Outlines the main characteristics of strategic and total reward, and looks at designing and implementing a reward strategy across the organisation
While any reward strategy must reflect an organisation's compensation philosophy, there are many additional factors which apply when considering reward in an international context. Should reward be set centrally or should each region or subsidiary develop its own strategy? How are cultural differences being taken into account? What are the financial and non-financial elements?
This factsheet explores the factors that organisations should consider, beginning with the purpose of the reward strategy and what the company wants to achieve. It then focuses on rewarding expatriate employees, looking at the implications and costs of using expatriates and the different approaches of home versus host-based pay. It describes the typical allowances and benefits offered to employees working overseas, such as housing, insurance and a travel home. Finally, it outlines issues around taxation and costs of living.
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When managing international reward, it’s important to strike a balance between making the assignment attractive and getting an appropriate return on the cost of sending an employee to work overseas. It’s important, therefore, for employers to appraise the cost of an international assignment before any selection process and to ensure that the benefits outweigh the costs.
If it’s decided that an expatriate placement is best for the organisation, then the reward of an employee should be carefully considered so that they don’t lose out as a result of the placement, and they also receive some compensation for the disruption associated with the move. However, employees should also be reminded of the considerable benefits of an international assignment in terms of their personal development, career prospects and development of their knowledge and expertise.
International reward strategy
Although the extent to which money is a motivator is a matter of debate, reward is a key issue in people management. A lot of reward theory focuses on motivation, incentivisation and engagement. This is particularly complicated when looking at the international context of reward within different cultures and institutions - see our international culture factsheet. Although there is some similarity in how senior managers and expats are rewarded, this is less true for non-managerial workers.
Cultural differences may, for example, affect the way employees view the effort-reward relationship and also the perceived attractiveness of various perks or benefits. Researchers have considered the relationship between Hofstede’s dimensions of national culture and the likely preferences found within employees for different aspects of reward, particularly that which is contingent upon individual performance1,2. Institutional factors such as political and legal structures are more influential given the introduction of pay minimums in number of countries and role (or absence) of unions and collective bargaining.
An organisation can adopt one of three main approaches:
- To set reward centrally - This has the advantage of ensuring consistency, and ensuring there is some control over reward expenditure. However, approaches to pay or benefits in one country might not fit the culture and laws of another, and so this approach might cause difficulties.
- To have a central reward approach that is adapted for each subsidiary - this allows adaption when the culture or local practice makes this necessary. However, varying the reward approach does mean that there will be less consistency across the organisation, and does reduce some of the cost control.
- To allow each subsidiary to set its own approach to reward - this 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 can lead to inconsistency of approach across the organisation with some subsidiaries being seen as less attractive to work for due to the rewards on offer.
Whatever approach is taken, reference must be made to the over-arching reward philosophy and strategy in line with business strategy. Reward strategy should then be reflected in reward policy and practice.
When considering reward, it’s important to note that this includes both financial and non-financial elements. Financial rewards might include pay, ‘perks’, paid holiday, etc. Non-financial rewards might include opportunities for learning and development, as well as ‘voice’ and quality of working life. Go to our factsheets on reward and pay and strategic reward and total reward.
Reward for expatriates
Employees might be needed to work on an international basis (known as working as an expatriate). This might be on a short term basis, or could be as part of a placement lasting several years - see our international mobility factsheet.
Whether long term assignment or shorter, but frequent business trips, working internationally brings both development opportunities and home-life disruptions to employees. Remuneration for those working internationally has to reward the individual for the job that they are doing, and also compensate them to some extent for the disruption they may experience.
It might be necessary to design pay and benefits in such a way to make international placements more attractive, however overseas assignments are expensive and organisations need to assess the likely costs and benefits.
Approaches to expatriation compensation
There are a number of approaches to expatriation compensation: home-based pay, host country-based pay (that is, locally-based pay), and headquarters-based balance sheet are the most common.
The home-based approach aims to ensure that the value of the package for the expatriate is the same as in the home country. This approach takes the package that the employee receives in the home country as the foundation for the reward on the international assignment. A number of items are then added to this ‘foundation’:
- Cost of Living Adjustment (COLA) - If the cost of living in the country where the employee will be working is high an adjustment is made to reflect this (see section on taxation and cost of living)
- 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 and so this is not included in the reward package calculation)
- Adjustment for taxation (see below)
- Allowances relevant to the assignment (see below).
