cheap) talent markets.

So, what's changed? Firstly, China as an economic market has matured. Salaries in Shanghai and Beijing are now comparable to those in many Western cities and so companies can no longer just increase salaries to compete in the talent market. More and more companies are looking for innovative ways to attract/retain key talents and the flexible benefits are just one lever to utilize.

Secondly, healthcare costs – which are typically met in full by employers – are rising exponentially. This is a highly valued benefit to employees and thus reducing the benefit level is not really an option for most companies. A well-designed flex scheme gives employers the opportunity to share future cost increases with employees and thereby control their overall healthcare spending. This is music to the ears of many HR and Finance teams who are desperate to gain control of the overall reward spend.

The third major change drivers are the demographic changes being seen in China. The differences between "Generation X, Y, Z" and the "Baby Boomers" are probably over hyped, but there are clear differences in the employee benefit needs of a young independent workforce and those approaching an expected 20 years of retirement. In many Chinese cities, younger people are desperate to get on the housing ladder; any support employers can provide in this area is greatly appreciated. Older workers are more concerned about the cost of medical and care benefits in retirement – especially those without a large, younger family to support them. A flexible benefits system provides a great platform to address these diverse workforce needs and significantly improves the perceived value of the benefit programs.

Flex – the China formula

As companies in China bring flexible benefit programs to market, some interesting and distinctive features are appearing. The income tax environment in China is such that there are virtually no tax incentives to encourage certain benefits to be or not be included in the flexible benefits program. This lack of tax incentives was initially perceived as a barrier to flex as a concept in China, but surprisingly, the impact has been quite the opposite. The lack of tax incentives means that the flex platform design process is not so influenced by disruptive external factors and hence, is more aligned to market needs and overall benefits philosophy. As an anecdote to illustrate this, it always seemed a little odd that many UK employers suddenly rushed to offer employees the option of purchasing bicycles within their flex program purely because the government offered tax breaks to do so. This option was, of course, quickly removed when the UK government withdrew this particular tax incentive.

The age of the "Iron Rice Bowl" in China may long have passed, but it is still common for employers in China to offer a very broad range of benefit programs to employees. These programs range from housing assistance through to the standard insurance products and onto smaller cash allowances and perquisites. As companies come to grips with the concept of flex, they are often seeing stage one as being an opportunity to rationalize some of these peripheral programs and bring the remaining onto a common platform. The system can then evolve over time to add and remove benefit programs to suit employee and employer needs.

The core of almost every flex program now coming to market in China is the ability for employees to make choices around their insurance programs. This includes both life coverage as well as medical benefits. Most commonly, employees are being offered 3 or 4 choices of programs that allow them to both top-up their own coverage levels, as well as to include dependants. One of the big question marks in China was the readiness of the insurance market to provide coverage in a flex environment. Insurance companies are typically cautious about how to price premiums for individuals who actively choose greater levels of protection coverage (be it life or medical). However, it seems (for now at least) that insurance companies are happy to take on this business and are generally offering competitive rates under a flex structure.

The War for Talent – winning the "hearts and minds"

The much talked about "war for talent" in China is no doubt as bloody as ever, but it is also moving into a new phase. The days of throwing money at the business and employees in China, just to have a presence, are probably gone forever. China is still a top-line growth engine for many multinational companies, but increasingly multinationals are looking for their business in China to contribute to the bottom line as well. This changing internal environment is forcing many companies to shift to "guerilla tactics" as they try to attract and retain key talent, without the ability to always match competitors' salaries.

Hewitt's employee engagement surveys routinely show that employees in China are dissatisfied with their benefit programs, thus providing an opportunity for some employers to truly differentiate themselves. Offering a flexible benefits program is one of the key tools for employers willing to innovate in this arena.

Wrap up: Communicate, communicate, communicate!

The evolution of flex in China looks very different from its predecessors in the West, but in the area of communication, there are definitely lessons to be learned. The power of good communication is much emphasized and this is certainly true in the case of flexible benefits.

If a flexible benefits system is to be a success, the users (i.e., employees) need to be the advocates. Employees need to enjoy interacting with the system and understand their options easily and without frustration. Choice is only a good thing when individuals understand the options being put in front of them.

"Confuse them and lose them" is the cautious mantra that needs to be kept in mind at every turn of the design and implementation of a flex system. The China experience to date is that the benefit design process is not that complicated, as many companies want to introduce the concept slowly, and with limited choice in the first few years. More critical is the design of the administration portal itself and the up-front communication to accompany the system rollout. Get the communication right and the whole system "goes viral". Employees begin discussing their benefit choices with colleagues on lunch breaks and soliciting new design and system ideas becomes an automatic process driven by employees. Get the communication wrong and employees pass on negative sentiments to others and the project then runs the risk of being archived as a white elephant.

Contact

Carl Redondo is the Practice Leader, Health & Benefits, Asia Pacific for Aon Hewitt Consulting. He can be reached at carl.redondo@hewitt.com.

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