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XI. Expatriate Pay
Multinationals operate, by definition, in many nations and segment their
workforces into subgroups based on home country.
Employees temporarily working and living in a foreign country are called
expatriates (or “expats”).
oExpatriates who are citizens of the employer’s parent or home country and living
and working in another country (e.g., a Japanese citizen working for Toshiba in
Toronto) are called parent-country nationals (PCNs).
oExpatriates who are citizens of neither the employer’s parent country nor the
foreign country where they are living and working (e.g., a German citizen
working for Toshiba in Toronto) are called third-country nationals (TCNs).
oLocal country nationals (LCNs) are citizens of a foreign country where the
parent employer operates (e.g., a Canadian citizen working for Toshiba in
Toronto).
Hiring LCNs has advantages.
oLCNs know local conditions and have relationships with local customers,
suppliers, and government regulators.
oThe company saves relocation expenses and the other often substantial expenses
associated with the use of expatriates.
oIt also avoids concerns about employees adapting to the local culture.
oEmployment of LCNs satisfies nationalistic demands for hiring locals. Only
rarely do organizations decide that hiring LCNs is inappropriate.
Expats or TCNs may be brought in for a number of reasons.
oThe foreign assignment may represent an opportunity for selected employees to
develop an international perspective
oThe position may be sufficiently confidential that information is entrusted only to
a proven domestic veteran.
oThe particular skills required for a position may not be readily available in the
local labor pool.
Exhibit 16.18 catalogs a number of reasons for asking employees to take work
assignments in another country.
Designing expatriate pay systems is a challenge. The high cost of expatriate
assignments must be offset by the value of the employee’s contributions.
A. Elements of Expatriate Compensation
Exhibit 16.19, is a shopping list of items that can make up expatriate
compensation.
The list includes everything from household furnishing allowances to
language and culture training, spousal employment assistance, and rest and
relaxation leaves for longer-term assignments.
Usually such lists are organized into four major components:
oSalary
oTaxes
oHousing
oAllowances and premiums
Salary
oThe base salary plus incentives (merit, eligibility for profit sharing, bonus
plans, etc.) for expatriate jobs is usually determined via job evaluation or
some system of “job leveling.”
oBeyond salaries and incentives, the intent of the other components is to
help keep expatriate employees financially whole and minimize the
disruptions of the move. This means maintaining a standard of living
about equal to their peers in their home or base country.
oThis is a broad standard that often results in very costly packages.
Taxes
oIncome earned in foreign countries has two potential sources of income
tax liability.
With few exceptions, foreign tax liabilities are incurred on
income earned in foreign countries.
The other potential liability is the tax owed in the employee’s
home country.
oThe United States has the dubious distinction of being the only developed
country that taxes its citizens for income earned in another country, even
though that income is taxed by the country in which it was earned. Most
employers pay whatever income taxes are due to the host country and/or
the home country via tax equalization.
Taxes are deducted from employees’ earnings up to the same
amount of taxes they would pay had they remained in their home
country.
oThe logic here is that if the employee kept the windfall from being
assigned to a low-tax country, then getting this person to accept
assignments elsewhere would become difficult.
Housing
oMost international companies pay housing allowances or provide
company-owned housing.
oExpatriate colonies often grow up in sections of major cities where many
different international companies group their expatriates.
Allowances and Premiums
oCost-of-living allowances, club memberships, transportation assistance,
child care and education, spousal employment, local culture training, and
personal security are some of the many service allowances and premiums
expatriates receive.
oThe logic supporting these allowances is that foreign assignments require
that the expatriate:
Work with less direct supervision than a domestic counterpart
Often live and work in strange and sometimes uncongenial
surroundings
Represent the employer in the host country
oThe size of the premium is a function of both the expected hardship and
hazards in the host country and the type of job.
B. The Balance Sheet Approach
Most North American, European, and Japanese global firms combine
these elements of pay in a balance sheet approach.
oIt is based on the premise that employees on overseas assignments should
have the same spending power as they would in their home country.
oTherefore, the home country is the standard for all payments. The
objective is to:
Ensure mobility of people to global assignments as
cost-effectively as feasible
Ensure that expatriates neither gain nor lose financially
Minimize adjustments required of expatriates and their
dependents
oNotice that none of these objectives link (explicitly) to performance.
oExhibit 16.20 depicts the traditional balance sheet approach.
Home-country salary is the first column. A person’s salary (based
on job evaluation, market surveys, merit, and incentives) must cover
taxes, housing, and good and services, plus other financial obligations
(a reserve).
The proportions set for each of the components in the exhibit are
norms (i.e., assumed to be “normal” for the typical expatriate) set to
reflect consumption patterns in the home country for a person at that
salary level with that particular family pattern.
The next building block is the equivalent costs in the host
country where the assignment is located.
The expatriate bears the same level of costs as at home. The
employer is responsible for any additional costs.
However, equalizing pay may not motivate an employee to move to
another country, particularly if the new location has less personal appeal.
oTherefore, many employers also offer some form of financial incentive or
bonus to encourage the move. Most U.S. multinational corporations pay
relocation bonuses to induce people to take expatriate assignments.
