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EXPATRIATE COMPENSATION

Eric Nelson | Compensation Management 549

The opportunity to work outside the U.S. is rewarding in my view. It would take little to convince me to accept the opportunity. That said, there are a number of key considerations I would align on with my company on prior to accepting the offer. All the benefits discussed in Strategic Compensation (Martocchio, pp 314-320) are important when considering an expatriate position, though my personal top three are: housing and utilities allowance; education reimbursement for children; and tax considerations. I’ll briefly discuss the importance of each for myself.  

The expense of housing and utilities is generally one of the largest, if not the largest, expense most families have. It can be a significant percentage of gross pay. According to U.S. Bureau of Labor Statics the average American spent 33% of their pre-tax income on housing (Oct. 2020). In addition to the significant expense, whether buying or renting, due to differing cultural norms, laws, etc., finding a home in different country can be complex and challenging. For me to move internationally, it would be crucial that my company not only ensure housing expense is not a financial burden, but also offer support in locating a home. 

Similar to my reasoning on housing and utilities, both the expense and complexity of finding schools for my children when living abroad is crucial to get support on from my company. As an example, yearly tuition fees for the International School of Amsterdam range from 18,140 euros for pre-school to 26,000 euros for high school. (https://www.isa.nl/admissions-process)

The reason I place tax consideration so high is that oftentimes the need for your company’s assistance with tax events can continue well after repatriation. This can occur when you receive certain benefits such as stock-options and/or deferred compensation during your time as an expatriate. The actual tax event from the exercise of stock-options or distribution of deferred compensation can occur long after you return to the U.S. Due to the complexity of these tax events, confirming with my company that I will receive professional tax preparation support even after I am repatriated is important. 

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EXECUTIVE COMPENSATION

Eric Nelson | Compensation Management 549

 I believe excessive executive compensation has led to wage inequity in America and is making U.S companies less competitive due to lack of investment in corporate funded research and development, capital improvements, and real wage increases for employees.

Due to the percent of executive compensation that is paid in bonuses, primarily stock-option bonuses, I feel it’s important to provide the following context. The passing of Securities and Exchange Commission Rule 10b-18 in 1982 provides a “safe haven” from liability for companies to repurchase shares of their stock on the open market. This is commonly known as stock buyback programs. Companies allocate a percentage of their yearly profits to repurchase shares of their stock. These repurchased shares are the primary source of stock option bonuses awarded to executives, key and highly compensated employees. So, what’s the problem?  Today, companies are allocating a large percent of their profits to stock buyback programs, and not allocating profits to reinvest in the company infrastructure, research and development, or real wage increases for employees. From 2003 to 2012, 449 companies of Fortune 500 companies spent 54% of their profits, $2.4 trillion, on stock buyback programs. Another 37% of profits went to paying shareholder dividends, leaving only 9% of profits to be reinvested back into the company and employees (Lazonick, 2014). The reduction of corporate tax rates with the passage of the Tax Cuts and Jobs Act of 2017 even further accelerated stock buyback programs. Just in 2018, publicly traded companies spent $1 trillion dollars repurchasing their stock shares, 95% of which were purchased in open markets. (Kennon, 2021). 

CEOs and key executives, with the approval of the board of directors, determine how much of a company’s profits will be allocated to stock buyback programs.  In addition to the repurchased shares being allocated for stock option bonuses, executives also benefit from the increase in value of the shares they currently own, or have been granted, as generally a company’s stock price increases in value when there are fewer shares on the open market. This process is creating a potential conflict of interest by company executives having the opportunity to manipulate the primary source of their bonus pay- the value of the company’s stock. 

As of late, there have been calls by stake-holder groups to revise SEC rule 10b-18, which in turn would have a direct impact on executive compensation. The link below is an article on this topic. 

https://www.sec.gov/rules/petitions/2019/petn4-746.pdf

I recommend executive compensation be focused on annual base pay with bonuses being capped at a percentage of annual base pay through new regulations. With bonus levels being regulated, all publicly traded companies will be on a level playing field in recruiting and retaining top executive talent. I would like to believe top performing executives will be motivated to work hard to increase company profits for the purposes of share-holder value, reinvestment into research and development, company infrastructure, and real wage increases for employees. 

An additional article on this topic that I found interesting.

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PRIORITIZING DISCRETIONARY BENEFITS

Meeting the needs of the Millennial and Gen Z workforce, combined with addressing current social challenges facing many of these employees, were overarching considerations I chose in ranking discretionary benefits. Employers benefit by this approach through attracting and retaining a talented pool of current and future employees. 

