China Pension Plan

Hiring talent in China has never been easy – particularly when it comes to your key middle managers. When business is booming your best people are spread so thin that they’re barely effective – or they hop to a new job the moment the get trained up. But what if the economy here in China follows the western markets into slowdown or even recession? There used to be a logically theory that payrolls tended to drop or at least stabilize during bad times, but unfortunately that isn’t going to apply to your hiring & retention situation in China. If you try to downsize or consolidate your market position by reducing head-count you are going to be relying on a core group of key people who can achieve more with less money & budget – and so is every other decision-maker in China.

Face it – whether we are looking at good times or bad times in the months ahead, you are still going to have to struggle to hold on to your best people. Here are a few ideas that may help with your retention challenge.

1. Cross train. It would be great if every manager in China did the work of 2 people - but that probably won’t happen. You might get each of your key managers to do the work of 1.3 people, though. If you can get three of your managers to accomplish the work of 4 then you have achieved the kind of productivity boost that local companies can’t achieve. There are two ways to make this happen - cross train to get more tasks picked up or develop operational specialties to get more problems solved. ‘Hoping things work out’ is not a serious management option

2. Promote. Mold you local hotshots into more effective workers. Give more responsibility and offer more FORMAL training. (Organized training seminars in hotel conference rooms are good. You standing at their desk telling them what they did wrong is bad.) Most of all, train your mid-level local Chinese managers to train more managers. When it comes to training and retaining managers, you really can ‘wish for more wishes’.

3. Decide who you want to keep and spend what you have to do to keep them for the long term. Deciding to lower your headcount by 50% is only effective if you are able to retain the best 50%. It sounds simple, but so many expat managers get this wrong and accidentally drive away their key people while retaining those too lazy or unqualified to find better jobs. The key to holding on to your best people is to provide them with the proper incentives to stay BEFORE they get better offers from the competition. Pensions, insurance, vesting savings plans and other long term benefits all give people reasons to stay. More money & vacation time doesn’t hurt either.

4. Train to retain. People like training. You’ll still have to pay more, but lost of the tech and artistic positions really like this. Salesmen who are making money couldn’t care less. Make sure there is a direct relationship between the subject being taught and the job description of the trainee. Sending managers to formal training programs is one area that tends to have A LOT more impact in China than in other places.

5. An ounce of prevention is worth a jing of cure. Once your key managers have gotten it into their heads to leave, you can expect to pay a lot more to entice them to stay. Set up formal incentives like vesting pensions and private medical insurance early, and let your key people know that your aim is to hold on to them for at least then next 3 years. Too many senior expat managers feel that they can’t “tip their hand” and reveal who is vital to their organization. Get out of the “everyone is expendable” mind-set — unless it’s true and you really have a line of experienced, competent, affordable replacements waiting in the wings.

Expat managers in China are finding out that the ‘low cost of labor’ in China is just a mirage – at least as far as key executives are concerned. We all have to manage as though employees are expensive – because they are. It is much cheaper to hold on to happy workers than to replace the ones who leave – but only if you plan in advance.

In China, pension and retirement funds are governed by a growing body of local laws.  But for expat managers who are trying to recruit and retain an increasingly international body of top managers, it doesn’t hurt to stay current on trends in more developed markets.

Let’s take a look at 3 types of retirement plans that are popular in the US and Europe right now.

Defined contribution plan,

Defined benefit plans

ESOP

Defined contribution plans are plans where the company makes an annual contribution to each participant’s pension fund.  Most plans have a “vesting” requirement – or a specified period of time that the employee must work to take full ownership of the fund.  Defined contribution plans, such as 401(k), have become the most common form of retirement planning.  These are win-win arrangements, allowing companies to limit their contributions to predictable, close-ended payments and giving individuals the freedom to invest funds as they see fit.

Defined benefits plans are still in use, though their popularity has waned in recent years.  A defined benefits plan requires the company to calculate a benefit for each participant – and then it is the company’s responsibility to fund that obligation.   This kind of plan was more popular in decades past, though large companies with strong union presences and government agencies still use them.  When you read about large auto companies and airlines running into trouble because of “pension obligations”, they are referring to years of legacy defined benefits plans that the company is contractually obligated to honor.  As an employer, you want to avoid defined benefits plans at all costs.

Employee Stock Ownership Plans have been gaining in popularity over the last 20 years.  ESOPs function like defined contribution plans, but instead of contributing cash the company contributes shares of its own stock.  When these plans work well, the employer has a cheap way of rewarding its hard-working employees and workers get access to valuable assets at a deep discount.  When they don’t work well, the employers feel insecure that they are giving away too much while workers fear they are receiving worthless paper assets.

