The Challenge Of Expatriate Compensation Economics Essay

The research on expatriate compensation has been scarce although many other aspects related to international transfers have been dealt with quite frequently (Briscoe, 1995: 128). Bonache and Fernandez (1997: 457) state that compensation is the aspect of expatriation which has received least attention (see also Suutari and Tornikoski, 2000). On the other hand, expatriate compensation is a complex issue both for individual expatriates and for international companies. Hamill (1989: 26) states that the compensation package is one of the most difficult elements in expatriate policy. The complexity is linked to the diversity of the goals, which should be taken into account in the development of international compensation policies and practices, as will be discussed later. According to Stone (1986: 69), having expatriates is a costly business, but having a bad international compensation programme is disastrous. A well-designed and maintained programme can ensure that costs are controlled and that expatriates remain motivated and productive. Furthermore, the importance of expatriate compensation has increased because foreign assignments are seen as a normal part of a business career rather than as an exception in a career in international companies (see e.g. Schell and Solomon, 1997: 114).

Problems related to expatriate compensation can be seen in the high level of dissatisfaction of international employees with their compensation package. Black (1991) has reported that 77% of the expatriate managers were dissatisfied with their expatriation salaries, their benefits and their international compensation packages in general. In line with this, Harvey (1993a) reports that 80% of the expatriates find the achievement of equality in their salary in comparison with their colleagues to be a very significant problem. In addition, many authors describe assignment failure (i.e. return to the home country before the end of the assignment) as one of the biggest drawbacks companies have to face. In that connection the role of compensation has also been brought up. Hamill (1989: 24) found that premature return is typically a consequence of many different factors including poorly designed compensation packages (for a more detailed discussion of these factors, see Scullion, 1991; Solomon, 1996).

It has also been recognised that compensation strategy is one of the most powerful means of focusing attention in organisations: it sends clear messages to members of the organisation, informing them about expected attitudes and behaviours (Schell and Solomon, 1997: 116). In line with this, Bailey (1995: 148) states that the challenge for a global company is the design of compensation programme that span the world and support the organisation’s strategic goals and objectives. If individually tailored expatriate compensation packages were possible in the past, new global corporate strategies have forced many companies to develop compensation policies and plans that guarantee consistency across borders, equity and transferability throughout the entire working life of the new mobile work force (Bailey, 1995: 149).

Expatriate compensation programme are also frequently re-estimated because of various changes in the companies. Harvey (1993a: 787) identified five main reasons for modifying existing international compensation programme: dissatisfaction with the present results (i.e. attracting, motivating and retaining international managers), the increased number of employees in international assignments, the increased number of nationals and TCNs in the organisation, the complexity and diversity of foreign assignments, and the integration of foreign acquisitions with domestic operations. Due to such varying and different needs across companies, no particular approach and no specific package components could be recommended more than another (e.g. Stone, 1986: 69).

All in all, expatriate compensation has been found to be a challenging issue to deal with and, furthermore, a great deal of dissatisfaction with existing principles has been reported. This being the case, the present study aims to increase our understanding of the sources of satisfaction and dissatisfaction with the compensation of expatriates. The objectives of the present study are: 1) to describe the compensation package design of Finnish expatriates, 2) to analyse the difficulties related to expatriate compensation, and 3) to analyse the level of the expatriates’ satisfaction with their compensation, the determinants of such satisfaction, and the redesign needs related to compensation. In addition, expatriates’ advice to future expatriates regarding contract negotiations is presented.

Expatriate compensation approaches and elements

There are different expatriate compensation approaches which companies can take when formulating their compensation policy. Although these approaches are not focused on in the present study, they are briefly discussed in order to make the different possibilities related to expatriate compensation understood. At the same time, different elements of the compensation packages are dealt with.

