Structuring Expatriate Compensation Packages

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Structuring Expatriate Compensation Packages
HR in Law Professional Briefing 21 July 2009
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Compensation Building Blocks Part 1

• What type of entity is employing the individual
  corporate or partnership?
• What is the employment relationship between the
  individual and the employing entity employed or
  self employed?
• Will this employment relationship change during
  the period of the assignment?
• What type of compensation is provided to the
  individual? (Consider equity partner profit
  share compared to employee packages)

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Compensation Building Blocks Part 2

• How do you ensure the expatriate compensation
  provides the same purchasing power as in the home
  country?
• How do you protect against adverse foreign tax
  regulations and higher effective tax rates?
• Who enjoys the benefit of lower or no tax
  jurisdictions?
• How do you approach exchange rate conversions,
  fluctuations and cost of living differentials?
• Do you recognise any projected shortfall in
  pension benefit entitlement?

4
Individualisation of Compensation Part 1

• We have a competency framework, but it is so
  vague and non-meaningful, it doesnt really help
  like a person at this level works on complex
  projects, and a person at the next level works on
  more complex projects. So I started developing
  it myself for my group because I kept getting
  questions like, What does it take to get
  promoted?
• HR puts caps on salaries based on level. I once
  had a truly top performer whom I wanted to
  reward. But I couldnt find a good way to do it
  because I was blocked.
• It used to be that people could move around a
  lot more based on their own drive, but now we
  cant do this kind of thing. We slot people into
  roles based on experience, and if someone no
  longer fits a role, they leave the firm and we
  might have a big loss of potential talent. So
  our career development system is much more
  sophisticated, controlled and efficient now, but
  it doesnt necessarily maximise the right fit for
  people, or our overall workforce performance.
• The competencies Im supposed to evaluate my
  employee on dont match the work the person does.
  So I always ignore the form and write see
  attached and make up my own.

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Individualisation of Compensation Part 2

• Traditional Standard broadband approaches to
  employee compensation can restrict both the
  expatriate and the employer, and can lead to
  unrealistic or inappropriate benchmarking and
  anecdotal comparisons.
• The individualisation of compensation is about
  tailoring compensation and benefits to
  individuals or discreet groups of expatriates.
• This might involve segmenting expatriates into
  categories, such as equity partners, senior
  executives, high-potential or average performers,
  mission critical areas or projects, career
  development or preferences, specific teams, etc.
• This approach might also take a modular approach,
  which entails creating a list of choices from
  which expatriates can select items of
  compensation and benefit, etc., to suit their
  needs.
• Another consideration may be a more flexible
  approach broad banding, with fewer, wider, more
  flexible salary ranges that would give a manager
  more freedom to tailor a package to the unique
  needs of a given expatriate and project.

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Variety of Assignment Structures

• Employed/self employed/long/short/frequent
  business visitors/commuters.
• Move from traditional tax equalised assignment.
• Shift from a global policy across the
  organisation.
• More flexible approach dependent on business
  requirements, career development, specific teams,
  employee initiated.
• Move to benefit suites
• - Host country allowance use independently
• - Benefits package pick and mix
• - Relocation and initial set-up only
• - Home country benefits only i.e., 401K,
  social security

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Expatriate Expectations vs. Reality

• Who manages expatriate expectations?
• Newspapers, online reports, social networking
  sites.
• Coffee machine and swimming pool discussions.
• Line manager misdirection.
• Uninformed HR.
• Old hands who always know best.
• Competitor misinformation (not the HR community!).

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Redundancies and Terminations

• Which law applies if redundancy takes place?
• What if the contract specifies a choice of law?
• What are the alternatives to expatriate
  redundancy?
• Ending of assignments and localisation of
  employees.
• Who is responsible for what? Employer or
  expatriate?

9
Exchange Rate Fluctuation

• Typically, expatriates are not compensated as
  exchange rates always move up and down swings
  and roundabouts.
• However, significant fluctuations can reduce the
  value of take-home salary.
• Periodic reviews might help, but be clear on
  trigger points to recalculate salary or
  allowances.
• What would you compensate for some items are
  affected differently by the exchange rate
  movement, e.g., normal daily expenditure,
  housing, savings.
• Is the expatriate paid in their home or local
  currency, or will you offer other alternatives?
• Does the individual have a host country bank
  account?

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Housing

• Recent budget changes to the taxation of lease
  premiums (LPs).
• Previously, considerable tax savings, taxed on
  rateable value and beneficial loan rate above
  75K
• Lease less than 10 years now taxed at full value
• - leases entered into or extended from 22 April
  2009
• Impact increased tax cost, either employer or
  assignee. Will this change the trend on
  accommodation provided? Will this impact on
  attractiveness of assignment?
• What impact will this have on the family?
• Consideration of assignments to lt 24 months to
  benefit from detached duty relief (DDR).

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Localisation Part 1

• Trend to localise assignments.
• Additional impact of UK tax changes
• - loss of personal allowance (PA) for remittance
  basis taxpayers
• - 50 tax rate for high earners gt150K 6 April
  2010
• - Phase out of PA gt100K 6 April 2010
• - Reduction of pension relief for higher rate
  taxpayers gt150K
• 6 April 2011, and anti-forestalling rules from
  22 April 2009

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Localisation Part 2

• How can you still preserve attractiveness of an
  oversees assignment to the UK?
• - assignments less than 24 months DDR
• - assignments less than 3 years overseas
  workday relief
• - salary sacrifice COLAs (DDR), home leave
• - provide ongoing tax assistance to deal with
  increased complexities throughout assignment, not
  just initial year.

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Localisation Part 3

• Remittance Basis Taxpayers Partners
• - Increased UK tax exposure due to 50 rate,
  pensions, and mixed fund
• rules on worldwide partnership profits.
• - Mixed fund rules potential increase on
  profits charged to UK tax,
• increased concern with 50 tax rate
• - Guaranteed payments segregated
• - Internal accounting procedures to separate UK
  profits?

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Questions
? Please contact StephenA_at_FrankHirth.com or
AnnetteN_at_FrankHirth.com