INTERNATIONAL JOB MARKET

In most international organizations based in the UK, there is the recognition that certain of their jobs could be filled by non-UK nationals. Indeed, there may be an advantage to doing so, either to gain from a different set of cultural values or ways of working, to demonstrate one's international credentials or to optimize labour costs. It is not uncommon for menial, domestic jobs or other very low-paid jobs, such as cleaning, to be filled by people coming in from lower-paying countries. More recently, there has been the targeted recruitment of software developers from countries such as India by some companies to meet both skills shortages here in the UK and to combat the high remuneration levels commanded by local software developers. The nursing profession would be a further example where nurses from the Philippines and elsewhere have been deliberately targeted by UK employers. However, the comments made already concerning pay equity among those carrying out similar or even identical work would need to be addressed, so employment cost advantages may be achieved or maintained.

Where jobs have a clear international dimension and multi-country scope, it is recognized that potential employees could come from an international market place. Indeed, one should also recognize that existing 'international' employees could be recruited by organizations not based here in the UK. As such, one would need to accept that the remuneration market place is international and that remuneration policies and practices need, for some employees or roles, to reflect a broader set of countries than just the UK. In such circumstances, it is not uncommon for organizations to select those countries that they might expect to recruit from or lose staff to and consider their approach to remuneration against this 'basket' of country practices, social arrangements, legislation, etc.

EMPLOYEES COMING INTO THE UK | International Remuneration

Clearly, those employees coming to the UK from overseas would be treated in a broadly analogous way to those employees going overseas from the UK. In this situation, if the employee is to be an expatriate, the policy applied will be that relevant to the home country and not necessarily that defined by the host country. If the posting is defined as a secondment, and thus the employee's contract and terms of employment are with the host company, remuneration will be driven by the host company's policies and practices.

The question of internal remuneration equity between this employee and his or her direct peers within the host organization is an issue that needs to be considered. If the employee is coming from a 'cheaper' country, with respect to relative levels of remuneration, it is tempting to set his or her remuneration towards the lower end of any relevant local pay range. Conversely, an employee coming from an 'expensive' country may be paid towards the higher end of, or even above, any relevant local pay range. There may be sound reasons for adopting either approach (eg control of costs, ease of transition, etc). However, one must consider how the employee or his or her colleagues will feel when salary/remuneration disparities become common knowledge. If such differences in individual pay are driven by differences in anticipated performance, then such differences would be more easily defended by the employer and understood by the employees. Where someone is brought in to provide high-value skills or contribution, a higher remuneration would seem to be appropriate. Conversely, an employee who is there on a development secondment, or who has been promoted into this new role, would be expected to perform below a fully acceptable standard for some time and, hence, would be remunerated at below the fully acceptable level at least for an initial period of time.

Thus, while it may be tempting to do so, great care must be taken if one is going to take the employee's previous absolute remuneration in his or her home country into direct account when setting remuneration in the UK.

TAXATION | International Remuneration

UK expatriates working abroad for a full financial year are not liable for UK tax unless their salary is paid in the UK as long as they do not fall foul of the 183-day rule. This rule, which means that UK taxation is incurred at least on some income, applies if an expatriate visits the UK for more than 183 days in any one tax year or for on average more than 90 days per year for the period of the whole assignment.

Local taxation rates in host countries, however, are enormously variable. True to the policy of 'keeping the expatriate whole' (ie ensuring that they are 'no worse off' in the host country), companies may elect to safeguard them from fiscal penalization by one of the following methods:

§  Tax protection. When an expatriate is paid a gross salary and working in a location where the tax rates are low, the employer need make no adjustment, but when the host country tax rates are higher than in the employee's home country, the difference is reimbursed, usually in the home country.

§  Tax equalization. The system of tax equalization is more equitable than that of tax protection and is therefore favoured by multinationals with large numbers of overseas employees. An expatriate who has benefited from a tax 'windfall' through the protection system, having, for instance, worked in a zero-tax country such as Saudi Arabia, may, justifiably, be reluctant to be transferred to a country with rates similar to the UK where 'windfalls' and reimbursements will be equally negligible. The tax equalization system offers a fairer global policy in that it reimburses tax excesses to those in high tax areas but makes a deduction from the total remuneration of those in low-or zero-rated countries. Thus, all staff are maintained on a tax standard that reflects that of the home country.

§  Net payments. The payment of a net salary not only ensures expatriates throughout the world of fiscal equity but removes the onus of tax administration from the employee in countries that have no equivalent of the PAYE system. However, as mentioned above, it is extremely expensive to operate a net payment system.