The home-country policy, which links the expatriates’ basic salary to the salary structure of their home country, is the most common compensation approach (Crandall and Phepls, 1991: 30-31; Dowling et al., 1994: 152). By using this pay system (basic home salary plus allowances) the company tends to enable expatriates to maintain a lifestyle equivalent to that which they would have in their home country (Helms and Crowder, 1994: 26; Dowling et al., 1994: 152). Typical allowances include for instance the expatriate allowance (or overseas premium), the cost-of-living allowance, housing allowance, education allowance, hardship allowance, car allowance, and home-leave allowance (for a more specific description, see Black et al., 1999). In addition to allowances, one has to consider inevitable incidental benefits due to the fact that social policies vary widely across countries. Still, the aim is to protect the benefits provided by the policies to the person in the homecountry (see Allard, 1996; Dowling et al., 1994). The compensation package can also include bonuses such as a performance-based bonus and a seniority bonus (see Dowling et al., 1994). Protection against exchange risk (see Helms and Crowder, 1994: 27; Schell and Solomon, 1997: 122) and taxation differences (see Helms and Crowder, 1994; Schell and Solomon, 1997) should also be included.

The popularity of the home-country policy can be justified by the fact that it provides clear and explainable differences between the salaries of expatriates who hold equivalent positions in different countries (Logger and Vinke, 1995: 261). However, this turns out to be a serious drawback to the approach because it results in lack of equity as there are salary differentials between expatriates and local managers as well as between expatriates of different nationalities (Chadwick, 1995: 236; Logger and Vinke, 1995; Schell and Solomon, 1997: 124). As the number of nationalities in the workforce expands, the home-country policy becomes the most expensive plan to maintain with regard to purchased data and administration costs. It has also been stated that this method works better when all or most of the expatriates come from the same country (Black et al., 1999: 178).

The other approach is the so-called host-country policy . The main difference from the previous approach is that it considers expatriates as local nationals and links their basic salary to the salary structure of the host country (Dowling et al., 1994: 150; Crandall and Phelps, 1991: 31; Logger and Vinke, 1995: 259-260). It compensates them according to the policies and programme of the assigned country (Chadwick, 1995: 242), which makes this approach fairly simple and straightforward (Black et al., 1999: 180). However, the significant international additional payments (such as cost-of-living adjustments, housing, schooling, travelling and other premiums) are usually connected with the terms of the home-country salary structure (Dowling et al., 1994: 151). Crandall and Phelps (1991:31) specify that under this host-country pay system expatriates are expected to live on conditions of the local economy so the notion of equity with the home country is not an issue. This approach aims not only at reducing the salary inequalities perceived by the employees of the same subsidiary but also at reducing the high costs of expatriate treatment to their minimum for the company. This policy is relatively new but increasingly popular (Allard, 1996: 42; Briscoe, 1995: 119). According to Black et al. (1999: 175) it operates best with a relatively small number of expatriates or with a cadre of international expatriates. As a result of this approach, the obtaining of host-country salary data can be a problem. Secondly, it complicates the re-entry compensation situation (Schell and Solomon, 1997: 126).

According to Schell and Solomon (1997: 124-132), companies have also introduced so-called hybrid systems that blend appropriate features from both home- and host-based approaches to respond to specific business challenges. These systems are very diverse and thus complicated to administer. The purpose of these systems is to end up with an international expatriate workforce that, while not coming from one location, is paid as though it were. On the other hand, the compensation is also unrelated to local markets so they provide no equality with local staff. A so-called regionally based pay system has also been introduced (Dowling et al., 1994: 151; Chadwick, 1995: 243; Black et al., 1999: 175). It allows companies to compensate expatriates working in their home regions at somewhat lower levels than those who are working in regions far from their home. Some companies are also exploring the lump sum approach (Dowling et al., 1994:68; Schell and Solomon, 1997: 132). The idea of this approach is to pay a total salary to the expatriate, who will determine how to spend it (Briscoe, 1995: 120). This is done in order to control costs, eliminate discussion about adequacies of allowances, ease the administration, and empower expatriates to make decisions on their own (Schell and Solomon, 1997: 132).

