Help Wanted: How to Hire in Europe

This is an article I wrote that CFO Magazine published in September 2011. Enjoy!

A software company in New Hampshire is in the process of expanding farther into Europe. It has decided to start hiring in Germany – primarily sales and support staff – and is considering hiring for similar roles in the Netherlands and the United Kingdom.

While the company can use many of the search strategies it uses in the United States, including networking, social media, and recruiters, there are facets of hiring in Europe that will be different – sometimes very different – from standard U.S. practices.

Two items in particular often trip up U.S. executives. One is the slow timing of new hires. When you find those right people, they won’t be able to start in two weeks. Instead, they will likely need to follow termination processes with their current employer, a process that can range from one to nine months. The other potentially difficult issue is the common use of employment contracts in Europe, even for nonexecutive roles. We look at this issue in more depth below.

Making a List, Checking It Twice
The employment contract is a required document in Europe, and an important one. Getting your head around the regulations, plus the existing cultural expectations, that need to be incorporated into such a contract can be a daunting task. However, doing a little due diligence will make it much easier. Here are a number of items to consider.

1. Language. In most European countries, contracts written in the local language prevail in court, so it is common to draft the contract in both the local language and in English. (They can be on the same document or in two separate ones.) In general, the English version will be used as the working document, with the translated version being drafted once the key terms are agreed upon.

2. Job description and title. In some European countries, candidates find their job description and title to be very important. Having a comprehensive job description and related title as part of the profile you use to advertise the job will keep discussions to a minimum at this point of the process.

3. Compensation. Getting the balance of salary and commissions right can be tricky, since European salespeople will generally expect to have more guaranteed compensation than U.S. salespeople. Depending on the benefits you offer, the salary-to-commission mix can be vastly different than what is offered in the United States, especially for seasoned sales reps.

Benefits packages are also likely to look very different from those in the United States. The basic law covers items such as paying 50% of health-care coverage and providing basic pensions. However, what companies offer or what cultural expectations are can be quite different. Large multinational German companies offer additional benefits, such as richer pension plans, that can equal up to 16% of annual salary, as well as employee stock-purchase plans with large discounts. Salespeople in Germany will also likely expect a company car or, at a minimum, a car allowance.  Subsidized meals and travel allowances are also common expectations. All of these items are likely to be included in the contract.

Once you agree on the right package, there are two other important subjects to address in writing: commissions and stock awards. Crafting the commission section of the contract correctly will save you a lot of aggravation and money.  Be sure to be clear on how commission is earned, how it is calculated, and if there are any guarantees. In addition, if you say in the contract that you will provide a plan each year by a certain date, ensure that you do so. In certain countries, if you don’t and you find that you need to terminate the employee, some courts will consider the entire annual amount due.

As for stock awards, be sure you understand the local tax rules before granting them to your employees. If not, they could have a substantially negative impact on your employees’ tax liability, as some countries tax upon grant.

4. Length of employment. European countries differ on this topic, but basically there are two common types of contracts: fixed term and open-end term. The most common contract term is open-end, with no fixed time frame, though there are circumstances where fixed-term contracts are accepted. When using fixed-term contracts with the expectation of bringing the person on board full time, keep in mind that some European countries limit the term and also the number of times one can renew a fixed-term contract, if at all. This is to avoid companies using this method of hiring to get around termination laws. It is also common in Europe to have a trial period or probation period, since terminating people can be a lengthy and difficult process. Each country has its own legal and cultural norm, so take full advantage of it. You may need it!

5. Vacation. European vacations are generally regulated.  In France the legal minimum is five weeks (25 days) plus 11 days for employees choosing to work more than 39 hours per week instead of the regular 35 hour workweek. In a lot of countries, the minimum is 20 days, though cultural norms may dictate more. In Germany, for example, employees working a regular 40 hour-per-week job are offered 25 days or more, even though the legal minimum is 20.

6. Non-compete agreements. Keep in mind that in many European countries, you as the employer will be required to pay the employee his or her average earned income for the duration of the non-compete period.

The End
Eventually, you will get a dual-language contract signed, sealed, and delivered. But what about how to fire that employee, if need be? This is a subject that frightens most executives who have employees abroad. Each European country has its own regulations and processes, and each culture has its own norms and expectations when it comes to terminating an employee. Countries such as the Netherlands, Germany, and France in most cases require the employer to give the employee warnings and a plan for improvement, and then reevaluate the employee after a three-month period. In certain cases, this can take nine months. Having this understanding before presenting a compensation package to a candidate will help with your budgeting process and potentially save you a lot of aggravation.

