Avoiding Tax Traps with Short-Term Assignments

Posted on August 13, 2009 by | 4 comments

Claudia HoweAuthor:
Claudia Howe – Global Mobility Tax, LLP

Has anybody heard about the magic 183 days?  So, if you stay in the host country for less than 183 days, you don’t have to pay tax in that country, right?  … right?  Well, actually the answer is:  sometimes.

Many folks will remember the 183-day rule, but often they do not quite know why or how.  But it sure lulls many international short-term business assignees (and their managers) into a false sense of security that as long as they are in the other country for less than that magic number of days, thinking they will be exempt from that country’s tax.  Let’s step back.

Tax Treaties Help Prevent Double Taxation

Tax treaties come into play when two countries want to tax the same income leading to the dreaded “double taxation.”  As the world has become smaller and more and more people are conducting business in countries other than their home, these folks find themselves in a position where they may be required to pay tax in both countries under the domestic law of each country.  For example, a UK employee goes to the US for a four-month project.  The UK will tax her on her world-wide income by virtue of being a tax resident in the UK.  The US federal government will want to tax her US source income because she has “effectively connected income.”

How Tax Treaties Work

Tax treaties provide that if certain conditions exist, the person is not taxable in the foreign jurisdiction, in this case the US.  Beware, each treaty is worded differently, but in general, the three main treaty conditions for an individual employed in the home country, and claiming exemption from tax in the host country under Article 15, the Dependent Services article, are:

  1. The employee does not exceed 183 days in the host country.
  2. The remuneration is paid by the home country entity (home payroll).
  3. The remuneration is not charged back to an entity in the host country.

As mentioned above, be careful to read the exact wording in each treaty to evaluate exactly what it says – there are variations on the theme.  For example, the 183 days could be in a calendar year, fiscal year, or in a rolling 12 months. The US has concluded numerous treaties and neatly lists them on the IRS website.   The UK also has a list.

The Fourth Requirement (in some countries)

Over the past few years, another hurdle to using the treaty has crystalized itself, also know as the “economic employer” approach.   The term “employed” or “employment” as stated in Article 15 had not previously been defined, until the OECD (Organisation for Economic Co-operation and Development) stated that substance trumped form.  This means that even if the person is legally employed by the home country, the entity that is receiving the benefit of the services, namely the host country entity, could be construed to be the real employer and therefore the Article would not be useable to exempt the income from tax in the host country.  The US has not adopted this approach as of yet, but many of the European countries that follow the OECD model treaty have.

Our friend from the UK on the 4 month assignment remains on UK payroll, spends less than 183 days in the US during any 12 month period (even vacation days not related to the assignment count), and her company does not cross-charge her compensation cost to any US entity.  So, is she off the hook?

State Tax Implications

Not completely.  The treaty in this case will enable our UK friend to be exempt from US federal taxes, but since she is working in the beautiful (and broke) state of California, which does not accept any treaties concluded by the US federal government, she will still be subject to California tax, regardless.

Social Tax Implications

Our friend also has to make sure that her employer has applied for a certificate of coverage under the US/UK totalization agreement to exempt her from US social taxes (more on that another time).

Foreign Tax Credits

Even if the conditions for an exemption from the host country tax are not met, the treaty can still be helpful in avoiding double taxation:  the income may now be taxable in the host country, but under the Relief of Double Taxation article (contained in most treaties), the home country must grant a credit for taxes paid in the host country, up to the amount of tax that would have been paid in the home country on that same income.   This might also apply in cases where no treaties exist.  Keep in mind, though, that in some countries, the practical requirements for claim a foreign tax credit are so complex that for small amounts, it may not even be worth the bother.

Summary

So, what should you, an HR professional, faced with the news of a short-term assignment and, the manager’s famous last words are: “we will make sure it’s less than 183 days,” do?

  1. Check the host country’s domestic law for when a person will become taxable.
  2. If taxable, check if the home and host country have a treaty and then find the latest version of the treaty (not the one you printed 5 years ago and … “it’s gotta be somewhere in this drawer”).
  3. Request a detailed travel schedule for 12 months prior to the assignment from the employee to understand how much time he or she has already spend in the host country for any reason (vacation, holiday, trade shows, business trips, etc.).
  4. Read all the provisions of the treaty carefully.
  5. Find out from the manager and your finance team if the compensation will indeed remain in the home country and will not be charged to the host entity or a client in the host country.
  6. Find out if the host country has adopted the “economic employer” approach.
  7. Are there any other taxing jurisdictions that you need to consider (state/province/social tax, etc.)?
  8. Whew – I am getting tired just writing all these things. . . . .

