China's new labor law has recently put the focus on employees' rights. The new labor law requires higher wages and greater job security, including a guarantee of lifetime employment for workers with 10 consecutive years of experience. Employers must also comply with tougher rules on job training and severance packages.

Guido Lilio helps companies engage employees and build commitment throughout China, Southeast Asia and Australia. You can contact Guido at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

The new requirements come at a difficult time. The Chinese renminbi appreciation against the US dollar combined with increased energy and raw material costs and higher shipping fees are squeezing profit margins and reducing the competitiveness of Chinese exports.

Meanwhile, shortages of managers and experienced talent are continuing to grow and are contributing to high staff turnover and ever increasing demands for improved compensation and benefits.

China's new labor law's emphasis on the protection of employment rights simply compounds the pressure on employers to develop successful HR policies and practices that will address these issues.

And what are the solutions?

Well, we know what doesn't work:

• Depending solely on above-market compensation alone to lower staff turnover;
• Relying on external recruitment to fill gaps in leadership;
• Continuously searching for new sources of manpower to offset staff attrition; and
• Hesitating to introduce performance management for fear that staff will leave.

The traditional employment contract, consisting of explicitly stated and recorded terms and conditions of employment, is not enough in today's environment to successfully retain employees. To be successful, leaders must ensure that employees' commitment and motivation are sustained during turbulent times.

The "commitment contract"

An unwritten "commitment contract" captures mutual expectations of the employer and their employees. It includes the beliefs and expectations that employees have about their employer and what is owed to them by the organization in exchange for their services. A commitment contract extends well beyond the traditional notions of legally enforceable terms and conditions. Rather than seeing commitment, motivation, and dysfunctional behavior as simply residing in the individual, the commitment contract more accurately explains behavior as the function of a negotiated agreement between an employee and his/her leader for securing reward and recognition.

The value of commitment contracts lies in their power as a motivational tool. Leaders must not only ensure the integrity of the written employment contract but also unwritten promises and expectations. Meanwhile, organizations need to understand how employee commitment and motivation is impacted when organizational change is implemented within the workplace.

Why employment contracts fail

When employees perceive that their company has failed to fulfill its promises (for example, competitive salary, increasing responsibilities, challenging and interesting work, opportunities for training and development), they often feel anger, frustration, and resentment, resulting in negative attitudes towards the organization. In these situations, the written employment contract may go to some lengths to secure compliance with basic hygiene and regulatory requirements - health and safety, hours of attendance, etc - but fails to secure commitment to achieve high performance.

Where leaders fail to secure this commitment, or worse still, are perceived to undermine the commitment during periods of significant changes, then negative or dysfunctional behaviors may arise. This in turn can contribute to increased turnover, increased complaints, decreased loyalty to the organization, and neglect of job duties.

Perceived violations of the commitment contract, whether deliberate or not, demotivate employees and negatively impact upon organizational performance. Demotivation may manifest itself in subtle ways, such as doing the bare minimum at work, undertaking private activities on work time, and failing to protect or defend the organization from external criticism.

Successful leadership

Understanding the dynamics of the commitment contract and how it is evolving is increasingly critical to successful leadership. The negative response to a perceived breach or violation of the commitment contract is a very tangible issue for organizations. Changes affecting the employment relationship are occurring relatively quickly and are forcing both employees and employers to reevaluate the unwritten rules of the workplace.

It is important for leaders to understand the difference between the "transactional exchange" component of the commitment contract and the "relational exchange" component. Transactional exchange is concerned with monetary or hygiene factors such as salary and benefits. Relational exchange revolve around the development of mutual trust, respect, and loyalty developing over time.

The relational component of the commitment contract is becoming a more complex issue for our clients as they are forced to cope with a tight labor market and keen competition for key talent. In this challenging environment, understanding how to attract and retain critical talent is essential.

How to make it happen

Putting in place an effective and successful commitment contract requires planning and discipline. Plus, it requires flexibility and willingness to adapt to change.

Implementing the commitment contract is a four-step process:

1. Define and communicate the organization's values and the conduct that is expected. When supported by senior management and widely communicated, values and code of conduct become living things that assist all parties to understand their rights, obligations and hence, expectations. These can then be utlizied during both the recruitment phase and the development phase to explain what is required as part of the job, and what the employee can expect in return. By defining values and conduct, leaders become more aware of their obligations to staff when they need to introduce change.

2. Document and communicate HR policies and procedures in order to reinforce employees' understanding of corporate values and appropriate conduct. Job descriptions further contribute to this understanding by helping current employees and prospective applicants understand the type of job, work group, organization, and employment relationship the organization values. When fundamental change is inevitable, discussing the change with staff can make a significant difference in terms of their commitment.

3. Develop coaching skills, and the ability to give constructive feedback. Such skills and behaviors, which can be taught and learned, combined with documented and well-understood performance management and remuneration policies and procedures, can enable a leader to confidently convey expectations and requirements of performance.

4. Handle grievances in an equitable and transparent manner so that outcomes are perceived to be consistent and fair. Resolution of grievances is another hallmark of an effective leader and a means of securing employee commitment.

Just the beginning

Creating the commitment contract is just the first step. Companies may well need to alter their commitment to employees. As the needs of the business evolve, leaders will need to define new terms and persuade employees to accept them. It is unrealistic for leaders to expect employees to fully buy into changes that alter the status quo. Gaining employee commitment through a revised commitment contract is fundamental to achieving new organizational goals and performance standards.

Leaders can successfully initiate a revision of the commitment contract via three key actions.

1. Draw attention to the need to change and establish the context for revising the contract;
2. Initiate a process in which employees are able to revise and buy into new contract terms; and
3. Lock in commitment with new formal and informal rules.

To make a commitment contract work successfully, leaders must first appreciate its value and be able to communicate to and gain the acceptance of their staff. They must then learn how to navigate through evolving change in a way that preserves employees' sense of trust. The map to aid such navigation may be found in personal credibility and empathy, consistent communication and effective consultation with employees.