Calculating the right reward package for expatriate employees

Many factors must be taken into account for employers to calculate the right reward package for expatriate employees, says Sam Barrett

Lower taxes and prices abroad are great for a two-week holiday, but such differences can have serious consequences for employers looking to place staff overseas on assignments. While some expatriates might find themselves in the lap of luxury, others could be stung by higher taxes and hefty living expenses.

Having an expatriate reward policy can ensure staff posted abroad feel the employer treats everyone fairly. Perceived fairness is also important for the expats’ colleagues in the country they are posted to. Not surprisingly, any seemingly unjustifiable discrepancies between an expatriate’s reward package and that of local staff will not go down well.

Fair package

David Heaton, partner in accountancy firm Baker Tilly’s employer consulting group, says: “Wherever an organisation is posting people overseas, the reward package has to be fair. If it is not, the employer will not be able to persuade anyone to work overseas for them.”

Employers may approach the design of an expatriate benefits policy in different ways, but they tend to base it on one of three main models. The first, and the one most commonly adopted, is the home country approach. Bob Sperl, senior international consultant at Watson Wyatt, explains: “With this approach, employers start off with the package the employee would have received in their home country and add on allowances to ensure that their overall economic position is maintained.”

This method works particularly well for a typical international assignment, which tends to last up to three years and sees the employee return home at the end. “Even where this is not the most tax-efficient way to provide benefits, it can help to reduce disruption for the employee,” says Sperl.

The second model, the host country approach, is based on the benefits package the employee would receive in the country to which they are moving. Sometimes this will include transitional measures, such as the provision of housing for an initial period while the employee settles into the new country. This kind of policy usually supports a longer-term assignment or one where the employee might end up being based in the country permanently.

International package

Thirdly, some employers, especially large multinational organisations, adopt an international benefits package. Simon Ball, head of global benefits UK at Aon Consulting, says: “These are built specifically for these organisations, giving them a range of benefits that can be used globally.”

As well as having a policy in place to determine which set of benefits is provided to an expatriate, Matthew Hunt, a principal in Mercer’s international team, says he is seeing more organisations segment their expatriate population according to what motivates the employee. “Employers are looking at what drives their employees, so for the high-fliers it might be all about a good package with lots of allowances, while for more junior people, the package can be smaller because they are motivated by the lifestyle element of an overseas assignment or because it is good for their career development.”

However an employer determines its expatriate reward policy, some elements will require special attention because of differences between the home and host countries. Salary is a principal consideration, especially as it is probably the most visible part of a remuneration package. “Tax rates vary greatly around the world, but an employee will be looking for at least the same net income wherever they are based,” says Heaton.

To achieve this, employers can use a process known as tax equalisation. This takes into account any difference in the tax rates of the home and host country, plus any differences in living expenses, such as the cost of accommodation, gas, electricity, and so on.

This information is used to adjust pay so the employee is no worse off as a result of the overseas assignment. But it is not always the case that tax rates and living expenses are higher in the assignment country. “Tax equalisation should work both ways, but most [employers] shy away from actually reducing salary where this is the case,” says Hunt.

Instead, an employer might cut back on some of the other living allowances that would normally have been paid.

Expatriate information

To make this calculation, employers can enlist the services of companies that collect expatriate information. For example, ECA International compiles data about the cost of living in different countries, tax rates, hotel and housing costs, and expatriate remuneration rates. Nelly Lebreton, business development executive at ECA International, says: “As well as data that can help [organisations] set their expatriate reward packages, we also supply information on countries that employers can use to brief staff before they go overseas. This type of information can be provided on a subscription basis or, for those employers dealing with fewer overseas assignments, on a consultancy basis.”

Another benefit that can pose challenges when posting employees overseas is healthcare. Because healthcare systems vary so much around the world, and could be of a much lower standard in less-developed countries, most employers will provide their expatriate employees with international private medical insurance. This will pick up the cost of any treatment and will also enable expatriates to be flown to safe facilities nearby or back home if required.

