THE ART AND SCIENCE BEHIND AN EFFECTIVE

Transcription

1 ACING INTERNATIONAL COMPENSATION: THE ART AND SCIENCE BEHIND AN EFFECTIVE GLOBAL REWARDS PROGRAM

2 Global compensation is among the most daunting challenges multinational organizations face. Managing compensation in one country can be complex in itself, but when pay plans are administered across borders, there are even more factors to consider. Although global rewards are never simple, it can be managed effectively with the proper planning and resources. Developing international pay programs is both a science and an art, and the ability to balance these two aspects is what enables multinational companies to create effective compensation strategies aligning with business objectives and local needs. In this guide, we ll review some of the key practices you can use to ace international compensation, including: Reviewing different forms of business establishment Identifying trends in global rewards Developing a global HR strategy Balancing global consistency with local markets Developing a strong international compensation plan Taking an international approach to benefits We ll begin by discussing forms of business establishment, which is an important first step in taking an informed approach to global rewards. Page 2

3 Forms of Business Establishment To support effective decision making in global compensation, it is important to first develop a full understanding of how the business is established. This will guide you in determining how applicable rules will affect your approach to global pay. Here are the main forms of business establishment: Distributor Independent Contractor The rules distinguishing an independent contractor from an employee vary between countries and care must be taken to avoid the company becoming responsible for taxes, social security costs etc. Branch/Direct Employment by US Employer For this form of establishment, be mindful of the corporate tax rules that come into play. Joint Venture While the partner may have responsibility over the compensation structure in the JV, it is still critical for your company to have full awareness of what is going on to ensure ethical and legal pay practices. Merger & Acquisition With mergers and acquisitions, you must take an active role in compensation from the onset. Early involvement facilitates effective compensation planning, versus post-merger cleanup, which is more challenging. Business Opened from Scratch When opening a business from scratch, it is essentially to be fully prepared and maintain full, ongoing communication with stakeholders from the beginning. Page 3

4 Hot Topics in Global Rewards There are currently some trends taking shape across global rewards. Being mindful of these developments can help companies better prepare to navigate the challenges of international pay with success. Below are some key topics to consider, many of which will be discussed in greater detail in later sections: Compliance and Governance Compliance becomes increasingly important as you move outside the U.S. The company becomes responsible for understanding and meeting local laws, tax rules, and other regulatory considerations. Because these factors add complexity to compensation, it is important to establish the governance structure in advance by determining who will be responsible for what. Incentives When it comes to short- and long-term incentives, there are a few key factors to consider. Which vehicles can you use to incentivize your desired business outcomes? How will global grant guidelines and local competitiveness impact your incentives? Likewise, how will you manage currency fluctuations? Benefits Creating a comprehensive benefits package across different locations can be challenging, especially when it comes to striking a balance between a global versus local practice. We ll review some practical tips for overcoming this challenge shortly. Setting Up Operations in Developing Markets Your objective is to attract and retain top talent in foreign territories, but it is important to remember that your company could be perceived as a small fish in a big market. Establishing trust and strengthening the perceived value of employment can make a significant impact in your recruitment and retention strategies. Page 4

5 Developing a Global HR Strategy In order to succeed in global compensation, you must first develop a global HR strategy. That strategy must also be directly linked to your overall business strategy. Your compensation structure must support talent acquisition, but over the long term, talent development is also critical to employee satisfaction and business success. Bear in mind the following factors when developing your global HR strategy: Ensure that global growth and profitability are not limited by the availability of the right people in the right positions and locations. Recognize the borderless organization in the development, implementation, and administration of all HR programs. Utilize global and/or regional career development. Build global and/or regional pools of talent. Page 5

6 International Employee Population The workforce becomes more complex and diversified when companies operate globally versus only domestically. You will need to accommodate a broader range of employment types, which could include local and regional hires, temporary transfers and expatriates, permanent transfers, and the global cadre or career expatriates. Each of these groups may have different compensation models. Expatriates and temporary transfers are utilized for a number of reasons. They provide a level of corporate control for companies and can also address skill gaps in specific regions. Expatriates may also be employed in other countries to fill a short-term need, or to support developmental goals. Total Rewards: Domestic vs. International While there are many elements to consider when developing a total rewards program in the U.S., there is often even further complexity in other nations. In Mexico, for instance, employers must not only consider basics like life and disability insurance, medical plans, and retirement, but also factors such as Christmas bonuses, profit sharing, vacation premiums, seniority, severance, savings plans, food vouchers, and cars. These types of multinational total rewards disparities can prompt questions from home company managers as well as domestic employees. From differences in paid vacation time to extra benefits like cars and extended maternity leave, HR professionals must be prepared to answer questions about why things are different outside the U.S. Thus, you have both a mission and an opportunity to educate your stakeholders about the differences between domestic and international total rewards practices and labor laws. While they may not always be satisfied with total rewards differences, they will at least have an understanding as to the reasoning behind these differences. Page 6

