Assignment compensation: Issues to consider in expatriate reward
At the Symposium Events Expatriate Management and Global Mobility Forum 2014, presentations from AIRINC, Mercer and Atkins highlighted issues to consider when delivering remuneration to international assignees.
19 December 2014
Dr Sue Shortland, who chaired the conference, draws upon these presentations to reflect on the issues to think through in the strategic choice of remuneration policy and practice:As the range of destinations for international assignees expands and the locations from which talent is sourced also rise, the complexity of the home/host pairings between which international mobility takes place increases. Added to the mix is the assignment type used – long-term, short-term, commuter, rotation, global nomad, and so on.As business strives to compete, ensuring that your business wins the competition for international competencies is paramount. Set against this is the need to contain costs, minimise administrative processes and enable maximumflexibility in deployment of human resources. Given these parameters, the selection of a suitable remuneration system that will meet the basic need of being able to attract, retain and motivate assignees is, most certainly, a challenging task.Traditionally, as AIRINC noted, there has been a choice of two main expatriate remuneration systems: home- or host-based pay. Home-based payment systems preserve equity with home-country peers; host-based systems provide equity with locals while on assignment. A global system that delivers remuneration suited to internationally mobile personnel (who move from country to country and have no ‘home’ base as such) presents a third strategic choice suitable for global nomad senior managers. Under this approach, equity is maintained among and between expatriates, regardless of their home- and host-country location pairings.The balance sheet
Over the years, the home-country remuneration approach (known as the balance sheet or build-up) has been the frontrunner in terms of strategic choice. It is used particularly by American and Japanese firms relocating staff abroad, but also remains a popular choice in Europe. It presents a clear and transparent approach to delivering remuneration to expatriates who will be returning to their home countries at the end of their assignments, and this approach ensures that they are able to slot back into home pay structures with ease, as home pay and pension continuity can be effectively maintained.This remuneration system was originally developed by the American oil industry deploying Americans primarily into oil-producing locations such as the Middle East. It enables the individuals to retain their home-country salaries, with additions paid to cover housing and schooling, higher cost of living and other expenditure, and allowances for hardship/health/climate and the like given as well if these factors are considered to be less favourable than at home.The principle underlining this payment system is that the employee should be no better or worse off. Home housing deductions, therefore, can be applied to ensure that the assignee does not profit through renting out home-country property while receiving free housing abroad. Cost-of-living calculations can be made more efficient based upon a more local approach to purchasing goods and services, rather than comparisons being made based upon home-country spending patterns. The balance sheet is underpinned by the principle of tax equalisation.As such, effort can be made to contain the cost of this remuneration policy. However, there is no doubt that this pay approach is expensive, given the range of allowances and benefits that are typically provided to assignees receiving this form of compensation delivery. While it theoretically works for any combination of home/host pairings, assignees moving from low-cost to high-cost locations will require significant uplifts, as their basic salaries cannot provide sufficient remuneration to live in such destinations.Although the balance sheet is a popular choice, providing, as it does, economic neutrality for the assignee, it does requires regular updating (for example, to keep abreast of changes in the cost of living), plus considerable administration and monitoring. It is less relevant for globally mobile populations and for those assignees who are not envisaged to return home. Given that it is expensive, it may not be the best choice for assignees who are going on developmental assignments, who might well be motivated to take a post abroad to further their career development, and therefore may not require all the ‘bells and whistles’ that frequently apply under the balance sheet. It is thus important to take care not to give the most generous package just to get people to go.Host-based pay
