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The objective of Japan Tobacco International (JTl) like many other multinationals, is to attract and retain within the company a cadre of talented individuals who will progress through the organization and eventually assume senior executive positions. However, globalization today means that executive experience has to be global and the talented individuals to which we refer therefore have to be mobile. Future leaders of global enterprises will need multi-functional and multi-cultural experience – and that experience does not come through regular stays at the local Four Seasons! JTI is attempting to develop a cadre of senior executives capable of working and living in a range of cultures.
With any gathering of HR specialists today, the #1 agenda item is the scarcity of talent. It used to be the scarcity of new-paradigm talent: those individuals displaying the competencies and behavioral characteristics that were needed for managing in delayered matrix organizations. Those principles are now under pressure – all talent is in short supply, especially talented people who are prepared to move from country to country – in fact, mobile talent makes endangered species look common!
The most frequently cited reasons for the lack of mobile employees are well known:
- two-career families (i.e., both spouses in active employment);
- the “squeezed generation” effect (i.e., baby boomers with children and aging parents); and
- non-traditional households (e.g., single parents and same-sex couples).
However, increasingly there will be other reasons for international assignments losing their cachet. Younger generations brought up with the Internet, extensive education and cheap travel will have seen or even been around the world. The sense of pioneering, the status and the high salaries that attracted prior generations are beginning to disappear. Younger managers will be harder to convince that an international career is worth the investment when balanced against other lifestyle considerations. The second effect will have a greater impact as “assignment wisdom” spreads about the price an individual might pay for an international career. Summed up, “I am grateful for the cash, the good pension and the chance to see a different country every three years; but where is home, where do I retire and where are my friends?” As employers, we will need to do more to counter this effect and we will perhaps see a return of the pre-retirement planning programs but, this time, with an international spin.
Mobile managers are scarce and will become more so. We have to try and increase the supply and do more to keep and improve the performance of those that we have! Responding flexibly to family or personal circumstances that would normally preclude or end an international career will help increase the supply. Accommodating family or personal circumstances that are affecting a manager’s performance while on assignment will also have a very favorable impact. Most multinationals will say that they have a low expatriate failure rate, meaning that the number of assignments that end prematurely for personal or family reasons is low. However, when asked how many assignments achieve the expected results, most will not be able to answer positively. The fact is that often we simply do not know what goes on in the personal lives of international assignees that can affect their performance. My firm’s philosophy is to do more for those we have and ensure that what we do is highly competitive in order to deter other suitors. This article provides an overview of how JTI attempts to achieve these objectives and the supporting rationale.
Why Have A Payroll Service Company?
The concept of a payroll service company (PSC) has been around for a long time and many companies use it as a vehicle to combat the cost of international assignments. For those not familiar with the concept, a payroll service company is a separate company used purely to employ expatriates. Located in a jurisdiction with extensive tax treaties, the PSC supplies staff to overseas markets where there are skill gaps or special managerial needs.
It recruits its staff from other countries artd charges a small administrative fee (see Figure 1 overleaf). The tax department will like the concept because it helps build a defense against “permanent establishment”. In addition, depending on t he jurisdictions involved, the PSC may help to reduce or minimize payroll taxes such as social security and income tax under an equalization program. Last, but not least, the PSC provides a catalyst for consolidating payrolls.
The PSC concept first gained our attention after we began to analyze how we were going to meet our mobile talent objectives outlined above. We needed a comprehensive approach that supported our business goals and which could be integrated with existing company programs. Cost and administrative savings. were an added bonus but not the driving force. Upon reflection, we concluded that we were not doing enough to meet the needs of, and thus develop and retain, mobile talent. In fact, we were creating bureaucracy and inefficiency . These efforts were sending the wrong signals to our international assignee population and were working against company objectives. Our analysis reached the following conclusions.
Employee Equity is Unachievable
For many years our philosophy was aimed at trying to reduce the differences between locals and international assignees in an attempt to minimize the “golden halo” effect, whereby a special group of employees with paid housing and additional compensation work alongside locally paid nationals bringing about a “them and us” culture. This did not help build a co-operative, team oriented environment and our attempts to reduce the differences did nothing to remove the perceived differences – whatever our policies indicated on the surface, underneath the divide continued.
Reality is that our people with the highest potential are international assignees. They may not always be the brightest and best but, because of their mobility, they will get to the top more easily. We are progressively admitting this and recognition is beginning to appear in policy and practice documents. Life for international assignees can be hard and involves particular problems . Those who embark should be compensated for the losses that result and have the needs that arise catered for. Recognition of this principle was a short step from deciding that we needed a special company (a PSC) to employ our international assignees, through which we could address their special requirements.
