Compensation & Benefits Practice in Alibaba

Curated by Alibaba Business School

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We have talked a lot about building a good culture, but of course, culture is not enough, a good C&B policy also plays very important role in attracting and retain people.

What is a good C&B policy? Do we have to offer the top salary?

We are glad to hear from Cherry Wong, the former head of Alibaba C&B department on the topic of “Compensation & Benefits Practice in Alibaba”.

I used to be a finance director in Alibaba for 8 years. After the company went IPO in Hong Kong, I transferred to the HR department and worked as the director of Compensation and Benefits department. After another 8 years, I am now working in the K12 school - Yungu School, which was built by Jack Ma.

It’s my honor to be here to share some of my thinking and experience in setting up Alibaba’s Compensation & Benefits function. I think most of you are the owner of business. There are two sides in the C&B, one side is about how to reward people, and the other side is what is your philosophy in sharing wealth. The earlier the owner think clearly of your wealth sharing philosophy, it would be easier for him/her to survive and go further.

Today you can take this opportunity to take a pause to think about your own business and wealth sharing philosophy. No worry about the technical part, I believe all of you have very good HR partner. C&B is very basic function in HR, however the most important thing is knowing people. You just need to focus on the philosophy and principle and leave the technical thing to your team.

What is C&B?
Here is the basic principle of theory of C&B.

C&B is a sub-discipline of human resources, focused on employee compensation and benefits policy-making. While compensation and benefits are tangible, there are intangible rewards such as recognition, work-life and development. Combined, these are referred to as total rewards. This is from Wikipedia.

There is also a very popular model invented by Mercer, a very famous consultant company of HR, which is called 3P Model in C&B - Pay for Position, Pay for Performance and Pay for Person.

We can learn a lot from textbook or courses about traditional C&B knowledge, however, I believe that as business leader, the most important thing is to think clearly what kind of things/people we do not want, and what kind of things/people we want to encourage. And C&B system is a powerful tool to manage our business and people.

When we are talking about C&B model, there are usually 5 steps to follow:

1. First of all, the founder & company’s philosophy. In Alibaba, Jack Ma always told us that when money is scattered, people gather. That means when you share your wealth, you will keep talents close around you. This is the most important philosophy Alibaba follows.

2. Second, we need to think about what is the development stage of your business. If we are in a preliminary stage, usually you don’t need to think about salary or bonus, because at that time, most of the key members are the founders. They need to put money in instead of out. At very early stage of Alibaba, everyone in the team earned the nominal salary which was only 500 RMB/month, even for the people who worked overseas. After we got fund, it became a real start-up company. Since we were nobody at that time, it was almost impossible for Alibaba to attract people. People joined Alibaba for some special reason, e.g. the new graduates joined the company because they could enjoy the free Internet. When the company got enough fund, the company had to look at the external market to align with the bench mark of C&B level. When the company grew big enough, it might be difficult to change policy, in a mature stage, actually there is not so much we can do, most of time we had to stick to the original way.

3. Third, we need to consider the capability to pay. If we have enough fund, that’s good. But if not, how should we reward our employee, that’s a creative way to think about. So, for C&B, sometimes it’s not just about money.

4. Fourth, we need to check the external factor, we need to do some industry analysis to know the market. Usually we need to do some research to understand the bench mark in the market and to know what is the position of our C&B level.

5. Fifth, the competitive positioning. You need to identify your major competitors and evaluate their C&B practice and how it will impact to your company? Based on that evaluation, you need to decide your Salary Competitiveness Ratio (SCR) . It is a measure of how competitive the current salary against specific competitors or against the general market.

Let’s get back to how Alibaba works in C&B. As all of you have learnt that Alibaba is strongly driven by strategy, strategy is about choice, and it needs 2 pillars to support, one is organization & people, the other is performance & management. And one of the key things here is about what kind of the people we want to attract, keep and motivate.

In Alibaba, our strategy is led by Mission, Vision & Values. It means Alibaba wants to motivate people who has strongly belief in Alibaba’s Mission, Vision and Values. Because this is the source of energy to keep them develop and resist when they are facing difficulties.

