Selecting compensation as an element to illustrate the difficulties multinational companies face in utilising expatriates

Table of Contents

Introduction

Difficulties for multinational companies in utilising expatriates

The taxation issues

The relationship between the salary level and the local salary/cost-of-living level

Currency rate risks and differences in prosperity and spending power

Social security and pension issues

Spouse related and family issues

Conclusion

References:

Introduction

The workplace has changed the last years. The employees enjoy more career opportunities. Their acceptance of an international assignment depends on a large degree on the organisation’s compensation policy. The expatriate compensation policy should follow the same principles as the domestic compensation in order to attract, retain and motivate employees to fulfil the expectations of the company within a determined budget (Jagatsing, 2000). The expatriate defined means “an employee of one company who is sent for a limited period of time from his or her place (country) of domestic employment to a place of assignment, for the purpose of working for and providing services to a receiving company.” (ASN, Services for Expatriates, March 2004). Compensation is “the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period.”(United Nations Statistic Division, March 2004).

The difficulties of the compensation of an expatriate lie in different economic systems, development models, political and institutional contexts, different pension systems, taxation issues and different cultures and traditions. Expatriate compensation is very complex and a challenging issue. Black (1991 in Suutari and Tornikoski, 2001) argued that 77 per cent of the expatriate managers were dissatisfied with their salaries and their compensation package. Considering these difficulties and differences in the international context the Human Resource Manager has to ensure that the compensation is fair and that it is also cost-effective in today’s global market place.

Difficulties for multinational companies in utilising expatriates

The difficulties for the company arise from the fact that the expatriate is facing a new culture by going abroad and whether to apply the home or the host country characteristics. The compensation should be attractive for the expatriate. It also should arrange reasonable compensation, facilitate transfers between foreign subsidiaries and between home-country and foreign subsidiaries, attract and retain employees, be cost-effective and constitute and retain an equable and expedient relationship between compensation of all employees of any subsidiary (Robock and Simmonds, 1983 in Harzing and van Ruyssefeldt, 1995). For the firm the problem or difficulty is the pressure to imitate the host or the home country. This can be explained by mentioning the term isomorphism. Isomorphism is “A substance which is similar to another in crystalline form and composition” (Thefreedictionary, March 2004). The isomorphism can have four effects (pressures) (Handout Lecture 7, 2004):

1. Local: the subsidiaries behave all the same way in the host country
2. Corporate: corporate culture, the HQ gives advices for a international equality
3. Cross-national: HQ represents prospects of home country environment which are transmitted to subsidiaries
4. Global: no clear roots, the multinational companies deal with isomorphic pressures from other firms in global markets

Isomorphism is affected by different factors. For the issue of compensation two of them are of particular interest: the home country characteristics and the host country/subsidiary characteristics. In fact the firm has to face various difficulties, which will be explained in the following.

The major difficulties identified in a study of Finnish expatriates (Suutari, Tornikoski, 2001) are:

1 Taxation issues
2 The relationship between the salary level and the local
salary/cost-of-living level
3 Currency rate risks, differences in spending power and prosperity
4 Social security and pension issues
5 Spouse-related and family issues

The taxation issues

The taxation issues are very difficult to deal with and the tax situation of an expatriate can be very expensive. In fact if an UK employee is paid abroad (remains out at least on year) normally there will be a local tax liability in the country where the expatriate is doing his assignment. The problem here is that the tax liability varies greatly from one country to another. Torrington (1994, p. 53) gives a good example for such a problem: “In Belgium, for example, the maximum marginal rate is 70 per cent, reached at a salary level of approximately £ 70,000. In Italyit is 62 per cent, reached at £ 280,000, and in Hong Kong it is 16 per cent reached at £ 21,000.” Obviously, these are not actual data because they are from 1994, but they show how much the various tax systems vary in the different countries.

Another issue is the lack of clearance of the taxation systems, the constant changes of the systems and the difficulty of getting up-to-date information about the tax systems. Due to these facts it is very difficult for the expatriates to assess their net income level and the same problem can be applied for the company.

The task for the employer is to neutralise these variations by paying a net salary to the expatriate and by paying also the tax obligations or by refunding the individual.

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