Unless you have checked all this out, you cannot rely on the famous 183 days.  And don’t forget the reporting and filing requirements for each jurisdiction!  You may want to call your favorite global mobility tax professional to assist with all of the above and to co-develop the options for the assignment step by step so you can articulate the risks and options to that manager and to your management.

More information on Claudia:

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Posted in Expatriate Taxation, Expatriates, Global Mobility Services, International Expertise

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Россия – Questions and Answers on Labor and Employment Law in Russia

Posted on August 12, 2009 by | 3 comments

mariblack3Author:
Mariana Villa da Costa – Littler Mendelson

Are you doing business in Russia?  Need help to understand the basics of Russian Labor and Employment Law?  This post will provide you with a basic understanding of how to employee staff and operate your business in Russia.  I will also highlight some key requirements that every employer needs to know.

Russia has a labor code that is extremely employee-friendly, as compared to other countries, such as the U.S.  For example, did you know:

  • Almost everything in Russia must be done formally and on paper;
  • Contracts are normally for an indeterminate term – fixed-duration employment contracts are almost unheard-of;
  • It is very difficult to terminate an employee; and
  • Any employee, without regard to seniority or nationality, is free to leave the company after just two weeks’ notice and has the right to work for a competitor immediately.

What is the main source of labor and employment law in Russia?

The Labor Code is the main codified statutory act and it governs the relationship between employees and employers of all types.

The parties to an employment relationship cannot contract differently from what is imposed by Russian labor law.  Therefore, if any provision of the employment agreement harms or makes the employee’s situation worse it will be considered invalid under the Labor Code.

Employees are entitled to minimum guarantees and protections that are mandatory and cannot be altered, even if the employee allows the employer to do so.  This allows the employees to have a bargaining power normally not found in the many countries.

Who is an employee? And an employer?

An employee is a natural person who enters into an employment relationship with a an entity/natural person for the personal execution of work, with an specific remuneration and under the employer’s subordination.

An employer is a natural person or a legal entity that is an employment relationship with an individual.  It must provide the employee with work specified in an agreement and it must ensure that the labor conditions are adequate and legal.  Furthermore, the employer pays remuneration on a regular basis.

Does a foreign employer need to have a local entity in Russia to employ local workers?

Russian law does not require a foreign employer to set up a local entity in order to employ workers in Russia.  Individuals can be employed by a company which is incorporated in a country other than Russia and has no representation in Russia. However, a signed employment contract between a local worker and an entity having no representation in Russia still will be guided by Russian law as the main place of work is Russia.  And, a foreign entity might be considered to have a Permanent Establishment (PE) in Russia, which could have profound corporate tax consequences.

Are employment contracts necessary in Russia?

Yes. Under Russian law, an employment contract is necessary and should be executed in writing.

However, if the company fails to have a contract, the employment relationship will still exist and be valid, and it will be considered to have existed upon the actual commencement of work.

In this case, the employer is obliged to conclude an employment agreement within three days of the employee’s actual commencement of work.  Therefore, an employment contract not executed in writing still is considered concluded and thus binding, effective and enforceable if the employee has commenced work with the employer’s knowledge.

In general, employment agreements in Russia are for an indefinite term.  A fixed-term employment agreement (for up to five years) may be concluded only in limited circumstances (for example, temporary positions, or temporary replacement of an employee).

Are there specific terms that every employment agreement should have?

Absolutely!

Besides basic information for employee and employer, such as name and taxpayer identification number, every Russian employment agreement should include:

  • Employee job title; occupation; the specific type of work the employee is to perform;
  • The place of work, and whether the employee is hired to work in the organization’s branch, representative office or another detached structural unit located in another area;
  • Start date and, if the agreement is for a fixed-term, the effective term of the agreement and the circumstances serving as grounds for why having a fixed-term employment contract under the Labor Code or other federal law;
  • Compensation and benefits;
  • Working hours and leisure hours;
  • If necessary, the terms and conditions defining the nature of work (mobile, traveling, en route, or other kind of work); etc.

Can we prepare the contract in a different language than Russian?

Russian, as the official language of the Russian Federation, must be used by all companies in their employment agreements, regardless of their ownership structure.

However, if you are sending foreign employees to work in Russia,  in practice, the employment contract will also be signed in the fluent language of the foreign employee. That will guarantee that the individual has a clear understanding of rights and responsibilities under the agreement.

