International benefits plans should consider local input, tax and legal issues

International benefits strategies must consider local input, and tax and legal issues, says Sarah Coles

Traditionally, UK companies setting up offices overseas were like homesick ex-pats, stuffing their suitcases with the delights of home and trying to re-create a little corner of Blighty. But a global benefits strategy that doesn’t take account of local markets will fail on two levels: it won’t attract the best people to an employer, and may not offer value.

Real value comes from providing a tailored solution for each country. This needs to start with what the country infrastructure dictates. At a very basic level, this is about mandatory minimums. In Switzerland and Australia, for example, there are minimum pension contributions, while in Germany there are minimum contributions for medical benefits. In some countries, like the UK, there are statutory rules around sick pay. So step one is to find the minimum mandatory levels set by government in each territory.

Legislation can also mould benefits, as these often develop to fit around state provision. Jeremy Hill, a principal at Mercer Human Resource Consulting, says: “If the state is very generous, then as an organisation you don’t want to be duplicating that. In France, for example, there’s a generous medical system provided, but there are charges for care, so medical benefits are tied into taking care of the charges. In Germany, meanwhile, there isn’t a private medical structure because the state system is a mandatory contribution to private insurers and everyone pays the same.”

Pensions pose a similar issue, so employers need to examine the pensions provision by a country to identify where the gaps are that need filling with private benefits. In Spain, for example, the state pension is very generous. So for staff earning up to €30,000 (£20,400), which is roughly the average earnings, pensions are not a high priority. Above that ceiling, nothing extra is provided, so organisations look to provide occupational pension schemes for higher earners.

Tax legislation can often influence the benefits offered. In the UK, this was underlined when the tax break for home computing schemes was withdrawn, which sparked a collapse in the market. In Sweden, however, this tax break still exists, and home computers are a popular benefit. While in Australia, taxation rules make salary sacrifice arrangements a popular option for all kinds of perks – even cars, says Chris Bruce, director of marketing and technology at Thomsons Online Benefits. So getting a grip on tax laws is vital.

Of course a typical benefits package isn’t necessarily dictated by legislation or logic. Cars are the ultimate proof of this. In Germany, for example, there is no particular tax break for offering a company car as a benefit, yet for employees above a certain grade it is considered an essential part of the package. In these cases, what is offered may depend more on a country’s culture and tradition than its legislation and available tax breaks.

It is vital, therefore, for employers to assess what is offered locally. “Quite often, we do surveys in different industries so we can say what the typical benefits are in a particular industry. It’s an opportunity not just to see what’s typical, but to see the range on offer,” says Mercer’s Hill.

Identifying how benefits are put together is also important. Simon Dudley, senior international consultant for Watson Wyatt, explains: “The labels of basic benefits may be very familiar, but the way they are financed and the level of benefit may be very different. Don’t assume anything. You can get caught offering the wrong compensation package because you haven’t understood local custom and practice.”

By understanding what tends to be offered, an employer can theoretically compete for talent by offering top-notch benefits. But in some countries there’s no real freedom to do this, because workplaces are so heavily unionised that the package is essentially dictated by collective bargaining.

This is true of traditionally unionised countries such as France, Italy, the Netherlands and Germany, as well as lesser-known examples such as the Bahamas. There is almost no flexibility in what compensation and benefits are offered to staff. Instead, it is dependent on grades, where employers have different categories of employee and varying benefits for each of these.

At the other end of the spectrum are regions like the Gulf, which have no unions. However, this also has a downside. “If you take financial services in Dubai you’re in a first mover situation. People are asking what typical practice is, and the answer is that it isn’t defined yet, because it hasn’t got that many people in the industry yet,” says Hill.

Employers are therefore left to look at their competitors beyond country borders. Tim Reay, a consultant with the international employee benefits team at Hewitt Associates, says: “More senior people often end up competing on an international level. Pay and benefits need to attract them from another country not another company.”

Benefits also need to reflect the overall corporate philosophy. While employers may establish their philosophy around cross-border benefits strategies centrally, they will differ over whether implementation should be centralised or localised. “Most organisations want a fair amount of local issues handled by local management, but want to know it’s handled in a way the employer is happy with. So the headquarters work out the messages of how we do things and lets the locals get on with it,” explains Dudley.

Local managers can then choose benefits suppliers. This tends to happen with perks that are specific to a territory. It’s also typical with company cars, because providers tend to operate locally.

However, there are some benefits to centralising this process to take advantage of economies of scale. This can simply mean setting up preferred suppliers. Alex Tottle, a consultant at Hewitt Associates, says: “Organisations have preferred providers for things like insurance. They try to have the same insurer or network because they get financial or administrative benefits. Others may try to find the same supplier Europe-wide or globally. It depends on the benefit.”

Alternatively, employers may opt to pool perks such as life insurance and disability cover, for greater efficiency. An employer offering different benefits across three countries, for example, could buy an insurance policy locally with a partner from an insurance network. The central office for the insurance company would then add together the premiums paid, and offset that against the administration costs and the claims. If premiums exceed the costs incurred it will pay an international dividend, so the employer gets some money back. It is increasingly common to take a pooling approach for pension investments, as long as an employer has enough assets to make it cost effective.

But centralised solutions don’t mean offering the same package everywhere. “It’s too expensive because you end up harmonising upwards,” says Reay.

It is also nigh-on impossible to make it clear that a package is the same in different territories. “A lot of the time it’s very difficult. You could have an executive in France and one in the Netherlands. Even if the total cost of employing both was the same – say €150,000 (£102,000) – the French executive would take home €65,000 (£44,202), because the rest would be eaten up by the employer’s taxes. The Dutch worker would see 30% or 40% more because the Netherlands has higher employee contributions. When the two executives meet each other and talk about salary, the French executive would leave aggrieved,” Reay explains.

Devising a successful cross-border policy, therefore, is about finding a balance between being a slave to the local market, and forcibly exporting existing benefits†

Case study: Reuters

News firm Reuters runs an international benefits package for its 15,000 employees with four global benefits professionals working closely with HR in each of its 100 territories.

Its philosophy is to run a few key benefits globally. This includes its worldwide defined contribution (DC) pension scheme.

Maggie Lester, international benefits manager, says “The regional policy isn’t worth handling. It’s better in a global arrangement.”†

The DC scheme can be also tailored to suit the locality. “In Japan, a lump-sum retirement benefit is considered more valuable than a life-long pension annuity, because culturally you’re expected to produce a lump sum and then your family look after you for the rest of your life,” says Lester.

She is also moving to offer two-times life insurance in every territory. The rest of the package is tailored to the locality. Reuters also accepts the need for certain perks in some regions, such as lump-sum permanent disability benefits in parts of Asia.

Unusual benefits worldwide

It is possible to buy a company car through a salary sacrifice arrangement. Employers can even take it with them to their next employer as long as it operates a scheme.

Luncheon vouchers are particularly tax efficient. Their use is so widespread they are considered a compulsory perk.

Private medical insurance cover isn’t just common for spouses and children, but also for employees’ parents, and sometimes extended family.

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Having a chauffeur is common among senior employees. Some executives have three drivers on eight-hour shifts, so they always have someone at the ready.

United Arab Emirates
There is very little taxation and few compulsory benefits, but staff are entitled to an end-of-service gratuity, based on their number of years of service.