Complexity of expatriate compensation

Many authors have discussed the issues which should be taken into account when making decisions considering expatriate compensation policies / practices. In the review of such writings, the difficulties related to compensation appear as the great number of different issues that should be considered. First, the compensation programme should attract and retain personnel in areas where the multinational has the greatest needs and opportunities to provide an incentive to leave the home country for a foreign assignment (Stone, 1986: 64; Hamill, 1989: 33; Harvey, 1993b: 62; Dowling et al., 1994: 149; Helms and Crowder, 1994: 22; Briscoe, 1995: 108; Logger and Vinke, 1995: 255; Logger et al., 1995: 145; Black et al., 1999: 176). It should also be reasonable in relation to the practices of competitors (Briscoe, 1995: 108; Logger and Vinke, 1995: 256; Logger, Vinke and Kluytmans, 1995: 145; Schell and Solomon, 1997: 118).

Second, it should at the same time facilitate the transfer of international employees in the most cost-effective manner (Dowling et al., 1994: 149; Briscoe, 1995: 108; Logger and Vinke, 1995: 255). The cost of expatriates is typically seen to be very high from the company point of view, and thus there are strong pressures to decrease such cost (Briscoe, 1995: 125; Dowling et al., 1994: 177; Senko, 1991; Schell and Solomon, 1997: 118). For example, Dowling et al. (1994: 177) have observed a trend toward cost containment among companies. However, there is a danger that the financial pressure to reduce the costs of the company may lead to an alteration in the perception of the overseas compensation package in general. The deterioration of the expatriate compensation package image then makes recruitment an arduous task (Hamill, 1989: 25; Senko, 1991: 39) and may decrease satisfaction.

Third, the programme should provide stability in the manager’s life-style and economic status when he/ she is transferred to a foreign assignment; in other words, it should maintain a given standard of living for the expatriate (Stone, 1986: 64; Crandall and Phelps, 1991: 31; Harvey, 1993b: 62). Here the influence of different family situations on compensation demands is a typical challenge (Harvey, 1993a: 792). Furthermore, one has to take into account various kinds of tax regulations and rates, and still preserve expatriate entitlements at a satisfactory level (Dowling et al., 1994; Helms and Crowder, 1994; Stuart, 1991). The changes in currency and inflation rates (Daniels and Radelbaugh, 1991: 778; Dowling et al., 1994:159; Helms and Crowder, 1994: 27; Schell and Solomon, 1997: 122) and the influence of social security issues have to be considered also (Allard, 1996: 40; Briscoe, 1995:141). All these issues increase the complexity of the situation and the need for information with regard to the local context. This is clearly one of the major areas in which expatriates face difficulties if the companies do not provide enough support.

Fourth, the compensation programme should accommodate the expatriate’s adaptation to the differences in the internal and external environments of the new organisation (Harvey, 1993b: 62; Logger et al., 1995: 145). Fifth, it should be consistent and fair in its treatment of all categories of international employees, i.e. it should aim at equality (Hamill, 1989: 33; Daniels and Radelbaugh, 1991: 775; Dowling et al., 1994: 149; Helms and Crowder, 1994: 22; Briscoe, 1995: 108; Logger and Vinke, 1995: 255; Logger et al., 1995: 145, Bonache and Fernandez, 1997: 464; Schell and Solomon, 1997: 119; Black et al., 1999: 175). The discrepancy among compensation programme for different types of expatriates (PCNs and TCNs) and between expatriates and local nationals (e.g. Briscoe, 1995; Chadwick, 1995; Harvey, 1993a) has been pointed out as one of the major challenges. For example, Chadwick (1995: 235) emphasises how a sense of injustice can easily develop when comparisons of salaries are made by expatriates. Complexity arises from balancing the conflict between the three groups: expatriates’ peers at home, the local workforce and expatriates’ peers in the international workforce at the same location (Schell and Solomon, 1997: 119). On the basis of these comments, the equality issue appears to be one of the major difficulties faced by the expatriates.

Sixth, the compensation program should also be consistent with the overall strategy and the business needs of the company (Dowling et al., 1994: 149, Bonache and Fernandez, 1997: 464; Schell and Solomon, 1997: 118). Thus, the compensation program should motivate and stimulate the manager to act in the company’s interest and to perform at a level above/beyond a base-line benchmark established by performance evaluations (Hamill, 1989: 33; Dowling et al., 1994: 149; Helms and Crowder, 1994: 22; Logger and Vinke, 1995: 145).