7 Balancing Global Consistency with Local Markets From a headquarters standpoint, it would be simplest to keep everything consistent with compensation. However, there are some variables which must be addressed with a more tailored approach. Different groups of employees and specific regions each demand their own unique pay parameters, which should be supported by your company s overarching compensation philosophy. For your C-suite, for instance, you may need to set global standards, which will be consistently applied. For line managers and staff, on the other hand, you might maintain a global pay philosophy and base actual compensation on local market rates. Of course, base pay is only one element to consider. You should also determine how annual incentives, long-term incentives, prerequisites, retirement, and other benefits will be approached. Will you maintain a globally set and consistently applied methodology to each, and address some elements by location? Applying consistent practices is the most effective way to avoid discrepancies and ensure you are supporting the company strategy on a global level. Global Grades/Structures A common question when approaching global compensation is this: If my company will need to adapt its pay plan to accommodate regional and local differences, why bother creating global grades and structures in the first place? There are a few reasons why this is still a good practice. For one, it helps to support global governance and consistency. For another, it can facilitate effective talent management across borders. Regardless of location, there will always be high-value skills and positions within the company. Likewise, global grades can also help you manage rewards elements as consistently as possible, including short- and long-term incentives, benefits, and perks. Creating global pay grades also fosters talent mobility. If you have a Grade 9 Senior Manager position in the headquarter location, for instance, the competence level may be comparable to a Director position in another country. This practice of matching positions into global grades or bands also helps HR determine which experience levels to look for in potential expatriates. Once you have created global bands, you need to construct local pay scales based on local market data. Look at peer group market data based on local conditions, then assign midpoints to grades based on this data. This will help you put a pay philosophy in place that is equitable, consistent, and in line with local market conditions. Page 7

8 With that said, it is important to note that you may have to make adjustments based on how specific jobs may be valued differently from one country to the next. For instance, the ways in which manufacturing jobs are viewed in the U.S. versus local markets are often different. If you apply pay structures and progressions between grades in the U.S., you may well have to adjust these based on the local market practices. Working with Consultants For many organizations, it is simply not feasible to tackle global compensation without enlisting the help of a consultant. Nonetheless, this does not mean that the company can expect everything to be handled by the consultant without taking an active role in the process. There should also be input from a Global/Functional Review Team. Here is a brief look at how the interplay between these parties should work. Role of the Client Sponsors project Coordinates with stakeholders in locations Defines success criteria Actively participates in all project phases Provides reality checks as needed Approves interim and final deliverables Facilitates successful implementation Consultant Ensures project meets success criteria, schedule, and budget Provides technical and process experience Provides global market practice information Project management Support implementation Global/Functional Review Team Validates job mapping and profiles Validates benchmark and non-benchmark positions Reviews location-specific pay levels and practices Most importantly, lines of communication should be consistently maintained so that all parties play an active role in project management. Page 8

9 Compensation According to an HRsoft poll, companies are split fairly evenly when it comes to having a dedicated unit for international compensation: while 46% do, 54% do not. Although it may not be necessary to have a dedicated unit in small companies, it is recommended that larger enterprises consider establishing one. Otherwise, the employees in headquarters may receive the greatest level of attention, while those in other locations may run the risk of becoming a lower priority. Having a separate responsible unit for handling international compensation ensures effective pay decisions are being actively made and monitored at all locations. To make equitable and competitive compensation choices, aim to identify the peer group in competition for manpower and talent. You may analyze subsidiaries of U.S. companies alone, or the total group. There may be factors to consider which pertain to a specific market segment or industry, whereas some jobs may not be industry-specific. It s also important to consider how your company may be perceived according to geographical differences. While a company can have a large influence in a domestic city, in a highly populated, diverse business environment such as China, it may not have as significant an impact. Likewise, while working for a U.S. company may look good on the resumes of international employees, they may ultimately decide that local companies deliver better career prospects. It is therefore up to your company to present a compelling employee value proposition, which can in part be achieved through compensation and total rewards. Base Compensation The factors encompassed by base pay can vary by location. In some areas, it may even include items such as a housing allowance. What s most important is that base compensation is always set and administered using local currencies. Otherwise, fluctuating currencies could cause significant discrepancies among your projected and actual spend. Page 9