How must salary payments be made in Russia?

Salary in Russia must always be paid in Russian currency (rubles).  Employees should be paid not less than twice per month, and must receive at least the minimum monthly wage established by law.

Many foreign companies tend to pay the employees in a currency different than the Rubles.  This is considered a violation of Russian law which the authorities deem discriminatory.

What else do I need to know about employment regulations in Russia?

In addition to the specifics I mentioned above, you also should know about the following if you have employees in Russia:

  • Employment contracts may be terminated only for certain reasons. Dismissal should be effected in strict compliance with the procedures established by law; failure to follow these procedures may serve as grounds to prove the dismissal to be unfair.
  • Russian labor law is bureaucratic, and thus employers are required to keep a large amount of internal documents and closely follow the procedures stipulated by law which also require execution of various documents.
  • Background checks and medical examinations are mandatory for certain jobs, while for other jobs, requesting such information on the applicant or employee might constitute invasion of privacy.
  • Noncompetition agreements, and customer and employee nonsolicitation agreements, are generally not enforceable in Russia.
  • Discriminatory conduct may constitute a criminal offense;
  • The employer in most cases acts as taxpayer or a tax agent.
  • To obtain certain (extended) rights to the intellectual property created by the employee, the employer should undertake certain actions within a limited time span.
  • The employer should not impede employees meetings and strikes, and lockout is prohibited.
  • Workplace safety regulations require special training of employees, certification of workplaces, investigation of workplace accidents, etc.
  • The employer should not impede employees meetings and strikes, and lockout is prohibited.
  • Sale of business (shares, assets of the company) does not generally constitute ground for dismissal.
  • Maintain an ongoing dialogue with employees to build loyalty. The ethical and moral aspects of employment are considered very important in Russia.
  • Be aware that the Russian labor code applies to all types of employees from all nationalities.
  • Initial recruiting processes are crucial, since it is very complicated to dismiss an employee.

This posting is intended to provide a brief overview of labor and employment law in Russia.  It is not intended as a substitute for professional legal advice and counsel.  Please post your questions and comments!

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Posted in International Employment Law

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Can’t You Just Convert the Currency?

Posted on August 10, 2009 by | 9 comments

Chuck Csizmar – CMC Compensation Group

It is human nature to look for simple solutions to perplexing problems.  Simple avoids confusion, keeps you “on message” and helps create greater employee awareness and appreciation of programs and policies. However, when you are dealing with the diversity and complexity of international compensation it is just not that easy – nor should it be.   For those seeking the simple life it can be difficult to understand and accept that each country operates in a different environment from the next.

Perhaps because of its long history of isolationist tendencies, or perhaps due to a bit of Yankee arrogance, but US managers tend to struggle with the challenge of this concept more than other players on the global scene.

For the most part US Managers do not want to hear that pay levels in Finland, or Argentina or Tunisia are different from the US.  They would rather treat everyone the same, call it globalization and consider themselves a one-world player.  Many push an agenda of simplicity that is in fact a misleading distortion, will be a costly strategy to implement and its results will more than likely irritate key talent within their workforce.

Consider the senior manager who simply wants to convert a foreign national’s salary into US dollars – based on a concern with what they call “internal equity”?  The assumption is that everyone pays approximately the same for an “XYZ Manager”.

Other considerations:

  • If simple conversion was a viable approach, why do we not see such formulae prominently displayed by salary survey providers?
  • Employees will be skeptical of the simplistic approach, as in their mind too many local realities would be ignored in favor of what is perceived as the Company somehow saving money
  • Lacking a strong correlation you will either needlessly increase your compensation costs, or under-value your employee talent and risk disengagement – or worse

I once developed a formulaic approach that explained to a COO why he could not (should not) establish internal equity between the US and the UK by simply converting GBP into USD.   I factored in a host of elements, including local taxation, competitive pay levels, incentive practices, cost of living, required social charges, benefit costs, etc. to make my case.   My point was that a simple conversion would be a distortion of the economic realities that drive pay levels in both countries.

Sad to say, but the explanation was ignored and the COO, though he acknowledged the logic of my argument, continued to prefer a simple conversion to establish relative values in his own mind.

To operate successfully on a global basis management needs to understand, to truly believe that each country operates like a separate and sovereign national entity, with distinct economies, taxes, competitiveness, employment laws, culture, statutory benefit requirements, etc. that make a 1:1 comparison with any other country a distortion that will cause you to either over spend or under spend your reward dollars.  Either result should be avoided.