Most companies in China prefer to go with a defined contribution plan because they are performance driven, cheaper to administer than a defined benefits and offer short-term employees the most attractive option.  But beware of making too many sweeping promises.  Employees who have been promised stock or big bonuses tend to remember them long after they’ve forgotten about the performance targets that they were supposed to achieve to earn those benefits.

One of the most cost effective perks you can offer a senior level manager in China is a really high-quality health care plan.  The better ones offer you a choice of hospital or clinic, direct billing and lots of great options that are tailored to families and frequent travelers. Your top people and their families see the benefit immediately – and it makes it that much harder to leave your company.  The best part is that even small corporate groups can qualify for big discounts, so your key-man plan will get more bang for the buck.

Here’s how it could work:

Fred and Richard start a software company servicing the manufacturing industry.  Most of the workers write code or fix bugs. Fred used to supervise the coding work, but has now delegated it to Lucy - the Head of QC. Ethel is the head of marketing, and is also indispensable. The newly promoted Head of Sales has just had a baby.

Problem: There are 2 owners, 3 senior managers and a few special cases that are really important to the company’s future. How can the owners target their HR spend to secure the truly important assets?

Solution: A private health insurance program offered to a small number of specified members. A typical program has varying degrees of coverage – at varying degrees of expense.

Fred and Ricky would sign themselves up for the Platinum package – which might include airlifts to better hospitals in Tokyo and a dental plan. They offer Lucy and Ethel Gold plans, which are still great. Then – because they’re super guys – they start a new program of offering Bronze level benefits to long-term employees on a co-pay basis.

Fred and Ricky  get big discounts for starting the group — and they have built a highly targeted key employee retention plan. The spend is still huge, but now at least the money is going where they want instead of on carnival-like team-building weekends for the front office and warehouse people.

China based entrepreneurs – particularly the ex-pat kind – are master planners. They are constantly reacting to changes in the market or preparing for new opportunities. It may, therefore, come as a surprise that many of these movers and shakers are neglecting one of the most important plans of all – their own household finances.

Many successful expat owners and entrepreneurs in China will tell you that it takes longer to create a winning model here than in other markets. What they don’t tell you is that while they were navigating the ever-changing landscape of China’s business & regulatory environment, they were neglecting their own future.

Delayed prosperity is one good reason for break from planning. Another is that building a financial plan requires money and time – two things most fledgling entrepreneurs are in short supply of. But if you’ve survived in Shanghai for more than a couple of years, there is a good chance that you are making a little money already, or soon will be.

Here are a few ideas for entrepreneurs who are crossing the threshold from “struggling” to “growing rapidly”. First tip – stop waiting for a flashing neon sign saying that you’ve made it. Most successful entrepreneurs have a lot of trouble identifying the exact moment when they have “made it” – so stop waiting for tons of cash to start accumulating behind the seat of the Benz.

1. Hire yourself — and pay yourself. Entrepreneurs are notorious for working long hours and taking very little out of the business. That’s great at the beginning, but if you are planning on staying in for the long term, you are going to have to start taking care of yourself. Here’s a financial tip that you can grow old with — after the 2nd year entrepreneurs should be paying themselves a regular salary and NOT a commission. In other words, budget a specific amount to pay yourself on a regular basis instead of just taking special payouts after a big deal.

2. Company growth or personal comfort – the choice is yours (at least a little). Some entrepreneurs think that business ownership is like a vow of eternal poverty. Every extra penny has to go back into the business. In the early days that might have been necessary – but now it may be more of a pose than a survival tactic. Revise your business model to reflect your track record of successful sales – and to allow yourself to take a regular paycheck.

3. Cash out gradually. One of the few silver linings from the recent stock market volatility has been the wake-up call that not every new business is going to end up a stock market favorite. In fact, plenty of successful, profitable entrepreneurs never see their companies list on the stock exchange. The key to getting rich from a growing business is to have a plan for cashing-out gradually without the assistance of investment bankers. One great method is simply to pay yourself more – be it in a regular salary or special bonuses – but don’t forget to invest the money into your long-term investment program. More and more successful entrepreneurs are finding that they do what’s best for their families AND what’s best for the business by setting up their own pension fund. The asset base of the company is preserved, but the owners and partners get the piece of mind of knowing that their long-term future is provided for.

4. Be unfair – give yourself and your key people better treatment. It’s not all about money – business owners in China must also be adept at non-cash negotiations. Forget the car and the villa – the perks that matter now are health care and education savings plans. Get creative with the perks to keep your best people on the job. Insurance makes a great top-level benefit for you and your key people, since there are often group discounts and other benefits. Look at life insurance, medical programs and income protections (or disability) protection.