The main alternative choice is to use a host-based approach to reward. This is significantly cheaper, as, if adopted in its purest form, it would mean that expatriates were paid exactly as locals, with no add-ons. Of course, this may not prove motivational to attract individuals and their families to uproot themselves and move, and hence it is usual for some additional support to be given, most notably in relation to housing abroad and children’s schooling. One of the other main advantages is that it is not complex to administer. On the ground, it provides peer equity, and as such it is a helpful approach to use when an organisation is transferring multiple assignees from differing national economic backgrounds to work with locals in the host country.However, on the downside, individuals are unlikely to be attracted to work in low-pay countries, and, if sent to high-pay countries, are not likely to be willing to move on or back home: a potential loss of equity with the home country makes repatriation very tricky. As such, this approach to remuneration has a major disadvantage – it can seriously hinder mobility and, with that, the transferof knowledge. Added to this are potential exchange-rate problems in unstable economic locations. So this approach can present more disadvantages than it does advantages if cost containment results in reduced mobility, then this approach will not be the best way forward.The global approach
The global approach to remuneration involves devising a pay system that applies specifically to mobile personnel, and, as such, they maintain equity with other expatriates rather than with home- or host-country peers. This approach is typically applied to cadres of senior managers who are continually internationally mobile and do not return to a home country. Such a system is also sometimes used for graduates on development programmes who are asked to spend two or three years on the move, typically spending six months in a series of host countries, perhaps with very different standards of living or economic wealth.The global approach requires an international pay scale to be devised and implemented in such a way that it can be applied to all leaders regardless of the home/host-country pairings. This can be complex to design, set up and administer, and can prove problematic in terms of exchange-rate fluctuations. Pension provision will normally be offshore, and this also requires additional administration.Strategic choice
Strategy is about choices and the consequences that flow from them. There is no doubt that, as AIRINC noted, more thought is going into the process of designing and implementing international assignment compensation systems today. As speakers from Mercer and Atkins pointed out, any choice must reflect the strategic direction of the organisation and its culture. Talent management objectives must also be examined, as these should drive the approach taken.Rationales for including particular elements in the package (such as hardship payments) should be considered. The pros and cons of different approaches to remuneration also need to be matched to assignment types. For example, short-term and commuter-style assignments are typically remunerated on a home-country basis, but the packages are modified to suit assignment lengths and patterns.Different pay approaches can be used for skills-driven assignments versus developmental assignments – the former potentially requiring a ‘richer’ package than the latter. However, it is critical to preserve equity among assignees undertaking expatriation for similar reasons.The days of the traditional view that one policy suits all, with repatriation as the norm and job guarantees on arriving home, are long gone. Today, remunerationapproaches need to embrace an expanding global mix of sending and receiving countries, diversity in the assignee population, and the requirement to manage talent globally.While cost control remains important, today’s emphasis is not about trimming and demotivating staff as a result. Instead, the emphasis lies on cost efficiency and effectiveness by using sensible tax planning and policy segmentation to achieve organisational objectives embracing global talent management while recognising multigenerational and diverse workforces with differing needs and expectations.For more Relocate news and features about international assignments click here
Over the years, the home-country remuneration approach (known as the balance sheet or build-up) has been the frontrunner in terms of strategic choice. It is used particularly by American and Japanese firms relocating staff abroad, but also remains a popular choice in Europe. It presents a clear and transparent approach to delivering remuneration to expatriates who will be returning to their home countries at the end of their assignments, and this approach ensures that they are able to slot back into home pay structures with ease, as home pay and pension continuity can be effectively maintained.This remuneration system was originally developed by the American oil industry deploying Americans primarily into oil-producing locations such as the Middle East. It enables the individuals to retain their home-country salaries, with additions paid to cover housing and schooling, higher cost of living and other expenditure, and allowances for hardship/health/climate and the like given as well if these factors are considered to be less favourable than at home.The principle underlining this payment system is that the employee should be no better or worse off. Home housing deductions, therefore, can be applied to ensure that the assignee does not profit through renting out home-country property while receiving free housing abroad. Cost-of-living calculations can be made more efficient based upon a more local approach to purchasing goods and services, rather than comparisons being made based upon home-country spending patterns. The balance sheet is underpinned by the principle of tax equalisation.As such, effort can be made to contain the cost of this remuneration policy. However, there is no doubt that this pay approach is expensive, given the range of allowances and benefits that are