Small & medium sized business owners in China know that finding and retaining Chinese managers and team leaders is a big challenge. For expat-run businesses that have turned the corner from struggling start-up to established profitable enterprise, HR priorities are shifting. We used to fight fire-fighting tactical battle to put ‘bums in seats’, but now we need to device long-term strategies that will build a stable team of core managers.

China HR has to stop focusing on the traditional 18-month manager, and start instituting key-person plans that will retain your top-echelon leaders for 5+ years. It’s time to rethink HR goals and policies.

How do you get your most experienced Chinese (and China-based expat) managers to commit to a serious long-term career with your growing company? Let’s take a look at the hypothetical case of John Chen, VP of sales at Expat Incorporated.

The Shanghai company has been on the ground in China for 4 years. Eddie Expat started the company as a one-man B2B service company in 2004 and has succeeded growing the operation into a profitable 35-person operation with a new branch in Suzhou and plans to expand to Beijing later this year. John Chen joined the company 25 months ago, and rapidly took control of sales department to become second-in-command of the company. Eddie Expat created the VP of Sales position for him 8 months ago, as part of a ‘long-term’ retention package put together after Chen was offered a prestigious position at a famous multinational company. Chen has seen his take-home income (including bonuses and commission) rise by 180% since joining the company.

Now Chen is back in Eddie’s office and talking about leaving for another promising opportunity. He has indicated that a promotion to Senior VP and a significant pay raise will keep him from jumping ship.

What should Eddie do? He knows that Chen will be impossible to replace – and that without him the company’s expansion plans will have to be shelved indefinitely. Eddie can justify a big pay-rise, but he’s concerned that this scenario will play out again and again every year. Furthermore, Eddie wants to delegate more responsibility for day-to-day operations to Chen so that he is free to focus on expansion and new product lines.

Eddie Expat’s Best Option:

Eddie should say ‘yes’ to Chen but with a new structure. Instead of just shoveling cash at Chen and hoping for the best, Eddie needs to make compensation integrate with his expansion and profitability strategy.

Eddie will agree in principle to Chen’s demands but structure a deal that disrupts the viscous cycle of endless negotiation. The company will raise Chen’s cash salary – but only by half the amount he asked for. The other half will be paid out in the form of a high-end family health-care plan and a long-term pension plan that ‘vests’ or becomes permanent over the next few years.

This is a win-win solution that gives both sides what they need most. It’s simply unrealistic for Eddie to think he can hold on to this valuable manager without paying the going rate. But simply dumping cash, bonuses and big commission payouts on star employees isn’t a retention plan – it’s an exit strategy! Once the successful manager gets the lump-sum payment he now has the freedom (and the ego) to pursue a wider range of options. Expat Inc has to pay Chen strategically.

3 arrows in the quiver of China Key Man Retention strategy:

1) High-end health care plans. A really good international plan for a family of 3 will cost your company upwards of $2,500 per year – and is much cheaper for groups than individuals. That means Eddie can give Chen a valuable benefit at a discount (20-40% is common). If your plan has direct-billing then Mrs. Chen will be able to bring their new daughter to Shanghai’s best international hospitals and highest-quality clinics without shelling out cash and dealing with the hassles of applying for reimbursement. The real beauty of this option is that Mrs. Chen will get used to the convenience and prestige in a hurry – and thus become your advocate in the household.

2) Pension plans that vest over 3 – 5 years. There are many ways to structure a company retirement or long-term savings plan, but the key is Vesting. Expat Inc will fund a dedicated savings account for Chen, but he won’t be able to take the money with him if he leaves before an agreed-upon term of employment. The longer he stays, the more portability he will have. Don’t make the vesting period too long or the plan becomes unattractive. But if Chen is free to take the money and run, there’s a good chance he’ll do just that. Typical plans start vesting after a year or two and increase steadily until the employee is ‘fully vested’, or entitled to 100% of the funds.

3) Company ownership and profit sharing. This is the last option because it is really the least valuable. Everyone loves the idea of becoming an owner in a rapidly expanding business, but what happens when your growth slows or even reverses? This is just the time when you really need those experienced, talented managers to help get the company back on track – but it is also the time when his share in the company drops. The worse things get for your struggling business, the more attractive it becomes for your key people to jump ship. Profit sharing only works when profits are rising. Shares in a troubled company drop in value. It’s still a great idea for building long-term loyalty and motivation, but you’ll find it doesn’t help you much when you need help the most.

What if Sr. VP Chen turns down your offer and holds out for cash? Now you know that he is may not plan on sticking around for the long-term, but at least you have time to make other arrangements. You may have to take a short-term hit on another big pay-rise, but now you won’t be blindsided when your key-man uses that key to exit your company.