Destination Asia - Expatriate Management Concerns - Stanley & Vierra

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BENEFITS & COMPENSATION INTERNATIONAL TOTAL REMUNERATION AND PENSION INVESTMENT

Transcript of Destination Asia - Expatriate Management Concerns - Stanley & Vierra

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BENEFITS &COMPENSATION

INTERNATIONALT O TA L R E M U N E R AT I O N A N D

P E N S I O N I N V E S T M E N T

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Benefits & Compensation International • 1

Destination Asia:Expatriate Management ConcernsPhillip A. Stanley and Kimberly Vierra

Phil Stanley is a Vice President of ORC Worldwide and is Managing Directorfor the Asia-Pacific region. Based in Singapore, he specializes in employeeremuneration and has over 20 years’ experience in the design, developmentand review of domestic and international compensation programmes,including salary administration guidelines, structures, policies and plans forboth expatriate and local national employees. Mr Stanley is Chairman of thefirm’s Asia Multinational Company Expatriate Roundtable. Before joining ORC he worked in the International Compensation and Development divisionof Northrop Corporation, Aircraft Services. Mr Stanley has Bachelor’s degreesin Business Administration and Psychology from California State University.

A Senior Consultant in the International Compensation Services practice of ORC Worldwide, Kimberly Vierra is also based in Singapore.

She previously worked for ORC in the New York office in 2000-01 and before that for PricewaterhouseCoopers and Nike. In 2001, Ms Vierra

relocated to Vietnam to start a training and team-building business. For thenext five years, she developed and ran experiential programmes for

various corporations, NGOs and foreign government institutions. Ms Vierra has a Bachelor’s degree in Economics from

Lewis & Clark College and a Master’s degree in International Managementfrom the Oregon Joint Professional Schools of Business, with a focus on

business practices in the Asia-Pacific region.

Asia-Pacific is tied with Western Europe as the mostpopular expatriate host region (see FIGURE 1 overleaf)and currently 12 of the top 25 expatriate destinationcountries are in Asia (see TABLE 1, also overleaf). Whilethey are popular as host locations, each country withinthe region has its own set of challenges. With majorpollution in China, long waiting lists at the internationalschools of Hong Kong, disease and sanitation issues inup-and-coming Vietnam, stability concerns in Thailand,and rising costs in Singapore, Asia is a complex andchallenging region. Here’s a brief look at each of theselocations.

CHINAChina currently hosts approximately 34% of expatriatesin Asia, with companies’ hot topics including thepotential reduction of hardship allowances and thelocalization of long-term expatriate staff.

Hardship allowances – typically paid as a percentage ofbase pay and delivered tax free to the assignee –compensate for harsh conditions and encouragetransfers to difficult locations. Hardship pay can rangefrom zero to 30% or more, depending on the relativeextremes of factors such as substandard expatriatehousing, climate and physical conditions, lack of culturaland recreational facilities, disease and poor sanitation,inadequate medical facilities, weak infrastructure, lackof suitable education facilities for dependents, physicalremoteness, political violence and repression,communications, crime, pollution, and unavailability ofgoods and services.

Today, many companies are questioning the need to paya hardship premium to first-tier Chinese cities such asBeijing and Shanghai – especially for expatriates whooriginate from Taiwan, Hong Kong, and Singapore. Whileelimination of hardship premiums for expatriates intoChina from neighboring or Chinese-speaking countriesmay make sense intuitively due to cultural and languagesimilarities and while such a policy could seem attractiveas a cost-savings measure, it may be unfair from theexpatriate’s perspective – particularly for those workingside by side with European or American expatriates who enjoy the full allowance. In addition, many of thehardship factors (e.g., poor infrastructure, and diseaseand sanitation issues) affect all expatriates equally,regardless of their country of origin or spokenlanguages.

The other current topic for companies with expatriatestaff posted to China is the interest in localization, orthe reduction of expatriate-type allowances and a moveto local pay and benefits. Unfortunately, while this stepis desirable from a cost-savings standpoint, it isn’t thatpracticable, given the current business and statutoryenvironment. In fact, the following reasons make thelocalization of expatriates in China quite difficult:

There is a significant local skills shortage for toppositions in China, which means that if a companytries to eliminate the perquisites typically enjoyed by expatriates, star employees will be snapped up by another company willing to keep them on anexpatriate package.

