The cost of a compliant global expense compensation program is often overlooked or not well understood by many organizations prior to selecting a delivery model.
For an organization to evaluate the true cost of running a compliant program, a company should determine the best compensation model for their organization and assignee population. There are many factors that must be evaluated including tax considerations for visa types, pay elements and their global tax consequences. Therefore, having the right expertise and infrastructure generally decides which model is selected. In the relocation industry, there are two common compensation models for global expense and compensation management. In-House (Company) ModelHuman resources, global mobility teams and payroll work in unison with a third-party tax provider to deliver services.Outsource (RMC) Model
A relocation management company assumes global administration and coordination with global payroll stakeholders and a designated tax provider to deliver services.Payment Approaches
Home Based ApproachThe home-based approach, also known as the balance sheet approach is the most widely used by U.S. multinational companies. This approach equalizes any cost differences between the international assignment and the same assignment in the home country, protecting the expat from being financially penalized by wide variances in standard of living.
Host Based ApproachThe host based approach is cost-effective as it localizes the employee. In this approach, the assignee transfers to the host country payroll and receives their base and incentive pay based on local compensation regulations. Many companies continue to cover the employee’s defined contributions or benefit pensions throughout the assignment.
Global ApproachIn a global approach, the assignment is viewed as continuous providing the flexibility to easily relocate employees to meet company needs, equality among similar jobs worldwide, cost savings and ease of management. Not all companies have the capability to establish a strategic global compensation system and normally use the home or host based approach. Expatriate Pay Delivery
Shadow PayrollEmployee receives 100% of their pay in the home country (salary + allowances). Their home country payroll is “shadowed” in the host country only for the purposes of calculating, remitting and reporting of host country taxes.
Split Payroll DeliveryA portion of the employee’s home country pay is delivered to the employee in the host country in local currency. The payment can be administered by the RMC or by local payroll.
Split Payroll
The employee receives a portion of his salary in both the home and host country payroll. Host country allowances are often paid along with the salary portion. Due to some country regulations, a split payroll could be enforced to comply with local pay delivery regulations, Russia and Brazil are examples of such countries. What’s the Best Method?
The above methods are generally based on the balance sheet approach and each company has the option to select the method(s) that are in harmony with their company policies and procedures. Typically, the company’s decisions come down to ease of implementation and administration. Below are a few examples:
Split Payroll Method
| Example Home Delivery
| Example Host Delivery
| Concerns/Comments
|
Pre-determined by the employer or employee (Percentage)
| 50% of NET pay
(Includes salary + allowance)
| 50% of Home country NET, paid in local currency
| This method can be administrative as the NET calculation will need to be updated should the employee have fluctuations in their regular paycheck.
|
Country enforced split
| Base salary minus host country local minimum wage (Includes salary + allowance)
| Local minimum wage
| Understanding of country payroll regulations is burdensome; ensuring proper set-up from the onset of the assignment is important for compliance with local payroll laws.
Considerations: pay allowances only in the host country, as the local minimum wage. If the total of the allowances does not meet local regulation amounts, a portion of the base salary, along with the allowances should be paid. Consult your local tax and payroll experts to ensure proper amounts are paid in both countries.
|
Pre-determined by the employee (Fixed Amount)
| Base salary minus required pre/post tax deductions, NET is then paid in the host country (Includes salary + allowance)
| Home country NET, paid in local currency
| Companies should put policies in place which determine the frequency an employee can update their split payment. Continuous reconciliations should be put in place to monitor NET changes.
|
Pre-determined by the employee and/or employer
| Base salary minus required pre/post tax deductions, NET is paid in the home country
| Assignment allowances are paid in the host country (COLA, Housing, Hardship etc.) in local currency
| When updates to allowances occur the host country payroll will require notification. In addition, if the home country taxes on global earnings the host country allowance payments will require conversion to home country currency and reported for wage inclusion.
|
There are advantages and disadvantages to every approach. Global compensation requires flexibility, additional detailed analysis, and is administratively tedious. Global companies will face challenges due to variations in tax and payroll laws, cost of living country to country differences and other challenges must all be considered in establishing compensation for expatriates. Continuously reexamine your compensation policies and programs as your business objectives and strategies transform. For cost efficiency purposes create multiple models for cost-savings initiatives.