Tag Archives: international hr

Global Salary Budgeting – Smart Approach or Misguided Shortcut?

Posted on August 23, 2009 by | 4 comments

heaps_warren1Author:
Warren Heaps – Birches Group LLC

It’s getting near to the time of year when companies start to draw up budgets for next year.  One of the most important numbers in the exercise is how much to budget for growth on the salary line.  Some organizations assume that making an assumption for salary growth globally based on the figures used in the headquarters country is a good solution.  After all, it’s easy to just take one number and apply it around the world.  Such an approach, however, is flawed.

Just as Chuck Csizmar explained in his recent post about comparing salaries across different countries by converting currencies, global salary budgeting needs to be done country-by-country, and taking a shortcut like the one described above is a recipe for disaster.   Here’s why.

Market Movement Varies by Country
The primary information used by HR and finance to determine salary budgets is market movement (this is a measure of how much salaries increase from one year to the next, usually from surveys) and internal economic assumptions (basically, how much can the company afford?).

Suppose your US-headquartered company decided to apply the US salary increase percentage to all of your markets overseas for a five-year period.  The graph below compares the average increases over the five-year period ending in 2008 for selected markets.

Average Pay Increases

As you can see, the average increase amounts vary a lot by market.  The difference compared to the US ranges from 7.1% (India) to almost 20% (Nigeria).  At the same time, the average in Europe is below that of the US. And that’s just comparing the averages for one year.  If you looked at the cumulative effects with compounding over the five-year period, the differences grow dramatically.

OK, I get it.  I need data for each market.   I’ll just use inflation.
Inflation data is fairly easy to get on a global basis.   You can usually find it for free on various websites, and your local finance folks will certainly have some figures for you to use as well.   They use inflation to budget price increases for your products and to anticipate the impact of price increases in raw materials and other costs of doing business for the upcoming year.   And of course, official inflation figures are produced by the government of each country in an unbiased and apolitical fashion, right?   But what does inflation, or cost-of-living, have to do with salaries?

Cost of Labor is What Matters!
Setting salaries is affected by many factors.  The absolute level of pay is certainly influenced by cost of living – countries with higher costs tend to have correspondingly higher salary levels.  But the main factor affecting salary increases – the one that drives the market movement each year – is an old rule from Economics 101. Three words.  Supply and Demand.   If you are recruiting for positions with hot skills, for example, and there is a shortage of these skills in the market, don’t you end up paying more for these recruits?  If there is high unemployment or an excess of qualified candidates, and positions are easy to fill, isn’t there considerably less pressure to raise salary levels?

Can I just use devaluation instead?
Short answer?  Nope.  Local employees are paid salaries set in local currency, and obtain their everyday good and services in the local market, in local currency.   Devaluation (or revaluation) defines the relationships between the currencies of different countries, usually with a reference to a “strong” currency such as US Dollars, Euros, Pounds Sterling or Yen.   Exchange rate changes do affect the price of goods, for example, especially imports or imported raw materials.   But these fluctuations do not fundamentally affect the cost of labor in a country.  Remember, also, exchange rates are sometimes controlled by governments to achieve other objectives.   Hardly a reliable measure of anything, really.

The Best Approach
To estimate your salary budget properly, you need to obtain data for market movement in each country, and analyze it in the context of your own organization’s situation (market position, health of the business, funds available for increases, etc.).   There are many sources for market data – everyone has their favorites (hopefully some of you are using Birches Group data).  And then you have to apply something no statistic or consultant can provide – your own judgment – to determine the right figure to use in your company.  Interpretation and analysis of the data and applying it to your company’s situation is the art of compensation rather than the science.


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Expats: Saving Money on Global Benefits, Part 2

Posted on August 18, 2009 by | 2 comments

George Bashaw

 

Author:
George Bashaw – Atlas Global Benefits

I hear snippets everyday about the economy recovering. Try telling that to your HR friends.  They are still getting pressure to cut costs and create efficiencies.  Adopting a true expat plan for benefits can create numerous efficiencies.  This blog is Part 2 in a series to help companies save money on international benefits by creating a global health benefits package specifically for expats.

Hard Cost
I am surprised every time I run into a company that does not have a global benefits package for expats.  A typical response is, “we don’t want to spend the money.”  This is a common misconception.

Did you know:

  • Expat plans are typically less expensive and more compressive than a comparable domestic plan;
  • The plans typically they do not have copays and many of the exclusions common with domestic plans;  and
  • The hard cost does not take into consideration the cost of a critical event like a heart attack or a medical evacuation and repatriation without international coverage.

Do a comparison and see where your company falls.

