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Expat Pay Plans Suffer Cutbacks

September 1, 1999
Related Topics: Expatriate Management, Featured Article
Global expatriate compensation trendscontinue to receive a lot of attention as companies expand their businessesbeyond U.S. borders. And although there hasn’t been a significant change inthe average expatriate compensation approach in the past year, companies aretrying to contain costs by scaling back in some areas. But they’re also givingmore attention to upfront selection and initial preparation in hopes ofimproving assignment success. 

Workforce interviewed Carolyn Gould,the partner-in-charge of expatriate administration and compensation consultingservices for Florham Park, New Jersey-based PricewaterhouseCoopers. Her views onpractices for U.S. expatriates are based on the results of their seventh annual"Survey of Expatriate Compensation and Tax Policies.” The survey isconducted in the United States, and therefore is heavily weighted toward U.S.multinational practices. 

What major changes have taken placerecently in basic compensation philosophy for expats?
Though there have been many articlesand presentations surrounding new expatriate compensation approaches, the mostpopular systems of today are actually the same that were in place 20 years ago.Most expatriate compensation systems fall into one of four basic philosophies:

  • Host-countrybased: Under this system expatriates are paid based on local compensationpractices. This is typically used in developed economies or high- salarycountries.

  • Home-countrybased: Under this system, the expatriates are paid a salary based on thehome country with cost-of-living, housing and tax differentials to provide astandard of living in the host country that is similar to what they wouldhave had at home. The home-country system continues to be the most popularsystem.

  • CompensationApproach

     #of Participants356277
     Betterof Home or Host4.3%2.6%

  • Headquarter-countrybased: Under this system, all expatriates regardless of origin are treatedas if they had come from the headquarter country. As with the home-countrysystem, various differentials provide a standard of living similar to peersin the headquarter country.

  • Betterof home or host: Under this system the company would compare the result ofthe host country based system and the home country based system and theexpatriate would receive the higher of the two.

How significant are the differences inexpatriate compensation programs for companies with headquarter locations in theU.S. versus Europe or other global areas?
We also conduct a similar survey ofAustralian companies, Canadian companies and European companies. The Canadianand Australian results were very similar to the results from the U.S. survey.

The European results showed at least 50percent using a home-country approach. However, the results also showed thatdifferent policies were used depending on whether or not the host country was adeveloped or developing economy. For example, the home-country approach was moreoften used in a developing economy and a host-country package in developedeconomies.

There’s a belief that there is aEuropean approach that’s prevalent, but in fact, the more popular approachvaries by country within Europe. German companies tend more often to use thehome-country approach as the home-country salary levels are high when comparedto many countries. Other countries whose salary levels are low would have aneasier time of using the host-country based system as individuals would view theassignment as financially favorable.

These results aren’t surprising whenyou consider that most assignments are for business need, and it would bedifficult to find people who would be willing to reduce their standard of livingsignificantly to take an assignment.

However, there are differences incertain elements. For example, most U.S. companies will charge the assignee ahome-country housing deduction toward the cost of the host-country housing. However, the policy isn’t as popular outside the UnitedStates. This is one of the few areas of difference, but the trend for mostcountries is to begin charging a housing contribution.

HousingContribution from U.S. Survey and Non-U.S. Survey

 U.S.22.9%* do notcharge
 Australia73.3%do not charge
 Canada51.0% do notcharge
 UK65.0%do not charge
 *down from 29.8% in 1992

What’s interesting is that there’sa perception that U.S.-based packages are much richer for the assignee. However,when you consider non-U.S. companies are more likely to provide free housing andalso provide an incentive premium, the actual additional cash that an assigneesaves as a result of the assignment is much greater. This is especially true ifthe assignee rents out his or her home while on assignment. In these cases,they’ll have the benefit of the incentive premium and also the rental income.

What trends are emerging in the area ofexpatriate compensation?
The trends as can be expected arearound cost containment. Although there hasn’t been a major change in acompany’s basic expatriate compensation approach, there has been a change inthe individual elements.

The first element undergoing change isthe incentive premium. There’s a growing trend to eliminate this premium, orat a minimum reduce the amount paid and the method of pay. For those companiesthat haven’t eliminated the premium, some have changed the payment from whathas typically been 15 percent of pay each pay period to 10 percent of pay paidin a lump sum prior to the assignment and upon return. The 10 percent iscalculated based on expected assignment duration, then typically 30 or 40percent of this expected total is paid prior to assignment, and the remainderpaid upon successful completion of the assignment or repatriation criteria.

