International and expatriate reward

Although the extent to which money is a motivator is a matter of debate, reward is a key issue in people management – and it’s particularly complex in an international context.

Cultural differences may for example, affect the way employees view the effort-reward relationship and the perceived attractiveness of various benefits or ‘perks’. Researchers have long considered the relationship between Hofstede’s dimensions of national culture and the likely preferences of employees for different aspects of reward, particularly that which relates to individual performance.

An organisation can adopt one of three main approaches in managing international reward:

• Setting reward centrally - presents the advantage of ensuring consistency and some control over reward expenditure. However, approaches to pay or benefits in one country might not fit the culture and laws of another so this approach might cause challenges.

• A central reward approach that is adapted for each subsidiary - allows for flexibility when the local culture or practice makes it necessary. However, varying the reward approach potentially creates inconsistency across the organisation and might reduce visibility and control over costs.

• Allowing each subsidiary to set its own reward approach - allows each subsidiary to use local knowledge about culture and the legal and regulatory environment to develop a reward approach that is attractive and compliant. However, the lack of control can lead to escalating costs and inconsistency of approach across the organisation with some subsidiaries being perceived as less attractive to work for due to the rewards on offer.

Whichever approach is taken, it’s important to ensure the overarching business strategy and reward strategy are aligned. The reward strategy will also be influenced by the primary driver(s) for the overseas assignment, for example, to implement a strategic organisational change, knowledge transfer, career development, etc.

While pay and financial benefits, such as bonuses, allowances and paid holiday, are important, they’re not the only rewards that employers should consider. Research shows that non-financial rewards can be just as important and our 2018 Reward management survey found that non-financial rewards are an increasing focus for employers. Non-financial rewards may include opportunities for learning and development, flexible working hours, company culture and performance-based recognition or non-financial incentives.

Our factsheets on reward and pay and strategic reward and total reward explore the purpose of reward and how to implement successful strategies.

Employees might be needed to work on an international basis (known as working as an expatriate) on a long-term basis (such as 3-5 years or longer), a short-term basis (6-12 months) or on the basis of frequent business trips (common across Europe) The assignment type and duration will typically determine the organisation’s approach to whether the assignment will be offered on an accompanied or unaccompanied basis, with appropriate definitions of ‘family’ and ‘dependents’. Political, social, legal and climatic conditions, and how they compare with the home country, all play a part in an employee’s motivation towards an expatriate assignment as well as the reward package. For more on international assignments generally, see our factsheet on international mobility.

Irrespective of the assignment’s duration, working internationally brings both development opportunities and home-life disruptions to employees. Remuneration for those working internationally must reward the individual for the job they’re doing, and compensate them to some extent for the disruption they may experience. This is why it’s often necessary to design pay and benefits to make international placements more attractive. However, overseas assignments are expensive, and organisations need to properly assess the likely costs and benefits.

Before looking at the various approaches to expatriate compensation, it’s important to note that continuing pressure on costs has brought greater use of local contracts, or variations of them, and a move away from the conventional ‘fully loaded’ expatriate packages, particularly in developed markets and/or non-hardship locations. However, this is not the case in many emerging markets where more conventional approaches to expatriate pay still prevail.

There are various conventional approaches to expatriation compensation, including home-based pay, host country-based pay (that is, locally-based pay), a concept that’s often labelled ‘local-plus’, and headquarters-based balance sheet.

Home-based pay

This approach aims to ensure that the value of the basic package for the expatriate is the same as in the home country. It takes the package that the employee receives in the home country as the basis for the reward on the international assignment. Various items are then added to this base:

• Cost of living adjustment - if the cost of living in the country where the employee will be working is higher than the home country, an adjustment is made to reflect this (see taxation and cost of living section below).

• Cost of housing - if the employee is expected to find their own accommodation then an amount to reflect this cost will be added (some employers provide accommodation, in which case this is not included in the reward package calculation).

• Adjustment for taxation (see below).

• Allowances relevant to the assignment (see below).

The process of starting with a basis and adding elements to the reward package is known as the ‘build up’ or ‘balance sheet’ approach.

The reward package can be paid in local currency or in home-based currency. It’s common for an organisation to split the payment, paying a certain amount in home-based currency that the employee can use for ongoing financial commitments at home (such as a mortgage) with the remainder being paid in host country-based currency so that it can be used for day to day expenses.