LESS COMMON BENEFITS ASSOCIATED WITH EXPATRIATE ASSIGNMENTS

Servants

Although the employment of servants may sound like a relic of a bygone century, there are still many countries in the world where it represents affluence, power and status. In such locations, expatriates - and the companies that they represent - are expected by the local populace to conform to best market practice and it is probably not unreasonable to infer that the esteem in which they are held will increase in proportion to the number of servants they employ. They will also, in many cases, be providing much-needed employment and so be contributing to the wealth of the community.

In addition, there are locations, notably parts of Africa and Central America, where security poses a real threat to anyone whose affluence is notable. In such places, merely being foreign might be enough to trigger thoughts of theft, kidnap or brutality in the minds of the local criminal fraternity. It therefore goes without saying that security guards are an essential part of these remuneration packages.

Club Subscription

Club membership fees and subscriptions are usually paid for by an expatriate's employer if there is a good business case. The social environment is seen as an important part of the settling-in process as well as a useful source of business contacts, particularly in developing countries.

Sports clubs are the commonest form of benefit and, in some areas, it may be necessary to provide access to more than one club - for instance where a golf club does not have separate facilities for squash and swimming. This benefit is not to be underestimated since, in many expatriate communities, the waiting list for club membership is long and the cost of joining correspondingly high.

Rest and Recuperation

'R&R' is usually a feature of a remuneration package for an expatriate in a high-hardship territory. The intention of the employer is to fly the expatriate (plus family if appropriate) to the nearest non-hardship location where decent meals, temperate climate and good communications may be enjoyed. R&R visits rarely exceed one week and are often no more than long weekends. The advantages to the employer are twofold: the trip is relatively cheap and the employee returns to work refreshed, with minimum disruption to the work schedule. R&R leave also often doubles as a shopping trip to allow the expatriate to stock up on essential items.

EXPATRIATE REMUNERATION

Of those types of overseas employment described above, the one that most obviously prompts special treatment of the employee is the expatriate assignment. How much expatriates are paid depends upon their job and status, personal commitments, the territory to which they are assigned and other variables.

An expression commonly found in the policy documents of multinational companies runs approximately thus: 'the aim of the expatriate remuneration policy is to ensure that individuals are "neither better nor worse off" as a result of their overseas tour of duty'. However, more and more companies are now increasingly unwilling to commit to such statements, faced with the spiralling cost of expatriate assignments and an increased focus on the real value to the company of sending employees abroad. It is often only possible to maintain an expatriate's home standard of living at significant cost to the company, particularly if the spouse is working as well.

The cost of sending an employee abroad far exceeds the salary outlay. In addition, the company must consider the air fares to and from the destination, which are not insignificant when individuals are accompanied by their families and may return once or twice a year for leave, or need to go to a holiday resort for rest and recuperation. Accommodation costs, relocation expenses, language training and UK boarding school fees are further financial burdens to be carried by the employer. Clearly, it is an expensive exercise and one that should not be undertaken without some obvious benefit to the employer. It is now generally accepted that the most common reason for assignment failure is the inability of the expatriate or partner, or both, to adapt to the local culture. Yet despite the importance of the spouse's contribution to a successful assignment, few organizations include the spouse in the selection process. A pre-assignment trip to the host location to allow the expatriate and any accompanying family to decide whether they can live in the host location, as well as a cultural briefing before going, is recognized as a way of minimizing assignment failure. Language tuition and independent financial counselling are often arranged for expatriates at this stage and are recognized as diminishing anxiety quite considerably.

Companies should remember that this anxiety and sense of displacement recur when the individuals are repatriated. The problems of reentry have been researched in some detail in recent years and good employers now recognize that the assignment does not end with the expatriate's return to the home country. If appropriate, employees should be made aware that practical assistance and counselling are available to them, should they require them.

There are three main expatriate remuneration systems in current use as described below:

1.  balance sheet or build-up (home based);

2.  local market rate (host based);

3.  hybrid (usually a combination of home- and host-based pay systems).

The choice of the most appropriate method is dependent on a number of factors, which would normally include:

1.  reason for the assignment (developmental, management function, skills transfer);

2.  nationality of expatriates and the countries to which they are sent (developed, developing, etc);

3.  length of the assignment (short-term, long-term, permanent);

4.  need for equity between certain groups of employees (eg other expatriates, local peer group).

TYPES OF OVERSEAS EMPLOYMENT

The terms and conditions of employment while abroad typically depend upon the nature of the work and its likely duration:

§  Feasibility studies: Where an employee, or team of employees, visits a territory to assess the potential market for the introduction or development of the company's goods or services. These visits rarely last longer than a month and the method of payment is usually no more sophisticated than a reimbursement of expenses.

