United States: A New World Of Compensation Strategies For Expatriates

Expatriates have for many years been able to command rich compensation packages even when their counterparts in the United States have seen their compensation stagnate or even decrease. This is changing, and expatriate compensation is being subjected to the new reality of compensation and pay for performance.

Multinational organizations need to treat their expatriate employees just like any other home-based employees and should develop a talent management system that guides them regarding what is expected during their assignment. The first question an organization needs to ask itself is why are we sending this executive to another country? The answers vary but the reason is usually to:

  • assume a leadership role,
  • support talent planning,
  • support a critical project,
  • develop local staff,
  • create a local business subsidiary, or
  • develop international leadership experience.

Each reason comes with challenges from not only a business standpoint, but also a compensation standpoint.

Before globalization became an everyday word in a company's vocabulary, organizations had trouble enticing an executive to leave home and take a three- to five-year assignment and disrupt his or her career path. The primary incentive was offering the executive increased compensation and assignment allowances. This way, if the assignment did not go well or there was no return position for the executive after a few years, he or she could at least feel better about being compensated for the troubles.

Expatriate executives saw the assignment as a cash windfall and since there were few if any willing to take the assignment, management continued to pay them with little or no accountability for pay-based performance.

All this changed a few years ago, however, as shareholders decided that executive pay was excessive and demanded that companies and their boards link pay to performance. Even out-of-reach expatriates were held accountable. They had to answer questions they hadn't been asked before:

  • What rate of return are you providing the organization?
  • What are you doing to develop local talent?
  • How are you supporting the development of talent?
  • How are you growing the local business?
  • How does your being in the local business help the total organization?

As expatriate populations have grown, companies have experienced skyrocketing costs with inequitable return on investment. Companies realized they needed to focus more clearly on the expatriate's role and what he or she was accomplishing in the foreign location. With expatriate assignments costing on average three to three-and-a-half times an executive's annual salary, all allowances were open for review.

Step 1

The first step in this review process is to develop clear and defined business goals similar to those of home-based executives. Additionally, the executive has to look at the assignment as a step in career progression, allowing the company to reduce the excessive assignment-related allowances and present the executive with a clearly defined path.

This new thinking allows expatriate executives to be included in the talent planning process, and the talent management group within HR includes these executives in its talent management review process. Expatriate programs that were originally separate departments in HR have been moved into the compensation department to better align these employees with the overall compensation strategy.

Step 2

The second step is to validate the performance of the expatriate against clearly defined goals: Did the executive meet these goals, and if not, why not, and what should management due about it. If the answer is no, the company has to think about whether:

  • the goals are achievable,
  • this is the right person for the role,
  • a local hire could better understand the market, and
  • there is enough local talent available to meet the expectations.

Multinational companies will always need expatriate employees to move quickly into new and emerging markets. The key is to develop policies and practices that keep the cost low while enabling the organization to make a footprint quickly and profitably. One way to accomplish that is to design expatriate policies that reflect different assignment lengths based on the business need and other needs of the location. There is no longer a one-size-fits-all approach.

An organization will have to develop many policies that address length, size and scope of an assignment. With each policy, you will have to carve out allowances to fit the assignment. For example, if the organization knows it needs someone for six months or less, most of the "standard" expatriate allowances offered for a regular three- to four-year assignment will not be needed. Something less expensive can ensure that the goal of the assignment is achieved and costs saved.

Another way to reduce costs is localization. If an expatriate employee is going on a three- to five-year assignment, the company designs a policy that delivers a localization approach in Year 4. This involves having the expatriate employee become a local hire in the foreign location, with allowances ending and the employee being treated the same as locals. Significant costs could be saved as long as a detailed policy was in place to help the expatriate executive understand what it all means for his or her career.

Pay and performance should be aligned and reflect the compensation structure of the entire organization. To best prepare for these competitive pressures, multinational companies should:

  • align the expatriate's role with the organization's business strategy;
  • make local talent development the foremost in the executive's goals;
  • create a compensation and assignment package that motivates the executive but allows for flexibility to localize, transfer or return the executive as needed; and
  • develop a talent management system that includes the development of local talent to replace the more-expensive expatriate assignment.

Time will tell if this new approach will take hold in multinational organizations. Expatriate management must pursue clear goals and metrics to meet business objectives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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