HR prices in China are about to go up – steeply – no matter what happens to the economy. If you are involved in the service industry in any way – and that would include all of us – then you are faced with the option of paying a lot more early or late. The only alternative is finding creative, out-of-the-box-thinking solutions – but we all know the chances of THAT working out.

The funny part is, this may all work out just great for you. Or someone like you.

New Millenium Math

Things in China have gotten expensive. Annoying for you – devastating for the masses on the lower rungs of the middle class. Anyone earning under 6,000 rmb a month is really feeling some pain right now, and that probably includes a lot of the people you have working for you – and plan on keeping.

If the Chinese economy gets sucked down into the global morass of sagging economies, then you are going to be swimming against a very cold, fast tide to cut costs and maintain profitability. You will need to cut those costs by firing people – or at least letting attrition work its dark magic. The few key people you have left will be shouldering more and more responsibility – and they are probably smart enough to figure out that they are being shafted. The guy in the office down the hall will gladly give their salary a heft bump to replace the pissed-off, overworked middle manager who just quit his shop for the same reasons.

If the Chinese economy avoids a slow-down then you’ll still be faced with broad-based salary hikes – but now in addition to paying more for those competent managers, you’ll also be bloating up your team with a lot of low-experience, high gross-pay employees under the new labor contract. And every one of them will need another piece of real-estate, a computer, software licenses (I may be goin’ out on a limb here, but you know what I mean), training, and lots of other costly extras. You will have a hell of a time making productivity climb as fast as your payroll does.

Dreams of Shanghai as a high-tech, high-concept outsourcing center seem to be wafting away on the hot breeze.

In “Waiting for Godot”, the famous Beckett play that many of us vaguely remember reading in high school, the characters are paralyzed by anticipation of the arrival of a mythical being that will give meaning and purpose to their pointless existence. There is no action or decision that should not be delayed until after the arrival of this omnipotent demigod– whom no one has seen and no one really knows too much about. It’s a humorous and intellectually challenging notion on the stage – but it’s a disaster when it takes place in your China operation.

Yet every time my client puts up a help-wanted posting, the company seems to ease into an expectant stupor – waiting for the new designer or IT guy or sales manager who is going to bestow order and logic and meaning.

What about your shop? Are you and your team getting hung up waiting for the mythical Da Ge who will fix everything?

Waiting for Da Ge usually takes 2 forms.

Sometimes the company makes a key strategic hire or expects a big gun from overseas to be transferred. It makes sense to defer big decisions and delay trying to solve troubling bottlenecks until the new person arrives, because they will be bringing with them new resources, experience and perspective. Solving big problems is, of course, the job of senior people, and it is only natural and positive to expect a great deal from new leaders.

Other times, however, the company slips into a much less healthy state of paralysis. Often a business will be suffering from some problem or inefficiency, and the bosses reluctantly agree to expand headcount and post a ‘help wanted’ listing for a new hire. In one recent case I was involved in the hiring of a firm’s first graphic designer. Suddenly, every single problem could only be solved after the designer arrived. Sales presentations, brochures, seminar announcements – even internal strategy documents – had to wait for the new graphics artist to work her magic. The only problem was that no one knew when the designer was arriving, what she was really capable of or when she would be ready to start contributing to the company.

The decision to hire is so important to rapidly growing China-based businesses that it can have an unanticipated impact on the company. When it leads to greater efficiency or competence then it’s a creative disruption that can help the company reach new heights. But all too often entire departments go on hiatus and delay every decision as they wait for the arrival of the mysterious unknown.

More and more expat businesses in Shanghai are turning to marketing outsourcers to help them with specific parts of their trade. Some need help starting a new product, while others may want to grow the territory. The problem is in finding outsourcers you can rely on. This is especially true in China, where it’s hard to verify a track record.

One thing you can try is to have them show you more than a cookie-cutter proposal that references vague job functions at big companies. That isn’t going to help you.

Keys to developing an ‘internal’ business plan.

1) Goal-Setting.
This is the beginning and the end – the alpha and omega. If their plan isn’t centered on specific goals then they are driving fast with no destination in mind. Good marketers develop good targets. If you’re buying marketing services then you have to beware of potential ‘sand-baggers’ – guys who set their own projections too low so that they can avoid pressure and still finish with dramatic target-busting performance.

2) New approaches & methods.
Innovation is good. When you hire a marketing team, you are really empowering them to represent your business. If they are not bringing their own ideas, experience and intellect to the mix, then you are getting cheated. Encourage your team to come up with new ideas that push the envelope and try new ways to attack your market.