10 Short-Term Incentives In the U.S., target total cash conceptually includes target bonuses, but elsewhere it could consist of base pay plus possible bonus. It may be expressed either as months or as a percentage, and could be fixed or variable. One important factor to keep in mind is that if the bonus is paid in the same amount every year, it could be considered actual acquired rights in some territories. Additionally, it may be helpful to bear in mind that while the U.S. tends to use payment to motivate individual performance, other nations may place more of an emphasis on group performance. As with base pay, it is important to set targets and measures in local currencies. Long-Term Incentives Long-term incentives are usually controlled by headquarters. Consider your potential vehicles and be mindful of tax concerns. This also applies to tax events, which could be grant, vesting or exercise. Additionally, it is important to consider whether other locations will receive the same awards as headquarters, or if there will need to be changes made to reflect local markets. Determine the level of competitiveness you wish to maintain in the local market as a driver for your long-term incentive decision making. Salary Review When performing salary reviews, calibrate salaries versus peer groups using relevant market data. As both U.S. and Europe are getting close to full employment and there are critical skill shortages also in other locations, this need to be factored into your decisions. Determine your desired positioning versus peer groups but be cautious about sources for information on inflation and salary movements when reviewing local data. Page 10

11 Benefits When determining benefits, first consider those that are statutory or mandated by local governments and/ or agreements. Then, factor in any that you wish to make local market practice-based. You may have some employees on global programs as well. Local coverage programs may encompass medical, life, travel, PTD, workers compensation, unemployment, and provident funds. Through the parent company program, benefit options could include U.S.-qualified plans such as pensions, and life and disability insurance coverage that have been added to the group policy. However, keep in mind that it is important to make sure that U.S. qualified plans are valid in the territory for which you are providing coverage. Pooling While pooling is better for underwriting terms and lower total premiums, it should be reserved for larger enterprises. While it is beneficial for the greater good, it is often sub-optimal for local organizations in specific countries. Most companies find that the process is typically very complex and needs the assistance from consultants and/or insurance networks. Page 11

12 Summary Developing a comprehensive total rewards package across borders is not simple, but when done effectively, it has the power to help support your company s overall talent management and business strategies. Although the process can be complex, it becomes easier to manage when broken down into specific, step-by-step components. Here s a brief recap of the concepts covered within this guide: Start by identifying your form of business establishment. This will largely dictate your approach to global pay and help you navigate applicable tax rules. Be mindful of current trends in global rewards. Consider the ways in which compliance and governance and foreign markets should determine how you administer international pay. Develop a global HR strategy. Having a set strategy in place, linked to your overall business strategy, will enable you to make wise compensation decisions that set your company up for employee satisfaction and business success on a global level. Balance global consistency with local markets. Develop global grades and structures, but make adjustments to accommodate local conditions as needed. Use available resources, such as consultants, to guide you through this process. If you have the means and have not already done so, work towards establishing a unit exclusively for handling international compensation. Ensure base pay, short- term incentives, and salary reviews are managed in local currencies. Although you may choose to have some employees enrolled in global benefits programs, it is critical to be mindful of local insurance regulations. Pooling is most effective in large enterprises but is often too challenging for smaller firms to administer. Global compensation can seem daunting, and although it can become more complex as companies grow, it does become less challenging with ample preparation. By following the steps listed within, you can develop an international compensation program that is tailored to your company s unique needs and long-term objectives. Page 12

13 Resources HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement. Phone: Web: hrsoft.com About the Contributor Anders Halden Strategic Rewards Group With more than 40 years of experience in International HR management, Anders has spent the last 25 years in the US consulting on total remuneration solutions for local nationals in all parts of the world and the design and development of policies for global mobility. Currently a partner with SRG, he previously worked with several HR consulting firms, most recently as a Senior Consultant with Towers Watson. Prior to coming from his native Sweden, he worked at the Ericsson Group in Stockholm. In this capacity, he was responsible for employment conditions for 900 expatriates in 60 countries and for local management. A frequent speaker at seminars and conferences, he has been quoted in Swedish media, The New York Times, The Wall Street Journal, CNN, and the BBC. Phone: Anders.Halden@Strategicrewardsgroup.com Web: strategicrewardsgroup.com Page 13