By Olivier Meier, Mercer
The rise of local plus approaches, increased personalization and flexible packages are some the trends that have attracted attention over the past few years. These recent evolutions of compensation approaches for mobile employees are often attributed to alleged preferences of the new generations – sometimes based on exaggerations that are not supported by research evidence – and efforts to contain mobility costs. However, these explanations fail to take into account the more fundamental changes impacting businesses and HR practices.
Current compensation approaches were designed for employees having a long and stable career in their companies and on a hierarchical system composed of grades and positions. The fact that employees are not staying very long with a given company in hardly a novelty but many HR professionals fail to appreciate the full impact of recent business changes resulting from the adoption of Agile practices, faster talent management cycles, digitalization, and the rise of the skills economy.
Here are seven dilemmas highlighting the disconnection between new business realities and pay practices for mobile talent and the international workforce in general.
1: The unresolved home/host approach dilemma
We traditionally contrast the home-based/balance sheet approach (maintaining a link with the home country salary) against the local or host approach (aligning an assignee’s salary with the local host pay structure). While the balance sheet approach has had its glory days, it has now become associated with expensive traditional expatriate packages. On the other hand, host approaches have gained popularity – especially in the form of local plus packages combining a locally based salary with additional expatriation-related benefits. This has led HR pundits to predict the imminent demise of the balance sheet and the adoption of host approach as main approaches for all moves. Like many superficial predictions, this one fails to take into account the complexity of mobility management and the fact that the most fundamental compensation issues have not been addressed: the problems linked to the limitations of the different compensation options and the host approaches in particular have not been solved.
A host approach doesn’t work for all home/host combinations (i.e. high salary to low salary, benefits loss), create inequalities between destinations, and can trigger cost and rigidity issues over the long-term (tempering with base salaries can inflate packages over the long-term as few employees will accept pay cuts.) A local plus package can address some of these problems but the duration and cost of the “plus” can negate the advantages of a host approach. A well designed local package can in some situation be less expensive and much easier to manage than a home-based approach but it won’t work in other scenarios or at best it will provide a quick win followed by many problems for both the company and the assignee in the long term.
This doesn’t mean, however, that the balance sheet should forever remain the one and only approach for mobile employees: its potential costs, the administrative burden it generates, and the limits to its application for some types of moves make it a useful but less than perfect solution.
Revolving the dilemma could therefore take different forms:
- Discarding the dream of a silver bullet compensation approach that will address the needs of all assignees for all types of moves and use different approaches for different scenarios. That’s what companies relying on segmented policies do. In practice, this could mean using the balance sheet for business critical moves involving highly mobile employees, possibly sent to emerging markets whereas a local or local plus approach would be used for moves between more developed locations and permanent transfers.
- Understanding that the local or local plus approaches have benefits but that they will materialize only if the company implements the new compensation logic in combination with a more global review of their mobility thinking. In particular, a successful implementation of a host approach requires a robust talent management approach to clarify the long-term intentions behind each move as well as educating management and assignees about the choice they make (and this involves more than just superficial communication.) Not all companies are equal when it comes to implementing such an integrated and holistic approach.
- Finally, the balance sheet approach should not be only associated with expensive allowances and benefits. The equalization of the purchasing power of the employees between locations is at the heart of the home approach. This concept of equalization remains valid, but it shouldn’t necessarily lead to designing expensive and standardized packages.
In other words, the compensation debate deserves more than just superficial considerations and requires further analyses. The complexity of the salary structures around the world also attests to the need for more detailed research.
2: Dealing with the paradoxes of international salary structures
When making salary comparisons between countries, we often talk about “low paying” and “high paying” countries. It can be a useful simplification for the purpose of a discussion but this simplified view doesn’t stand up to a deeper analysis into salary structures.
The concept of high and low paying countries would be valid if all countries were highly egalitarian and their salary curves similar to those of the Scandinavian countries. We know that the reality is very different: The main characteristic of emerging countries is that their salary curves are very steep – in other words, low level employees earn very little but top level managers have very high salaries (sometimes higher than in Europe or the US.) This is the result of persistent social inequality and years of double digit salary growths. The evolution of the salary curves has multiple consequences for compensation management:
- It opens up new possibilities to move people on host compensation approach: local packages in emerging markets can be attractive for higher positions and give opportunities for companies to use host approaches.
- It creates costs issues: employers considering moving senior executives or highly skilled experts from certain emerging countries will face very high costs. Adding in high cost-of-living payments, housing allowances, and other expatriation benefits can result in high-cost packages for these highly paid employees from supposedly “low cost” emerging markets. The global war for talent also means that low cost mobile employees don’t remain low cost for long when their international experience increases and their expectations rise.
- More generally, the complex compensation landscape makes reasoning based on country level difficult: it is not possible to suggest that high level assumptions about a given country will be applicable for all job levels, all industries and types of employees – this matters at a time when global mobility is not restricted to a managerial elite and is opening up to many different employee groups and profiles.
If the concept of country is not sufficient to draw conclusions about possible packages so are the notions of grade and job definitions.
3: Pay drivers – skills versus positions and grades
Traditional compensation approaches are based on the idea that employees are moving up the career ladder in the company and should receive a pay based on a given grade in fixed salary structure. The advent of fast digitalization and new ways of working are changing this logic. New digital skills are in huge demand and in a context of skills scarcity, companies need a greater flexibility to pay according to skill relevance. The concept of career progression itself is evolving as companies are adapting to a more volatile workforce that is moving more quickly not just between jobs but also between forms of employment (in-house and freelance.)