3) End to end solution or integrations & education.
Decide what you want and go for it. Some outsourcers are like contractors – you want them to come in, do something, pass it off gracefully and go away. Other times you want them to start something permanent and hang around long enough to iron out the bugs and train your people. Either is fine – but you should have an idea about what you want and then structure your search around that.

4) Costs, limits and realities.
A business plan that doesn’t differentiate between normal expenses and extraordinary business restructuring isn’t really a plan. Yes, innovation and new ideas are great. But every organization has limits – and if your guys plan runs counter to company rules or practices then you are gonna have a rough road.

5) Ambitious – but realistic.
The best plans push the system without breaking it. Generally you’re looking for guys who can produce more with less, but don’t make that your only criteria. Marketing has the ability to magnify the force of your company, but only you develop and execute the right plan. Your real stars will come up with new ideas that take into consideration shifts in the marketplace, competition and new technology.

“I love working for Bob. He’s so whimsical and mercurial. Remember that project he had me start 3 weeks ago? The one that was top priority and required me to work weekends and stay until 7:30 or 8:00 every night? Well, it turns out that not only doesn’t he need it – but he’s known for 10 days that it was pointless. Isn’t that a hoot?”

It’s actually pretty rare for top managers to speak this way. Low-level staffers, on the other hand, do learn to work this sort of leader pretty quickly

What can you do to make sure that your team sees you as someone to follow – and not an obstacle to manage?

Entrepreneurs behaving båadly isn’t necessarily a ‘China Issue’, but the large number of entrepreneurs and lack of management depth means that once you start down the wrong road you can get lost pretty quickly.

What can leaders of fast-growing companies do to make sure that those whose respect is crucial to success don’t view them as a loose cannon?

1. Track the projects you start. 

It’s you responsibility to keep track, and to let your team know when things change. The higher your position, the more you time you spend managing other people’s activities. Not having a clue what your top people are working on means that you’re clueless – not that you’re important. CEOs of giant firms consider this a crucial success factor – and so should you.

2. Don’t hit the panic button too often.

Limit the “drop everything and do this right now” projects. How many #1 priorities are you assigning in any given week? If you are saying, “this is a top priority” more than 2 or 3 times a week, you may be diluting the importance of your own words.

3. What happens to the output? 

When you’re people sign off on a big project, does it get filed away and forgotten about or is it contributing to the success of the business in a real and tangible way? If your guys feel that they’re doing pointless busy-work, then they’re going to become low-quality performers. That pathetic old saying about the “mushroom method of management” (keep them in the dark and feed them bullsh–) is even sadder when you’re doing it by accident.

4. Creativity isn’t another word for flakey. 

Just because you are innovative and impulsive doesn’t mean that the normal rules of business have been put on hold. Too many young managers confuse innovative or dynamic with inconsistent and unpredictable. The further outside the envelope you are, the more important basic leadership skill become.

5. Delegate intelligently.

Delegation doesn’t mean giving someone else the crappy jobs, and it doesn’t mean using low-level staffers as punching bags. It does mean ceding real responsibility to trusted staffers and making use of your key people’s intellectual firepower and strategic abilities. Don’t make the mistake of thinking you’ve hired a team of clairvoyants who can fill in the dark and shadowy voids of your brilliant but vague vision.

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.

Last night I attended China Chicago Club’s monthly get-together, where the speaker was Tim Lamb from JLJ Business Entry. Tim was talking about WOFE’s and compliance with Chinese regulations. Tim spoke for a while and covered a lot of important topics, but I’ll break down the main idea for you right now: China has a comprehensive body of business law, and if you break those laws you stand a very good chance of having a very bad time.

What about your old-hand friends who tell those hilarious stories about making buckets of cash without filing a form or leaving a corner uncut? Talk to them when it’s time to sell, move or cash out. Those stories tend to be a lot less amusing.

The realities of operating a WOFE (wholly owned foreign enterprise) in 21st century China:

1) Not everyone breaks the rules. In fact, if you are a foreign business in China, you are going to be scrutinized by a wide range of governments, bureaucracies and regulators who all hope to catch you doing something illegal. Those fines, penalties and overdue fees show up on their P&L statements, so good luck trying to squirm your way out of them. Oh — and if you are still having your receptionist negotiate with government officials, you may want to consider raising your game a little and investing in a relationship with a qualified lawyer, accountant or consultant.

2) It’s your responsibility to know the laws. If it is going to take 6 months to set up your WOFE or move the HQ from Beijing to Shanghai, then that is YOUR problem – not China’s. You can’t win in court by claiming ignorance. You can’t claim that the contract shouldn’t be binding because you can’t read Chinese. You can’t say you didn’t know you needed permission or approval to do business here. Those days, unfortunately, seem to be over.