§  Commuter assignments: Such assignments have grown in popularity for two quite different reasons: first, in response to the growing unwillingness of employees to disrupt their children's education or the career of a spouse for the sake of a full expatriate assignment; second, where the organization does not wish to enter into the cost or commitment of a full expatriate assignment. Further, it may believe that the employee(s) concerned would be willing and able to travel to the work location on a Monday morning (or Sunday evening!) and return home on the Friday evening without detriment to the work or themselves. Such assignments are usually confined to European countries where the relative ease of travel and work permits makes such patterns of work manageable both for the organization and for the employee. Although it is not uncommon for 'Eurocommuters' to sustain this pattern of work indefinitely, it inevitably puts a strain on family life and can make it difficult for the employee to feel truly integrated into the work environment. However, one of the main advantages for the employer is that it can be more flexible and significantly cheaper than a full expatriate assignment. Small, serviced apartments can be rented instead of larger, more costly family houses and the added cost of moving children to international schools, etc, is avoided. The company would pay all reasonable out-of-pocket expenses plus the cost of travel, with the employee continuing to be paid in the UK where he or she would continue to pay income tax, national insurance, etc. Sometimes, the employer recognizes the inconvenience to the employee of such assignments and pays some form of lump sum, probably linked to the delivery of the project the employee was sent overseas to work on. This type of assignment can also be employed usefully at the start of an expatriation to ensure that both employer and the employee have a 'probationary period' during which arrangements can be undone without too much difficulty.

§  Contract work: Construction and civil engineering companies typically recruit contract staff for specific projects. Food and accommodation are often provided on site, in which case there might be no local currency payment. A lump sum or series of lump sums for the contract, agreed in advance, is then paid in the UK.

§  Short-term assignments: The definition of a short-term assignment varies from company to company but often refers to a period that does not exceed six months. Some companies choose to make the break point at three months, others at the point where the employee becomes liable for tax in the host country. Such situations might describe the presence of headquarters staff in the offices of a subsidiary when newly acquired or when such staff are sent in to address poor business results at one of their overseas locations. Such an arrangement is not dissimilar to the commuter assignment in the sense that employees on short-term assignments would typically continue to be paid in the UK, and pay tax in the UK, but would receive some allowance paid in the local currency to cover out-of-pocket expenses, hotels, etc. As with the commuter assignment, it is unusual for the assignee to be accompanied by family in the host location. As such, it is not uncommon for the employer to pay for a certain number of flights home over the period of the assignment, which can be used by the employee or the employee's family. Any additional tax liability arising from the assignment is usually met by the employer.

§  Expatriate status: Employing local nationals is usually much cheaper and has distinct local political advantages (eg in the Middle East, where localization is a strong national imperative for many countries) by comparison with expatriation, but many UK organizations continue to mix the local workforce with at least some management from the UK headquarters. Whether these UK managers are still employees of the parent company, whether they are kept on the UK payroll or whether they are transferred to the local company and local payroll would tend to be dependent upon who wants the manager there and the anticipated duration of the posting. If it is the country organization that is driving the posting, then the country might be expected to pay and be more obviously responsible for the assignee and, hence, have him or her on the books and pay his or her remuneration directly. If it is the UK headquarters that wishes to have the manager spend time in the host organization, then the costs of the assignee may be split between the host country and the headquarters or even fully funded by the headquarters. If the assignment is expected to be relatively short, it may be considered inappropriate to go through the administration of transferring the individual to the host country's payroll and changing the employee employment/ contract status. If the individual concerned is employed by the host country company rather than the parent company and the source of remuneration is local, it is generally accepted that the employee's status is a secondee and not an assignee.

International Remuneration

The continuing development of emerging markets, the consolidation within many industry sectors to produce a smaller number of larger, international companies and improved global communications have made it essential for UK companies to compete within an international market in order to survive. This internationalization of the market place has prompted a number of situations where remuneration must be considered on an international basis:

§  UK-based organizations will find it necessary to send some staff abroad to further the development of their overseas interests or as part of the career development of the employee.

§  Non-UK-based international companies will send staff to the UK to address specific business requirements or for them to gain international experience as part of their management development programme. While some organizations will choose to treat staff covered by either of these two situations on an expatriate basis, some may consider that the duration or the developmental purpose of any such assignment makes an expatriate assignment inappropriate and would look to some other basis for remuneration.

§  There will be those UK companies that recognize that a proportion of their staff could be recruited from outside the UK and/or that such staff could be lost to companies based outside the UK. In this instance, it would be necessary for the organization to consider remuneration for such roles on an international basis in order to judge and manage the competitiveness of their remuneration.

§  The employee may be required to work across a number of other countries (any of which may serve as his or her base), which may or may not include the UK. Maybe such roles are truly pan-European, with the job holders able to reside anywhere, within reason, across Europe. As such, the remuneration of the individual could be driven by practice/policy of the home or host country or some 'basket' of countries. The latter may be particularly appropriate if a team of staff is engaged in such work and some level of equity of treatment is desirable.