5. Prepare for success. Have a plan in place. First, be able to determine when you have hit your own definition of success. (It sounds silly, but many entrepreneurs are more stressed-out by success than by failure.) Next, build your own payout into your growth plans. At the start it was cool to pay yourself last – now that’s not necessary and not a good idea. Sit down with your lawyer, accountant and financial planner to discuss taxes, ownership structure and exit strategy. That lean, mean, profit machine you’re building now can be a source of joy or misery in the future, depending on the choices you make now. Remember - the tax man looks at profitable businesses much more carefully than at the bankruptcies.

For more information about your financial options, click here

(Reposted with permision from ChinaSolved )

You want to hold on to your best people — and you know it’s going to cost you. In China you’re likely to see the price of your senior managers go up particularly fast. You’re no fool, though. You’ll spend what you need to spend, but you don’t want to throw the money down the drain.

How do you get the maximum bang for your buck when it comes to key man compensation planning?

Deferred compensation, performance driven bonus, key man compensation plans – whatever you call them, they all function pretty much the same way. The idea is to create a Win-Win situation where your best people do their best work for the best pay for an effective period of time. But like so many other great ideas, this one can go terribly wrong if executed poorly.

When it comes to planning a deferred comp program, you need to walk a delicate balance. If you defer too much for too long, you’ll do little more than alienate your key person and cause him to see the eventual payout date as a graduation day (or in extreme cases –a parole date). But if the payout is too early — or too small — you’ll squandered the benefits of deferred comp.

Here are some ideas to help strike the right balance:

1) Complicated is bad. Compensation plans shouldn’t involve all that much math. If you are working with too many different schedules and contingencies and targets and bands, then you may have too much going on. A typical key man comp plan has a base, a commission or performance component, and a longevity component. You can pay different amounts for different behaviors or performance, but the whole thing has to integrate into one logical package.

Simplicity is particularly important if you decide to go the “profit sharing” route. A complex payout calculation is fine when people are making more than they thought they would — but it causes all kinds of resentment and suspicion when the business isn’t doing great and the bonuses come out a little on the light side.

2 - Don’t plan his exit strategy for him. Are you dropping a pile of money into your guy’s lap? Is it more cash than he’s ever seen? $25 K may not seem like a huge payday to you, but to a local Chinese hotshot it may be more than enough money to give him the freedom to throw off the yoke of your tyranny (as he sees it). Sure, he may quietly put down a payment on a nice apartment and show up for work extra early tomorrow — but there’s also a good chance he’ll decide he can afford to quit, retire, start his own business — or accept the equally generous offer from the guys down the street. Annual bonuses are particularly problematic when it comes to exit strategies. Consider quarterly pay-outs.

3 - Too much too early and he’ll start t believe his own hype. While delaying too long may cause people to leave, paying out too much too early may make you wish they’d go. This is particularly true for young salesmen who are just starting to collect big commission checks. You don’t want to de-motivate your people by putting a lid on compensation (especially if you have already made a commitment) but you may want to put some coaching and creativity in place to make sure that your new superstar doesn’t develop an attitude problem. Some companies have had success with offering to put some of the payout into a deferred comp plan that the company contributes to. This is a good option – but if you try to force it on your big-earners after they have already earned the commission or bonus, you can expect serious resistance. It’s best to build in some sort of provision for deferred comp early – or figure out how to deal with big egos.

4 - Set the performance benchmark too high and you will de-motivate your team. Many otherwise savvy managers have fallen into this trap because it seems to make sense. On January 1 you announce a generous bonus plan tied to performance measures that you know to be very challenging. If it’s an all-or-nothing plan then you may find something strange start happening around March. Lot’s of your team will have stopped working hard – or are working very hard to find a new job. What happened? They’ve determined that they’re unlikely to hit the targets and have re-assessed their work environment around the lower base salary (sans bonus). What’s the solution? An incremental incentive plan that still pays even when the workers miss the big target. It’s ok to pay more for break-out performance, but if you tell your staff that they aren’t good enough to make more than the base then they just may believe you – and look for lower-hanging fruit elsewhere.

5 - Hunger isn’t necessarily your friend. Not in Shanghai anyway. Senior managers of a certain age tend to romanticize the struggles of their younger days. We like to think of our own success as being borne of deprivation, diligence and ambition – and possessing a sharing nature, we try to give our young staffers the same positive learning environment. In other words, we get cheap with payroll because A) we can get away with it (in the short term) and B) we think there will be plenty of time to compensate them more generously when their contribution to the bottom line increases.

