Quotes of the Day

Wang Yinhong is a China CEO's dream. He is also a China CEO's nightmare. Trained at one of the country's most elite universities, the 30-year-old Shanghai native has a degree in chemical engineering and an M.B.A. He is a bright, hardworking young employee — the kind of guy companies in any number of industries would die for. And the problem is, Wang knows it. He's with his fourth company in seven years. "I keep getting better and better job offers, so I keep accepting new jobs," says Wang, now working in Shanghai for a research-intensive biotech firm that just got an injection of venture capital. "I've gotten more money and more responsibility at each stop."

Previous economic miracles in East Asia — Japan in the 1960s and South Korea in the 1980s — were built in part on corporate loyalty. Workers from top to bottom stayed put, and companies tried for decades to more or less guarantee a job for life. In China it couldn't be more different. Except in the most hidebound state-owned enterprises, corporate loyalty barely exists. A job-hopping melee — in particular for the best and the brightest — does.

Doing business in China has never been easy; never mind how swiftly the country has been growing. Legal and regulatory environments are anything but settled. Intellectual-property protection is still a mess. Corruption is ever present. But for companies across industries, what should be a simple bread-and-butter issue — retaining skilled employees like Wang — is possibly the biggest headache they have. "It's a huge issue," says Rajeev Singh-Molares, the Shanghai-based Asia Pacific president for telecom giant Alcatel-Lucent. "We spend an inordinate amount of time around here trying to deal with it. We spend time and money trying to recruit and train the best people we can find in a very competitive market — investing in them in a serious way — and then, after a few years, some of them get poached. It's incredibly frustrating."

Part of the frustration is rooted in a basic if counterintuitive reality: China may be the world's most populous nation, churning out roughly 7 million college graduates every year, but elite companies — whether high-profile domestic firms or multinationals — find the pool of talent to be thin. In fact, large numbers of new graduates from second- and third-tier universities often struggle to get a job at all. Those that do, top executives say, often don't show much initiative and have no idea how to think for themselves. The Chinese government is well aware that its educational system has to change, but that's a slow-motion process. That's why the competition for the top 10% of graduates coming out of China's top schools is so intense and why it's so aggravating for executives like Singh-Molares when so many of their of best and brightest depart after a few years on the job.

The problem doesn't confront just foreign multinationals — far from it. "China's talent wars," says Wayne Wang, chairman and CEO of CDP Group, a Shanghai-based human-resources consultancy, "don't discriminate on the basis of [corporate] nationality or by industry. The war for talent is everywhere. High-tech, low-tech, new industries, old industries. It's an absolute free-for-all."

Consider the Internet space: social media, e-commerce, online gaming, search. In survey after survey of new college graduates in China, it's always viewed as one of the most attractive potential industries in which to work. And because it's an industry largely off-limits to foreign competitors, it's dominated by homegrown companies. But while firms such as Baidu, 360buy and Youku (the YouTube of China) get their share of the best engineers and computer scientists, hanging on to them is another story. The HR manager at one Beijing tech firm pegs the industry-wide annual turnover rate at 35% — a stunningly high figure. Of course, some people just don't work out, but that's not the main issue; poaching is. At some companies, in industries such as biotech and pharmaceuticals, HR executives say turnover rates among managers and skilled employees approach 50%. "It's insane," says Wang.

Business Without Borders
So prevalent is the problem that some CEOs more or less throw up their hands and acknowledge this as a market reality that companies simply have to accept rather than try to change. "Look, the reality is that this is a seller's market. If someone has basic technical skills and a willingness to work their tail off, they can continue to jump from job to job for the first 10 to 12 years of their career, gaining experience and salary bumps along the way. Though we managers hate it, to be honest, if I were in their position, I'd do the same thing," says Kent Kedl, managing director of China and North Asia for Control Risks, a global risk consultancy. But the consequences in China of not trying to retain talent can be severe. Not only, as Alcatel-Lucent's Singh-Molares says, is it "deeply disruptive" to an organization to have to constantly retrain new people, but the issue can also have a competitive impact far beyond that. Intellectual-property protection in China remains porous: a survey for the American Chamber of Commerce in Shanghai released earlier this spring showed a vast majority of respondents saying there had been "no change" in intellectual-property-rights enforcement in the past year, despite repeated assurances by the central government in Beijing that China would crack down on piracy. The same survey ranked retention of talent far and away as the biggest human-resources challenge that companies face.