Seventh, the compensation should facilitate re-entry into the home country at the end of the foreign assignment (Stone, 1986: 64; Crandall and Phelps, 1991: 31). For example, Daniels and Radelbaugh (1991: 772) state that the problems with repatriation arise in three general areas: those of (1) personal finances, (2) readjustment to the home-country corporate structure, and (3) readjustment to life at home. Depending on their compensation package design (and for example on their tax treatment, see e.g. Stuart, 1991: 82), the expatriates and their families are used to a certain standard of living during their assignment and usually the repatriation includes changes in their situation. The programme should also take into consideration managers’ career needs after repatriation (Harvey, 1993b: 62; Schell and Solomon, 1997: 118; Stone, 1986: 64). The existing evidence indicates that the reality which expatriates face does not match their career expectations (see Black, 1992; Forster, 1994; Stroh et al., 1998). Thus, the repatriation issues can be expected to be among the major difficulties of expatriates to be dealt with.

Finally, the programme should offer ease of administration (Bonache and Fernandez, 1996:464) and communication and provide sufficient data to human resource managers to reduce conflict between the organisation and the managers (Harvey, 1993b: 62).

All in all, various kinds of issues have to be taken into account when making decisions about expatriate compensation. On the basis of this review, cost reduction aims, information needs with regard to local context, equality challenge and repatriation issues appeared to be among the major difficulties related to expatriate compensation from the point of view of the expatriates.

Compensation and satisfaction

Research on satisfaction with job-related factors has long traditions (see e.g. Locke, 1976; Hulin 1991). Locke (1976) describes job satisfaction as a positive emotional state resulting from the appraisal of one’s job or job experiences. Within this literature, a difference has been made between intrinsic and extrinsic satisfaction (Naumann, 1993). Intrinsic satisfaction is related to work performance and feelings of accomplishment and self-actualisation. Extrinsic satisfaction, on the other hand, is related to rewards received by the employee (i.e. recognition, compensation, and advancement). Research on job satisfaction includes the analysis of both antecedents and consequences of satisfaction. Within this framework, the analysis of satisfaction with expatriate compensation can be classified as a study which focuses on antecedents of one form of extrinsic satisfaction, i.e. satisfaction with the compensation.

Very few empirical studies which have covered expatriates’ satisfaction with their compensation could be found in the literature review. What has been reported gives a picture according to which expatriates’ dissatisfaction with their compensation is very common (Black, 1991). One of those few studies in which other empirical findings on problems related to expatriate compensation were reported was made by Harvey (1993a). Harvey reports that 80% of the expatriates found the achievement of equality in their salary in comparison with their colleagues to be a very significant problem and that 56% of the expatriates saw that compensation /benefit problems related to repatriation were significant. Still, studies of this kind do not identify how different elements in expatriate compensation packages influence the level of satisfaction, but rather identify contextual variables which may cause problems.

On the whole, the existing evidence of the difficulties related to expatriate compensation and antecedents of expatriate satisfaction with their compensation is very limited. Next, the focus will be shifted to research methods and the empirical analysis of these issues among Finnish expatriates.

Methods

In order to be able to collect representative data on the compensation of Finnish expatriates, it was decided to contact a Finnish union of university-level engineers. This guaranteed that the expatriates represented various types of organisations and branches of industry and thus that the results would not describe the practices of a few very international companies only. Second, it became possible to bring together a clearly more extensive sample size than would have been possible otherwise. Third, the responses were received directly from the expatriates and not from the company representatives as in most compensation studies. On the other hand, homogeneity of the educational background of respondents should be kept in mind when interpreting the research findings.

During the time of the data collection, the union had 1097 members working abroad. Due to the extensive number of respondents working around the world, a questionnaire survey was seen as the only possible data collection method. The response rate was 41%. Of the 448 respondents 147 had found a job abroad on their own and could therefore not be classified as expatriates, who are sent abroad by their employer. These respondents were excluded since their compensation situation differs totally from that of the typical expatriates. All in all, the responses of 301 expatriates were accepted for analysis.

