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which the employee is left to fend for themself.
Unsurprisingly, the latter is an option that can
prove tempting in countries where there is little
or no tax to pay, but unpopular elsewhere. A
further approach – known as “net to net” –
adjusts the employee’s net income for the cost of
living in the new country and may be used in
conjunction with one of the other approaches.
As Peter Ferrigno, Leader of Ernst & Young’s
Human Capital practice for EMEIA, points out,
the aim of equalizing liabilities between
destinations is to remove tax from the question
of whether or nor to accept the assignment.
“Large companies don’t want people to
determine whether they move or not based on
the rate of tax. Tax protection, on the other
hand, to cover the cost of higher rates but giving
someone the benefit of lower ones, becomes
more and more difficult to justify on the grounds
of fairness.”
A global approach
Small wonder therefore that a growing number
of firms, particularly larger multinationals
international, have chosen to set up what are
known as “global employment organizations”
(see box). These seek to lift executives clear of
disagreements over the rate of tax, as well as
problems over entitlements to pensions, by
creating an international entity that hovers over
all destinations.
Often domiciled in an offshore location, such
organizations are popular with oil companies and
firms that need to move skilled people from one
site to another, often at short notice. Instead of
providing a fresh contract each time an employee
moves from one country to another, all those
within the global employment organization are
employed on similar terms.
Such an approach may have its advantages but it
does not suit all, not least because of the cost of
managing offshoots. Take Deutsche Bank, a
global financial services organization
headquartered in Germany that has no fewer
than 180 “country combinations” – sets of
nations, in other words, between which
employees migrate on a mixture of short- and
longer-term contracts. With developing markets
making much of the running within the world
economy, many of the destinations are big cities
in Asia.
“Five years ago,” says Matthew Ozburn,
Deutsche Bank’s Director of Human Resources
International, “the number of executives moving
from job to job around the world was probably
1% of the workforce. Today it may be double
that number, even allowing for a rise in the
number of employees in Germany brought in by
the acquisition of a domestic operation such as
Postbank. “We use an approach which we call
host-based”, says Ozburn. “We start from the
premise that the executive has a pay package
which looks like those of his or her peers. Then,
considerations as to whether or not the employee
has a family, children and so a need for
schooling, etc. are introduced on top.”
“Within each market, we must remain
competitive. So an assignment in, say, Singapore
will be different from one in Frankfurt. We do a
calculation at the outset, which addresses
whether there is an advantage or disadvantage
for the employee. We look at the difference
between what an executive would have received
in their home country and what they stand to
get in the new one. The result is a system of
equalization that allows for the combinations
of pay found in the financial services industry:
a mixture of salary, bonus and deferred
equity.”
Deutsche Bank also uses a system called
“local to local”. Under this, an employee would
complete an assignment on local terms in one
place and then move to another on similar terms.
That such an arrangement is used more and
more reflects, among other things, the growth in
banking in and around offshore and what are
known as near-shore locations. Many such
centers require the same kind of skills,
experience and knowledge, so executives can
move easily from one to another.
Pensions pose a problem
Within the European Union, of course, individuals
assigned from one country to another can
remain under their home state’s system of social
security, subject to certain conditions. This can
be done for up to five years. So, for a typical
assignment, it may not become an obstacle to a
job abroad.
By comparison, says Ferrigno, pensions
remain an issue. In part, he says, this is because
each country’s legislation is different, but also
because of a philosophical difference between
private vs. state, and employer vs. private
provision, in different places. “Long term, the
trend away from final salary systems in countries
like the UK and the US will probably accelerate a
simplification towards schemes based on defined
contributions,” he explains.
Even so, the appetite for mobility among
international executives will still pose difficulties
for companies, not least because of the risk of
getting it wrong. Firms are in danger not just of
leaving employees disgruntled and so losing
them altogether, but also of making mistakes
that can undermine their reputation at home as
well as abroad.
As Debner points out, out that there is a risk
of an employee choosing to do it themselves,
making a mistake and thereby failing to comply,
and so causing trouble for their employer.
“The risk of an investigation by the tax
authorities has increased in recent years.
This can damage a company’s reputation. The
danger of being dragged into the headlines for
alleged wrongdoing is one of the worst.” The
secret, it seems, is to be aware of such risks from
the outset and to manage them as they arise.
Percentage of employees
that are short-term
assignees (