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Posted in Compensation, Global HR Expertise, International Expertise, Leadership Development

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How Big Must Your Relocation Provider Really Be?

Posted on August 2, 2009 by | 10 comments

edit-Alan Biz Mug Shot 1The Forum recently received a great question via our “Ask the Expert” feature:

“We are a “young” international and domestic relocation management company but our staff has many collective years of experience in the industry. We are having a hard time breaking into the corporate market.  It seems that HR Departments do not want to give us the opportunity to present our services.  How can a small company like ours work itself into the international employee relocation market within a corporation?”

We can truly empathize with this situation, which is one we’ve often seen.  This is especially true in today’s economic environment of slashed budgets and significantly reduced transfer and assignment volume.  Overworked and highly stressed company staff are unlikely to spend precious time, now, to hear about services they’re not currently using.

The reader suggested that the “big” global relocation service firms receive a better reception from prospective clients than do the smaller and newly established firms.  In our experience, this is basically true.  The reader also stated that many of the smaller firms have a stronger service orientation and can be much more responsive and flexible than the big well-established providers.  Indeed, we have seen cases of this too.  It’s possible to demonstrate that smaller firms made up of seasoned experts, but with lower operating overhead and more flexible processes, can be quite cost competitive while providing high quality services as well.

So why are the small firms having difficulty “breaking in”?  What is it that the big firms offer as “competitive advantage”, often successfully, that the small firms do not?

Big firms have a large footprint.

They can point to wholly owned offices and affiliate relationships in a wide array of countries.  This can be a huge issue for corporations that want to have local touch points for their employees and direct knowledge of local environments readily available.  The small firms often don’t have such a geographic footprint and might not be sure how to establish one.

Big firms have globally experienced staff.

Frequently, their staff come from a variety of countries, have lived and worked in multiple countries and speak a number of languages.  They also frequently have individuals with prior international assignment policy development and program management experience on their teams.  This engenders great credibility in the eyes of the corporate buyer.

Big firms leverage their extensive experience.

 They have managed programs covering multitudes of assignees across a variety of countries and industries.  The corporate buyer is far more impressed with stories about “been there, done that” than with honest admissions of “haven’t been there, haven’t done that — yet”.  Corporations tend to be risk adverse and shy away from “being the guinea pig on whose dime the new service provider learns the business”.

Big firms have technology.

They offer sophisticated state-of-the-art, web-enabled capabilities for projecting total assignment costs, managing reimbursements, communicating with clients and their transferees, interacting online with data providers, providing country-specific information, and tracking and reporting expenses.  Many smaller firms do not have such (expensive) technology and, occasionally, cannot demonstrate expertise in managing the complex requirements of expense management and tracking across multiple countries and pay-points.

Big firms have strong relationships with key service providers.

They know and work with a variety of firms providing assignment cost of living and housing data, international tax experts, destination country employment counsel, cultural and language training firms, etc.  These pre-existing working relationships mean single point of contact and seamless service provision that is extremely attractive to corporate clients.

Big firms invest in polished marketing campaigns.

They advertise, host and sponsor conferences, deliver keynote presentations, conduct webinars, host booths at SHRM and ERC conferences, develop highly polished web sites, publish surveys and articles, etc.  This does not, of course, make the big firms better at providing services but, at the end of the day, polished marketing does impress prospective clients and creates name recognition.

Big firms have the advantage of name recognition.

 Finally, there is the cliché that no procurement professional was ever fired for hiring a well-known “big name” even if there was a service breakdown later. Let’s face it, in many corporations there is a built in bias toward hiring only name firms and avoiding the perceived risk (accurate or not) of hiring unknowns.

So what can a small/new firm do?

Emphasize responsiveness, service orientation and flexibility.

Probably the two most critical attributes in which to excel and compete are outstanding service and price.  Responsiveness, flexibility and competence are critical in what, I think we would all agree, is a service industry, after all.

Build internal international expertise.

This should be done via hiring highly experienced, preferably well-known, and globally networked staff and through education such as the SHRM GPHR and ERC GMS programs.  Travel and learn from first-hand experience about assignee destinations around the world.  External consultants also can be quite helpful in this area.

Invest in technology.

The ability to project and track costs, communicate with management, transferees and other services providers, e.g. the client’s international tax firm, and manage data is critically necessary.

Develop and nurture relationships with complimentary service providers.

