Four Considerations for Expatriate Assignments

Moving people around the world is a necessary part of doing business in a global economy. Many large companies have been doing this for a very long time. Newer companies entering the global marketplace may find it necessary to have an employee on-site, to look after their interests in another country. If your company is considering setting up expatriate assignments, here are four considerations to keep in mind.

It’s Complicated

The world of global compensation, and dealing with the details of payrolls, taxes, retirement, and deferred compensation is highly complex, and can’t be covered in any detail in this blog post. Before heading very far down this road, you’ll need to work with legal and tax specialists to make sure that you are meeting the requirements of all national and international laws that apply. However, we can cover the major considerations for handling an expatriate assignment, which are:

• Selecting the correct employee;
• Understanding the international assignment;
• Deciding which compensation approach to use; and
• Understanding the different tax laws that apply.

Selecting the Correct Employee

According to Brian Friedman, the founder of The Forum for Expatriate Management, in the past, the employees selected for expatriate assignments were typically those who were failing in the home office. It was thought they might have a better chance of success overseas, or maybe it was a case of getting a little distance from the problem. Today, however, that is no longer true. Due to the expense and impact potential of overseas assignments, the “best and the brightest” are being selected.

According to the Society for Human Resource Management (SHRM), employees should be selected according to the goal of the assignment (i.e., if the job is technical in nature, an engineer is needed). However, the job skill set is not the only issue that needs to be considered. As SHRM states, “Achieving the company’s goals in the host country hinges on that person’s ability to influence individuals, groups and organizations that have a different cultural perspective.” Thus, selecting for these abilities is as important as any specific technical skill. And while you may think only younger workers are interested in traveling, it’s important to note that there is an increasing number of baby boomers willing to take overseas assignments.

Understanding the Assignment

Friedman et al. and SHRM both emphasize the importance of understanding the assignment. What exactly is the company trying to accomplish? Is this a short-term assignment or a multi-year assignment? Does it make sense to have multiple positions overseas, or would a “global nomad,” someone who is willing to move from country to country, suffice?  Or, can locally-hired individuals do the trick?

Having a goal for the return on investment (ROI) is also important. What are the financial goals? Can the person accomplish an adequate return, given the cost of an assignment, which, depending on the location, can easily top $1 million?

Deciding Which Compensation Approach to Use

There are five approaches to use when compensating expatriate employees, as listed below.

1. The Balance Sheet: This approach is used in almost 75% of expatriate employee cases worldwide. The main emphasis of the balance sheet is to pay an overseas employee comparably to incumbent employees in the same or similar positions in the home country. The expatriate should neither gain nor lose, from a monetary perspective. This can be determined for both home-based and office-based scenarios.
2. Negotiation: This is the most straightforward approach. The two parties simply find a mutually-agreeable package. However, negotiating every position can become time-consuming and expensive, and may lead to problems of comparability if you have multiple expatriates involved. Negotiation is most often used for special situations, or in organizations with only a few expatriates.
3. Localization: Localization involves basing the expatriate’s salary on the host country’s pay scales. This approach provides for cost-of-living allowances, which can be applied to taxes, housing, and dependents. Advantages of localization include ease of administration and providing equal footing with local nationals. Disadvantages include the need for negotiated supplements, and paying on the basis of local economics rather than on the basis of the assignee’s performance and job responsibilities.
4. Lump sums: In this method, the expatriate is offered a sum of money, based on the home country’s system for determining a base salary. The employee can then determine how much he or she wants to spend on travel, moving, housing, etc., rather than having the company provide these things. A disadvantage to the lump sum approach is having to calculate the amount, which usually involves a complex and time-consuming analysis. This approach is usually used for one- to three-year assignments.
5. Cafeteria: Used for senior-level expatriates, the cafeteria method offers the expatriate a selection of options to choose from. These might include the use of a company car or company-paid tuition for the expatriate’s children. There is, however, a limit to the number of options and amounts to be offered. This approach is similar to the lump sum method.

Understanding Different Tax Laws

It would be nice if the entire world operated under the same tax law, but it does not. Understanding tax laws in the country your employee will be working in is critical. Questions to ask include the following:

• Are there limits on the amount of time the expat can be in the country before local tax laws apply?
• Is the tax rate based on the individual’s country of citizenship or his or her country of residency, or both?
• Are there tax equalization agreements between the two countries?
• What are the standards, if any, for dealing with deferred compensation?
• Do the laws allow for a “tax gross up”?

These are just some of the many considerations you should keep in mind when entering the world of expatriate employment. Take the time to study the complexities of your specific situation, and be sure to seek the help of legal and tax professionals, to ensure the success of your expatriate assignments.