And based on the philosophy as I mentioned above, we need to decide the model of what kind of the people we want. In Alibaba, we want people with 3 energies. One is the Heart Power, which means they have the strong belief in mission, vision and values. The second is the Head Power, so people can think systematically and be creative to find out ways to tackle difficulties. And the third is the Hand Power, it is about execution. So when we know that we need such people, we will know how we should use C&B to find, retain and motivate such people.

One sentence to conclude Alibaba’s C&B statement: Let people with shared dreams, vision & values, and results to be rewarded.

In Alibaba, we have 4 principles for C&B policy making under the C&B statement: start up spirit, pay for performance, culture of sharing, warmth and responsibility.

We believe it is the dream and mission that drive people rather than money. We pay for long-term performance, and pay for results. We believe that leaders should take the main responsibility, which means, it is fair that leaders gain more money when the business is good, they should take more responsibility than ordinary employees when the business is in the downturn.

To be frankly, these 4 principles were not proposed by Jack Ma on the first day, they were concluded by HR team after several years’ practice. They were concluded for more managers to understand what are the people Alibaba wants to pay and what are the people we want to promote.

Principle #1: Start-up spirit
Jack said no matter how big Alibaba is going to become, we should always keep the energetic start-up spirit. That means we should always consider survival first. And for a start-up company, dream comes first, make things happen and get result. These would keep us energetic instead of doing day to day routine jobs.

The other thing is that we need to stay hungry and stay foolish. We need to make every employee feel the sense of urgency in their daily work. Because as a start-up company we have limited resources, even when we have money, we will not follow the high benefits.

In the real situation, the company will always initiative many new businesses, we will set up new teams as well. But when we ask employees to join the new team, the leaders would always talk about dreams, the values we can create for our customers, and what difficulties they will face when they join the new team rather than talking about money. I know that in some companies, especially those sales driven companies, they will tell the people to join the new team for money, which is not the Alibaba way to set a new team. However, if the team can get a real result, they can also get a surprising reward. As I can remember, during my C&B period, when we set up Taobao team in 2003, less than 20 people were asked to sign a confidential agreement in a meeting room, and then they were locked in another room to develop the Taobao platform. They just put all their effort to build Taobao as good as enough to win the battle with eBay. After 2-3 years later, Jack Ma and Joe Tsai initiated a very surprising share scheme to those Taobao founding team. Now most of them are more than billionaires, but I think at the very beginning they never thought that they can get such big wealth.

Except for Taobao case, in the year 2008, the Ministry of Railway launched an online ticket selling platform, but it turned out to be very badly user friendly for the sudden big traffic. The platform was down at that moment. But it was during the Chinese New Year, people need to buy tickets to go home, so they asked for Alibaba’s help. When we got the task, we just set up a team to go to Beijing to help them, and they solved the problem and make great values for all Chinese people to help them go home. The team finally got a big bonus for their excellent work. The normal yearly bonus is about 3-month salary, and the ticket team got around 12-month salary as their bonus in that year. The best performer in that team even got 20-month salary bonus. That was definitely a surprising gift to that team.

I think that is the spirit for a start-up, which is dream driven and big surprise.

Principle #2: Pay for performance
A business needs to survive, and we need to get things done, that’s easy to understand. In Alibaba, yes we pay for daily salary for routine work, but other than that, if one works hard enough to get thing done, to make good result, he/she will get good bonus in the end of the year. We also have a very clear guideline to share the bonus. We will assess the company’s performance for the whole year, then we will get an average bonus pool and annual salary growth percentage. Based on the company’s overall performance, the management team of the company will assess different team’s performance, to differentiate the bonus pool. The excellent performing team will have 5-month bonus pool while the bad performing team would only have 2-month bonus. After that, the team managers will assess their team members individually to get another round of differentiation. In Alibaba, in the early stage, excellent performers would usually get over 10% annual salary growth as well as 5-10 months salary bonus. And the bottom ones would usually get double 0, which means no salary growth, no bonus. That’s very harsh C&B policy at that time of course. Now it is more moderate, maybe no salary growth, but they will still have 1-month bonus to celebrate the ending of that year.

