Mobile employees are often used by organizations to effect international growth, to be headquarters’ “mind and management”, to transfer culture and values and conduct technical troubleshooting.
However, companies have traditionally failed to invest in their mobile employees to the same degree that they invest in local staff. The cause may stem from the cost; five times as much administrative time (according to a client study that we completed) and three to four times the compensation. Perhaps employers think that that is enough. Whatever the cause, there are significant opportunities for improving the return on this expense and to improve engagement and attraction levels amongst this population.
The demographic shift that has occurred over the last few years necessitates a change in approach, but companies are continuing to use a model essentially developed in the seventies, when the typical expatriate employee was male and the primary source of family income, who was committed to a long term career with one employer and eager to see the world. Today’s demographic of male or female, highly educated and worldly, with dual wage earners seeking shorter term employment opportunities with multiple employers screams for a new thinking. A senior colleague was fond of saying that “high potential people will get to the top despite what you HR people do to them”. Mobility is similar – it is its own competency, and those who are willing and inquisitive will engage and for the most part, notwithstanding whatever is put in front of them. However, that is changing; younger managers are not motivated by an international career. They have travelled extensively and readily connect to the rest of the world through a number of different channels. They need more family support than most employers have traditionally been willing to provide. Even with the mobile gene, a company may determine that they don’t have the competencies now needed to represent corporate interests in an overseas market.
Most HR folks agree that a one year international assignment is worth probabaly about five of domestic training and development but how many organizations do you know that think of assignments as an
investment? Most companies think only in terms of the cost. With extended careers with one employer, the investment in a mobile employee could be recouped over that career.
It’s sometimes the work environment that imparts the development experience but business cultures tend to be similar irrespective of location, especially in larger companies. An employee might be lucky enough to be thrown into an opportunity where they are allowed to thrive, innovate and explore but that’s not always the case. The personal growth that will outlive any structured training comes from living in and navigating a different culture; it’s the white space around work where personal growth occurs and increasingly so when a family is involved.
At a recent meeting comprising lifelong domestic practitioners one person in the room stood out. He listened intently, asked clarifying questions and made his contribution in short, clear sentences. These were skills learned in a multi-language environment, where clarity and understanding were critical to productivity and engagement. We later learned that he had had two tours of duty with a major brand management company in Asia.
We hear of companies planning to develop “international capability” through teleconferencing and increased travel. This qualifies participants only as a travel experts; no one becomes internationally experienced in business class, no matter how often they use it.
Employers mostly hope for the best with expatriates. They seek volunteers, attracting those with an inclination toward mobility and hope that a star emerges who will contribute beyond the cost of the assignment. Few think of the value created and how this can be captured and redeployed or developed further. Returning expatriate retention rates are appalling because of this shortcoming. A recent experience that underlined this problem was that of a returning manager with a very large international bank whose HR department didn’t seem to be aware that she had ever left to work in their overseas subsidiary. Because no one knew how she had developed, performed, matured while on assignment she has had to re-earn her promotional spurs. What a shocking underutilization of an incredibly valuable asset. The bank had invested heavily in her, and now she is a primary candidate for departure.
The challenge with fewer available mobile employees with focused skills and competencies, means that we are going to have to persuade and build support structures for those whose first choice is not a foreign assignment – or those who eagerly took their first assignment and are now reluctant to take a second. Its the high potential scenario all over again. Those who are ready and willing to take on an international assignment, will take care of themselves; it’s the less mobile with other in-demand skills, that we are going to need to focus on.
We are at a crossroads; a shrinking number of willing participants in an environment where most employers are reluctant to invest further to attract them. To create tangible features that attract and support the less willing will require better deployment of the funds currently being utilized. There are five major areas of expenditure in running a mobility program, none of which add one iota to their attraction or provide support for wavering mobile families:
- Tax Compliance – not just income tax but social security and corporate tax. Monitoring and ensuring compliance is now essential to reducing risk. Countries regard expatriate tax as a revenue stream and will quickly lose interest in chasing employees to ensure compliance but will chase the employer when they suspect there has been an underpayment.