Below is a chart showing the ranking of discretionary benefits from most likely to least likely to eliminate. Note that health insurance is not part of this discussion. With the passage of the PPAC Act in 2010, health insurance is a legally required benefit   

The four least likely discretionary benefits to eliminate serve the following purpose. First, Paid Time Off.  A specific recommendation would be to implement an Unlimited Time Off policy. This would allow greater flexibility for employees to manager their workload versus their time at work, while providing a cost savings to the employer by eliminating the liability in funding PTO accrual accounts and pay-out of unused time when employees depart the company. Investing in Retirement Programs will be continue to be important to the Millennial and Gen Z workforce. Current projections are that Social Security benefits will be fully funded until 2037. After that point, continuing taxes are expected to pay only 76% of scheduled benefits. ( ssa.gov). At that time the oldest Gen Z employees will be only 51 years old. Thus the importance for employers to invest in Retirement Programs to attract the most talented employees. The next two important discretionary benefits to maintain, Family Assistance Programs and Flexible Scheduling, help to address the specific needs of Millennial households, which often times are dual income households. Despite the increased income of dual income Millennial households (Elkins, CNBC, Jan 2019), according the recent GAO reports (gao.gov, Dec 2019) Millennial households have significantly more debt and lower median and average net worth than Generation X households at similar ages. Employers will need to provide these benefits to encourage dual income Millennial household employees to remain in the workforce, or run the risk of not having a large and diverse talent pool to draw from.   

Potential behavioral changes that may be required by employees through eliminating or reducing some employer funded discretionary benefits would be the need to purchase life insurance and/or disability insurance on the open market.

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Wk 5 | Person-Focused Pay

I selected Pfizer as a company to examine wanting to see if they had adopted a skilled-focused pay structure- a type of person-focused pay- for their production workforce. The hypothesis being that with the technology involved in pharmaceutical manufacturing it would be beneficial for Pfizer, and their employees, if they were trained in the production of a variety of Pfizer drugs versus specializing in just one type or a specific process. Supporting this position is recent evidence showing that companies in the manufacturing sector are adopting a skill-based pay structure.

“In one of the first comprehensive studies of skill-based pay plans, a management researcher at the University of Arkansas found that such plans are more successful and sustainable in manufacturing facilities than in service organizations. The research also revealed that support among supervisors and employees for the innovative plans consistently predicts their success and survival.”

Below is a link to the full article:

https://www.reliableplant.com/Read/3959/skill-based-pay-manufacturers

I came across an unexpected “twist” in my exploration on Pfizer’s adoption of a person-focused pay structure. The twist is why Pfizer should adopt a competency-based pay structure- another type of person-focused pay- for a different job group and reason. The position is that due to competitive threats, Pfizer should adopt a competency-based pay structure for their sales force. Many of Pfizer’s top sales performers top-out in earnings after 3 to 5 years with the company. Competitors then hire them away for higher compensation. Pfizer desires to lower the turn-over rate of high performing employees. Adopting a competency-based pay structure would encourage their sales force to acquire new skills and knowledge, allowing them to transfer within Pfizer to other functions or advancement into management. The goal is for these high performers to remain at Pfizer and develop life-long careers.*

Mark Blessington, of Mark Blessington, Inc. authored a case-study on this that can be found on his site: mark.blessington.com

I had not contemplated this benefit of a person-focused pay structure, but in this example for Pfizer it makes sense. 

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An Early Lesson

At 13 years- old I learned my first lessons in compensation that impacted my behaviors- some of those behaviors to this day. I liked playing golf and wanted to play as much as possible during the summer. I needed to figure out a way to pay for my golf passion. But did not desire to follow my father’s advice, paint fences and mow lawns, as I had the previous summer. That was way too hard and took away from time playing golf. I needed a creative solution.

I approached the teaching pro, Dave Tapp, and asked for a job. His response was not what I wanted to hear, I was too young to be “hired” for a job. Back to painting fences and mowing lawns!

But I continued to think on creative ways, as well as being a pest to Dave, to come up with a solution. We finally agreed on the following: each morning I would be responsible for setting out water for the golfers, and rake the traps; in the evening I was responsible for picking up range balls. In return, I could play as much golf (Mon thru Fri) as I wanted and received two 30-minute lessons each week.

I learned a few things from this simple summer of golf. First, compensation can come in different forms- not just dollars & cents. Next, the concept of creative solutions. I was too young to understand the concept of a barter system, but somehow figured it out. And finally, the concept of negotiation and persistence. The process of negotiation does not have to be negative or adversarial. If you just keep collaboratively communicating to find mutually beneficial solutions, many times good results will happen.