There is another factor to follow Pay for Performance. After Alibaba went IPO, most of the wealth went to the price of the stock, which means if we perform good, the market price will go high, and we will get a better reward.

When we are talking about Pay for Performance, I think the most difficult part for managers is to differentiate people. In Alibaba, we have 361 review mechanism. We consider 30% are the top performers, 60% of people are average, and 10% are the bottom performers. Based on this, we will then go to how to distribute the salary growth and bonus.

Q: Is the performance tied to company’s revenue and profits?

Cherry: Not really, it is based on the development stage. In the early, the company was still burning money, no revenue and profits all, we still used this policy. It depends on the momentum and potential of the team from the top managers’ judgement. Even today when Alibaba is already a listed company, we still don’t tie up the performance to shared price. Usually we will point to the KPI, which depends on the strategy of the company. As I remember in one of the early year of Taobao, the key performance factor was customers’ satisfaction, instead of GMV and turn over. So as I said, C&B policy is a very powerful tool when we use it properly.

Principle #3: Culture of Sharing
Alibaba has the highest employee holding percentage of the Employee Stock Ownership Plan(ESOP) among Chinese companies. Jack and Joe just keep their shares at 7-8 percent, while in many other Chinese Internet company, the owner usually owns more than 50% of the shares. In early stage, the Alibaba employees held more than 15% of the company’s shares. From which, we can tell that Jack Ma and Joe Tsai are very generous bosses, who would like to share their wealth as many as possible to the employees who work with them. They believe that if we can make the cake bigger, everyone will get more wealth in the end.

What we need to be careful is the word fair, which is a very sensitive word in Alibaba when we are to distribute wealth. Because we believe only those people who has strong belief in mission, vision, values and get good result should earn more. So, in Alibaba, we are no egalitarianism in distributing wealth. But on the other hand, we will have very surprising big sharing to the employees. For example, in the early stage of Ant Group, it designed a shares mechanism to distribute shares to every employees working in Alibaba based on their position levels and length of service, it is to encourage people to grow together with Ant Group.

Principle #4: Warmth & Responsibility
To elaborate this principle, it means to pass warmth & share responsibility. As I mentioned, Alibaba believes that we are always a start-up company, so we will not provide extraordinarily high benefits as many multinational companies, e.g. Google. Google has a lot of free services, free meals, free laundry, free gyms, free bus, etc.. In Alibaba, we have very limited free things. We believe that the company is not a babysitter but a business. This is very important! As we know that one of Alibaba’s values is Work Happily and Live Seriously, everyone needs to take care of his/her own life and family. This is the staff’s responsibility rather than the company’s.

But Alibaba will also provide benefits that cares employees and their family. We are not going to provide what they want, but what they need. So we have created some special scheme in the past years. For example, in Alibaba we have iHome program, which is a interest-free housing loan program. 10 years ago, the average age of employees is around 28, when they are to set up their families. In Chinese culture, they need to buy house or flat to get marry. How the company can help those young people to settle down in their working place? So we designed the housing loan program for those young people who need help (usually junior staff). If they meet the criteria, they can apply for interest-free housing loan to help pay for the installment and then they can pay the mortgage by themselves. This provided a great help for the young people to settle down in Hangzhou, the Alibaba’s headquarters. It is a very attractive scheme to attract young people to join Alibaba.

The other thing is that we do not provide rich insurance plan for staff to go to personal clinic, but we will help them to take their parents to do the annual physical check, which is to show our thanks to the employees’ parents to support their hard working. These are the warm benefits we design to the employees.

Final Recap

Q & A
Q1: When did Alibaba come out with these 4 principles?
Cherry: Actually it should be around 2014. Because when the company grew up, we hired many new management team members, and they didn’t understand the philosophy in Alibaba when we did the annual Big Show to distribute the bonus, we felt that we need to standardize some principle to share to the management team and employees to help everyone be on the same page.