- Employment Law Compliance – immigration records are often synced today with tax records to assist revenue authorities improve revenue collection. Many countries place restrictions on foreign employment to facilitate payroll tax collection. Local employment requirements often designed to protect lower paid locals, catch expatriates and impose costly severance and other conditions.
- Employment Contract Administration – often involves a home country or point of origin,
employment agreement plus a local version to cover the local payroll and work permit requirements. Multiply this by the number of home locations that you have and the number of foreign destinations. Get the picture? An extensive matrix of different terms and conditions that all need to be reconciled and integrated with each other.
- Benefit Plan Administration – demonstrating that local coverage is sufficient and/or comparable to the employee’s entitlement at home, topping it up with an international plan or finding ways to continue to use a home plan designed and integrated with the home country tax and social security systems, is only the start. Then there are currency issues around paying benefits, how a foreign plan is to be treated for local income tax purposes and how any pension gap caused by lack of participation in home country social security or tax deduction is to be filled as well as issues around medical diagnosis and treatment in a foreign language.
- Home Location Administration – no one ever seems to want to and some actually can’t sever ties completely with their home location. There are close relatives to visit periodically, houses to maintain, elderly parents to care for, bereavements to deal with, discretionary medical or dental treatment required etc. and for each home country in the matrix, a familiarity with local custom and practice is required by administrators. It is not surprising why administration requirements are a multiple of five for mobile employees. Additionally it is not difficult to see why the function is usually manned by a person who is comfortable with the detail, but often someone who never travels and has little empathy with the challenges faced by young families on a first assignment.
Not one of the items on this list increases the satisfaction or reduces the improves the life of an
expatriate. Performing these tasks exceptionally well is the table stakes for entry to the game. Get them wrong or apply them inconsistently and administrators will be tied up for weeks – so administrators err in favor of saying no rather than yes, and thereby create a precedent.
We addressed earlier the question of value rather than cost and similarly none of the items above help enhance or protect for the benefit of the employer, the significant professional development that is occurring during an assignment and its utilization in a further assignment or stretching role upon a return home. Employees are alert to vague promises of how an assignment will progress their careers and point to colleagues who left the company within months of returning à la the woman referred to above.
Reducing expenditures on administration and redirecting these to systems that visibly enhance the brand, make the employer more attractive in a competitive environment and that support wavering mobility would seem, therefore, to be what the current environment demands.
Using a separate expatriate employment structure to manage mobility as far as we can tell, has been around since the 70’s when it was employed to help Americans avoid social security payments to the US system. The Payroll Service Company or Global Employment Company began to emerge in the form we know it today, in the early nineties, when companies grappled with and prepared for the original “War for Talent”. We worked then on models in the consumer goods sector to enable mobile managers to move seamlessly between overseas markets. In the interim we have contributed to versions to help minimize tax exposure to cash hungry developing markets, to improve employment and tax governance over an elaborate matrix of nationalities and host countries, to reduce social security exposure and lift an employment brand to be best in class. Rationale and approach is unique in each case and sometimes will not involve unified employment.
In each case however, the approach aimed to differentiate the employer from its competitors. By
definition, an off-the-shelf global employment solution does not exist; to optimize opportunity each is designed around the needs and objectives of its sponsor with a number of common outcomes:
- A reduction in administration expense – adoption of a common employment structure radically shrunk the number of different employment agreements that needed to be navigated. A common employment platform meant home leave, vacation, benefits, tax treatment and even compensation were the same irrespective of where an employee originated.
- Managing employment through a single company rather than modifying existing employment agreements, introduced a common legal platform and payroll regime. Despite the emergence of global pay scales in many industries some employers continue to arbitrage labor costs by recruiting from different locations and therefore omit compensation from this list. Some considered severing ties with the home country to be too problematic and adopted common employment conditions but did not use a common employment entity.
- Whatever the degree of desired commonality, expatriates are treated largely the same resulting in immediate administrative savings and creating the opportunity for automation. A single approach also permits centralization of administration as expertise in the expatriate’s home country is no longer required. Central management leads to deeper holistic expertise and dramatic improvements in service.