Social security

The other major issue related to healthcare is the fact that many countries have social security arrangements in place for their residents. In the Netherlands, for example, paying into the Dutch healthcare system is compulsory, even when a resident is working overseas.

“To get round this, most of the international medical insurers have arrangements with the Dutch healthcare system,” says Ball. “So if a Dutch employee working in the UK claims for £30,000 of treatment, the insurer will go to the Dutch healthcare system to claim back part of this. This type of arrangement, which is also seen in France and, to a lesser extent, Belgium, does help to drive down the cost of cover.”

Pensions also need to be considered, although these usually pose few problems because existing arrangements are often retained and tend to go untouched. “Most companies, probably around 80%, will look to maintain the employee’s pension in their home country,” says Ball. “Some have set up offshore pension schemes for their expatriate employees, but these are becoming less common.”

As well as adjusting benefits to take into account differences between countries, expatriates often command additional allowances while on assignment. These can include accommodation costs, school fees for their children, and language tuition or an interpreter. “All sorts of things can fall into this area,” says Heaton. “I have seen cases where an employee has had a private jet transported with them and another where they insisted on taking their piano.”

Hardship allowance

Destination can also affect what is in an employee’s benefits package. Although the equalisation process can take account of variations in the cost of living in their new location, some places require further financial reward in the form of a hardship allowance.

These allowances take into account everything from the crime rates and political situation through to climate and healthcare provision to determine the size of the allowance. “We operate a scale from A, which are safe, stable countries such as those in continental Europe, through to F, which would warrant an allowance of 30% and include Afghanistan, Nigeria and Iraq,” says ECA International’s Lebreton.

Whatever the make-up of the reward package, it is also important to consider what could be classed as an employee benefit, because this will have tax implications. For instance, where an employer pays a bigger salary to compensate for higher tax rates, this difference will be a taxable benefit.

Ian Grant, director of private client tax services at Smith and Williamson, says: “There can be a requirement to file two tax returns, for example a US citizen working in the UK, and often the employer will provide an allowance for professional advice to do so, which may itself be taxable.”

But wherever an employer is sending staff and whatever they are expecting to receive in benefits, it is essential to have a policy in place. “I always recommend consistency,” says Watson Wyatt’s Sperl. “There will always be differences between international assignments, but if employers draw up a policy and refer to it, this will ensure they are regarded as treating employees fairly.”

†

EXPATRIATE BENEFITS PROCUREMENT:

Financial pressures are forcing change in the way organisations purchase expatriate benefits. Simon Ball, head of global benefits UK at Aon Consulting, says: “Sending employees on overseas assignments is expensive and, in the economic downturn, organisations are having to rationalise these costs. As a result, there has been a huge change in the way organisations, especially the large multinationals, procure their global benefits. It used to be driven by the human resources department, but now we are seeing risk management much more behind the process.”

An example of this can be seen in healthcare, where, rather than putting private medical insurance in place for staff, employers are looking at purchasing treatment. “This can really help to reduce the cost of benefits,” Ball explains.

“Medical insurance premiums can increase by around 11% a year, but by taking this approach, costs can be contained much more effectively.”

†

THE MOST EXPENSIVE AND THE CHEAPEST CITIES FOR EXPATRIATES TO BE POSTED

If an employer is posting someone abroad, it needs to take into account the cost of living in the destination and adjust salary accordingly. To make this process easier and fairer, ECA International is one company that compiles details of living expenses for expatriates in more than 390 locations worldwide. Costs include groceries, clothing, meals out, electrical goods and motoring. Items such as housing, school fees and hardship allowances are not included, as these are often compensated for separately.

Based on the results of the Cost of Living Survey published by ECA International in September 2009, the following are the most expensive and cheapest cities in which to be an expatriate:

Read more articles from the: Special report 2010: International reward