Both assumptions are flawed. That entry-level kid you hired out of school at rmb 5,000 per month 18 months ago can now get rmb 12,000 down the street at your competitor’s shop. You don’t have to triple his pay (necessarily), but you have to present a more positive outlook than the other offers he can get just by returning a phone call. You do have alternatives to a cash bidding war, however. Consider creative non-cash benefits (health insurance is good for family types) or deferred compensation plans like pensions and company-contributing savings plans.

The team-building weekend was great, and your sales manager is satisfied that the new telemarketers and receptionist are fired up and have good attitudes about their job.  But what are you going to do for the mid-level and senior managers who are thinking about their families and careers.    Big cash raises are great — and no matter what retention plan you choose you should expect to spend plenty.  But there’s more to a retention plan than salary. 
 
So how are you going to hold on your best, most reliable people — the backbone of your operation.  You’ve allocated the budget – but how do you use it to attract and retain the best managers in Shanghai?

• Higher salaries.  Great for a while, then they want more.  Plan on this step as more of a starting point than a finish line.
• Life-style enhancements.   Yes – better health benefits and retirement planning.  You’ll be paying a lot and it only works on married guys – preferably with kids.  But once the wife gets used to good benefits (in Shanghai that means the nice international hospitals where the receptionist brings you tea and an education savings plan) there’s turning back.   You can structure them any way you want, and give owners & other key decision-makers (i.e.: you) better programs better packages than others. 
• Bonuses & Commissions.  A necessity, but beware of encouraging negative behaviors.  Lots of competent salesmen tend to look at year-end bonuses and big commission checks as more of an EXIT STRATEGY than a retention plan.
• Multi-year investments   Paying for MBA is the most familiar example.  You can tie tuition payment to a number of years with the company – both before and after the benefit is paid for.  In other words, you have to work for the company for 2 years before you’re eligible, and then for 2 years after you get the degree or you must repay X% of the tuition.  Get creative, and it works a lot of different ways.  Help with mortgages, education savings funds (matching), professional training & certification…  
• Leave the door open.  Some of the most loyal employees are the ones who leave and come back.  Only works once, though.  

Maybe it’s wishful thinking on my part, but I have stopped feeling like the oldest guy in the room these days.  Shanghai is really putting down roots as a business center and many of the core teams running multinational departments, JVs and WOFEs are starting to look more, uh, mature.   Shanghai has grown as a regional operating and management center as successful start-ups and branches expand to serve clients throughout China, HK, Taipei, Korea and Japan – thus draw in experienced talent from all over Asia.

My business is helping China-based companies develop compensation and retention plans.  I’ve been finding that Shanghai clients’ focus is shifting as demographics change and market develop.  3 or 4 years ago, the goal of retention plans was to hold on to entry or mid-level local managers and develop them to take on more responsibility.  While that’s still a concern for most international businesses in China, the new priority seems to be Key Person (‘key man’ is soooo 20th Century) retention plans. 

More and more of my business conversations are about how to hold on to the core group of top managers - many of whom are established expats of a certain age.  Often overlooked, these are the guys who make the medium-term strategic plans that are increasingly driving the success of China-based businesses.  The logistic and bureaucratic fire-fights of the early 2000s seem to be under control, and now top decision-makers are thinking about growth (top line & net net) and expansion (branches & headcount).

The question for a lot of senior managers is now, “how do you hold on to the people who look, talk and think just like you?”  And it’s no longer a local-expat, us-them decision-making process.  40+ Chinese C-level managers tend to have even more options and opportunities than their expat counterparts – and have the same concerns and values when it comes to compensation.

The answer to your company’s retention challenge can usually be found in a well-constructed compensation plan.   Pensions, deferred compensation and intelligently-designed incentive plans are the only thing that will retain and attract top managers.  But it’s not a matter of negotiating salary and benefits.  Compensation and retention are long-range, high level strategies – not bureaucratic chores that have to be dispatched after your C-level stars have told you they are leaving. 

If you are responsible for the bottom-line performance of your company, then you are an HR manager.  Get used to it, and get good at it.   Selection and Retention are strategic imperatives at each and every company.  It’s a global concern, but in China where there is a shortage of top management talent, it is a make-or-break success criterion.

ChinaPensionPlan.com is designed for top decision-makers, MDs and department heads whose performance is directly tied to bottom-line profit growth.  We will be providing you with HR strategy recommendations, solutions and ideas that target the executive suite.  We look forward to working with you.