In summary, hiring in Europe requires a fair amount of preparation, and it is advisable not to go in blind. With a little research, you will enjoy a smoother and more stress-free hiring process.

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Budgeting for Global Success

This is an article I wrote that CFO Magazine published in August 2011. Enjoy!

When planning for a multi-country expansion, nailing the finer details can make or break your budgeting effort.

A privately-held software company based in California is starting to pursue new sales in Europe. The company has already opened a U.K. office as its headquarters in the region, and is now charting its course into other European countries.  As executives there begin to budget for these efforts, they are struggling to understand country-level requirements, in part because they are in a bit of a rush. In particular, they are concerned about whether or not they have captured all important expenses. While they can use their U.S. and U.K. expense bases as a starting point, there will be items that are materially different in other European countries, and if these are not properly captured and planned for, they could have a negative material effect on their budget.

Here, we look at the major budget categories and some common pitfalls finance executives face when going into new territory.

Revenue
Projecting revenues is one of the trickiest parts of the budgeting process. Getting it right requires a true understanding of how the sales cycle may differ from country to country. Here is a current example: for this California-based software company, it takes three to four months to close a $100,000 deal in the U.S. In Germany, this same deal under similar conditions can take six to nine months, and require a lot of customer handholding and a “proof of concept” that most U.S. customers do not require. Since this company is new to Europe and virtually unknown in an established market, it in fact should expect a 12- to 14-month sales cycle. The lesson: Be as realistic as possible when estimating new international revenues, and don’t forget to do your homework.

Labor Expenses
The largest category of expenses the California company expects to incur in Europe is labor. In this case, employee compensation plus employer contributions to social security and insurance represent nearly 80% of their expense base. Why so high? Here are a few components:

1) Market norms for salary and benefits in Europe are likely to be higher than in the U.S. In the U.S., this California company offers salespeople nominal salaries, with up to two-thirds of compensation riding on commissions. It is also the cultural norm that it – and most U.S. companies – does not offer benefits such as company cars nor car allowances, and that annual vacation is two or three weeks.

If the company were to offer this package to potential sales candidates in Germany, it would not only be hard-pressed to get anyone to interview for the position, it would also be in violation of certain labor laws for failing to meet the minimum vacation requirements. In Germany, salespeople expect a much higher salary and smaller commission, a company car or car allowance, and for the employer to pay half of the health insurance. Last but not least, the legal minimum required vacation in Germany is 20 days, or four weeks.

2) Labor-related taxes can vary significantly country to country. If you were to apply an average percentage, say 15%, across the board for employer-related social security and insurance contributions for all countries in your budget, and you have a large number of people in France and Belgium, the budget-to-actual differences will be material.

For example, an employer’s social security and related insurance contribution costs as a percentage of gross compensation for the California-based software company are as follows:

UK                                13.8% with no ceiling

Germany                      20.18% with a ceiling of €66,000 (U.S. $94,000)

Belgium                       35% with no ceiling

The Netherlands          35% with ceiling up to €40,000 (U.S. $57,000)

France                          42% with no ceiling

 

Comparing the U.K. to France, the cost of social security and related insurance contributions varies 28.2%. Multiplied across four sales people in France with an overall package of € 200,000 ($284,000) per person annually, the difference is over € 225,000 ($320,000). This is a material difference for most companies.

Operational Expenses
These are a typically a smaller overall percent of total expenses for a sales office, but there are still potential surprises. Travel and entertainment expenses, for one, can vary widely per employee depending on their region. In the U.S., air travel can represent a large portion of the overall travel budget for many companies. In Europe, car and train travel can be the dominant means of transportation. Most important, make sure you understand the cultural norms surrounding meals and meetings. In the U.K., a business lunch could mean meeting at a local pub, a meal that would cost under GBP 30 (U.S. $48). In France and parts of Belgium, however, lunch with a customer or prospect will probably include a bottle of wine, with the total bill easily exceeding € 100 (U.S. $160). Several lunches of this kind per month per employee can easily be a sizable five- figure amount annually, and have a noticeable impact on a tight budget.

Marketing expenses – and strategy – are also important to consider upfront. The classic mistake that many American companies make is repeating a winning marketing strategy from the U.S. in other countries. While there are countries such as the U.K. and the Netherland that lean towards a U.S.-style of marketing such as cold-calling, direct mail, and E-mail campaigns, there are others, like Germany, where such marketing programs are not accepted and sometimes illegal. Without some advance consideration, you will more than likely waste good money on fruitless efforts.

