A Chinese managing director or rather a German one? And an automatic annual increase in salaries by ten per cent for all employees? The managing director of the Düsseldorf-based Asia-Pacific Management Consulting GmbH, Lin Kuang-hua, provides tips for the human resources strategies of foreign companies in China.
Mr Lin, as far as filling the position of managing director of a foreign-invested enterprise in China is concerned, some plead for an “expensive” expat, others for a Chinese. What would you recommend?
To think that Chinese would be considerably less expensive than expats is wrong. Especially in sales-oriented managing director positions, many well-qualified Chinese managing directors are meanwhile earning as much as and at times even more than expats. Among our numerous German clients in China, a Chinese from the automotive supply industry has been drawing the highest salary in China since 2012.
If the managing director in China should mainly be responsible for sales and the key accounts, it is better to employ a Chinese. Expats often lack the necessary linguistic and cultural knowledge to master the sales job and the required fostering of relations. However, if the focus mainly lies on production and quality assurance, a German expat is often better. Many of our medium-sized clients do, in fact, have Chinese managing directors and German production managers in China.
Less recommendable is the practice of some medium-sized enterprises to employ expatriates as CFOs or controllers in China, since expatriates are not able to read contracts and documents in Chinese and must assign this work to Chinese employees and trust them. In other words: despite the expensive costs for expats, it is in fact the Chinese employees who are doing the work. As a matter of principle, we recommend our medium-sized enterprises in China to outsource the complete bookkeeping and controlling activities to trustworthy service providers that are preferably represented in Germany and will assume responsibility and liability towards the parent company.
How can German companies ensure the loyalty of their Chinese managing directors in China?
Loyalty, integrity and compliance problems are not only an issue with Chinese managing directors. With expatriates these problems occur less often, however, the damage is often far greater.
Prevention is initiated when recruiting and selecting personnel. Apart from qualifications, criteria such as personality, integrity, dependability and references must be carefully considered. It is recommendable to have detailed discussions with former employers and superiors, and not just with those the applicants have specified themselves.
In addition to certain incentives, such as performance-based pay, company pensions, career development programmes, especially good employment contracts, where, for example, longer notice periods and possibly a post-contractual non-competition clause are stipulated, are crucial for loyalty and long-term commitment to the company. In the recent past, various competitors of German medium-sized enterprises in China have tried to lure key employees away, offering them shares, stock options or apartments worth more than €300,000. There is no measure for employee retention that helps against these aggressive headhunting attempts except the post-contractual non-competition clause. The latter may be agreed upon for a period of two years.
What is far more crucial, however, is ongoing communication, and this not only with the managing director but also with the entire second management level. Only in this way can potential problems be recognized in time. It is therefore important that the German parent company does not leave the recruitment of the second management level entirely to the managing director in China. Otherwise, there is the serious risk that all employees would be friends and relatives of the managing director. We therefore recommend to all our clients to either take the recruitment process in their own hands or, at least, be present personally during the interviews and selection of the second management level to ensure the proper selection and guarantee the employees’ loyalty.
Chinese employees often expect their salary to increase annually by a minimum of ten per cent. How can a company avoid this “salary spiral”?
An annual lump-sum uniform salary and wage increase is the worst possible option to adjust salaries in China. This way, the well-paid managers will always be overpaid, whereas the company will constantly be in danger of losing the best skilled workers and engineers.
Resourceful employees will obviously always come to their German boss with the press release that salaries in China are increasing by ten per cent annually. This average figure, however, reveals very little about the reality. The fact is that salaries are increasing disproportionately for the low income groups, by ten to fifteen per cent annually, whereas in principle the well-paid top managers will only receive less than five per cent increase per year, if at all. On average, wages and salaries of German companies in China will increase by around eight per cent annually.
Also a lump-sum increase in salaries according to positions and seniority is not the best option. It must be performance-oriented. A prerequisite for this is not only an annual performance evaluation of the employees. Equally as important are annual feedback talks and target setting discussions in order to explain to employees how well or bad they have performed so far, in which areas they are expected to improve and why they have received more or less than the average salary increase, and which career opportunities within the company they may expect. However, Chinese managers often shy away from conflicts: they are pleased to tell their employees how well they have performed but not vice versa. Yet, salaries cannot be adapted to performance without a functioning feedback discussion system because employees will immediately suspect favouritism or old boy networks if the reasons for a decision are not being explained to them. In this case, the company may lose especially the best employees.