Thus, while the subject of international remuneration meant expatriate remuneration in the past, today it can mean a range of situations that needs to be addressed and managed in a variety of ways. Indeed, it is becoming increasingly apparent that the 'one size fits all' approach to expatriate remuneration is not necessarily the most effective. In recent years the rapid growth of emerging markets and the need to develop employees for management roles across 'global' organizations has highlighted many of the shortcomings of adhering to remuneration methods with colonial roots. In short, managing an increasing number of nationalities, from both developed and less developed countries, at different stages of their careers, highlights the difficulty of imposing a single remuneration system across the 'overseas' workforce.

This chapter deals with expatriate pay under the following headings:

§  types of overseas employment;

§  expatriate remuneration;

§  main benefits associated with expatriate assignments;

§  less common benefits associated with expatriate assignments;

§  taxation;

§  employees coming into the UK;

§  international job market;

§  pan-European roles.

GUIDING PRINCIPLES FOR BOARDROOM REMUNERATION

The following guiding principles on boardroom remuneration have been developed by Hay Group:

1.  Pay policies and practices for executive directors can and should be used to attract and retain top executives of outstanding ability and to help focus and reward performance which results in increased shareholder value.

2.  The pay of executive directors should be determined on the basis of an explicit pay philosophy and strategy which has been consciously developed to support the organization's business strategy, structure and approach to human resource management.

3.  The pay of executive directors should be tailored to the organization's particular culture, management style and competitive environment. Pay can help to reinforce a distinctive culture and management style. The degree to which there is a clearly agreed set of values at board level can help to foster a desired culture throughout the organization.

4.  The pay of executive directors should foster a pay-for-performance orientation and top-management focus on sustained performance and the creation of shareholder value.

5.  Executive directors' pay processes should become part of the overall management process. Performance objectives and measures should be consistent with the organization's decision-making processes and management information systems. If it is not the right measure for the incentive scheme, it is probably not the right measure for making decisions.

6.  The design of executive director pay packages should consider the needs of individual directors but not at the expense of underlying goals and objectives. Too many pay schemes in the UK have been developed on the basis of tax efficiency alone with little or no regard for fundamental business objectives.

7.  The pay of executive directors should be determined and monitored in a manner which safeguards against self-interest and avoids impropriety. Pay philosophy, scheme design and pay levels should be approved and monitored by independent non-executive directors.

8.  While the design of top pay systems can be complex, schemes should be easily understood and clearly communicated. The objective is to influence behaviour and focus efforts, not to strain for over-precise measurements. If directors do not understand the scheme, it will not work.

INDIVIDUAL REMUNERATION PACKAGES

Over the last 15 years or so, a lot has been written about the concept of 'cafeteria' or 'flexible' remuneration packages. Most of the work, and the practice, originated in the United States and other countries such as Australia where the tax regime is helpful to this approach. The idea essentially is that employees should be offered the chance to select how they wish to be paid in terms of cash and benefits and so have their remuneration tailored to their personal ambitions and lifestyle.

For executives in particular, the story does not end there. Many remuneration packages are individually negotiated and tailored at the time of recruitment to a board level appointment. As companies find that they cannot always promote to board level from within, they face increasingly tough negotiations on remuneration packages from those they seek to recruit from outside. In some cases the demand may not be for a package which is only nationally competitive, but for a globally competitive one, especially at the top of major multinationals. There are a number of reasons for this:

1.  Directors, perhaps comfortably in post somewhere else and approached by executive search consultants, often feel they are in a good position to negotiate major improvements for themselves as an 'incentive' to move (they might be being enticed into a volatile and precarious environment where job security cannot be guaranteed, or one which is much more publicly exposed).

2.  People are more aware than ever of market rates for top executives and see a move as an opportunity to 'catch up' to a more realistic level. People at board level usually expect a substantial improvement in earnings to make it worth their while to move. This can make recruiting top calibre directors from outside very expensive, unless they are working in a sector or organization where they are currently underpriced.

3.  Directors may employ their own specialist remuneration and sometimes pension advisers to make sure they get a good deal.

4.  Being an effective director generally goes with having an ambitious and assertive personality - it is unreal to expect such people not to be shrewd negotiators and to look after their own interests, especially if they perceive that they are being brought in to wake up a 'sleepy' organization. In such circumstances they will often see a shake-up on the pay front (which usually means moving to the more competitive end of market practice), as part of a necessary process of change.

HR directors, company secretaries and indeed chief executives increasingly therefore often need to be flexible when faced with demands from an executive they may have spent a long time trying to entice and will need to have:

§  a willingness to tailor the remuneration package to fit individual requirements;

§  a clear idea of which items of pay they are prepared to negotiate on;

§  the ability to cost out alternatives quickly;

§  a maximum total earnings cost they are prepared to go to get the executive they are after;

§  a prepared case to defend a package which other directors or even shareholders may initially perceive as an anomaly.