Redefinition of jobs and organization structures
Organizations are turning into platform for talent, managing the ebb and flow of workers and aiming to become more agile. Integrating the speed of changes in the traditional compensation model is proving difficult. Some companies have started responding to the limits of traditional reward approaches by taking measures to break down job grades into subgrades to offer more frequent promotions. Others have implemented more frequent salary reviews, shorter and more intense developmental moves, and training programs. These fixes might be insufficient if they are not followed by more fundamental changes within organizations.
Paying for skills
In a gig economy, organizations are paying for skills rather for jobs as such. This implies understanding the relevance of the skills of potential candidates and their experience (skill depth). Furthermore, remuneration of gig workers is impacted by the duration of the tasks performed, the business requirements (and urgency), and the global competitive environment (skill supply).
Fixing the base package is just the first step. As employees request more individualized reward and frequent feedback, organizations have to address performance management issues.
4: Fixing performance management
Mercer’s 2019 Global Performance Study provides useful lessons for talent mobility managers. Some 70% of respondents to the Mercer study indicates that there is a need to improve the link between performance management and talent management decisions.
The absence of systematic linkage between individual goals and the company’s priorities is viewed as problematic for all employees and not just mobile ones: Mercer’s Performance Management study finds that, globally, 83% of companies set individual goals but only 56% require business unit goals. This means that many managers are setting individual goals in a vacuum without connecting the employee goals to the broader business unit’s goals or company’s priorities. Ultimately this is weakening the credibility of performance-related pay approaches.
Mobile employees: missing goals
The lack of clear definition of failed international assignments is a problem when trying to evaluate performance of an internationally mobile workforce: in Mercer’s Worldwide Survey of International Assignment Policies and Practices, 52% of respondents indicated they didn’t have a definition of failed assignments.
The organizations who do have a definition commonly use criteria such as assignment completion and “meeting business objectives”. However, these criteria remain vague and don’t capture all possible scenarios. Failed assignments are not just about employees terminating assignments prematurely. They are also about low productivity while on assignment, assignees who leave the company shortly after the end of the assignment, or even the lack of succession planning in the host location.
Employees receive more than just a cash amount from their company and the question of compensation should be part of a broader definition of reward.
5: Compensation versus reward
Organizations focus more and more on the overall Employee Value Propositions (EVP) and not just on pay components or “compensation” in a narrow sense. An EVP includes the sum of the benefits the employees will derive from their employment with the company: pay, benefits but also career progressions, learning opportunities and purpose. Well-defined EVP are part of the overall employer branding. Talent mobility has a role to play to support career development and provide incentives for employees looking for learning experiences and a different lifestyle.
Package items are not meant to be set in isolation
Having your assignees argue about elements of their packages, item by item, provides a stark reminder that the individual components of the assignment package should not be discussed in isolation. What’s the total value of the package? All too often employees are not even aware of the total cost (direct and indirect) covered by companies to facilitate their relocation. What lifestyle will be allowed by the compensation package? If the package includes incentives, what is the windfall that the employee could expect and is it in line with the company’s objectives? Dismissing these questions too easily could open the door to further negotiations and requests for exceptions.
Will employees truly buy into this broader definition of “reward” or will they stick to request for more cash? Experience shows that the reward concept is bound to remain an HR gimmick if its different components are not perceived as relevant by employees.
6: Being relevant
In practice it means different things:
To be relevant a reward package needs to be flexible enough to address the need of the different employee groups. Companies are moving from segmentation of policies – pre-defined policies for types of assignments to more personalized approaches. This is not about creating more polices but about make them more flexible to accommodate different needs and expectations. Finding the right balance between rigid once-size-fits-all policies and excessive flexibility that could trigger compliance, duty of care and other issues down the line is a delicate exercise.
Superficial input, assumptions based on past experiences and even gut feelings are often dominating the discussion about employees expectations. Yet capturing structured feedback is needed to understand what package component and degree of flexibility are truly expected by each employee group. Once a decision has been reached, its impact needs to be monitored over time and this means again gathering more feedback from employees. Mercer’s recent survey about flexible policies reveals that most respondents are not tracking the actual effectiveness of their flexible packages, and that the benefits of flexibility are mostly identified as common perceptions.
Benefits – even flexible ones – are of limited value for mobile employees if they are not easily transferable from employers to employers and from country to country. Expatriates traditionally suffer from fragmented pension history and the risk of incomplete coverage. This question also impacts compensations approaches as the use of local approaches could lead to a lack of portability. The risk is even now greater for international gig workers willing to market themselves globally and changing employers frequently. It is a complex issue to solve at a local level and becomes even more challenging in an international context where the impact of tax, legal, and currency issues can limit the usefulness of these portable solutions.
A compensation approach might be the right one for the company and the employee in the short-term but lead to huge costs or problems in the long term.
7: Short-term versus long-term consequences
Addressing this dilemma requires a good understanding of the context and implications of each compensation option.
Companies usually do a fair job about explaining the content of the packages but are less successful at providing contextual information and information about the long-term consequences of the choices made in terms of pension, currency, saving management, housing, schooling and other issues. Employees need not only to receive advice but also be encouraged to speak up about their personal objectives. Companies might be reluctant to dive too deeply into these issues but ultimately it’s part of duty of care. Letting employees make the wrong choices for the future or at least not providing enough insight can impact the image of employers. Companies want to avoid situations where former assignees turn against them and say that they were “never told about that specific issue.”
Providing contextual information to management
Line managers also requires more education and information as their focus is often on short-term consequences and the need to find an immediate answer to urgent business and talent issues. The consequences of excessive short-termism are higher costs in the longer-term and a lack of flexibility to change approaches later on. Ultimately, it’s both the prerogative and the burden of talent mobility professionals to provide management with an accurate picture of the complex mobility compensation issues that could impact the company in the long-term.