In this series, we consider that the vast majority of foreign managers have left China in the last three years. Even before the Corona Pandemic, the exodus of foreign employees was slowly beginning, with the speed then changing from gradual to rapid in recent years.
Many German-speaking investments in China, which are often significant revenue generators for the entire group, are now managed by Chinese managers. Successful Chinese managers are always entrepreneurs in their own right. Therefore, today we would like to discuss how such managers can be bound to the company.
Our guests are Mr. Rainer Burkardt, founder and managing director of Burkardt & Partner Rechtsanwälte in Shanghai, who has been working as a consulting lawyer in China for twenty-six years, and Mr. Thaddäus Müller, partner at Fiducia Executive Search with offices in Shanghai, Hong Kong, and Singapore. The interview is conducted by Dr. Gerald Neumann, partner at Ebner Stolz in Shanghai, Bangkok, and Stuttgart.
Interview
Gerald Neumann: Thaddäus, you have more than 15 years of experience in China. What distinguishes Chinese managers from German-speaking managers?
Thaddäus Müller: The cultural differences are significant. In general, I have observed that Chinese employees identify much less with their employers than in Europe. Employees change companies more often and quickly take advantage of company dissatisfactions or tempting offers from other employers compared to Germany. This also applies to managers who have overall responsibility for the company. Additionally, Chinese employees, at all levels, expect clear hierarchies. In China, a management team is less often and more frequently a single managing director. Other managers or employees with managerial roles are considered clearly subordinate.
Gerald Neumann: Rainer, do you see it the same way?
Rainer Burkardt: In principle, yes. However, it depends on the type of company. Chinese employees are more likely to leave large multinational companies with an impersonal management structure than medium-sized companies with direct and intensive contact with the managing director. German-speaking family-run companies have an excellent reputation and often have an outstanding corporate culture. This is highly appreciated.
Gerald Neumann: Are those incentives that you mention to candidates for your clients, Thaddäus?
Thaddäus Müller: Absolutely. Our German-speaking clients not only compete with other German-speaking employers for qualified candidates but also – and increasingly so – against local Chinese companies and, of course, against US companies. Compared to both employers, I see advantages for German-speaking employers regarding company culture, but perhaps not necessarily in terms of compensation. American companies often offer significantly higher pay, especially when it comes to the variable component.
Gerald Neumann: Does that mean German-speaking entrepreneurs pay too little?
Thaddäus Müller: Not necessarily. However, successful Chinese managers expect high variable components, and local employers and Anglo-American companies often offer higher pay.
Rainer Burkardt: Truly successful managers know their market value and value to the company, especially when the subsidiary in China operates independently and is not managed as a branch office by the parent company abroad. In these cases, the salary expectations from Chinese managers often exceed what the parent company is willing to pay. In such cases, alternative solutions need to be considered other than fixed salaries.
Gerald Neumann: What options are there for designing variable salary components in China?
Rainer Burkardt: Generally, the same legal structuring options are available abroad. Initially, performance-based annual bonuses can be granted with flexible criteria. Sales managers receive commissions based on sales, while for managing directors, the bonus is usually linked to the subsidiary’s business success but sometimes also to the success of the entire corporate group.
Gerald Neumann: So, can we assume that Chinese managers would accept a higher variable component, Thaddäus?
Thaddäus Müller: That’s how I would see it. The aforementioned cultural factor applies here. If a candidate is unwilling to accept a high variable component, it should be questioned whether they are truly the right candidate.
Gerald Neumann: From a tax perspective, a one-time annual bonus is subject to reduced rates; at least, that is the current regulation. Are there any other legal differences compared to German labor law, Rainer?
Rainer Burkardt: Chinese labor law is much less differentiated than, for example, German labor law. Additionally, there is significantly less security due to insufficient high-level court rulings and academic commentary literature to clarify ambiguous laws and handle disputes. This means that the employment contract must have clear and unambiguous provisions. Unfortunately, we often encounter very complicated or imprecise contract wordings that quickly end up in labor court. It should be noted that Chinese labor courts often rule in favor of the employee, especially when it involves a foreign-invested company.
Gerald Neumann: Should compliance aspects also be taken into consideration?
