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. But you’re no fool. 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. If you are paying a salesman, don’t make long term payouts contingent on the same performance measures as short term commission. Figure out what this guy really brings to your team — or what you want him to bring — and make most of your payout contingent upon that. I was recently called in to fix a situation where EVERYONE’S performance was directly tied to sales performance - even though management expected a widely varying set of goals (most of which were non-sales oriented).

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.