This must include in-country providers and data, immigration, tax, language training and cultural training firms, among others.

Create name recognition through a well-focused and professional marketing campaign.

Demonstrate how the firm should be perceived as a trusted advisor and capable service provider. Create a public presence in the industry.

Delight your current clients and enlist them as your champions

When courting new business, make use of recommendations and testimonials from satisfied clients.  Ask your clients for leads and to make “warm” introductions.  Word-of-mouth recommendations are priceless.

Direct business development efforts towards smaller firms.

They tend not to have the budget for, and less of a bias toward, the big firms. It’s also relatively well known that the big firms don’t give their best attention to small accounts. Go where there IS business AND less competition.

Implement a “Blue Ocean” strategy.

There are many capable providers of  global mobility services, large and small.  The market, especially in the current economic scene, may actually be over-supplied with providers.  Competition is fierce.  We would suggest that small firms specifically target prospects whose mobility needs – geographically and transfer types – best match the firm’s geographic footprint and operational strengths.  Approach those firms that are not being approached by the multitudes of providers.

Seek out the advice and counsel of those with depth of experience and expertise.

We believe that seeking guidance and mentoring from experts can be quite worthwhile.  Professionals with prior “in-house” corporate experience, as buyers of external global mobility services, across a variety of industries are especially valuable.

We again thank the reader who submitted the question.  Now we invite our readers to share their views.  Please let use know your thoughts via comments on this post.

More about Alan:

On LinkedIn

Contact Alan

LOF Solutions

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Posted in Expatriates, General, Global HR Expertise, Global Mobility Services, International Expertise, Relocation

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Report to Our Readers – July, 2009

Posted on July 29, 2009 by | 2 comments

heaps_warren1Back in April of this year, we launched the International HR Forum Blog.  It was a bit of an experiment.  None of us were experienced bloggers.  Some of the authors knew each other and had worked together; some met for the first time virtually during our initial conference call.  But we were all very excited to try a bit of the latest technology to reach out to the broad HR community and share our expertise and passion for international human resources.

After just over three months, we could not be more pleased with the results!

The Forum is catching on!
The Forum has had over 12,000 page views since its inception.  We are averaging between 100 and 200 page views a day, and over 3,000 page views a month.  We are very pleased with these results.

We Are A Global Community
The most fascinating aspect of being involved with this blog has been the diverse community that participates.  You can see this for yourself – just check the different flags in the Feedjit box, or for a real treat, click on the box and look at a whole page of feed statistics.  Depending on the time of day, you will see an array of flags from every region in the world.  In the morning here on the east coast of the US, I notice the visitors from Europe, Africa and the Middle East.  During my evening hours, the Asia/Australia contingent is there.  And during the workday, many of my colleagues in the Americas check in.

It’s impossible to list all of the countries from which we’ve had visits – the posting would be too long.  But as I write this post, there have been visits from at least 15 different countries in the last several hours.  We’ve had visitors from developed countries in Western Europe, Canada, Australia, etc.  But equally, we have had excellent participation from developing markets such as Vietnam, Indonesia, Gabon, Nigeria, India, Brazil and more – even Mongolia!

It’s this diversity that makes the blog experience  so rewarding for us.  To know that we are reaching an audience from so many places, large and small, is more than we ever expected.

We Have Almost 125 Subscribers!
In the short time we’ve been writing, almost 125 people have subscribed to the blog, automatically receiving our posts via email or their RSS reader of choice.  This is especially gratifying to us, since it sends us a message, as authors, that you value our content, and want to be kept informed about it.

Our Connections
Many of you follow our content via postings through various LinkedIn Groups.  We have arranged with several of the group owners to automatically post our blogs as news articles in the groups.  Similarly, several other HR and non-HR related sites have picked up our feed for the benefit of their readers; we’ve listed these partners in the Other Resources section on the blog.  If you are a group owner or blogger and would like to feature our feed, just let us know.

Going Forward – Get Involved!
The experiment that has evolved into the International HR Forum is a success, and we are committed to continue blogging to provide you, our readers, with the most interesting and relevant content.  You can help us.

Blogging is just another type of communication, and it’s most rewarding when it’s two-way.  We invite you – encourage you – to make use of the comments feature on the blog.  Let us know what you think, if you agree or disagree, if you think our content is terrific, and how we can improve it.  Offer suggestions for topics, guest bloggers, great resources to share, etc.  The more active the community of readers becomes, the more useful the blog will become as well.

