April 26, 2012:
Our last article in the series, Putting Together the Right International Compensation Package, explored the elements that make up an international compensation package and what you will need to consider when selecting the right elements for your global mobility program. In this article we will begin to discuss the various international compensation delivery options.
In other words, you have decided what the compensation package will be and how such things as exchange rate protection and cost of living will be administered. Now you need to turn to the realities of how the compensation will be delivered to the employee, factoring in both ease of administration as well as convenience to the employee.
There are three most common options for payroll delivery during an international assignment:
- Home based pay
- Host based pay
- Split pay
This article will focus on split pay delivery, and its advantages and disadvantages.
The reality is that most expatriates will have on-going financial commitments at home during their assignment. These could include funding pension and savings plans, paying mortgage or utility costs, providing income to family members who are not at the assignment location, paying for a child’s university education, etc. They will also incur host expenses and need to access a portion of their compensation in the host country currency for personal living and family expenses.
In order to manage these expenses in both locations, the employee needs funds in both currencies. This could mean receiving funds in both origin and destination, or being paid in one location, in one currency, and the employee is responsible for managing funds between countries. To provide the funds in both the home and host location, companies can use a split payroll system.
A split payroll is where the employee is paid a portion of their compensation from the host country payroll and the remainder from the home country payroll. It involves running and reporting two distinct payrolls: home and host country.
Split payroll arrangements resolve two needs – providing a portion of income in the home country for ongoing expenses there, and providing a portion of income in the host location for expenses incurred in local currency. Before establishing a split payroll arrangement, it is important that you verify with your tax provider that the location of payroll delivery does not affect residency status or other factors which could affect tax planning. Another factor to consider is if there are percentages of compensation that are required to be delivered in one location or another due to the volatility of the local currency. Brazil is one such example.
So what forms the basis for the split? You can select among the following options:
- The traditional balance sheet approach the components of the split are decided at the outset of the assignment and maintained throughout
- An employee directed approach employee chooses how much he/she needs to receive in home country currency and in host country currency. It is more flexible in that it can be based on a percentage of income or on specific components. This option is most typically open for revisions to the split at pre-specified time intervals
- An enforced split this is a split that is dictated by the laws and labour practices of some jurisdictions
When split pay is chosen, it is generally done to benefit the employee and provide maximum flexibility for their assignment. Option 2 is most commonly used as it allows the employee to manage their own finances and determine the amount they will need in each location on a regular basis.
The downside of split pay is the administrative burden of managing multiple payrolls for each assignee. Whether you have a third-party company managing your international assignments and compensation, or you are managing the program in house, there are multiple steps to be taken every time the split is updated.
To best manage this type of split, it is recommended to limit the times an employee can make changes to the split whether it’s specific amounts or a percentage of the overall compensation.
An alternative to the split payroll system is to have a third-party administer the host paid delivery. Home payroll would be responsible for the regular payroll and any applicable taxes. The third-party could deliver any allowances or payments directly to the employee, in local currency, then include it in any expense or compensation reporting you may have as part of your agreement.
Depending on the size of your global mobility program, the administrative tasks required by payroll, the employee, and HR / Relocation Company make it a less than viable option in most cases. This can’t be stressed enough. Managing split payroll increases the complexity and amount of administrative tasks significantly. If your company does not have a large critical mass of assignments, split pay will become very taxing on your payroll personnel. We will focus on host-based pay in the next article.