typically provided to assignees receiving this form of compensation delivery. While it theoretically works for any combination of home/host pairings, assignees moving from low-cost to high-cost locations will require significant uplifts, as their basic salaries cannot provide sufficient remuneration to live in such destinations.Although the balance sheet is a popular choice, providing, as it does, economic neutrality for the assignee, it does requires regular updating (for example, to keep abreast of changes in the cost of living), plus considerable administration and monitoring. It is less relevant for globally mobile populations and for those assignees who are not envisaged to return home. Given that it is expensive, it may not be the best choice for assignees who are going on developmental assignments, who might well be motivated to take a post abroad to further their career development, and therefore may not require all the ‘bells and whistles’ that frequently apply under the balance sheet. It is thus important to take care not to give the most generous package just to get people to go.Host-based pay
The main alternative choice is to use a host-based approach to reward. This is significantly cheaper, as, if adopted in its purest form, it would mean that expatriates were paid exactly as locals, with no add-ons. Of course, this may not prove motivational to attract individuals and their families to uproot themselves and move, and hence it is usual for some additional support to be given, most notably in relation to housing abroad and children’s schooling. One of the other main advantages is that it is not complex to administer. On the ground, it provides peer equity, and as such it is a helpful approach to use when an organisation is transferring multiple assignees from differing national economic backgrounds to work with locals in the host country.However, on the downside, individuals are unlikely to be attracted to work in low-pay countries, and, if sent to high-pay countries, are not likely to be willing to move on or back home: a potential loss of equity with the home country makes repatriation very tricky. As such, this approach to remuneration has a major disadvantage – it can seriously hinder mobility and, with that, the transferof knowledge. Added to this are potential exchange-rate problems in unstable economic locations. So this approach can present more disadvantages than it does advantages if cost containment results in reduced mobility, then this approach will not be the best way forward.The global approach
The global approach to remuneration involves devising a pay system that applies specifically to mobile personnel, and, as such, they maintain equity with other expatriates rather than with home- or host-country peers. This approach is typically applied to cadres of senior managers who are continually internationally mobile and do not return to a home country. Such a system is also sometimes used for graduates on development programmes who are asked to spend two or three years on the move, typically spending six months in a series of host countries, perhaps with very different standards of living or economic wealth.The global approach requires an international pay scale to be devised and implemented in such a way that it can be applied to all leaders regardless of the home/host-country pairings. This can be complex to design, set up and administer, and can prove problematic in terms of exchange-rate fluctuations. Pension provision will normally be offshore, and this also requires additional administration.Strategic choice
Strategy is about choices and the consequences that flow from them. There is no doubt that, as AIRINC noted, more thought is going into the process of designing and implementing international assignment compensation systems today. As speakers from Mercer and Atkins pointed out, any choice must reflect the strategic direction of the organisation and its culture. Talent management objectives must also be examined, as these should drive the approach taken.Rationales for including particular elements in the package (such as hardship payments) should be considered. The pros and cons of different approaches to remuneration also need to be matched to assignment types. For example, short-term and commuter-style assignments are typically remunerated on a home-country basis, but the packages are modified to suit assignment lengths and patterns.Different pay approaches can be used for skills-driven assignments versus developmental assignments – the former potentially requiring a ‘richer’ package than the latter. However, it is critical to preserve equity among assignees undertaking expatriation for similar reasons.The days of the traditional view that one policy suits all, with repatriation as the norm and job guarantees on arriving home, are long gone. Today, remunerationapproaches need to embrace an expanding global mix of sending and receiving countries, diversity in the assignee population, and the requirement to manage talent globally.While cost control remains important, today’s emphasis is not about trimming and demotivating staff as a result. Instead, the emphasis lies on cost efficiency and effectiveness by using sensible tax planning and policy segmentation to achieve organisational objectives embracing global talent management while recognising multigenerational and diverse workforces with differing needs and expectations.For more Relocate news and features about international assignments click here