If gaining international experience is really one of the future
competencies required by organizations, then the need for such bonuses ought
to be reduced, since the expatriate experience should increase the likelihood of
future promotions.
oEither the experience expatriates obtain is unique to each situation and
therefore not transferable or companies simply do not know how to value
it.
oResearch reveals U.S. expatriates feel their U.S. organizations do not
value their international expertise.
oAnother way to look at it is that the employee takes a risk going overseas.
Near-term promotion opportunities may be lost.
oWhile international experience could have a handsome payoff in later
promotions for some, this payoff is not certain and not true for all.
Alternatives to Balance Sheet Approach
oNegotiation simply means the employer and employee find a mutually
agreeable package.
The arrangements tend to be relatively costly, create
comparability problems when other employees are asked to locate
overseas, and need to be negotiated with each transfer.
oAnother alternative, localization, or local plus, ties salary to the host
country’s salary scales and provides some cost-of-living allowances for
taxes, housing, and dependents.
The allowances tend to be similar to those under the balance
sheet, but the salary can vary with the location.
oWhile the balance sheet approach ties salary to the home country, the
modified balance sheet ties salary to a region (Asia-Pacific, Europe, North
America, Central America, or South America).
The logic is that if an employee of a global business who
relocates from San Diego, California, to Portland, Maine, receives
only a moving allowance, why should all the extras be paid for
international moves of far less distance (e.g., from Germany to Spain)?
Another common modification is to decrease allowances over
time. The logic is that the longer the employee is in the host country,
the closer the standard of living should come to that of a local
employee.
oThe lump-sum/cafeteria approach offers expats more choices.
This approach sets salaries according to the home-country
system and simply offers employees lump sums of money to offset
differences in standards of living.
For example, a company will still calculate differences in cost of
living, but instead of allocating them housing, transportation, goods
and services, and so on, it simply gives the employee a total
allowance.
oFinally, a company can consider using fewer expatriates and more local
country nationals.
Such a strategy has many advantages, including lower cost, and
greater familiarity with the aspects of the business environment unique
to that country.
Another advantage is that such a strategy can be combined with a
strategy of greater integration of talent into the career planning and
development system.
Greater use of third-country nationals (TCNs) can also fit this
strategy. TCNs can be less expensive if they come from countries
having lower compensation levels.
C. Expatriate Systems → Objectives? Quel dommage!
When talking to experts in international compensation, the complexities
of taxes, exchange rates, housing differences, and the like become clear.
oWhat one does not hear is how the expatriate pay system affects
competitive advantage, customer satisfaction, quality, or other
performance concerns.
Expatriate pay systems do emphasize maintaining employee purchasing
power and minimizing disruptions and inequities.
oBut the lack of attention to aligning expatriate pay with organization
objectives is glaring. Sadly, the major innovation in expat pay over the
past decade seems to have been to relabel expats and TCNs as
“international assignees.”
The expatriate pay must be sufficient to encourage the employee to take
the assignment yet not be so attractive that local nationals will feel unfairly
treated or that the expatriate will refuse any future reassignments.
oThese systems also presume that expats will be repatriated to their home
country. However, the relevant standard for judging fairness may not be
home-country treatment.
oIt may be the pay of other expats, that is, the expat community, or it may
be local nationals.
Employee Preferences
oBeyond work objectives, costs, and fairness, an additional consideration is
employees’ preferences for international assignments.
oFor many Europeans, working in another country is just part of a career.
Yet for many U.S. employees, leaving the United States means leaving the
action.
They may worry that expatriate experience sidetracks rather than
enhances a career.
oEmployees differ in their preferences for overseas jobs, and preferences
can vary over time. Research inform us of the following:
68 percent of expatriates do not know what their jobs will be
when they return home.
54 percent return to lower-level jobs. Only 11 percent are
promoted.
Only 5 percent believe their company values overseas
experience.
77 percent have less disposable income when they return home.
Only 13 percent of U.S. expatriates are women. (Yet 49 percent
of all U.S. managers and professionals are women).
More than half of returning expatriates leave their company
within one year.
XII. Borderless World → Borderless Pay? Globalists
Some corporations, particularly those attempting to become “globally integrated
enterprises,” are creating cadres of globalists: managers who operate anywhere in the
world in a borderless manner.
oTo support the global flow of ideas and people some companies are also designing
borderless, or at least regionalized, pay systems.
oOne testing ground for this approach is the European Union.
oOne difficulty with borderless pay is that base pay levels and the other
components depend too much on differences in each nation’s laws and customs.
Focusing on expatriate compensation may blind companies to the issue of
appropriate pay for employees who seek global career opportunities.
oIgnoring these employees causes them to focus only on the local operations, their
home country pay, and devote less attention to integrating operations in global
firms.
oIt is naïve to expect commitment to a long-term global strategy in which local
managers have little input and receive limited benefits.
oParadoxically, attempts to localize top management in subsidiaries may reinforce
the differences in focus between local and global management.