Q2: What happened before 2014? I assume something must have been there for a long time.
Cherry:
Yes, actually it has been existing and practiced for many many years, but nobody put them into a piece of paper. Every year, when we were to decide the annual bonus and salary increase, we need to discuss with Jack Ma and the former CPO, Lucy Peng to check with their ideas. But when the company grow up, just us is not enough, so we make it into principles to share with more people.

And Jack Ma himself took very active role to express his opinion about wealth sharing from the very beginning. So he always communicate not only with the top management team about how to do the performance review, how to reward and motivate people, but also he shared his idea to all employees frequently. With a company getting bigger and bigger, we need to find a smarter way to communicate.

Q3: When you came out with these 4 principles of C&B in 2014, what was Jack’s idea about these principles? Do you have any secret stories that can be shared to us?
Cherry:
I don’t believe that Jack has high professional Technics about C&B, I think it is natural thing for him to consider how to reward people. His philosophy of sharing wealth is the most important thing.

The founder’s idea about people including what kind of people you want and what kind you don’t want plays very important role in making C&B policy. And this is what I want to emphasize to all of the founders in front of computer, you have to communicate as clearly as possible with all your core management team about this.

The business culture is the owner’s culture.

Q4: How competitive is the salary of Alibaba compared to other Internet companies? When Alibaba is mature, what long-term benefits does Alibaba provide to staffs?
Cherry:
When I was the head of C&B, our target is the 75% tier among the Chinese Internet companies. That means we are not the top company providing the most competitive salary(higher than average, but lower than the top ones). I believe it is still our target market position. I think it is because we strongly believe that we cannot just use money to attract people to join. At least they need to have confidence in our business. And after they have been working here for many years, they will have strong belief in our mission and vision.

The long-term benefits is about the shared options. In Alibaba, we have a 4-year scheme of on hire grants, which means when we hire a new employee above certain level, we will grant him on hire options. And usually we have a cliff period for those options. It means when you pass a certain cliff, you will win 50% of the on hire options, and later you gain 25% options each year until you gain all of the options of the 4 years.

Q5: If you could raise 5 key lessons for today’s topic, what would they be?
Cherry:
I think first of all, we need to have very clear idea and clear statement from the owner or founder. The second thing is that be consistent. And the third one is that as a founder, you need to be generous. It is very important character for a business owner, because we believe that it is not only you run the business, you need a team.

So in Alibaba we believe that customer first, employee second, and shareholder third.

Q6: Does Alibaba do peer to peer evaluations? In your opinion, out of the 3Hs(Power of Head, Heart and Hand), which is the strongest do Alibaba employees have?
Cherry:
I think there is no explicit peer to peer assessment, but every year we will have 360 degree assessment (the assessment from your leader, peers and subordinates) for management teams. It is more like looking into a mirror to gain full understanding for oneself.

As to the 3Hs question, in my own opinion, it depends on the working level. For the front-line employees the hand power is more important. Take instruction and get things done! And when you go to more senior position, the heart power will be more important. Which means the belief and the value you believe in. These will help set up the norm in your own team. Only when the leader believes in the company’s value, the team spirit will be align with it.

Q7: How many percentage of profit are you going to share as bonus?
Cherry:
We did not connect profits to the bonus pool. Maybe we have a guideline from the company board which will give a pool to a very big range for 3-5 years. It’s the open information which you can check from our annual report. Actually in Alibaba we have 2 bonus pools, one is for general staffs, the other is for senior management team. It reflects our principle that the leaders should take the responsibility. For the general staff, they need to keep their living standard in a certain level.

The range of the bonus pool in Alibaba will vary from 2.5 to 5 months salary. It is not that big difference for ordinary staff, but it will be a really big gap for those senior managers who has different results. For those senior leaders their bonus and salary increase will be frozen in some bad years. Of course, they will gain more if they have good performance.

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