Design for Reality
In keeping with most global companies, JTI follows balance-sheet methods when developing not only compensation but also benefit programs for international assignees. There are good reasons for this – we were not always a global company. We originally had a US parent and most of our international assignees were Americans on assignment for three to five years who then returned home. This is no longer true. JTI has international assignees from 20+ locations on assignment in a further 20 locations. No one nationality prevails and the chances are that, once on the international career track, these managers will most likely move on to another location for their next assignment, so originally there was logic in keeping the expatriate in the home country benefit plan. In addition, it deferred the agony of having to address transferring the expatriate to the new country’s plan, kept him/her content by retaining at least one tie with the home country and provided the same continuing level of benefits. This was a convenient but flawed approach. Our most valued employees were forced into programs that were designed for their “stay at home” colleagues, resulting in a number of problems:
- only limited periods of foreign employment could be recognized for pension plan coverage;
- tax effectiveness was usually lost;
- claims and reimbursement administration could not operate internati o nally;
- benefit coverage was designed for locals and did not include t he special features needed when resident in another country;
- internal administration to achieve compliance or creatively extend coverage was costly, with expertise generally coming from outside of the company and often from more than one source; and,
- as the second assignment came along, perceived security and comfort began to be reduced in the eyes of the expatriate (e.g., unfunded international pension plans and self-insured disability programs).
In response to these findings, JTI determined that a feature of its PSC was that it should provide its own benefit plans focussed exclusively on the needs of international managers. Once freed from having to combine the needs of locals and international assignees under one plan, the impact was stunning. Some features of the new plans follow:
- Medical plans emphasize prevention and reimburse regular physical checkups as well as providing special prevention coverage for certain countries,home country language helplines and claims reimbursement in any cw:rency anywhere. Claims administration is focussed on prompt reimbursement and not on claims management.
- Pension savings plans provide fully funded defined contribution savings with employee directed investment. Plans are not registered and therefore require little compliance management. Higher tax equalization costs of international assignees. A closed defined benefit plan provides integrated coverage for those past generation international assignees for whom the switch to defined contribution was not beneficial.
- Disability plans provide for multi-currency claims payments and qualifying examinations in any country.
- There is no integration with social This was a tough decision as participation in home country social security is often an emotional last tie with the home country. However, designing plans that were delinked was easier than communicating the changes involved!
For benefit purposes, it was concluded that most international assignees would not substantially benefit from social security pensions at retirement. The collection of benefits from the respective authorities would be complex and most countries would means-test away or deny coverage without extensive documentary support. The benefits did not justify the cost of maintaining knowledgeable staff to administer offsets from company plans; maintain individual records of contribution history; confirm receipt of benefits received; and deal with currency issues. If any benefits do become payable, the company will not attempt to recover them from the international assignee, nor will it keep any records not required by law or help the international assignee recover such entitlements.
This, of course, is merely an overview and, in many cases, this approach leads to unexpected consequences. For example, in Switzerland, an international assignee has to participate not only in social security but also in a locally qualified second-pillar plan. Exclusion from the French mandatory occupational plans denies returning French international assignees access to important unemployment benefits and, of course, Americans without 40 quarters’ participation may be denied full Medicare coverage. These issues can all be effectively addressed as exceptions where necessary but the total number of “special situations” is surprisingly fewer than one would imagine and the associated workload is a great deal less than “capturing” full social security histories for all international assignees.
Wherever legally permissible, international assignees are not enrolled in any local social security plans and, for the purposes of balance-sheet compensation, social security contributions are treated as a hypothetical home country tax and reimbursed (and grossed up) where payable in the host location.
The end result is a cleaner set of benefit plans with a competitive design, with the major part of the cost going toward design rather than administration. Communicated effectively with appropriate emphasis on the features designed for the international family, these arrangements present an attractive proposition for the new international assignee. The plans are designed to provide continuous coverage for an entire international career and convey this message to the employee from the. very outset. This simpler approach has advantages organizationally in avoiding pockets of partial administrative knowledge in the home, host or headquarters location. A single centralized expert now provides focussed support to meet the benefit needs of JTl’s international assignees.