3) China’s new HR rules cover western companies AND WESTERN EMPLOYEES in China. Yes, that’s right – all of your expat managers need contracts must receive some form of benefits, pay taxes and everything else listed in the new HR law. Will your Senior VP of Marketing who earns $150 k per year sue you for a badly worded contract? Probably not. Will the pissed-off salesman with the Chinese wife sue when you fire him for non-performance? Hmmm. Better make sure you paperwork’s all in order.

4) You have to spend your registered capital within a set period of time. Yes, I know how clever you felt when you started your WOFE and banked 75% of the required capital. That was great. Now invest the funds or plan on explaining to some VERY humorless bureaucrats why you didn’t. It won’t be a problem, unless you plan on expanding, moving, selling or getting audited by the government (which should be happening every year).

5) You need government permission to move, expand, open new branches or make significant changes to your business plan. Furthermore, if you want to dissolve your WOFE or rep office, you had best follow official procedures (which sound quite involved and time-consuming) if you ever plan on doing business in China again. China loves paperwork.

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.

Like many China service businesses, I both hire outsourcers and look for clients to hire me to provide services for them.

On the hiring side, I’ve been noticing that many of the consultants I used to work with are now becoming more difficult to hire. Their customer service skills aren’t the issue – they simply choose to take bigger or more specialized projects. As consultants and outsourcers get more successful they become pickier about the jobs they take on.

On the sales side, I have to admit that I too have become more selective – and to some potential clients, a good deal more difficult. I simply don’t have the time or resources to do exhaustive proposals on spec for clients that may or may not know what they’re doing. I am more interested in longer-term, higher value-added projects that involve more commitment from the client company – and I have been around long enough to have become a little pickier about whom I work with.

What’s the best way to approach a potential business outsourcer in China?

If you are looking for a business consultant or outsourced solution in the China market, you have more choices than ever. But like all competitive markets there is a very wide range of quality - and prices are rising quickly. If you are in the market for services, here are a few ideas that may help.

1. Get your ducks in a row first.
You have to understand your problem before you sit down with an outsourcer – and all your departments have to agree. Most of my projects involve Sales and HR, and at times it can feel as if they are on different planets. If you don’t understand or have a consensus about what lies at the heart of your business problem, then either analyze it yourself in advance or make that part of the consulting mission. Don’t expect to figure it out as you go along, on the consultant’s dime. I no longer take jobs that will end up in failure.

2. Decide if you want the consultant to scope your problem.
In other words, determine what the real BUSINESS problem is and how you want to solve it. If you don’t know, then you have two solutions. 1) Figure it out yourself as preparation for the hiring process. 2) Outsource this part of the problem. Companies that think they can get an outside consultant to analyze and solve business problems as part of his selling proposal are usually disappointed. Good consultants won’t go into much detail – and poor consultants may tell you what you want to hear in order to make the sale.

3. Delegate the hiring process at your own risk.
I once had the final negotiations for a long-term project with a newly hired HR assistant. The big bosses had all met with me and give their informal approval – but then disappeared from the process. I finally gave up dealing with the HR representative after 8 months of delays and a non-stop stream of requests for new proposals and alterations.

4. Time counts.
I once negotiated a repeat job in August, was told we’d be doing the project in November – and then got an email in February saying they wanted to start right away. This doesn’t make your organization look tough – it makes you look dim and chaotic. Rates go up.

5. The good ones are selecting you, too.
Long-term suppliers are constantly telling me that they will do a certain job at a reasonable rate for me because we have a good relationship, but that they don’t usually do that kind of work anymore. Likewise, when someone approaches me to help them I assess my ability to do the job successfully, the efficiency with which I can work with their staff and the odds of me getting paid within a reasonable amount of time. I don’t take every job anymore – nor do I write detailed proposals for every inquiry. There simply isn’t enough time.

If you use a consultant you are in essence making a strategic hire. You may have to do some selling. You may have to do some educating and explaining. And once the hire is made, you need to give him the authority and resources necessary to get the job done.

Business Process Outsourcing and outside consultants are trends that are becoming more important to organizations – and in some cases the ability to find good service suppliers is a major strategic advantage. Make sure that your organization is getting the most from its outsourcers and consultants by hiring them correctly.

You thought you were giving a high-potential young hitter his first big break, but now you have created a monster in your organization. He’s gone from being a hard-working, ambitious young go-getter to an entitled, bossy, mini-tyrant. There is disharmony and strife on your sales-floor – and you’re becoming concerned that it’s just a matter of time before some good people head for the exit.

How do you manage the man-diva in your shop?