- Internal Equity – for many international companies their mobile workforce is their most important group; opening new markets, transferring skills, processes and values to new locations. As we have seen, however, they were often treated as the least important with internal inequity non-existent within the group, as each expatriate had a different set of terms dependent upon where they came from or how strongly they negotiated. Using a global approach the terms and conditions for all expatriates become the same. Inequity occurs of course throughout HR programs but is amplified amongst expatriates. When thrown together in a host location the one thing that they have in common initially is their terms and conditions and their comparison. The administrator gets the call when it becomes apparent that they are different. which contributes to the 5:1 ratio mentioned
earlier and inevitably higher cost.
- In many industries and for some skill sets, common pay scales that cover the globe, continent or region have emerged. This has happened in recognition of two things; scarcity of talent and its homogeneity – if you have the skills and are mobile you can command the same pay irrespective of where you come from. Secondly, the shrinking differences between the costs of living and consequently the requisite cost of living allowances. This often means paying more for the tables to calculate the difference than the allowance that results from the calculation. These two factors, coupled with the recognition that many transferees may not return home and so why tie pay to one
location have begun to influence the move to common expatriate pay.
- Compliance – a single, common employment entity will reduce the size of the compliance matrix for personal income tax as well as corporate tax and social security. Matters of transfer tax and permanent establishment obviously don’t go away but they are clarified and use of an offshore entity can reduce risk and exposure for corporate purposes. However, the single most important advantage stems from the ability to provide oversight to income tax compliance around the world. No local tax legislation provides an answer to the question “how do we minimize tax exposure ?” CFOs, however, in the absence of clear black and white legislation, usually want to take a position that has the minimum direct impact to the company (and ideally, a predictable indirect risk).
Minimizing the complexity and number of locations in the matrix enables greater certainty. Penalties for failure to comply with income tax or social security are designed to encourage compliance, but revenue authorities will chase the employer irrespective of whether the employee is at fault placing corporate reputations at risk, as well as government approved licenses and other relationships that are predicated on the Company being a good corporate citizen. Companies can no longer afford a laissez faire approach to employee income tax compliance. A single employment company makes this less costly to manage and more effective at risk mitigation.
- Talent Management – when companies adopt a global approach to expatriate management, it is often low key, especially when the purpose is to reduce tax exposure. This is a lost opportunity and the approach can be promoted to potential new expatriates, especially those who have worked internationally for other employers. The structure, when marketed effectively, will demonstrate that the frustrations experienced with a prior employer are removed or minimized.
Common employment terms and conditions dramatically simplify the process of transferring an expatriate from one international location to another. The mechanism enables central tracking of all employees on assignment – no one is left behind. Without it responsibility for home country redeployment is distributed to a local HR manager who has never been on assignment and has no idea how the individual has grown, who often resents the perceived excessive pay and benefits and can only envisage the employee’s contribution at the level prior to the assignment. Consequently, the individual’s skills and experience are not put to use causing early departure and destruction of the value created.
A single source for employing expatriates provides the opportunity to introduce benefits and support features designed exclusively for the mobile employee and family. With the matrix approach these tend to be modified local arrangements designed for employees who stay home. For example, EAPs designed exclusively for a mobile workforce and offering related services, benefit plans that are currency friendly to accommodate reimbursement in a location different from where the claim was incurred, host location
orientation that is separate and distinct from real estate vendors and provision of spousal support services etc. These can be customized to the profile of your workforce and prioritized and targeted at areas that are known to cause frustrations and premature assignment failure.
Globalizing an expatriate program through the adoption of common terms and conditions and/or
utilization of a single common employer is not only contemporary and timely but will:
- Reduce the costs of expatriation
- Enhance success in the competition for scarce top talent
- Mitigate financial risk exposure
The transition needs to be carefully planned and utilize the experience of professionals who have previously undertaken these projects. These are typically once in a career projects and the likelihood of failure is dramatically increased with a well intentioned neophyte managing the project. While ostensibly focused on talent management and therefore an HR initiative, a successful project will involve finance, tax and risk management across all jurisdictions and require an experienced leader familiar with the interaction of these and other functions in the management of mobility. Failure to launch successfully with the customized infrastructure can have worse consequences that not launching at all.