Focusing on the Big Picture
In our eagerness to undertake administrative tasks, we were missing the strategic imperative outlined above. Many people were busy with compliance and accounting work that was taking them away from achieving the larger operational objectives and identifying the needs of the international assignee. We looked after our international assignees very well but in a reactive way; the focus was on fixing the problem and not on identifying trends among our employees or, more importantly, solutions. This is critically important today as we face a scarcity of mobile talent. Change will not happen overnight and will not happen at all if management commitment is not targeted at meeting this difficult challenge. Constant communication and reinforcement with international assignees and administrators, along with alignment of principles and practices to reinforce the change, are vital.
The creation of the PSC required the centralization of data collection and costs, in order for the costs of the assignment to be invoiced to the host location. Previously they were being captured in home and host locations, which were often in different formats and consolidated only after a significant delay. A simple and efficient process was necessary to manage the invoice procedure and this would also enable faster preparation of important statistical data (see Figure 2 overleaf).
So as not to repeat the sins of the past, JTl’s philosophy and approach have emerged as the following:
- Outsourcing administrative work. All backroom administrative work that does not involve significant contact with international assignees (e.g., payroll administration, accounting and costing) will be outsourced.
- What to retain in-house. All work that involves contact with or responding to international assignees will be retained in-house. Primary contact with our key talent group is too important to outsource to a third party and enables us to develop observations on needs and to track trends that may require JTI to amend its practices or develop new programs.
- A service-oriented approach. International assignment management will be focussed on service toward JTl’s international assignees and away from administration. This would not have been possible without the catalyst of the PSC.
- Freeing up management time. The outsourcing of data and cost summarization will free management time to concentrate on the results themselves rather than on their preparation and will provide greater visibility of assignment costs to aid planning and performance.
Obtaining Value from Training and Development
Before the PSC was established, JTl training and development programs did not differentiate between mobile and immobile talent. The PSC did not create the reason for doing this but we just didn’t previously have a simple mechanism for focussing exclusively on this group. Our local high potential employees were included in international training and development programs alongside international assignees . This will continue but now we have a vehicle through which we can focus development and training opportunities for managers who have already declared their commitment to an international career. We have the ability to capture data centrally in order to identify and help develop this special group.
Rewarding Performance Not Relocation
Despite the fact that international assignees are competitively compensated for the differences in costs between locations and for the inconvenience of moving their families, the primary source of reward should be no different than for any other employee (i.e., based on job performance). The cost of an international assignee can be three or four times that of a local employee but, for some reason, performance standards for international assignees have been sometimes less demanding. The reverse should be true. Having created a vehicle that provides superior compensation and benefits , the entry requirements should be commensurate high. In support of this objective, JTI has a justification process that requires the sponsoring manager to acknowledge the full cost of the international assignment, including severance payable should the assignment not work; the advantages to the individual’s career of succeeding in the assignment (e.g., by identifying three possible future appointments); and the assignment objectives. After three to five years of an assignment an international assignee may be converted to local status in the assignment location unless the assignment is re-justified as needing to continue.
What Next?
JTl’s PSC will take several years to achieve all of the objectives outlined above and will continue to evolve in response to the changing needs of our international community. The PSC does discriminate in favor of mobile talent and we will constantly explain the importance of this competence to our employee population. The PSC provides a unique vehicle through which to provide programs aimed at overcoming barriers to mobility and performance without the challenges of compliance with home and host country practices. The PSC will bring focus to the strategic issues around developing internationally experienced executives and direct energy away from the administrative compliance aspects. Specific projects include the following:
- Flexible relocation. This is the ability to re-characterize elements of the relocation policy to meet specific individual needs (for example, more home leave to recognize the needs associated with elderly parents and schooling provision for children with special needs). Other policies will be added to provide customized arrangements for high impact candidates.
- Empowering the administrators. Front line international assignment administrators will be given discretion to authorize on the spot amounts to address individual issues in a timely manner without the need to seek higher approval.
- Replacing the balance sheet. A global payscale for mobile talent will replace the balance sheet to achieve a better alignment with a career of continuous international assignments.
- A retiree medical expense program. A plan that is convertible at retirement to an individual policy to provide reimbursement of medical expenses is rapidly becoming a priority for Europeans as well as Americans.
- An international EAP. An international Employee Assistance Program responds to those unique needs not recognized by existing plans or helplines.
The process of developing the PSC has been a valuable learning experience and has caused us to question and change principles that had remained unchallenged for years. All of the advantages and activities outlined above can be achieved without a PSC but its existence brings a sharper focus to what’s important and what’s not. The payroll service company is, in fact, a misnomer and belies a potentially far more significant strategic tool than one for simply minimizing tax and reducing social security costs. In JTl’s case, it will reinforce the values behind our business goals and enable us to respond with greater urgency and to anticipate the future needs of international assignees.