In summary, when planning and budgeting for your expansion abroad, take enough time to ensure you have covered all items which could have a material impact on your budget. The more research and homework you do during the beginning stages of your planning, the more likely you are to produce an accurate outcome.

 

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Going Global: Choosing a Location

This is an article I wrote that was published in CFO Magazine in June 2011. Enjoy!

A publicly traded software company took a common approach when it first decided to expand into Europe: it located in the United Kingdom with the expectation of managing all European operations from there. The company hired 12 people over eight years there before finally deciding to pull the plug on this operation, which generated disappointing revenue and market share, along with unnecessary costs such as company cars and personal assistants.

What went wrong? The approach wasn’t all bad. For one, the company didn’t try to manage overseas operations from the United States, a budget-saving effort that almost inevitably fails. Assuming it was setting up a foreign office, Europe is a logical place to start, since it has many legal and cultural similarities to the U.S. And the UK certainly has some advantages as a landing spot. In fact, 44% of U.S.-based executives would consider the UK as a prime location for future investment, in large part due to common language, according to a recent survey by the Institute of Chartered Accountants in England and Wales, compared with 38% considering all other European countries.

But too often, companies choose a country for their foreign operations without enough careful thought. Language and ease of doing business are important factors, but they shouldn’t be the only drivers of where to locate.  In fact, defining — and locating in — the true target market, rather than swinging wide at an entire continent, has some unbeatable advantages.

Now, four years after pulling out of Europe, this software firm is moving back to the continent, but this time with a different strategy that includes hiring locally instead of consolidating all employees in one region. The firm has hired a local business-development professional in the Netherlands and is in the process of hiring experts in Germany. They will also hire in the UK, but this time, the UK folks will only focus on the UK market.

How can your firm make the right location decision the first time around? Consider and weigh all of the following points, rather than just one or two:

1. Core Customer Base

Pinpoint the location of your core potential customer base. Sometimes, the answers are obvious. If you sell into the car manufacturing industry, perhaps Germany would be a good choice for you. If you sell into the fashion industry, your choice is likely more focused on Italy or France. In other cases, finding the core customer base is a discovery process, and you may need to adjust course along the way. Many countries have a chamber of commerce or a representative organization in the U.S. that can be helpful in the process. You should also look at where your competitors are, or companies in related industries. Strategic partners in your home country who have already established an overseas presence can also help you get quick traction, just to name a few.

2. Staffing

Where is your best and most qualified talent pool? Most likely the employees you want will be located in the same region as your core customer base and may come from a customer you want to sell into or from a competitor. One client, for example, is trying to hire an employee from SAP in order to build business in Germany. In general, local people know their market, and they have an existing network, which you can leverage. They can also provide realistic perspectives on how long it will take for you to recoup your investment. Local partners can also help you with the local marketing plan, and they can steadily help you build your brand, just to name a few.

Those are also some of the reasons why managing all operations from one location often fails. Europeans tend to be nationalistic and prefer to do business with someone within their own country. Having a Brit manage Germans works if the Brit speaks German, understands the culture, and makes a real effort to integrate. If you have a Brit who treats others like Brits, it can be problematic.

3. Legal structure and regulatory climate

Is a permanent establishment easy to set up or does it require specific, local expertise? More important, can it be done within your deadlines and your budget? In the unfortunate case of having to let staff go for any reason, can this be done in a reasonable and fair manner, or do laws and regulations make it a difficult and costly process? For example, though the Netherlands is a fairly easy place to establish an office, and can be a friendly place to do business, these factors are often overshadowed by what are perceived to be unreasonable protectionist employment laws and regulations surrounding employee warnings, sick leaves, and terminations. If a company is not properly prepared, staffing issues cannot only be time-consuming, they can be a nightmare. However, if your core customer base and talent pool are located in the Netherlands, these issues will likely be secondary considerations.

4. Preliminary tax considerations 

While this factor shouldn’t drive the whole decision, it is an important one to consider. Some countries require a much higher annual financial base to conduct business due to tax, regulatory, and customary requirements. The first type of tax you’ll likely need to consider is the VAT (value-added tax), which is similar to sales tax in the U.S. Most European countries allow you to recoup the VAT paid on business-related expenses like hotel rooms and car rentals, but in some countries, like France, there are significant limitations on what you can reclaim. Payroll taxes can also vary quite a bit. In France, employers can pay the equivalent of 45.2% of an employee’s wages toward social security and wage tax; rates in the Netherlands, for example, are marginal. You may also want to look at tax issues that will crop up as sales grow, such as how different countries handle transfer-pricing issues.

