Is there any Human Resource department in the country that would take a request to assume responsibility for budgeting an employee’s housing, furniture, utilities, transportation and education expenses seriously?
Many HR departments not only entertain such requests, they actually fulfill them – often without even being aware of it.
This “budgeting” is an insidious part of many companies’ approach to compensating expatriate employees. In an effort to reward employees for their willingness to leave home, companies offer a variety of payments to supplement base salary, much of it designated for specific purposes, such as housing or education. The result is that the company, in effect, assumes responsibility for managing the employee’s finances.
Although the intent of such payments is laudable, the reality is that the system generally results in greater overall expense – sometimes to the point that the company’s original intent in establishing an overseas operation in the first place is undermined.
Today’s competitive economy offers companies the perfect opportunity to reassess the situation and put the responsibility of budgeting back where it belongs: in the hands of employees themselves.
The balance sheet has a long history in expatriate compensation practice. It was designed to provide a no loss-no gain adjustment for overseas costs that exceeded those in the United States. In theory, positive differentials were applied when costs were higher and negative or no differentials applied when costs were lower.
The balance sheet as currently used, however, may have fundamental flaws that contribute to the failure rate of employees assigned abroad, the substandard performance of many employees and the failure of US multinationals to achieve planned objectives in their overseas operations.
Moreover, these compensation policies are a source of discontent among repatriated employees returning to the United States after assignments in which housing, transportation, schooling, club membership, and other expenses were partially or fully reimbursed.
When those reimbursements and basic overseas incentive pay are eliminated, the result is often a financial shock from which returnees never fully recover.
Most US multinationals justify the added expense to project a quality image overseas or in the belief that most Americans are highly inconvenienced on foreign soil simply because the place is different.
Expatriates should be additionally compensated for their willingness to leave family, friends and familiar surroundings on the company’s behalf, but existing programs have created three general problems:
o Inappropriate lifestyles,
o Dysfunctional distractions from the job and,
o Intensified repatriation issues.
Inappropriate lifestyles. Under balance sheet compensation policies, an employee assigned overseas receives an itemized printout of allowances from his or her company.
The printout prepared by the HR organization varies from employee to employee based on job title, US base salary, family status and country of assignment. These data reflect living costs (food, services, housing, transportation and so forth) and are generally expressed as differentials above those of a typical US family of the same size as that of the expatriate. The company normally obtains such data from outside consultants who specialize in balance sheet estimates.
The problems that emerge from this itemized, inflexible method of providing expense allowances come from the fact that the estimates for living abroad are not the ceilings but, effectively floors. Thus, if the balance sheet prepared by the company and its consultants allocates $2,000 per month for housing, that amount dictates the type of housing sought regardless of whether less expensive accommodations could have been found. The same hold true for other areas – such as transportation, club memberships, etc.
What this means is that the majority of expatriates opt for maximum allowances. Americans assigned overseas not only live better than expatriates from other countries with whom their companies compete – but far better than most local nationals in similar positions.
These relatively high allowances remove the incentive for Americans abroad to save money by investigating the local marketplace, using the same services as colleagues at work, or purchasing local products.
The effect, furthermore, is more than financial. The key to successful adjustment overseas is acclimatization and the ability to blend in with the local culture, economy and lifestyle of the indigenous population, or at least that part of the population touched by the day-to-day work assignment.
It is a curious anomaly that US companies focus a good deal of time and money on orientation and cultural training, only to provide a compensation package that reinforces directly contradictory behavior.
Dysfunctional distractions. The balance sheet has created a new kind of game between employees and the home office – one that is unknown in domestic compensation practices and can be a serious distraction overseas.
Because the balance sheet provides allowances based on a typical family and uses approximations of US quality or equivalence overseas, it is, of course, subject to interpretation. Furthermore, because savings are unlikely to accrue to employees, it is therefore in the employees’ best interest to ensure that interpretations fall in their favor and that all allowances are maximized.
This generally begins an ongoing dialogue with the home office that lasts throughout the tour and covers topics ranging from what kind of housing can really be located (as opposed to what the consultant reported) to who will pay to replace the light bulbs in company-owned lamps.
The result is that the balance sheet approach places employees in an adversarial relationship with the home office as they strive to obtain what they perceive to be their best deal.
Repatriation issues. The item-by-item balance sheet approach to expatriate compensation, with no incentive for choosing less expensive lifestyle components, is the underlying reason most Americans live better abroad than they could on an equal salary at home.
When incentive pay and other bonuses are added, overseas compensation can reach sufficient heights to create a severe sense of economic letdown when employees are repatriated.
A primary reason for this certainly is the better-that-average conditions that expatriates become accustomed to overseas. Families sometimes leave behind mansions staffed by inexpensive servants to return to ranch style homes where god forbid, they have to do their own cooking. Executives who went to work in limousines return to taking commuter trains; and club memberships taken for granted are no longer available.
In addition, the inflated lifestyle of Americans working abroad may include many non-financial advantages. In some nations, for example, employees and their spouses receive invitations to black-tie affairs, socialize with leading figures in government and the arts, and are routinely accepted as elite people in the community. Back home, their status may not be so exalted.
As a rule, HR has found that the longer a person is abroad the harder it is to adjust to life upon returning to the United States.
Conclusion
The basic objectives of any compensation program are to attract, retain and motivate. In expatriate compensation, it is time to return those basics.
The balance sheet and its subsystems of charts, graphs and cost studies have changed the focus of many of those who go overseas from job performance to an endless pursuit of, “What’s in it for me?”
Companies claim that without the existing programs no one would accept an overseas assignment. Yet often these are the same companies that complain about the constant carping of their overseas work force. Clearly the wrong people are being sent overseas (many may accept assignments with the unspoken intent of financial gain) with the wrong compensation package.
The answer is simple: no nonsense compensation that provides a US base salary and a tax-equalized, all-inclusive living allowance. Such an allowance would be based on job title (salary grade), family status and assignment location. The disposition of the living allowance would be at the sole discretion of the expatriate and would, in effect, place the family, not the company, in the center of lifestyle decisions.
By removing an emphasis from piecemeal payments for such expenses as housing and transportation, the company could begin identifying a move overseas as just another relocation, focusing on job challenges and growth opportunities instead of greed.
As an added benefit, companies might save as much as 25% in expatriate expenses without materially affecting expatriate lifestyles. Those savings, coupled with fewer e-mails about who owns the light bulbs, should make any HR executive smile.
By: Michael A Conway About the Author:
Mr. Michael A. Conway holds a BS in Aeronautical Engineering and a Master’s in Business Administration. After a distinguished career with one of America’s largest corporations, Mr. Conway established a consulting company and for the past 15 years has worked with both local and international clients in the Middle East and Far East. His focus is on Strategic Planning, Organization Design and Human Resource Development. He has more that 12 published articles on Human Resources and International Business.