Help us spread the word – share the blog with your friends and colleagues. You can just tell them, or use the Share link to send them a link to one of our postings.

Thanks
Finally, on behalf of all of the authors, we would like to express a special thank you to each of our readers, for supporting this initiative.  Without you, we would not exist.  And because of you, we are thriving.

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Posted in General, Global HR Expertise

Recalling Expats? Handle with Care

Posted on July 28, 2009 by | 2 comments

Photo Liz Perelstein (2)Author:
Liz Perelstein – School Choice International

“In recent months, companies have begun recalling expats from multiyear assignments up to 12 months early… The CEO of a Pacific Northwest manufacturer (who requested his publicly traded company’s name not be used) is pulling his European division manager home after only eight months of a two-year assignment because the business can’t continue to foot the $500,000 annual bill for his salary and living expenses.”  –Workforce.com, March 16, 2009

Education is a top priority for middle class families in every culture worldwide, and always has been.  This is true of 32,200 Tamil school girls praying before entering examinations in Madurai, Chinese families who have pinned all of their hopes and dreams on their sole child, and parents in the Northeastern part of the United States who are still, according to The New York Times blog The Choice (July 18), willing to spend $40,000 on college placement counselors for their children despite the economy.  This results in scarcity of suitable school options in major cities globally.  Even if there are vacancies in less popular schools, those that are generally considered “top tier” are overbooked no matter what the economic situation.

As a result, repatriation, which always is difficult, brings additional challenges when it is sudden and forces families to seek schooling for their children mid-year, particularly under rushed and stressful circumstances.  In addition to the logistical challenges involved in gaining admission to schools, children are excluded from extracurricular activities – the cricket team already has been chosen, as has the cast of the play – essential aspects of re-entry if they are to successfully make friends and reintegrate into their home cultures. Repatriation to one’s former home is particularly difficult, according to The Art of Crossing Cultures by Craig Storti, because expectations and reality clash.  When employees are moved home without sufficient notice, they, and their families, do not have sufficient time to process the emotional aspects of the repatriation so it is all the more important that they receive assistance with the logistics of the school search and transition, as together both aspects are quite overwhelming.

Regardless of the country of repatriation, employers can provide:

  • Accurate and easy to use information in the form of books, research, websites and web based tools;
  • Transition assistance so that families understand that the former school may no longer be the best school for a child given the wealth of experiences s/he has had overseas as well as the curricular differences;
  • Expert help in identifying and getting into schools that meet the unique needs of each child at this point in time;
  • Specialized assistance for children with special needs, gifted children, and those seeking schools in particularly competitive locations.

This is something that companies must think about if their goal is to develop policies that will serve them in good times as well as bad.  Benefits of good support when employees with children are recalled are rapid employee productivity, increased loyalty, talent retention, willingness to take future assignments, and improved morale, which includes encouraging other employees to undertake assignments when needed.

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Posted in Expatriates, Global HR Expertise

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Resourcing in Southern Africa

Posted on July 20, 2009 by | 1 comment

Imported Photos 00033Author:
Yendor Felgate – Emergence Consulting

Recessionary times have dramatically impacted the volume and level of resourcing opportunities available in Southern Africa.  Anecdotal evidence from resourcing companies we engage with or have trained over the last 6 months, suggest that in the first half of this year we have seen vacancy levels oscillate between 30 – 60% less vacancies.

The impact in Southern Africa has been uneven, with the obvious exceptions being Angola and Mozambique, where local environments and skills shortages continue to fuel resourcing opportunities.  The relatively small markets of Namibia, Zambia and Botswana have slowed, with a number of companies placing moratoriums on new or replacement hires. These markets are highly susceptible to any slowdown in the worldwide demand for commodities, even impacting governments, who tend to be the largest employers.

South Africa is by far the largest resourcing market in the region and has been similarly impacted.  The knock on of the slowdown in the region has led to increased Southern African applicants applying for South African jobs.  In turn South African companies increasingly look to apply job moratoriums in the work place, with an overt South African first policy. When speaking to companies, many are literally ‘holding on’, using natural attrition to right size their businesses.  Our sense is that this can only go so far, and that we will see a range of corporate restructuring in the South African market in the last of half of this year, despite the perceived upside of hosting the World Cup next year.  Such a dramatic market change has impacted applicants and recruitment companies alike.

Firstly this has slowed down the use of non-South Africans in the South African market, which is a big blow to encouraging Southern Africa as a region, to utilise skills co-operatively.  Our view is that companies and recruitment agencies continue to miss significant upside opportunities in the hiring of African talent, both in terms of pricing and value add.

