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Paying for differences

first_imgPaying for differencesOn 1 Nov 2001 in Personnel Today Previous Article Next Article The gap between pay levels and cost of living is ever apparent for companiesmoving people around the world. Friction can arise when expats and local staffwork together on very different packages. Rob Outram reportsIt was late 2000 and student representatives – “tomorrow’sleaders” from around the world – had gathered for a conference inEdinburgh, Scotland. The keynote speaker, the chief executive of one of thebiggest IT and management consultancy firms in Europe, was telling them theywere valuable people. The war for talent was the biggest challenge facingglobal corporations, he said. But one of the students – from Lima, Peru – disagreed. “In mycountry,” she said, “medical and engineering graduates are waiting inrestaurants and driving taxis. There are just not enough jobs for qualifiedpeople.” It was a salutary lesson that conditions in developed, wealthy economies donot represent a universal way of life. Pay levels and the cost of living varywidely. These stark differences become an issue for companies operatingglobally when they move people around the world. Pay differentials can make itharder to persuade employees to go abroad on assignment, or they may make ithard to bring them home. They can also create friction when people workingtogether, notionally at the same level of responsibility, are on very differentpackages. Jeanne Poole, vice-president, global compensation and benefits atmultinational telecoms company Acterna, says, “It can depend on theemployee. Is this a global employee or a short-term assignee? “If it’s the latter, it makes sense to keep them in their home countrypay structure – although some companies would switch people onto localpay.” As Carolyn Gould, an international compensation specialist at professionalservices firm Pricewaterhouse-Coopers explains, “More and more companiesare sending people around the world to meet general staffing needs, notspecific strategic needs. In that case the most common approach is local levelsof pay, with allowances.” Expats expect to be well rewarded and compensated for any extra costs andhardships associated with the move. When the move is to a country where pay ismuch lower, that can create friction with local staff. Lance Richards, former director, global HR of Teleglobe CommunicationsCorporation, based in Virginia US, was formerly in Beijing, China, where thecost of living and salary rates were much lower than in the US. Richards says,”In China my monthly expat salary was more than the local HR managerworking for me earned in a year. But she knew I had come in with 17 years’experience, to set up the office and transfer skills to the local staff.” The main problems came, says Richards, when the company brought in twoChinese nationals returning to the US. As he explains, “There was a lot ofnoise about that and the fact that they were on expat packages. The local stafffelt that just because these two were lucky enough to leave China and completetheir education in the US, they were not worth 10 times the local rate. “But one had a second MSc to add to the one he had gained in China anda PHD at Cornell University, in the exact technology we were working on. Theother was an attorney, a Chinese national who had practised in New York City,who knew Chinese and US intellectual property law. “Over the two years the locals did grow to understand why Westerntraining was worth a premium, but they were never comfortable with the size ofthat premium.” Alice Wong, an HR consultant based in Beijing, agrees. She says, “Ingeneral expats are very well respected [in China] but friction will arise iflocal staff think that the expat is not as competent as they are, and if HRcares too much about the expats and ignores compensation and benefits for localstaff.” The gulf between wealthy expats and locals is also a particular issue whenbenefits are more apparent, says PwC’s Gould. “For example,” shesays, “Colleagues may not know your salary but they will be aware that youlive in a better neighbourhood. Sometimes it may even be a better neighbourhoodthan the head of your local company.” Another problem is that a too-generous expat package can provide a majordisincentive to ever return home. Lance Richards cites the example of a Britishcompany that paid two expats a hefty £70k-plus salary (approximately US$98k)plus housing allowance to work in Atlanta, Georgia, in the US where housingcosts were actually lower than in the UK. Says Richards, “The Americanview was ‘You Brits are crazy – if you pay them that much they will never wantto leave!’” One solution is to settle differences through clearly identified allowancesfor cost of living, hardship, education and so on, rather than through basicsalary. That way, expatriate packages are easier to justify to the expatsthemselves and to their colleagues. It also helps if those allowances are notarbitrary, but based on objective information from one of the specialistcompanies providing such information. These include ORC, AIRINC, William MMercer and ECA International and Runzheimer. Denise Oemig, director of international services at Runzheimer, advises, “Wewould not recommend paying more than the market rate in basic salary.Relocation, for example, should be a separate payment. It should not be part ofsalary or linked to salary.” Firms like Runzheimer provide up-to-date reports on cost of living differentialsand the cost of relocation. Life can often be more expensive for an expatriatethan for locals. Language, culture or safety considerations might dictate thatexpatriates live in certain high-cost areas and educate their children atfee-paying international schools. As Willam M Mercer’s Worldwide Cost of Living Survey 2001 shows (see above),the most expensive cities for expats are not necessarily those with the higheststandard of living. For example, Moscow is the second most expensive city (afterTokyo) while Sydney, Australia is