The questionnaire required first some background information related to the expatriates and their employers. The compensation section was started with questions about the predeparture contract-making situation (whether the company had clear expatriate compensation principles, whether the expatriates had enough information for signing a contract, and how difficult the situation was for the expatriates). After this, separate questions were asked about the major benefits and difficulties related to the compensation and there were some empty lines for written replies. Next, attention was focused on the compensation package design (total salary level, allowances/ bonuses, and insurance benefits). Eight types of allowances and seven types of insurance were specified in the questionnaire (see the results section). The selection of these was based on the literature review and on the experience of the union representatives with reference to Finnish standards. Furthermore, an ‘other, what’ question was included in order to see if some other types of compensation elements were relevant also. With regard to holiday payments, questions were asked about the length of paid holidays, holiday trips to the home country, and what kind of holiday payment principles were followed (home-country principles, host-country principles, not-paid-at-all, other). Next, the level of satisfaction with the compensation was measured on a 5-point Likert-scale. In the end, the respondents were asked about redesign needs and they were asked to give advice to future expatriates, again with empty lines for written replies.

The respondents were typically males (96%) and they were married or in common-law marriage (88%). The respondents were typically 30-39 years old (52%) although there were respondents of all age categories. 58% of the respondents were on their first assignment. The expatriates operated in various kinds of jobs although because of the nature of the sample, technical jobs were more common (43%) than other task types (general management 23%, marketing 25%, other 9%). A clear majority (68%) of the expatriates operated in managerial positions (top management 20%, management 23% and middle management 25%). The length of the assignment also varied a great deal but most common were assignments for two (27%) or three years (23%) or then the contract was temporary. The assignments were typically to Europe(48%), North America (25%) or Asia (22%). The employer organisations were most often Finnish private companies or their subsidiaries (78%), or foreign private companies (17%).

The results of the compensation package design and related opinions are presented describing the frequency distribution of responses on a Likert-scale or yes/no -scale. In the analysis of how the various components of compensation package influenced on satisfaction with the compensation, t-tests or Anova-analyses were performed. T-tests were used with regard to allowances and insurance benefits in which the response format was on the yes- /no-scale (i.e. existence of the element of compensation as an independent variable and the level of satisfaction as a dependent variable). In the case of salary-categories, vacation payment categories, vacation day-categories, and vacation travel-categories, an Anova-analysis was performed in a similar manner. Open-ended questions were analysed by grouping the comments of the expatriates on the basis of the themes presented. This was not a difficult job since typically the compensation-related comments were very concrete and easy to group into categories such as ‘accommodation-issues’ or ‘taxation-issues’. After this presentation of the methods of the study, the focus will be shifted to the research findings.

Results

The results are presented in three subchapters following the identified objectives of the study. First, the expatriate compensation packages are described. Second, the major difficulties related to expatriate compensation are presented. Third, the results of the level and sources of satisfaction with compensation and of the related redesign needs are described. Finally, expatriates’ advice to future expatriates regarding contract negotiations is presented.

Expatriate compensation package design

Starting from the monthly total salary of expatriates (see Table 1), the results indicate that variation in salaries is wide, as could be expected because of the extensive range of assignment-related background variables. On average the expatriates earned 34,146 FIM (5,743 ECU) per month. The average salary among the union members working in Finland was 20, 266 FIM (3,409 ECU) during the same period of time.

***Insert Table 1 around here***

When expatriates were asked to identify the allowances and bonuses which their compensation package included it appeared that the housing allowance was the most commonly included allowance (see Table 2). Education, car / transportation and expatriate allowances were less commonly included in the expatriate’s compensation packages. Cost-of-living allowances and hardship allowances were included in less than 10% of the cases. When other items were reported, they were for example payment for holiday travels (see below: holiday compensation) or compensation for the lost salary of the spouse. Performance-based bonuses were also relatively common since 37% of the expatriates were under a performance-based compensation system. Seniority bonuses were rarely paid.