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2 • Benefits & Compensation International

Chinese salary levels, while increasing rapidly, stillfall below those of most developed countries.Consequently, an employer would be hard-pressed

to find an employee who would agree to be put intoa typical local salary structure.

While salary levels are low, income taxes in China arethe highest in the region. The top marginal tax rateis 45%, and China taxes worldwide income if a personis resident for more than five years (see TABLE 2opposite).

Regarding benefits, non-nationals of mainland China(including those from the Greater China locations ofHong Kong and Taiwan) cannot participate in thestate-run medical or pension systems.

An employer will have to take all these points intoconsideration when deciding whether or not to localizean employee.

HONG KONGWhile Hong Kong is considered by many to be anattractive place to live and conduct business, employersface two key issues today.

First, the air quality is deteriorating, making someemployers consider Hong Kong to be a hardship locationdue to the smog and offer assignees compensation to offset the difficulty of living with poor air quality.Anecdotal evidence suggests that, as a result of theworsening air pollution, many companies are thinkingabout relocating their operations away from Hong Kong.According to a Merrill Lynch statement made in 2006:

“Skilled professionals are departing Hong Kongbecause of this [smog]. More will follow . . .Singapore stands to be a major beneficiary andthe investment response is clear: Buy [shares in]Singapore office [property developments], sellHong Kong [properties].”

Second, Hong Kong issued a proposed race discriminationlaw as a consultation paper in 2004. The proposal wouldmake it unlawful to offer less-favorable employment termsand conditions to locals than those offered to foreigners.It permits certain exemptions for:

– an expatriate hired before the legislation is enacted;

– an expatriate transferred within the same group ofcompanies;

– a job requiring skills not found in Hong Kong; or

– an expatriate who is not a permanent resident andwas recruited outside of Hong Kong.

This proposed law is still pending final approval.

SINGAPOREWith a strong economy fueling growth and an influx ofexpatriates fueling demand, housing prices are soaring.Average rental prices over the past 18 months increasedat rates of 21-42%, depending on the district. Thissituation is contributing to a larger assignment cost forSingapore-posted expatriates, particularly those from theUnited States. Recent US tax law changes have increasedthe costs associated with employing US assignees, withthe most severe impact felt in high-cost housing / lowincome tax locations (e.g., Hong Kong and Singapore).

FIGURE 1 Where are Expatriates Located?

Africa

Middle East

Asia-Pacific

Latin America

North America

Western Europe

Eastern Europe

29%

4%

10%

5%

17%

29%

6%

Source: ‘2006 Worldwide Survey of International AssignmentPolicies and Practices’, ORC Worldwide

TABLE 1 Top 25 Expatriate Destinations

Ranking

123456789

10111213141516171819202122232425

Country

United StatesChina (mainland)United KingdomGermanySingaporeJapanHong KongFranceThailandBelgiumNetherlandsSwitzerlandMexicoIndiaAustraliaTaiwanKorea, Rep. ofBrazilMalaysiaCanadaItalyIndonesiaSpainRussiaPhilippines

Source: ORC Worldwide Data Service, June 2006

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Besides the expensive housing market, the costs ofconsumer goods are expected to increase. Fueled byrising energy costs and the goods and services tax (GST) increase from 5% to 7% in July 2007, many analystsexpect a jump in retail prices. If all other factors remainequal, expatriate cost-of-living allowances will mostlikely increase.

Another interesting development is the new PersonalisedEmployment Pass (PEP). With this enhanced employmentpass, expatriates are no longer at the mercy of theircurrent employer in order to live in Singapore. Thosegranted PEPs have a grace period of six months betweenjobs and do not need to apply for another pass when they find a new job – in other words, this new type ofemployment pass is linked to the employee, not theemployer, giving the expatriate more leverage if he or shewants to continue working in Singapore.

THAILANDSome Thailand-based expatriates may be waiting for“the storm” after the calm military coup that occurred inSeptember 2006, yet it may be a “calm before the calm”situation. However, continued violence in the southernregion of the country, as well as changes in ownershiplaws, may make some foreign investors and expatriatesnervous.

In addition, assignees in Bangkok face challenges in dailyliving. According to our firm’s ‘2006 Location-SpecificSurveys of International Assignment Policies andPractices’, a majority of Bangkok-based expatriates citedpollution and traffic congestion as their most seriousconcerns. Water pollution from factory emissions, alongwith urban and organic waste, is another very seriousproblem throughout the city.

