Three Ways to Design International Pay: Headquarters, Home Country, Host Country - Human Resources employment abroad strategies

Workforce, Jan, 2001 by Victor D. Infante

The sun never sets on today's business world. From global manufacturing bases to widespread international trade to instant Internet communication, companies cross international lines with the regularity of migrating geese.

One frequent consequence of the growing amount of international business is the expatriation of more and more employees. The reasons for doing so are myriad: assuring that the company's culture and way of doing things are transferred; lack of local specialized talent; a desire to develop specific employees.

Enough reasons, certainly, to outweigh the nuisance of payroll complexities.

But are companies ready to relocate their staff overseas? A survey by KPMG, International HR Consulting, indicates that many aren't.

"There's a great deal written about HR being a strategic business partner," says Timothy Dwyer, KPMG's national director of international HR consulting. "I think that on the international HR side, people need to take a good long look as to why they're moving people. They need to ask, 'Why are we going through this craziness?' If you determine why it's happening, how can you make it happen in a more efficient manner, in a way that addresses company needs? There are a few businesses that do it well, but most are reactive."

For most companies, HR becomes a glorified moving service for international relocation, with no serious planning in advance for disparities of pay scales, taxation, or even cultural adaptation. By beginning its planning process at the first inkling that international employee relocation is a possibility, HR can achieve a smoother transition that benefits both the employee and the business.

The payroll question should be among the first questions addressed in international relocations. An employee being paid at US scale would be doing pretty well if they were relocated to, say, Nigeria, but might--at the same rate--be extraordinarily underpaid if living in Switzerland or Japan. Furthermore, calculating taxes becomes an important concern.

"The challenge for America," says Dwyer, "is that we are one of the few countries in the world that taxes global income. Even if they leave the U.S., citizens have to file a U.S. tax return. Most other countries have a system that, when you break residence, you no longer file taxes."

There are three basic ways to handle payroll in international situations, depending on the standard of living and tax system of the company's headquarters, the employee's home country, and the host country. These are the Headquarters Approach, the Home Country Approach, and the Host Country Approach.

By way of example, let's assume a theoretical company, Fictional.com International. Fictional.com is headquartered in Los Angeles, with offices in London and Tokyo.

The Home Country Approach leaves the employee's pay unaltered wherever the employee is relocated. For example, if an executive from Fictional.com is relocated from Tokyo to London, he or she still retains a Tokyo salary. The employee continues to contribute to both taxes and Social Security as the law dictates in both countries, although the company may augment the salary to compensate the employee for additional expenses.

The Headquarters Approach assigns the relocated employee the equivalent salary of an employee performing the same job within the company's headquarters. For example, if Fictional.com's executive is relocated from Tokyo to London, under the Headquarters Approach, he or she would be paid on a Los Angeles pay scale. This system basically treats all international assignees equally, although adjustments may be required to keep the employee from being eaten alive by taxes.

The last method, the Host Country Approach, assigns the employee the equivalent salary of someone performing the same job in the country the employee has been assigned to. For instance, if Fictional.com's executive is relocated from Tokyo to London, he or she will be paid, under this method, at the rate of a London-based peer.

This method is efficient for relocating an employee to a country with a higher cost of living, but it might prove disastrous in a location with a lower cost of living. ("You're moving me to Mexico AND cutting my pay?!?!")

Obviously, this is a process that demands great attention to detail. A company with 30 or so locations worldwide might want to use a Headquarters Approach because of the sheer immensity of the paperwork. A company with just a location in Dallas and one in Saudi Arabia might opt for a host-based salary for assignees, because Saudi Arabia doesn't have an income tax. A thorough investigation of the relevant laws of every country involved is advisable before the first employee is relocated.

"I would argue that the most important thing to do is to get policies and procedures in place first," says Dwyer. "What happens is many companies start going international, then come to HR and say, 'We're going to send someone to the U.K. in six weeks. Go!'

"If HR is a strategic business partner, and knows that part of the business plan for the next year might include international assignments, they should ask the question, 'If we were going to move someone overseas, how do we do it?' Think about it as soon as you think it might happen. It's a lot better than the panic approach. Listen to the business."