With regard to insurance benefits it appeared that the assignment insurance was the most common insurance benefit (see Table 2). Travel insurance, health insurance and accident insurance were received by about 40% of the respondents. Life insurance, retirement insurance and in particular unemployment insurance were less common. In those few cases where other insurances were reported, they were for example family insurances. The following issue covered was holiday compensation (see Table 2). Almost half of the group did not receive any holiday compensation. If such payments were received, the host-country principles were followed more commonly than Finnish principles. On average, the number of paid holidays was 28 a year. With regard to holiday trips the most common agreement was that one holiday trip per year was offered by the company.

***Insert Table 2 around here***

Difficulties related to the compensation

Next, the focus will be shifted to the major difficulties related to the compensation. As can be seen from the Table 3, five major difficulties appeared from the expatriates’ reports.

***Insert Table 3 around here***

The most commonly reported experience was that taxation issues are complex and difficult to deal with. This is in line with the comments in the literature, but taxation is given a more central role than was expected. Usually such comments concerned the lack of clarity of taxation issues, constant changes in taxation principles and difficulties in getting any up-dated information about taxation. Expatriates stated for example that “there was not enough information available about the principles of taxation” and “the interpretations of the taxation laws made by the public authorities vary a lot from case to case”. Due to this situation, it was very difficult for expatriates to evaluate their real net income level.

Almost as common as comments on taxation were comments with regard to difficulties in getting any advance information about the local salary and cost of living level. It was reported that “I did not know about the high local salary-level when I made the agreement”, “the living costs were clearly higher than I expected”, and “it was difficult to find any up-dated statistics about local costs and salary-level”. These findings are again clearly in line with the picture appearing from the literature (i.e. the need for information on the local context and questions of equality). As a third major issue appeared problems with regard to currency rate changes, which are difficult to estimate beforehand and which strongly influence the standard of living and the value of savings. Expatriates reported that “salary payments in local currency are very risky from the savings point of view” and that “payments in Finnish currency create a risk of losing the net value of the salary in local markets”. In that way both the use of local or home-country currency creates its own problems.

As a fourth major group of problems appeared issues related to social security and pensions. The situation was described as very similar in nature to the taxation issues, e.g. the expatriates found it very difficult to get up-dated information, and did not always know where they should pay the costs there or in their home country and how much they should pay. Almost as usual were comments on the spouse-related disadvantages such as the loss of salary and pension points of the spouse during the assignment of the expatriate. Due to these problems expatriates stated for example that “the loss of the salary of the spouse should be compensated for by the company”, and that “although my salary level as an expatriate is relatively high, the family’s income-level is lower than in Finland”. This is a typical dual-career disadvantage.

On the whole, the difficulties were mostly related to the maintenance of the standard of living and to lack of sufficient information (e.g. on taxation, the local cost-of-living level, social security and currency-rate risks). The equality issue appeared in relation to the local salary-level only. Tight compensation policies of the companies and repatriation challenges did not appear in the present sample. The former is clearly linked to the level of satisfaction reported later and the latter is probably related to the fact that the expatriates were still abroad and had not faced the repatriation problems yet.

Satisfaction with the compensation

As a background question to help us understand the predeparture situation of the expatriates, these were asked about the process of negotiations. The majority of the respondents (66%) reported that the company had clear compensation principles, which were followed when their contract was made, and that they had found enough nesessary information when they made the contract (63%). In addition, about half of them (49%) reported that it was very easy or fairly easy to make the contract. Only 24% reported that is was difficult or very difficult. All these figures are in contrast to the picture of the complexity of expatriate compensation which appeared from the literature review, i.e. the majority of the companies did have clear compensation policies and the expatriates felt that the agreement situation was not difficult for them.

In line with this, the present findings on the level of satisfaction are in clear contrast to earlier findings: only a clear minority of the respondents were very dissatisfied (2%) or dissatisfied (10%) with their compensation contract as a whole. The clear majority were either satisfied (48%) or even very satisfied (16%). 10% had no clear opinion. When expatriates were asked in the form of an open-ended question about the major benefits which their compensation packages offered, they saw three major benefits. First, the lower level of taxation was reported by 83 expatriates as a clear benefit since the Finnish level of income taxation is among the highest in the world. The taxation issue is thus one of the factors which explain the high level of satisfaction of Finnish expatriates in comparison with findings elsewhere. The other very commonly