It happens in a lot of sales organizations. You’ve jumped your own queue to promote someone without seniority or paid out a huge commission check. Now your golden-boy has bought into his own hype and is channeling Gordon Gecko in short, shrill bursts.

1) Did you make a mistake?
This is the toughest question that a lot of senior managers never ask themselves. Maybe the potential you saw was wishful thinking on your part. Maybe he’s just not mature enough to handle the responsibility consistently. Young hot-shots may be smart – but that doesn’t make them leaders. If your bold management decision has turned out to be a bust, you have to fix it quickly.

2) Does he have a point?
There’s a chance your boy is right on the money. Maybe he really is right and the rest of the team is wrong. Complacency kills, and it’s a disease that has spread through many China-based sales organizations. If your team has gotten lazy, self-satisfied and complacent, then maybe your golden-boy is doing exactly what he’s supposed to be doing by shaking things up a bit.

3) Who is he pissing off?
Who is doing the grumbling here? Is it the receptionist who botched an important message and the telemarketing staffer who spends more time on MSN than on cold-calls? Or is he poaching leads from your big hitters? Never underestimate the size of a successful salesman’s ego – your top earners fully believe that they can earn more across the street, even if it means starting over. And don’t be surprised if once the exodus starts it keeps right on rolling until it’s just you and the problem (assuming of course that he hasn’t jumped ship by now as well). This happens a lot – and Shanghai can be the perfect storm for this sort of thing. Don’t force the hand of your best earners.

4) Is he producing?
This is the key question. If your man is ruffling a few feathers but delivering the goods, then maybe this is a problem worth solving. But if it turns out that he was all talk and no sales, then you will have to make an adjustment sooner rather than later. Remember how hard it was to answer question 1 about whether or not you made a mistake? Well, now you have your answer.

5) Can it be saved or turned around?
Is he nervous or insecure? Making a few silly mistakes on his first big job? Or is he really a socio-pathic asshole? Insecurity can be handled with an outside training course and a couple of nights of team drinks at The Spot or Blue Frog. Crazy & mean just never gets better.

The most important thing is to be in control of the situation. This is exactly the type of situation that alienates lots of senior managers from their front line organization. If you appear unaware of the situation – or worse, seem to side with the attitude problem – then you are going to drive a wedge between yourself and the very people you need to help you succeed.

Damage control for a bad promotion can be extremely difficult. Sometimes these things work themselves out on their own – but you’ve got to be ready in case tough action needs to be taken.

Successful entrepreneurs in China will tell you that success took longer than they had originally planned. Ex-pat owners of businesses in China who have been slugging away for 5+ years can suddenly find themselves on a steep growth curve. Many of these ‘overnight success stories’ that were years in the making end up leaving their owners hostages to the business. The founders are cash-poor while the business gets bigger and richer.

What can successful China entrepreneurs do to boost their household finances without destroying the company balance sheet?

Over the years you’ve tweaked the business model, found the right marketing & sales mix and were ready when demand caught up with your offering. What happens when your 5 year old business becomes an overnight success?

1) A sudden uptick in business activity may leave you with lots of money and lots of spare time. Probably not, though. It’s more likely that you’ll find yourself in a period of hyper-growth and hypo-cashflow. Don’t panic. Most small businesses grow at an uneven pace – particularly in China. Be prepared for a significant lag between higher sales and higher retained earnings.

2) Asset rich – household poor. Entrepreneurs are notorious for putting everything they have into their business – and that’s great. But as the business grows you will need a plan for transferring some wealth from the company accounts to your own portfolio.

3) Your business is not an ATM. Pay yourself a predictable salary. Big annual bonuses are fine – as long as you have some sense of how much you are earning. Someone bootstrapping a brand-new business probably doesn’t have a clear idea of how much he will earn in 2008 – but if you’ve been around for a few years and have a steady flow of business, you should be able to give a ballpark estimate of how much you’ll pay yourself.

4) IPOs and M&A grab the headlines, but successful entrepreneurs need a Plan B for cashing out. Leaving ALL your assets in the company can be risky. China business is famous for stories of successful entrepreneurs who ended up running into trouble with partners, bureaucrats, suppliers, key clients – and changes in regulations. Make sure you have a cushion in case the business suffers a major shock.

5) Incremental cash-out options. While living off your expense account is a bad idea, retiring on the company may be a winning strategy. Entrepreneurs and owners should consider setting up in-house pension plans, education funds and health insurance programs that preserve your business’ capital structure but still provide for the owners’ long-term financial health.

For more ideas about incremental business cash-outs, take a look at www.ChinaFinancialPlanning.com.