5. Cultural differences

Never underestimate the power cultural differences might have on your efforts to be successful. At one point, I was working in Japan, Germany, and the US on similar projects — establishing critical strategic-partner contracts — but at very different paces. In the U.S., we were able to close partner contracts rather quickly, as we normally worked directly with management. In Germany, we worked with management but they typically sent the contracts to their lawyers for review toward the end of the process. In Japan, we worked with people who reported to management, and even after management got the contract, they would spend more time mulling over the terms and conditions than their German and U.S. counterparts. Then, at the end of each step of the process, they sent it to legal. In the end we were successful but it took a year — yes, a year — to close the contract in Japan that would have taken us a month to close in the U.S.

Off the List

Of all the factors to weigh, you might have noticed that I did not mention language. The perception of language as a barrier is just that, a perception. English is an accepted business language in Europe, so don’t let it be a major deciding factor. If you find yourself faced with a situation where the people you are working with have no or limited English, there are in most cases local partners who could help you.

The first foray outside the U.S. is never easy for a business, but taking the time to properly look for the right location and having an open mind can improve your odds of success.

 

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Expanding abroad – Step 2 Place of Business:

This is the second part of a series on steps to take while planning, launching and executing your expansion abroad.

 As mentioned in previous blog entries, I am sharing the experiences we gain at Hull Speed Associates as we assist our clients in expanding abroad. The experiences I share are real situations of how we encourage our clients, and the pragmatic steps we take to help them in this process. I urge you to share your comments by clicking the comments button below. Oh, and please subscribe to the blog if you have not done so already ;-).

The second step is the beginning of the expansion phase, choosing a location(s) to establish the legal entity(s). I have chosen the UK as an example as a place to start.

The UK has several legal entity options but on average our clients choose one of the following three: a Place of Business (“Representative Office”), a Branch company, or a UK Limited.  Here are a few highlights of a Representative Office.

A Place of Business (Representative Office) are premises where a physical or visible indication exists that the company may be contacted there, or a particular location where the company habitually does business from. Basically a US company “hangs a shingle” as the US company in the UK.

 A few items to note:

  • The Representative Office does business as the overseas company, not as a UK establishment.
  • You must register the overseas company with Companies House showing that the overseas company is doing business in the UK.
  • The Representative Office does not trade, thus does not generate revenue. Rather, the overseas company does. Contracts are established and signed between the customer and the overseas company directly.
  • The staff is employed by the overseas company rather than by a UK establishment.
  • Profits and losses are part of the overseas company it represents instead of as a stand-alone company.
  • Liabilities extend back to the overseas company it represents. Ouch!
  • Corporate documents of the overseas company are registered and filed with Companies House and must be presented in English. If you are registering a foreign company whose corporate language is not English, certified translated documents will need to be prepared and filed.

 Pros:

  • Once the registration is complete there are no further filing requirements including tax returns and annual financial information filed with Companies House.
  • If your overseas company home language is English it will make it easier to communicate.

 Cons:

  • There is no UK establishment, thus causing a perception issue.
  • Liability extends back to the overseas Company.
  • Finding qualified staff can be a real challenge.

These are just a few.

Summary:

One question for me kind of sums it up: “When would this option make sense…?”Well, actually there are cases where it would make sense, especially over a Branch. For companies who want to expand into the UK but for reasons may not want to establish an incorporated entity there are cases where companies receive tax breaks and government development grants by continuing to be incorporated in their home country. Another argument, and for a lot of US companies this is a strong one, it gives them the opportunity to “test the waters” before jumping into the annual reporting requirements and related costs. For a lot of companies this is used as a “First Step” into Europe before making a commitment by establishing an incorporated company.

However, given the liability, lack of qualified talent and perception issues mentioned above, clients do not use this as a long-term option. Once they meet certain internal milestones they then establish a UK Limited company.

I would like to thank Paul W. from our UK service provider for contributing to this entry.

In the next entry I will address “UK Limited”.

Regards,

Bill Hite

bill.hite@hullspeedassociates.com

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EXPAT LIFE – Bring your hobby with you

 As mentioned in my last blog entry I attended a week-long woodworking course in Metten, Germany. The course happened to have been taught by Garrett Hack, one of the most respected and talented woodworkers in the US. During the course one thing struck me, and it was not a board falling on my head… 😉 No, it occurred to me just how important it is to bring a hobby with you when you move abroad. Since I was a kid I have loved woodworking. During the time I lived in Marblehead, Massachusetts I had a woodshop in the basement of my house. Yet during the final stages of my move to Germany I sold all of my woodworking machines and tools. This was difficult for me, but at the time I felt it was worth it because I really wanted to start my new life as an expat in Germany. A few years after living and working in Germany I discovered that I really missed woodworking. In 2006, the year after I married my second wife, we bought a house just south of Munich, including a good-sized garage. This – and the encouragement of my lovely wife – gave me the opportunity to rebuild a woodshop. Now, before I travel back to the US for business and when I am home in Europe I look for and take courses where I can. This has given me a great creative outlet, inspires me at Hull Speed Associates and it adds joy to my life.