This approach of starting with a foundation 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 usual for an organisation to split the payment, paying a certain amount in home-based currency that the employee can use for ongoing financial commitments (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.
Careful thought needs to be given to the use of home-based pay as it can cause inequalities between the expatriate and the local employees and between expatriates of different nationalities. The host country-based pay approach provides a reward package to expatriates in line with employees doing a similar job in the country where the expatriate will be working. This approach is simple and ensures parity between the expatriate and local employees, but might not give employees an incentive to accept overseas placements if the rate of pay is considerably lower than in the home country. It is usual for an expatriate to receive allowances for things such as school fees, accommodation and travel in addition to the host country-based pay.
The headquarter-based balance sheet approach is a more ‘global’ approach in which the employee’s home country has no impact and they are simply paid in line with what they would be paid if working in headquarters. Although simple to administer, this can be very expensive and as a result home-based and host country-based pay are the most common approaches to determining expatriate reward.
Other approaches include:
- Budget system - where the costs incurred by the expatriate in both the home and host country are assessed. The combined costs are then expressed in the currency of the host currency, and grossed up to take account of tax. However, this is time consuming, due to the listing of all the costs and their changing nature, and hence it is not often used.
- Lump sum – where the employee moves to an expatriate role with no adjustment to the existing reward package, and accepts a lump sum in return. This is most commonly used for short term placements.
- ‘Cafeteria’ system – which works in a similar way to the flexible benefits (sometimes called ‘cafeteria’ benefits) used in many UK organisations. A number of benefits are offered to the expatriate (for example. housing, school fees) and the employee chooses those that s/he wants, up to an agreed limit. This approach does address the fact that employees have varying needs, but can be costly and time consuming to administrate.
- Negotiation of personal agreements - where the organisation and employee agree a personalised package, negotiated between the employee and head-office management. Although this approach does mean that any personal issues can be addressed it can be problematic as consistency between expatriates might not be maintained. This approach is only likely to be successful if the organisation has few expatriates on placement.
Allowances and benefits
When determining expatriate allowances it is important to be mindful of the needs of the employee, the location and nature of the assignment and the costs involved, but might include relocation, housing, language support and school fees. See more on in our international mobility factsheet.
Taxation and cost of living
If an employee is working overseas it is likely that s/he will be required to pay taxes locally. There are two main approaches used to addressing this issue:
- Tax equalisation – the employee’s pay is kept in line with the level of pay that they would have received at home. So, if the taxes are lower in the host country pay is reduced accordingly, and if the taxes are higher the pay is increased to reflect this.
- Tax protection – whereby the organisation makes up the difference if the expatriate pays more tax abroad, but if the employee pays less s/he keeps the difference. This approach is less common.
Costs of living vary considerably country to country. If the cost of living is higher in the host country, an appropriate multiplier 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 should be similarly reduced – however, organisations may be reluctant to do this. The fluctuation exchange rate between currencies also needs to be considered. One approach to dealing with this is to pay part of the salary in home country currency, and part in host country currency – as suggested earlier.
- CHIANG, F (2005) A critical examination of Hofstede’s thesis and its application to international human reward management. International Journal of Human Resource Management. Vol 16, No 9. pp1545-1563.
- CHIANG, F. and BIRTCH, T. (2005) A taxonomy of reward preference: examining country differences. Journalof International Management. Vol 11, No 3. pp157-375.
Useful contacts and further reading
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)
RENNIE, A. and McGEE, R. (2012) International human resource management. CIPD Toolkit. London: Chartered Institute of Personnel and Development.
UBS Switzerland AG (2015) Prices and earnings 2015. Geneva: UBS.
VERNON, G (2010) International pay and reward. In: EDWARDS, P and REES, C (eds) International human resource management. 2nd ed. London: FT/Prentice Hall.
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BRINK, S. and MYHR, M. (2014) Assessing competitive pay for executives in a global labor market. Benefits and Compensation International. Vol 44, No 1, July/August. pp15-18.
CROSBY, M. (2013) Knowing when to use a host-based compensation program. Workspan. Vol 56, No 7, July. pp27-30.
NORMAN, M. and WHITBECK, J. (2010) Make the most of your expatriate compensation strategy. Workspan. Vol 53, No 4, April. pp14-21.
SHARP, R. (2012) Reward strategy: what are the benefits of a global approach? IRS Employment Review. 13 April. 7pp.
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