only 103rd worldwide in cost terms. At least the cost appears to be narrowing, according to Mercers. The gapbetween the world’s most and least expensive cities has shrunk by around 20%,says senior researcher Rehan Mustafa. He explains, “What we are seeing isa gradual reduction in global cost of living extremes. This reflects pricereductions from wider availability of international products, particularly inthird world countries.” Cost of living is not the only factor affecting pay differentials. The jobmarket itself plays a part. For example, an international survey published inManagement Today magazine in July 2001 found that chief executives of companiesin the UK were paid on average a third more than their French peers – £509,000as opposed to £382,000 (US$713,000 to US$535,000 approximately) – but just overhalf their counterparts in the US rake in nearly £1m annually. Paydifferentials like that mean, when home country pay is used as a basis, therewill be considerable anomalies between teams of expats from different homecountries working together in a third country. Jill Mervin, an American HR consultant based in London explains, “Thecomplication comes when people are working side-by-side from several differentcountries. The traditional ‘balance sheet’ approach is based on the idea theywill all go home at the end of the assignment. But as a rule, the Americanalways ends up with more money. It’s OK if you only look at the individual. Ifthey work together, it’s a problem.” “Sensitive employers might say ‘everybody’s allowance will be the sameand it will be paid in local currency, and the difference in salary can be paidat home’. But employees might well say ‘That’s a sham, you’re playinggames’,” adds Mervin. An even bigger problem can come when moving someone to a much wealthiercountry. Malou Roth, HR consultant and former vice-president HR, training anddevelopment at Molex, a global high-tech manufacturing company, argues that thestandard “balance sheet” approach may not be right in such cases. Roth gives an example, “We transferred some entry level engineers intothe US, from China and Taiwan. Their home country salaries would have convertedto a very low US salary, even adding the cost of living allowances.” “In practice, you don’t worry if you have a Swede and a German workingside by side and one is making 10 per cent more, but when you bring thelower-wage countries into the equation it can be an issue.” Technically, Roth says, if you adopt the balance sheet approach “youare handling it”. But if the cost of living allowance is calculated as apercentage on a very low base salary, you will still end up without adequatemoney to live comfortably. As Mervin says, “If you have employees from a variety of countriesworking side by side, each should be able to buy a round of drinks withoutgoing broke.” But while the simplest short-term solution is to transfer the employee ontothe US payroll, says Roth, that can create problems in the long term. Theperson may be reluctant to return home if the net host country salary, takingtaxes into account, is much higher than the net salary they would be earning intheir home country. The differential between the high taxes of most WesternEuropean countries and low tax levels in, say, Hong Kong or the Middle East, isvery marked. Also, a period on a foreign payroll could affect the employee’spension, social security, and some social benefits in the home country. Some forward-thinking companies are looking at alternatives, according toDavid Arkless, CEO of Empower, an international performance improvementconsultancy based in London. One is to reduce the need for expat assignments.Arkless says, “The exchange of expertise internationally is happening moreand more, not so much physically as over networks, mentoring over a companyintranet.” Another is to create a cadre of globally mobile employees, typically youngMBA graduates, remunerated on a global package and mentored by an experiencedmanager back in head office. Arkless says, “The big petrochemicalcompanies are among those doing this.” There is no evidence that the movement of expats in itself is narrowing paydifferentials. So for any international transfer, according to Runzheimer’sOemig, “The intent of the move is all-important.” To arrive at a fair and workable solution, line management and the HRfunction must both understand the nature of any international transfer. Andthat means talking to each other. As Oemig puts it, “Sometimes companies can get confused about thereasons for the assignment. They only know that they need someone in thatcountry next week. And the HR department is often the last to know about themove. The guy may already be on the plane by the time they find out!” Robert Outram is editor of CA Magazine, the journal of the Institute ofChartered Accountants of Scotland and Scotland’s largest circulation financeand business magazine. Expatriate pay – three main approaches– Home country salary adjusted bycost of living, relocation, hardship and other allowances (the “balancesheet” approach).– Local pay rates, with or withoutallowances.– Global “expat” pay scalesunrelated to any one home country.The world’s most and leastexpensive cities for expatriate assignmentsTop 51st        Tokyo, Japan2nd      Moscow, Russia3rd       Hong Kong4th       Beijing, China5th       Osaka, JapanBottom 5140th   Johannesburg,   South Africa141st    Madras, India142nd  Quito, Ecuador143rd   Bangalore, India144th   Blantyre, MalawiSource: Worldwide Cost of LivingSurvey 2001, William M MercerCalculating “hardship”Physical threat:– Actual or potential violence in area– Hostility of local population– Prevalence of disease– Limited medical facilities and servicesDiscomfort:– Difficult physical environment– Geographic isolation– Cultural or psychological isolationInconvenience:– Educational system– Quality or availability of housing– Community/ recreational facilities– Availability and quality of goods and servicesSource: AIRINC Comments are closed. 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