An employer in the PRC will likely face various challenges when trying to cultivate a high-performance culture and retain innovative talent. One key obstacle is that PRC law is protective of the rights of employees in general and limits an employer’s flexibility to implement decisions and policies that may infringe upon those rights.

Amongst other things, PRC law restricts an employer’s ability to terminate employment or implement disciplinary action against employees for performance reasons. Moreover, policies or decisions regarding incentivising employees (such as payment or withholding of performance bonuses), may be challenged and overturned if the rules are not clearly specified in the policy document or the policy document has not been subject to mandatory employee consultation procedures.

In this article, Johnny Choi, Associate, Simmons & Simmons Beijing, discusses how an employer may overcome these legal obstacles and manage the related risks, so as to promote retention of high performers and innovative talent.

Introducing employee incentive policies

It is common for employers to introduce incentive compensation packages, such as performance bonuses, commission plans and phantom share schemes, in order to encourage high performance and innovation within an organisation.

The payment of performance bonuses or other cash-based variable incentive compensation is not regulated in the PRC. The law here merely provides that bonuses should be included when calculating any employee entitlement that is based on the employee’s total wages.

Due to the lack of regulation and the pro-employee approach taken by the PRC labour arbitration commission and courts, if the eligibility and payment rules of the incentive compensation packages are not clearly documented, the company’s decision to pay or withhold the benefit may be challenged and overturned. This runs contrary the original purpose of the incentive policy to reward those employees who match the company’s culture and values. Labour arbitration commission and courts are reluctant to apply and may disregard clauses that give broad and unfettered discretion to employers to make decisions on the payment or withholding of bonuses.

For example, the majority of companies operate incentive compensation packages on a payment condition tied to service: in order to be eligible for payment, the individual must be employed by the company on the payment date. This reflects the fact that the purpose of the incentive compensation is not only to reward employees for high performance, but also to retain those employees.

However, there have been cases where the labour arbitration commission or court in the PRC supported an employee’s claim for an unpaid performance bonus where the employee had left the organisation at the time of payment because that payment condition was not clearly specified in the policy document. The labour arbitration commission or court held that clauses that gave broad and unfettered discretion to employers on the bonus payment violated mandatory requirements to pay wages and therefore disregarded those clauses.

On the other hand, well-drafted incentive compensation policies with clear eligibility and payment conditions are much more likely to be enforceable in the PRC. In addition to the employment condition mentioned above, if possible, the policy should also contain a condition related to employee performance, such as deeming those employees with ‘below expectations’ appraisal results ineligible for performance bonuses.

Companies introducing or updating their policies on incentive compensation packages also need to build in consultation with their employees with respect to these policies. If an employer does not conduct the consultation process the rules or conditions in the policy, which may result in a reduction in benefits (such as the employment condition mentioned above), may also be challenged and overturned. Generally speaking, the consultation process involves a consultation period and meeting with the employees to discuss the policy. During the consultation period, the company should consider and respond to any questions and suggestions from the employees; this should not be a hollow exercise. Publication and implementation of the final policy should then follow.

Managing employees’ performance

The limitations placed on managing employees’ performance provide another obstacle to cultivating a high-performance culture and retaining innovative talent in the PRC.  These limitations at times frustrate an employer’s ability to terminate employment of an employee who has proven to be unfit for the organisation.

Under PRC law, an employer wishing to terminate employment for performance reasons must first provide training or adjust the employee’s role, and if the performance issue remains, it may then terminate employment.

The law does not elaborate on the nature and content of the training or adjustment of duties, or the relevant procedures. If an employer terminates employment for performance reasons, and the employee challenges the decision before a labour arbitration commission or court, the employer must produce evidence to convince the labour arbitration commission or court that, before terminating employment, it satisfied the above-mentioned requirements. In practice, the bar is set quite high for the employer. If the employer fails to satisfy the above requirements, it may be ordered to pay additional compensation to the employee or reinstate the employee to his/her original position.

A properly devised performance management scheme may be used by a company to convince a PRC labour arbitration commission or court that it has taken steps to satisfy the above mentioned requirements. This would be helpful in the event that the employee fails to improve at the end of the performance management process, and the company needs to consider terminating employment or negotiating with the employee to terminate employment.

Performance improvement plan (PIP)

A company may place an employee with persistent or substantial performance issues on a PIP. The PIP should note the following:

• The areas where the employee’s performance is not meeting the required standards.
• The specific performance standards that the employee is required to reach.
• The actions that the employee is advised to take in order to meet the required performance standards.
• The measures that the company has adopted to assist the employee to meet the required standards; where possible, this should include one or more of the following: offering training courses for the employee to attend; regular review meetings to discuss and guide the employee on performance improvement; and details of any adjustment to the employee’s role.
• The time by which the employee must improve performance to the required standard.
• The employee’s acknowledgement of the performance improvement plan. The company may rely on the acknowledgement as an admission by the employee that his/her performance does not meet the job requirements, thus preventing any future argument by the employee (such as at the time of termination) that he/she is not capable of performing the role to a sufficiently high standard. However, the company need not withhold implementation of the PIP merely because of the employee’s refusal to acknowledge it.

Other documentation

In addition to the PIP, other documentation that a labour arbitration commission or court may consider in the event of a dispute with an employee on performance (such as termination of employment due to performance reasons) include:

• The job description (which is commonly attached as an appendix to the employment contract).
• A performance evaluation report from the regular performance evaluation cycle.

The labour arbitration commission or court will regard the job description as evidence of the employee’s duties as agreed by the parties. The performance standards that the company requires the employee to meet should generally be consistent with the employee’s duties set forth in the job description.

Employers should be aware of the limitation placed by PRC law on their flexibility and discretion in implementing incentive and performance management policies in the PRC. In this regard, well-drafted policy documentation and implementation procedures, that comply with the legal requirements, including mandatory consultation requirements, will help employers overcome the obstacles and assist companies to promote high performance and innovative talent within the organisation.

Simmons & Simmons‘ award-winning China employment team is among the largest of its type in Hong Kong and China. Clients include international investment banks, other financial institutions, government agencies and multinationals. For more information go to www.simmons-simmons.com.

Simmons & Simmons is registered in China as a foreign law firm. We are permitted by Chinese regulations to provide information on the impact of the Chinese legal environment and also to provide a range of other services. We are not admitted to practise in China and cannot, and do not purport to, provide Chinese legal services. We are, however, able to co-ordinate with local counsel to issue a formal legal opinion should this be required.