The use of home-based pay can cause inequalities between expatriates and local employees, and between expatriates of different nationalities, which is why it is important to pay particular attention to the context before deciding of an approach.

Host country-based pay and ‘local-plus’

The host country-based approach provides a reward package in line with employees doing a similar job in the country where the expatriate will be working. It’s simple and ensures parity between the expatriate and local employees, but might not give employees an incentive to accept overseas assignments if the pay rate is considerably lower than in their home country.

A ‘local-plus’ approach is typically a salary and benefits package determined by the local market with additional benefits to contribute towards such items as housing, children’s education and home leave trips. In this approach, no reference is made to home country pay levels or tax. This is quite a common practice in parts of the Middle East and Asia-Pacific.

Headquarters-based balance sheet approach

This is a more ‘global’ approach in which the employee’s country of residence has no impact and they are simply paid in line with what they would be paid if working in headquarters. Although simple to administer, it can be very expensive which explains why home-based and host country-based pay are the most common approaches to determining expatriate reward.

Other approaches

Other approaches include:

• Cafeteria’ system – works in a similar way to the flexible benefits (sometimes called ‘cafeteria’ benefits) used in many UK organisations. A ‘menu’ of benefits is offered (for example. housing, school fees) and the employee chooses the ones they want, up to an agreed limit. This approach does address the fact that employees have varying needs but can be costly and time-consuming to put in place.

• Negotiation of personal agreements - where the organisation and employee negotiate and agree on a personalised package. Although this approach allows for personal issues to be addressed, it’s only likely to be successful if the organisation has few expatriates on placement as it’s a case-by-case arrangement and allows for little consistency across expatriates’ packages.

When determining expatriate allowances, keeping in mind the employee’s needs, the location and nature of the assignment is essential to accurately assess the costs involved. These might include relocation, housing, language support, school fees and hardship allowances. Some companies also offer a ‘foreign service premium’ which is typically the same for all expatriates irrespective of the location and is seen as a means of compensating for the upheaval of an expatriate assignment. Another reward component, a completion bonus, can be used, depending upon the nature of the assignment. See more on in our international mobility factsheet.

Tax

If an employee is working overseas in a taxable environment, it generates a tax liability, in which case the organisation will have to decide how to treat such a liability. There are two main approaches:

• Tax equalisation – the principle behind this method is that the employee would pay no more and no less tax than they would have continued to pay back home. It can cause issues if applied in non-tax environments, that is. the employee would have a home country tax deduction but, in reality, the company would not be incurring any tax liability. The advantage of this method is that the employee pays the same tax irrespective of the location.

• Tax protection – whereby the organisation makes up the difference if the expatriate pays more tax abroad, but if the employee pays less they keep the difference. This approach is less common.

Cost of living

The cost of living varies considerably from country to country. If it’s higher in the host country, an appropriate multiplier or allowance is applied to bring the overall value of the reward package to a level at which the employee will be able to maintain the same standard of living as they enjoyed in the home country. Logically, if the cost of living is lower in the host country, the reward package may be reduced – however, organisations are often reluctant to do this to maintain good employee relations. Currency exchange rates normally but not always impact relative cost of living, and this is typically taken into account when calculating cost of living adjustments.

Contacts

ECA International

International European Benefits Association (IBEA)

Reward and Benefits Association (REBA)

UBS - Cost of living in cities around the world

Books and reports

ARMSTRONG, M. (2019) Armstrong's handbook of reward management practice: improving performance through reward. 6th ed. London: Kogan Page.

BREWSTER, C., HOULDSWORTH, E., SPARROW, P. and VERNON, G. (2016) International human resource management. 4th ed. London: Chartered Institute of Personnel and Development. Chapter 10: Rewards; Chapter 14: Managing expatriate assignments.

PERKINS, S.J., WHITE, G. and JONES, S. (2016) Reward management: alternatives, consequences and contexts. London: Chartered Institute of Personnel and Development. Chapter 11: International reward management)

ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR fundamentals. London: CIPD and Kogan Page.

SHORTLAND, S. (2018) International assignment reward policies: the importance of compensation and benefits to women’s expatriate participation. In: PERKINS, S.J. Routledge companion to reward management. London: Routledge.

Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.

Journal articles

BONACHE, J. and ZARRAGA-OBERTY, C. (2017) The traditional approach to compensating global mobility: criticisms and alternatives. International Journal of Human Resource Management. Vol 28, No 1, January. pp149-169.

CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.

Members and People Management subscribers can see articles on the People Management website.