Efficiencies for HR
A company has three options when insuring expats:  keep them on a domestic plan and run claims through their current carrier; put them on a local (country-specific ) plan; or a specialized expat plan.  By choosing the latter, you can greatly reduce the administrative burden.  Here’s how:

  • Compliance:  Administering employee benefit plans in multiple countries creates a significant amount of compliance with local laws.  Adopting a global benefits package for globally mobile employees shifts the burden of compliance from the HR department to the insurance carrier.
  • Claims and Service:  This becomes the responsibility of the expat carrier.  It is only a matter of time before you have an employee in an assignment country on the operating table demanding payment to begin surgery.
  • Consistency in Benefits:  It is common for companies to provide expats with a local health care solution rather than one that is fully transportable around the globe.  Since benefits vary from country to country, you could end up with a disgruntled expat when they discover that one country’s benefits are richer than the next assignment.

Benefits for the Expat

  • Freedom:  Expats are on foreign assignment and their needs are significantly different than someone who is a local employee.  By nature, the expat will travel (different countries and home) and they need coverage that will follow them.
  • Productivity:  A global benefits package keeps your expat focused on their assignment.  They no longer worry about having to travel for medical care or deal with claims and medical provider issues.

Foreign Nationals
Creating a global benefits plan for non-US citizens working abroad requires some due diligence and proper communication.  The challenge is to design a plan that is integrated with any social benefits so there is no duplication. Perception of the new plan is very important.  In order to be well received, it is necessary to properly communicate the benefits to the expatriates so they are comfortable with the new private coverage as compared to their prior social system.

Use a Broker for a Complete RFP
I know this sounds self serving, but use a broker who writes international coverage.  Out of ten companies I call on, nine have one of two expat carriers. But there are more than a half a dozen carriers who provide quality coverage and it would serve you well to get a full RFP.  Second, a broker has knowledge of the market, leverage with carriers, and can match your needs with the appropriate insurance provider.  Third, most brokers have enough business to merit carrier discounts that can help negate commissions or broker fees.  In sum, make sure you are specifically insuring your risk and use a professional to facilitate the process.

I hope this helps you navigate through the complexities of expat health care options.  Please let me know your thoughts by leaving a comment.

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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.

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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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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.

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

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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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Update! Employer Mandated Health Coverage in Dubai

Posted on July 6, 2009 by | 3 comments

George BashawAuthor:
George Bashaw – Atlas Global Benefits

In early May, I wrote a blog on the Dubai Health Authority’s (DHA) efforts to implement employer mandatory health insurance.  Since my blog, the Director-General of the DHA has put the funding scheme on hold until 2010.

Instead of paraphrasing a nice article in the Khaleej Times, you may find it here if you would like more information on the topic.

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Multinational Pooling: Saving Money on Global Benefits, Part 1

Posted on June 23, 2009 by | 14 comments

George Bashaw

Author:
George Bashaw – Atlas Global Benefits

With pressure from the C-Suite, HR is walking a tightrope to reduce cost and provide equal or better benefits.  Multinational pooling is one option to consider for a company that has multiple international locations.  This blog is Part 1 in a series of suggestions to reduce cost without sacrificing the quality of benefits.

Multinational Pooling
Multinational pooling is a contract in which a corporation with two or more locations can spread insurance risk by joining a larger pool of insureds.  This contract is facilitated by a pooling network which has a network of providers in various countries. Pooling can be used to spread risk for a number of employee benefits including medical, life, and disability insurance.

Many pooling networks require a minimum of ten employees per country.  Therefore, pooling can be a great way for smaller companies to provide consistent benefits, reduce administration, and save money.

How Can Multinational Pooling Reduce Cost?
Since the pool consists of a large group, the risk is experience-rated instead of fully insured.  The nature of an experience-rated contract eliminates some of the administrative costs and margins of a fully insured plan.

Providing the experience is good (determined during due diligence), the premium may be less.  If the corporation decides to participate in a pool and the experience is favorable, a dividend payment is received at the end of the year.  If the experience is poor, it may be mitigated by stop loss insurance, or the balance will be carried forward and can be recovered by future dividends.

Additional Benefits of Multinational Pooling
Underwriting small groups is always challenging.  By pooling with a larger group, there are better guarantees, limits, and benefit offerings.  This allows smaller groups to meet a common objective: consistency in benefits. Additionally, the pooling arraignment will likely provide enhanced financial reporting, consistency in communications, lower acquisition costs, and reduce the burden on HR.

What Else?
Multinational pooling is not for everyone.  Due diligence with a few pooling networks can determine the pros and cons.  As this is a complex, technical area, it’s always best to work with a benefits professional with experience in this area.

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