IncentivePremium Paid
 No Premium Paid27.8%38.3%
 Premium paid lump sum either
 prior, upon return or both
 Premium paid per period or lump
 sum dependent upon location
 Premium paid annually2.4%2.2%
 Premium paid each pay period43.3%26.4%

The second area is the trend to notprovide free housing to assignees. In keeping with the home-country system, hadthe assignee stayed in the home country he or she would have had a housing cost,so charging a norm while on assignment helps cuts costs and still follow thespirit of the system.

A third area is the goods and servicesallowances. Companies continue to reduce these items to reflect the growingtrend to have their data customized for their policies. For example, if thecompany provided transportation in the past and purchased standard vendorcost-of-living data, then they were overcompensating for transportation, asit’s also in the cost of living data.

In addition, new allowances have beendeveloped that reflect that, for many countries, expatriates can become bettershoppers over a six-month period versus the old allowances that assumed anassignees never became familiar with their locations. In the United States, forexample, when you move from region to region, you can’t find all the samebrands, so you learn to substitute for like-quality at a better price. These newallowances assume that the assignee makes some of these brand substitutions. Infact, this index has become the new standard and all companies startinginternational operations are using these allowances. One vendor has termed thesethe “EPI” or “Efficient Purchaser Index,” and in the past year haschanged this to be the “Standard Index.”

The final area of significant change isthe deduction of a state hypothetical tax. Under a home-country compensationapproach, the assignee is held to a hypothetical tax, which theoreticallyrepresents the tax that he or she would have paid in the home country, and thecompany will pay all actual taxes. Historically, when an assignee went onassignment, it was likely that he or she wouldn’t have to file a state taxreturn (dependent on their home-state laws). As there was no actual return, most companies would charge the assignee only a federalhypothetical tax and allow the assignee to keep the benefit of no state taxwhile on assignment.

TaxReimbursement State Hypothetical Tax

 Yes,based on company state22.7%20.5%
 Yes,based on assignees state18.9%46.1%

With the latest survey data, it’sclear that this is a benefit that is disappearing. Currently only 22.8 percentdon’t charge a state hypothetical tax, and of that percentage, 43 percent areconsidering charging it, so we believe this trend will continue. 

What factors are driving these trends?
The main factor is companies’ need tocut costs and still be fair to their assignees. Many of the changes that haveoccurred still are within the philosophy of the home-country system, so thatcompanies are viewed as keeping to the same approach.

However, change isn’t easy andcompanies have had to move slowly to ensure that they have a package that canstill attract and retain expatriates. Cost containment is important, but if youend up with a policy that no one is willing to accept, then you have a muchgreater problem.

The trends are also happening becausethe reason for assignments has been changing. In the past, most assignments werefor senior management to set up operations. Today, all levels of employees arebeing asked to take assignments, so the needs of the assignee have changed asthe demographics of the expatriate population have changed. 

What do you think is or will be theimpact of some of these trends?

As financial incentives are decreasing,companies need to focus on other motivators. There’s a big movement to providemore formal selection and repatriation programs. Selecting those assignees whohave the greater chance of success and properly planning for repatriation willminimize the need for current financial incentives in exchange for futureadvancement. Unfortunately, this isn’t an easy task, and will requirehigh-level support in any organization. 

What’s considered “best practice”in the area of expat compensation right now?
Best practice is whatever works foryour company. Companies all seem to be looking for the answer that will solveall the issues, but unfortunately, to date, no one has found it.

Expatriate compensation is very muchtied into your corporate culture. Some systems that work great for one companyfail for another. The countries you’re in, the reason for your assignments andthe demographics of your population are all considerations when you determinewhat “best practice” is best for your company. 

What are leading edge companies doingin the area of expat compensation?
Leading companies are much more focusedon the selection and repatriation, as mentioned earlier, but also on assignmentpreparation. Many more companies are providing cultural training, languagetraining and destination services to help the employee and accompanying familymembers to truly be prepared.

Companies are providing a much greaterfocus on the family through the use of spousal allowances, house-hunting tripsthat include teenage children and special provisions for single assignees. Thegoal is to help the entire family acclimate to the location. 

What’s the biggest challengecompanies face in designing and implementing compensation programs for expats?Is that challenge likely to increase ordecrease?
The biggest challenge is finding theright mix of short-term financial incentives and long-term career enhancers.With the continued focus on cost, this challenge will increase in complexity aswe deal more with dual-career issues, divorced families, an ever-increasing mixof nationalities being asked to take assignments and the different expectationsthey’ll have.

That means companies need to have agreater focus on measuring success and return on investment. The old mindset offocusing on what we need to pay someone to get them to go will be replaced withwhat long-term value the assignment will provide to the individual and thecompany.

Workforce, September 1999,Vol 78, No 9, pp. 40-46  SubscribeNow!

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