That's hardly a coincidence. The two issues are inextricably linked. In 2008 an employee named Xiang Dong Yu quit his job as a product engineer at the Ford Motor Co. and joined a Chinese competitor, bringing with him 4,000 documents he had downloaded onto his computer. Xiang later made the mistake of traveling to the U.S., where he was arrested and prosecuted. But the brazenness of the theft and the reality of China's uneven enforcement record is what lingers for many top executives. "That kind of thing still happens all too often here,'' says the China chief of one American high-tech firm. "Every night at the close of business, those are your secrets walking out that door."

Corporate Swag
Companies know there is no silver bullet for dealing with the seller's market for talent. The first and most obvious thing they are doing is substantially increasing wages and benefit packages for highly skilled employees. Annie Jiang, vice president of human resources at Youku, says the company has recently expanded the pool of employees who receive stock options in Youku, which went public a year and a half ago. Other companies are taking a similar approach.

That helps, but it's often not enough. Jiang and others say they try to lay out a career path for young employees, showing what promotions will be available and when if they continue to succeed at the company. "At technology companies like ours, you have to give people the option to stay on the tech side of things or hold out the option of moving onto the management side," says Jiang. "You have to listen to your people and try hard to tailor jobs and a career path to them."

Then there are what Jiang calls the "more subtle things" that can be lumped under the rubric of corporate culture. Wang of CDP Group says younger employees in particular are drawn to companies with a strongly perceived corporate culture. Alibaba's Taobao Marketplace, an e-commerce company in China, has had success in this area. Jack Ma, Alibaba's founder, has created one of the strongest company cultures among private Chinese firms. Every employee, not just senior managers, receives stock options. People are rotated frequently into new jobs. This, Ma says, "stretches them and keeps them challenged." Teamwork is stressed relentlessly. Ma says it takes three years for employees to "become fully immersed into our company culture."

Newer companies like Youku try to coddle employees Silicon Valley — style, not just financially but also by trying to create a New Agey corporate lifestyle. On a recent Friday, employees lined up to take advantage of free-massage day, a weekly feature. There are 10 different clubs the company sponsors — including yoga, badminton and table tennis. If you can get three of your fellow employees to endorse an idea for a club, Youku will sponsor it. Once a month, the top executives sit down for Youku afternoon tea and take questions from any employee who attends. "You're really trying to create a strong culture in which someone isn't going to leave if they get a job offer for several hundred more [yuan] a month," says Jiang. She says Youku's turnover rate is just 18% per year.

A lot of multinationals aren't quite so touchy-feely, but they have other things to offer. In particular, they are increasingly giving employees hired in China the opportunity to work, either short or long term, in other countries. Ford offers engineers in China an advanced training course at its research and training center in Dearborn, Mich. Alcatel-Lucent has moved employees from China into global roles in the U.S. and France. "That option is definitely available to them," says Singh-Morales. The company is also going out of its way to demonstrate to its best Chinese nationals that there is no limit to how high they can rise within the company, nor how fast. Just recently, a young engineer in Shanghai who played a pivotal role in turning around a business unit that had been struggling was given a significant reward. He was promoted two rungs up the corporate ladder into a key global-management job. It's "a guy we really didn't want to lose," says a senior executive at the company, and the swift ascent was most definitely meant as a signal to other young employees: "This is what can happen if you're good." It's a message top management hopes they hear: telecom-industry executives in China say it's not unheard of for competitors to try to poach entire teams of people at the top companies — offering 50% pay raises.

Still, given the current climate in the job market (and a slowing economy in China that has not yet dented the demand for the best employees), sometimes nothing much works. Wang, CEO of CDP Group, says he was startled recently when one of his most talented young managers approached him and said she had been offered a job at another company for 50% more pay than she was then getting. How did he respond? "I told her," he says, "Congratulations and good luck."

• Bill Powell / Shanghai
• The world's most populous nation is short on homegrown business brainpower to lead its companies. What Chinese firms are doing to lure — and hold on to — the best and brightest