Expatriate Management: Legal, Cultural & Compensation Issues

Introduction

Several home-based companies are slowly shifting their business operations to foreign countries to establish an impact in the global business world. Given the current changes in international business, the number of expatriates is increasing for both long-term and short-term assignments. For these organizations, sending employees overseas is an opportunity to improve business activities, but without the right preparation, it is a challenging initiative. Companies are therefore constantly training employees on international work issues to ensure their success in the global marketplace (Kontrimas, 2006).

Businesses face several challenges relating to hiring employees for American-based operations or expatriating employees to work in remote facilities, open new plants, and engage with international clientele. As is the case with H2O, mentoring future corporate leaders to successfully manage operations on a worldwide scale is a welcome step to ensure their operations are not limited to Germany alone. To accomplish this, the firm must understand the issues relating to sending home-country employees to work in America — including legal, compensation, and cultural considerations — before expatriating workers.

Sending Home Country Employees to Work in the US

Sending local employees to work in the US is both time- and capital-intensive for organizations based outside the American continent. Companies spend thousands of dollars preparing expatriates and ensuring their full integration into the U.S. labor force (Ajami & Goddard, 2006). Some companies in domestic markets possess essential attributes that help them enter international markets with minimal difficulty. However, sending employees overseas can be challenging due to the expenses incurred and because expatriates often lack the contacts and knowledge of local customs and business practices that local hires possess.

For H2O, there are several factors that should be considered before expatriating workers to the United States. The first is language. The firm should research whether American English bears any meaningful relation to German, and if not, hire an interpreter to induct employees into the language of the host country. Before sending employees to America, H2O should also train them to communicate in a language that citizens in the foreign country understand and use in daily activities (Walker, Walker, & Schmitz, 2003). Because there are numerous language nuances and some words may not be easily translated, language must be a core concern for H2O prior to deploying German nationals to the US.

The next factor is selecting the right employees to send overseas. Sending shy workers may undermine business activities, as such individuals may struggle to sustain meaningful professional discussions. Conversely, overly assertive employees may be reluctant to leave home and familiar surroundings. The firm should therefore prioritize expatriating individuals with prior overseas experience. Such individuals have already demonstrated an ability to integrate into foreign cultures, seize opportunities to extend professional value to their new teams, and share knowledge and experiences upon return.

The host country's culture is another important concern. Many organizations fail to make an impact in international markets because they do not understand local customs around conducting business. In some Western countries, a handshake signals courtesy, and such seemingly minor details can determine the future of a business relationship. Sending female employees to conduct contract negotiations, for example, may undermine the outcome in certain cultural contexts. Therefore, before H2O sends home-country nationals to work in the US, the firm should ensure expatriates undergo basic training on the culture of the host nation to avoid culture shock and social misfortunes. Expatriates should also learn about the religious beliefs and practices upheld by most American citizens, since religion can influence where and how discussions are held. Lessons on local customs and practices should be initiated before employees are sent abroad.

Before establishing operations in America, H2O should also cultivate diplomatic ties with the host nation. Formal diplomatic relations will help employees conduct their activities without undergoing stringent scrutiny and provide a framework of agreements covering taxation, trade limitations, and insurance. These contacts will also help in arranging introductions and meetings with governmental executives, business authorities, and regulatory bodies that will monitor expatriate activities during their stay. Diplomatic relations will further help safeguard the firm's intellectual property, trademarks, and copyrights from potential infringement.

The next consideration is the American financial system. According to American financial authorities, immigrants are required to obtain a company registration number before they can be issued a business tax identification number, which is necessary to open bank accounts. Prior to moving business operations into the United States, it is also essential for H2O to determine its pricing strategy for inter-company transfers of services and products (Paik & Charles, 2011). The company should also develop a thorough understanding of American human resource practices — including employment, benefits, labor relations, terminations, unions, pensions, social insurance, and compensation — since the American system differs considerably from the German one. The firm should prepare an offer letter outlining the products and services it will provide and should furnish all employees with documents detailing their terms of employment.

Finally, H2O must understand American regulatory requirements. Before establishing premises in the US, the firm must research environmental regulations that could affect operations, including restrictions on manufacturing facilities and waste disposal. Compliance with local regulations is likely to add to the expatriation cost. Once operations begin, the firm will be required to insure its employees and the business. All applicable regulations must be met and certified by the relevant American regulatory authorities before new business premises can open.

Compensation is an important factor employers must consider before sending workers to overseas assignments. An attractive compensation package is essential for H2O for several reasons. First, it enables the company to attract strong candidates for positions in the American operation. Compensating employees appropriately ensures they remain satisfied working for the company, helping the firm maintain internal equity and remain externally competitive in order to attract and retain qualified staff (Brock, Shenkar, Shoham, & Siscovick, 2008). Second, compensation packages serve as a motivational tool; rewarding employees for consistent performance encourages them to work harder, increasing efficiency and productivity.

A further reason for providing compensation packages is to optimize total wage levels. Since the planned assignment in America extends beyond two years, expatriates will need to undergo training in the host country's business practices and initiate tasks likely to generate increased profit. The longer the stay, the greater the benefit to the company. Expatriates should therefore be remunerated based on tasks accomplished and improvement in financial outcomes. The firm must also determine the duration of the overseas mission, since compensation structures differ between short-term assignments (less than one year) and long-term assignments (more than one year). For H2O, the short-term period runs up to 90 days, while long-term assignments range from 90 days to three years.

Expatriate Compensation

There are six approaches H2O can use when designing a compensation package:

The negotiation approach is typically used when sending employees on their first overseas missions. The company negotiates with each employee individually regarding compensation. While flexible and potentially cost-effective, the main limitation is that inexperienced firms may struggle to strike a consistent balance, and some expatriates may end up with excessively high salaries.

The localization approach addresses the problems of high cost and inequality by paying expatriates the same remuneration as local nationals. However, this must be balanced against differences in living standards between the home and host countries.

The lump sum approach minimizes intrusion into expatriates' lifestyles. The firm estimates the salary needed and allows employees to spend it as they see fit, with minimal company interference regarding how wages are used (Niederman, 1993).

The cafeteria approach gives expatriates a range of benefit options in addition to their salary — such as a company car, insurance, or housing — without increasing their tax liability.

The regional system approach is used to maintain equity across the regions where expatriates are deployed, ensuring consistency within geographic clusters.

The balance sheet approach is used by companies whose international operations have grown significantly and whose number of expatriates has increased accordingly. It is typically applied to senior and mid-level expatriates and ensures that their standard of living is maintained relative to their home-country counterparts.

In determining the best compensation structure, H2O should ensure that expatriates are fully reimbursed for the costs and lifestyle adjustments associated with expatriation (Pattiea & Parksa, 2011). Rewarding expatriates well also supports self-confidence and personal motivation, helping them remain effective in a competitive international market and build satisfying careers.