Secondly, the South African recruitment market will go through a significant restructuring of the players offering recruitment services.  The larger companies will consolidate during this period, with some of the more adventurous ones looking to expand in the region.  Small to medium companies are under pressure, with some already closing.  In order to survive, these entities will increasingly need to come up with different customer propositions or products.

We see the market differentiating between low cost producers and the higher end players, who increasingly operate in a more consulting role, with a wider range of products or services.  This period will be very difficult for ‘traditional’ players, who want to simply ride out the storm, as margins will reduce in tandem with the recession.  This will be exacerbated by the trend of companies accessing candidate databases directly and using social networks in lieu of recruitment agencies.

The third impact will be an escalation of tension between stakeholders around what it means to employ people.  Governments will look to protect full time employment, whilst the market will intensify their search for labour flexibility.  This tension has already erupted in Namibia, with the recent banning of labour broking and the South African government is also looking to do the same.

This brings us back to the question of where next for commercial recruitment.  We have a two scenario view.  The first or low road suggests that recruitment becomes unattractive as a commercial venture with the banning of labour broking and the commoditisation of recruitment.

The second scenario is hardly a high road, but one that will benefit those recruitment companies that look to diversity their services and become low cost producers when mining their candidate IP.  This implies a significant change in current recruitment approaches, pricing and funding models.

In the short term, our sense is that a complex combination of the two is occurring currently.  None of the above in our mind necessarily benefits applicants and we think that recruitment professionalism will be increasingly under pressure.

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Posted in General, Global HR Expertise, Immigration, Leadership Development, Professional Development

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But . . . We Already Pay Competitive Wages!

Posted on July 16, 2009 by | 1 comment

Author:
Chuck Csizmar – CMC Compensation Group

What doesn’t happen when your company pays competitive wages?

You’ve read your company’s want ads and heard the pitch from your recruiters; you offer competitive wages to qualified candidates.  That’s got to be a strong hook for attracting talent, right?

Big deal.

You regularly update your country-specific pay structures based on market trends, so the opportunities you offer your employees should support your retention and motivation strategies, right?

Not enough.

Most employees presume that your company is already doing or aspiring to meet the goal of competitive pay.  After all, companies routinely advertise the practice (“we offer competitive wages”) and candidates in return expect this of potential employers.  But what happens when your goal of offering competitive pay is finally achieved?  Are employees pleased and content?  Can companies rest in their efforts to attract, motivate and retain?

I’m afraid not.

When in a situation where they’re not paying the “going rate”, management fervently hopes that employee challenges and criticisms will disappear once they reach that difficult-to-achieve target.  I say difficult because it’s not only an illusion but an expensive problem if you have a large body of underpaid employees.  And once you climb that mountain, well . . . so what?

What doesn’t happen when you offer competitive pay is that your recruitment problems have not magically disappeared, your employees won’t be satisfied and your compensation program has achieved nothing more than being average – and isn’t that a “C” grade in school?  Is that where you want to be?  Is that a practice that ensures your employees will be content to stay with you?  As far as aspirations go, it’s only middle-of-the-road.  You will find that it is not an advantage to pay the going rate, but it is definitely a disadvantage if you don’t.

Even if your company does pay “the going rate” or the norm or the competitive average (what the survey data shows), that means that approx. 50% of the companies out there are paying *more* than you.  That’s what average gets you, with half doing more and half doing less.  Is that what your company aspires to achieve?

Remember, no one leaves your company for less money – so all you’ll hear from your employees is about how so-and-so is making more money somewhere else.  And of course, employees only hear what supports their own notions – so they wouldn’t pay attention to the whole rewards package, just the specific components that confirm their opinion that your company isn’t paying enough.

The only way to avoid this scenario is if you become the premier paying company in your market / industry – and can you afford that cost?

Lest we forget, it is important to differentiate between having a salary structure (grades, salary ranges and midpoint) that provides competitive rate “opportunity” and actually paying employees at those rates.  Some may describe this as whether the company is “walking the talk”.  I recall a client who boasted that their salary range midpoints were continually adjusted to mirror market rates, but later was embarrassed to discover that their actual pay practices delivered pay levels well below their own published midpoints.  However, it did help explain the high turnover and low morale.