Rainer Burkardt: I highly recommend that. Compliance is a hot topic for foreign companies in China. When discussing a managing director with overall responsibility, compliance should be one of the main factors in determining the variable part of their compensation. For sales managers, attention should be given to ensuring that the eligible revenue for commission includes an appropriate margin and that the transaction is completed, meaning the purchase price is paid to prevent kickbacks and fictitious transactions.
Gerald Neumann: We regularly advise our clients to maintain low liquidity in China, actively manage their working capital, and report on it. Can this also be a bonus criterion?
Rainer Burkardt: Yes, that is now being used as a bonus determinant, and I think it’s a good idea. Local managing directors often need to pay more attention to these financial indicators, and they have clearly defined criteria for measuring success.
Thaddäus Müller: Based on my observations, candidates also accept this. However, as Rainer mentioned, clear regulations are necessary. As I mentioned before, the important thing is that a sufficiently high variable component allows for attractive compensation. Managers want to participate in the success. Of course, the employer can also set a cap to ensure the overall package remains within a reasonable range.
Gerald Neumann: Participating in the success could also mean granting Chinese managers shares in the company in China or even in Germany. Is that also requested, Thaddäus?
Thaddäus Müller: Not so much, actually. The focus is more on high compensation from the employee’s side. There are, of course, special cases, but they are more common when the employer and employee have known each other for a longer time. However, it’s still a rare occurrence, especially in family-owned companies.
Rainer Burkardt: I recommend granting shares only if you have known the manager for a longer period of time and if they have delivered the desired business results in the past. However, it is important to ensure that the corresponding corporate agreements continue to allow the German parent company maximum freedom in implementing important investment decisions, that the participation of the Chinese manager can be terminated without their involvement or ideally even against their will, and that the financial requirements for the Chinese manager’s participation are kept as low as possible. It should be noted that in certain equity participation models, the wholly-owned subsidiary can become a joint venture with the Chinese manager as a shareholder.
Gerald Neumann: Can there be a phased plan in place for this?
Rainer Burkardt: Certainly. The company can initially grant the manager a well-compensated employment contract with performance-related bonuses, with the prospect of acquiring shares after a certain period of time. However, I would be cautious about granting a legally binding option at this stage. Certain parameters should be outlined early on to bind the manager and avoid future disappointments. However, in my opinion, such options should only be granted after thoroughly analyzing the tax and legal advantages and disadvantages of the respective equity participation model.
Gerald Neumann: Can the employee potentially save parts of their salary from acquiring shares?
Rainer Burkardt: Yes, that is generally conceivable. Personally, I would prefer to structure it more simply and communicate to the employee early on that they may need to provide a monetary consideration for the shares.
Thaddäus, Rainer, thank you for your insightful explanations!
Part 2 of our series “Restructuring China Investments” will be published in August 2023 and will focus on the sale of production to local investors in China.
About our interview partners: A brief introduction of Rainer and Thaddaeus
Thaddaeus
Thaddäus is a partner at Fiducia Executive Search in Asia and has been with the company for 18 years. He holds a degree in business administration and has a passion for HR and recruiting. He and his team assist industry leaders and international medium-sized companies (mainly from the DACH region) in finding the right talent for key specialist and leadership positions in China and Southeast Asia.
Prior to his work at Fiducia, Thaddäus worked in the automotive industry and the textile division of W.L. Gore, a large American technology corporation. Thaddäus studied at the Catholic University of Eichstätt-Ingolstadt and the Stellenbosch Business School in South Africa.
Rainer
Rainer Burkardt is the Founder and Managing Director of the PRC-licensed law firm Burkardt & Partner Rechtsanwälte in Shanghai. Having been living and working in China for 25 years, Mr. Burkardt belongs to the few German lawyers who possess long-lasting, on-the-ground China experience. His expertise lies in providing practical legal advice predominantly to SMEs from Austria, Germany, and Switzerland on their investments in China.
Since 2009, Mr. Burkardt has been the trusted lawyer of the Consulate General of Austria in Shanghai. He had served as Vice-chair of the European Union Chamber’s Legal Working Group, Shanghai, for two years before he was elected as Chairman in 2010. Since 2013, he has been appointed as an arbitrator at Shanghai International Economic and Trade Arbitration Commission (SHIAC).
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