As borders dissolve and mobility increases, international HR managers are facing an era of constant change and reinvention. John Pfeiffer of AIRINC Europe looks at the expansion of the European Union as the next driver in the evolution of expatriate compensation.

• The shifting balance: Recruit, retain, repatriate
• Enhanced balance sheet packages
• Hardship and the new EU States
• Toward a united Europe

Taking advantage of the new-found freedom of movement among the ten new EU member states, multi-nationals have already implemented expansion plans from the Baltic States, through Central Europe, right to the northern edge of Africa.

These new factories and offices bring with them a wave of mobility among and between the established and new member states, exposing promising staff to a career-enhancing international experience and relocating established management to fast-track new ventures.

Not all signs point to smooth sailing, however. As recently as 10 years ago, expatriates assigned to Warsaw, Prague and other cities felt compelled to do a significant amount of purchasing in Western Europe due to lack of availability of recognized brand names.

Those days may be past, but economic disparity still exists. The addition of lower wage and lower cost locations to the EU poses increased challenges in creating fair compensation packages for managers from the new member states doing rotations in high-wage, high-cost EU economic capitals like London, Frankfurt and Paris.

At the same time, expatriate-level housing and hardship premiums given to Western European expatriates in the region may inspire resentment among local peers. Likewise, local salary arrangements often used in transferring people between similar locations in "The European Region" will not work when going from high to low salary locations.

International HR strategists have long struggled to find the proper balance between a pay package attractive enough to recruit the right person for the right job and the need to control cost. This often means home-country balance sheet arrangements designed to protect home purchasing power — the classic cost-of-living-allowance (COLA) arrangement.

What happens, though, when a COLA is not enough? Consider, for example, a 'rising star' junior manager transferred temporarily from Latvia to Germany, a country that enjoys one of the highest living standards anywhere in the world. Even a COLA and housing support may not deliver a package on par with local peers' spending power, to say nothing of Swiss or American expatriate peers' at the same host location. This type of package may be successful in recruiting the candidate, but will fall apart when he/she realizes how they are paid relative to Western peers in the same office. In other words, it fails the retention test.

The 'recruitment-driven' answer to this conundrum might be simply to put the Latvian manager on a local German salary. It surely delivers enough to live locally and establishes equity among transferees and local peers, creating the best chance for retaining the employee through the course of the assignment.

Only at the end of the assignment, when the company wants to return this employee to Latvia on local conditions, to lead a local team and maintain the competitive advantage of Latvian salaries, does the flaw in the German salary arrangement become apparent. How can the company now transition a 'high flyer' from a German salary to a lower Latvian salary and still successfully 'recruit' them to the new job at home in Latvia?

The issues of repatriation are particularly easy to overlook in the rush to recruit, especially to a higher-paying location. Repatriation, though, is more often then not the key ingredient for success where the emphasis might be on developing an entire generation of local leaders.

In an effort to recruit rising stars to higher-cost -locations on fair terms, while still maintaining a 'home country' career reference, companies have increasingly turned to a new kind of international compensation tactic — an 'enhanced balance sheet' arrangement.

The concept begins with the fundamentals of the balance sheet: the employee maintains a home-notional-salary throughout the course of the assignment, paying a hypothetical home-country tax burden. As under the balance sheet, a home-country build up is done to maintain home-country purchasing power.

Rather than stopping there, however, the 'home-host hybrid' approach compares the calculated 'balance sheet package' to the spending power of a local peer. This calculation can be done using company-internal salary lines, assuring harmony with the overall compensation culture of the host organization.

Any difference between the calculated 'balance sheet package' and the local peer's spending power can be paid as a 'position allowance' on top of the calculated COLA.

The advantage of this approach is that it keeps the employee's compensation orientation at home (base salary, tax, pension, etc.), but delivers the better of home or host spending power during the assignment, ensuring equity at post.

To encourage parity with expatriate peers from other countries already at the host location, housing can be delivered at the same standard as other transferees of the same job grade, regardless of home location.

The inclusion of the 10 new member states in the European Union raises the question of hardship within a previously well-defined region where hardship was previously not an issue.

Despite rapidly improving standards of living, many of the new states are still thought of as 'hardship locations' - triggering premiums of 5 or even 10 percent of base salary during expatriate assignments. Due to market norms, the payment of hardship to Western European expatriates may be necessary in order to recruit the right people for two- to three-year assignments in the new EU member states.

But what about assignees moving around within the new EU states? Should someone moving from Bratislava to Prague or Vilnius to Tallinn be paid the same hardship percentage as someone moving to those cities from Dublin or Paris?

While many would immediately answer 'no', consider the reaction of a new generation of Central European leadership realizing that it is being treated as 'second class expatriates' when it comes to recognition of the hardships of life abroad. As companies use expatriate assignments as a tool for career development, it is vital to keep the motivation of the employees visible during the development of policies and practices.

Many companies justify paying a set percentage in a given location by recognizing the amount of currency actually delivered is dependant on home salaries for equivalent jobs. Transferees from low-wage locations receive a lower hardship payment in 5 percent locations than do transferees from high-wage locales.

Increasingly, companies are investigating ways of establishing 'relative' hardship evaluations, which consider certain factors on an objective, 'global' basis and others on more of a home/host basis. These methodologies seek a blend between consistency and specificity required of the new European mobility landscape.

As more executives move around among the new member states and from East to West, more and more accepted practices will be called into question. International HR Managers stand before an era of necessary invention and innovation. Over the coming years, many new methodologies will be tried. Many will succeed and some will fail. Some will change the face of the business as we know it.

Only one thing is sure, the inclusion of 10 new countries to the European club is the next great driver in the evolution of expatriate compensation.

April 2004

John Pfeiffer is Managing Director of AIRINC Europe