For their part, employees will relate to what they are being paid, not the midpoint of a salary range or other such declared “opportunity”.  To them the company’s supposed “competitiveness” is more illusion than fact; especially if they’re experienced and have been with you for awhile.  Thus the company needs to keep its focus on actual pay vs. opportunity pay.

Why do employers fail to pay the “going rate”?  Typically it is not a strategy, but a series of practices that have evolved over time.

  • For various reasons some candidates will accept a lower rate than should normally be paid for their knowledge and experience, and managers tend to view this as good news and a cost savings.  In fact it is more like putting a skeleton in the closet and hoping it doesn’t haunt you later on.  One day these same employees will change their minds.
  • Once you’ve started down the slippery slope of paying some employees below market rates the practice is soon compounded by the well-intentioned practice of internal equity.  Managers don’t want to pay similarly qualified new people more than existing employees, so the new hires are offered either below market pay or placed inappropriately in higher value jobs to get them more money (a different problem for another article).
  • Pay-for-performance systems have a hard time keeping up with the increased marketability of employees.  A minimally qualified employee hired at the minimum rate will gain knowledge and experience (and thus marketability) faster than a company’s annual merit system can recognize.  This is compounded when you have to hire a qualified worker and discover that the market requires you to pay more than what you’re paying your more experienced employees.

So, what’s the answer?  You likely won’t find management agreement to become the premier payer in your area, so you should consider instilling some flexibility into your pay practices.  You should consider targeting certain key jobs in your organization (highly skilled, difficult to replace, etc.) and make sure those jobholders are well paid for the market.

Other positions that are not as skilled and more easily replaceable you could continue with your “competitive opportunity” strategy.  Any losses would be more easily absorbed.  This approach is somewhat akin to ring-fencing your key talent, protecting them against poaching while recognizing / rewarding those with the most potential impact on your business.

So be careful when you proudly claim how your company provides competitive wages.  You may not be correct, and if so – big deal.

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Accurately Measuring the Price of a New Location

Posted on July 14, 2009 by | Comments Off on Accurately Measuring the Price of a New Location

Photo Liz Perelstein (2)Author:
Liz Perelstein –  School Choice International

One of our clients identified a new emerging economy where operating their business would save considerable money.  In this new region property, local labor, and running the plant promised to cost only a fraction of the price of similar variables in their current location.  In order to get the new plant operating successfully, they needed to move 100 families for up to three years to train local employees on their processes and corporate culture.

About to embark upon a group move of the initial families, unanticipated costs surfaced.  The company had previously implemented a policy where it moved families as locals rather than as expats.  As a result, international schools were not budgeted for the current move.  This was a good decision in the previous location. However, in the new country, local residents use private schools whenever possible.  While local private schools may not be as expensive as international schools, they are still a significant expense for a move of 100 families.

Before moving into a new country, learn about the culture of schooling and the impact to your budget.

In some countries, public schools educate the “top” local talent – only students with “problems,” or those who are unlikely to succeed in the public sector attend private school. In others, public schools have poor records of educating students. They may even have chronic union problems, facilities issues, or other structural troubles that deplete the government run educational system on an ongoing basis.  In these areas, parents may use private schools when possible and send their children to public schools only if no alternatives are available.

To identify your educational costs for a group move, picking a location where state schools are viable for local middle class (and higher) residents is a good first step.  However, it is still important to ascertain whether these will be appropriate for non-native families.  Once you have determined the overall culture of public vs. private schooling in your proposed location, compare the school systems that your families are coming from with those they are going.  Are the curricula similar or will children have a hard time adjusting in the new location – as well as repatriating – if they do not attend home national schools?  And finally, are the schools familiar with overseas children so that the transition is reasonable?  Do they work with new families to ensure that the experience will be both academically and socially worthwhile?

If schools are aware, willing, and able, a local education in expatriate destinations can be immensely profitable for many children.  But if you do not ask the right questions before the move, you may find that you have grossly underestimated your costs, or otherwise find yourself with many failed assignments.

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Managing Across Cultures

Posted on July 9, 2009 by | 2 comments

Warren Heaps photoAuthor:
Warren Heaps – Birches Group LLC

Cultural knowledge is critical when operating in today’s global business environment.  There is a wonderful new book penned by my friends Mike Schell and Charlene Solomon from RW-3 called Managing Across Cultures: The Seven Keys to Doing Business with a Global Mindset.  It’s a terrific read.

If you work with global teams, deal with people from different countries, or perhaps your company is exploring business expansion into new country markets, you will find this book extremely valuable.  Check out this interview from Fortune magazine with the authors, too.

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