VIETNAMWith its accession to the World Trade Organization(WTO) earlier this year, many companies are flocking to Vietnam to take advantage of the relatively low labor costs and make their mark in the second fastestgrowing economy in Asia. According to Navigos Group*,while Vietnam enjoys an advantageous demographicpyramid with an army of eager recent graduates, thedemand for more experienced talent is soaring becauseof the scarce supply. This situation has created anescalation in employee expectations and significantlyimpacts recruitment and retention practices, especiallyat the higher levels. The limited supply of qualified local applicants is prompting many companies to send expatriates to fill the skills gap at the top and mid-management levels.

What do expatriates face? This influx of foreign staff is forcing the costs of expatriate housing to rise in Hanoi and Ho Chi Minh City as developers rush to meetthe demand for an adequate housing supply. Otherconcerns include the lack of international-standardhospitals and a tainted blood supply, making companypolicy regarding medical evacuation an importantconsideration. In addition, many expatriates complainabout the lack of recreational facilities and child-friendlyoutlets, not to mention a difficult climate with pollutionand sanitation issues. Employers must carefully screennot only the expatriate but also any accompanyingfamily members to ascertain their ability to adapt to alocation that is not for everyone.

GENERAL EXPATRIATE TRENDS IN THE REGIONA number of trends in compensation and otherassignment-related policies have become apparent overtime, as follows:

According to a 2003 TMP/Hudson survey of 589senior managers – and our ongoing work withclients – “full expatriate” packages are on the declinein Asia, and are typically being reserved for only themost senior staff or those transferred from anotheroffice for definite limited-term durations. Assigneesare accepting “partial expatriate” or “local plus”packages, especially those who are already in Asiaand want to stay beyond the contracted term.

Perquisites like R&R† trips – vacations to nearby non-hardship destinations, given as an escape from thehardship conditions – are on the decline across theboard. Another common practice under fire is paymentfor club memberships, often given as a benefit inhardship locations where recreational outlets may belimited. This perquisite has been on the decline formany Asian cities, including Bangkok, Beijing,Guangzhou, Jakarta, Kuala Lumpur, Manila, Mumbai,Seoul, Shanghai, and Taipei. According to our firm’sresearch, nearly 60% of the companies that participatedin these surveys offered paid club membership for theirexpatriates assigned to these Asian hardship locationsin 2001. In 2006, that number dropped to 38%. Possiblereasons for the decline include budgetary constraintsand concerns over perceived inequity with local peers.

There are more and more destinations whereexpatriates are experiencing waiting lists atinternational schools. For example, at the Hong KongInternational School (HKIS), one of two internationalschools that offer a US curriculum, the basic tuitionnow costs more than US$19,000 a year. This highprice tag is a result of the exceptional demand for, andlimited supply of, international schools in Hong Kong.Last year, 309 children waited for placement at HKIS,with a total student body of about 2,600 students. Afurther example is in Singapore, where the AmericanChamber of Commerce (AmCham), which advocatesfor the US business community, has set up a task forceto address the waiting list issue. Its efforts will include

TABLE 2 Comparison of Top Tax Rates

Country

USA (federal)Hong KongSingaporeTaiwanChina

Minimum salaryat top rate

US$349,700

11,507209,974111,759155,763

Top marginal rate

%3516204045

* a Vietnamese recruitment firm operating in Hanoi and Ho Chi Minh City

† rest and recreation

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close communication with local school boards and theSingapore government, directing members to specificschools, and providing other relevant information.

Not only is the use of expatriate staff in Asia increasing, buttheir profile and countries of origin are changing. Thereare more intra-Asia assignees, more assignees hailing fromless-developed countries, and more female expatriates.

CREATE APPROPRIATE POLICIES & PROCEDURESAsia will most likely continue to be a top destination forexpatriates, as it is the world’s fastest growing region,driven by high consumer demand and favorableeconomic conditions. Companies should prepare for thisgrowth by creating appropriate policies and proceduresgoverning employee mobility for these fast moving andcomplex destinations. Ω

Reproduced from Benefits & Compensation International, Volume 37, Number 3, October 2007.Published by Pension Publications Limited, London, England.

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