 So while planning your transfer as part of your company’s expansion abroad, don’t forget to bring your hobby with you. It will help you integrate into the local culture in a more profound and fun way.

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EXPAT LIFE – Don’t forget your spouse or partner

I am starting my 14th year as an expat, and lately I have run into a number of expats from various countries who all share the same feeling I had in the beginning – feeling somewhat lost. Back in the late nineties, when I was in the final stages of moving to Munich, I was given some very good advice, which was to send my former wife to an intensive German language course for a month. Though it seemed to be a bit time consuming and expensive I soon understood why after her class ended that this had been sound advice. When you move abroad you, the person being transferred, are at work with colleagues all day while your spouse or partner is more than likely left home alone. Moving is one of the most stressful things we can go through in life, especially moving to another country where both the local language and culture are foreign. Integrating into the local culture will make or break a positive experience for most people and one of the first steps is ensuring you know at least the basics of the language in the country you have just moved to. I am currently at the end of a week-long woodworking course in Metten, Germany. I will talk about bringing your hobbies with you in another blog entry, but one of the participants in our class is a Canadian who just moved to Switzerland from Ontario. Besides being a very pleasant person he is happy with the move he and his wife just undertook, and one of the reasons is that he is taking German courses and is now able to speak and understand a good portion of the basics. It has had a large impact on his ability to integrate and in turn has made him happier. He did this while his wife was at work…. So when you are planning a business expansion abroad and you are considering transferring one of your employees, and their family, do yourself and your employee a favor. Include an integration plan for the members of your employee’s family as part of the transfer. It will ease so much stress from the family home life, which in turn will help your employee integrate into the new work culture faster and better.

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Expanding abroad – Step 2 The Branch:

This is the second part of a series on steps to take while planning, launching and executing your expansion abroad.

As mentioned in one of my last blog entries, I am sharing the experiences we gain at Hull Speed Associates as we assist our clients in expanding abroad. The experiences I share are real situations of how we encourage our clients, and the pragmatic steps we take to help them in this process. I urge you to share your comments by clicking the comments button below. Oh, and please subscribe to the blog if you have not done so already ;-).

 The second step is the beginning of the expansion phase, choosing a location(s) to establish the legal entity(s). I have chosen the UK as an example as a place to start.

 Just a quick note about Corporate Tax Rates. The Corporate tax rate in the UK has just recently changed from a maximum of 28% to a maximum of 26%. Compare this to  the US corporate tax rate which can exceed 35%. We will talk about Transfer Pricing in another entry but it kind of makes you think, doesn’t it?

 The UK has several legal entity options but on average our clients choose one of the following three: a Place of Doing Business, a Branch company, or a Ltd.  Here are a few highlights of a Branch.

 A ‘Branch’ is basically an extension of the company it is a Branch of. A bit like a branch on a tree.  It functions as an office rather than a stand-alone entity. It cannot sign contracts for things such as property lease or employment contracts, for example.

 A few items to note:

  • Profits and losses are part of the company it is a Branch of instead of as a stand-alone company.
  • Liabilities extend back to the company it is a Branch of. Ouch!
  • You actually register the company it is a Branch of instead of the actual local company.
  • Corporate documents of the company that owns the Branch are filed in the registration and must be presented in English. If you are registering a foreign company whose corporate language is not English, certified translated documents will need to be prepared and filed.

Pros:

Hmmmmm.. Lets go to the next part and revisit this later…

Cons:

  1. Liability extends back to the company it is a Branch of.
  2. The perception of doing daily business. Ltd vs. Branch Office of a foreign company.
  3. Reporting requirements are from the company it is related to instead of as a stand-alone. Audit and disclosure requirements, for example.
  4. You still have annual corporate tax filing requirements.

 Summary:

 One question for me kind of sums it up: “When would this option make sense…?” Given the liability issues mentioned above, I’m not sure I can think of one. Perhaps you can?

 I would like to thank Paul W. from our UK service provider for contributing to this entry.

 In the next entry I will address “Place of Doing Business”.

 Regards,

 Bill Hite

bill.hite@hullspeedassociates.com

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