Avoid These Global Compensation and Benefits Plan Obstacles
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
May 7, 2022
Avoid These Global Compensation and Benefits Plan Obstacles
Business imperatives push multinationals to expand at least some of their pay, bonus and
benefits offerings internationally. This is why in recent years we have seen multinationals
globalize many compensation and benefits plans that, back in the old days, would have
remained completely local. Indeed, as multinational human resources marches toward greater
and greater international integration, compensation and benefits lead the charge. Global
“rewards strategies” have emerged as multinationals’ most vital integration tool for motivating
workforces across borders and for internationally aligning human resources.
Multinationals now serve up a smorgasbord of regionally and globally aligned
compensation, bonus and benefits offerings. Examples include: regional sales commission
plans, global profit-sharing plans, international sales incentive plans, cross-border variable
compensation/pay-for-performance plans, multijurisdictional executive retention bonuses,
international severance pay plans, cross-border equity/stock plans, global tuition
reimbursement programs, expatriate medical plans—even international employee assistance
programs and global adoption expense reimbursement plans. Sometimes it seems that
multinational headquarters looks at each compensation and benefits offering it makes available
to its local headquarters staff and asks: Shouldn’t we expand this and offer it to our teams
worldwide? After all, our business case—the reason we launched this program in the first place
—is just as pressing across our operations abroad.
While the business case for globally expanding a bonus or benefit may indeed be global,
the mechanics here can get complex. Each of the world’s countries, in its own particular way,
locally regulates many aspects of employee pay and benefits. Every time a multinational
headquarters launches, expands or improves some border-crossing bonus or benefits scheme—
and certainly every time headquarters internationally amends, reduces or discontinues one—
the employer needs to flush out and then overcome all the legal obstacles in each affected
jurisdiction.
Consider Payor Entity Carefully
The first question when launching any cross-border compensation or benefits offering
should always be: Which corporate entity within our multinational conglomerate will fund this
plan? Even more importantly: Which entity in our group will directly tender plan payments or
benefits to employee participants in each jurisdiction?
Headquarters funding—and particularly headquarters payment tendering—of an
international pay/benefits plan opens a Pandora’s box of legal issues as to: payroll
withholdings/ contributions/reporting; corporate and employee-participant tax/social security;
currency regulation/reporting/foreign exchange; “permanent establishment” (unlicensed
transacting business abroad); and, as to stock/equity plans, securities law.
Separately, whenever a headquarters entity directly tenders money (sometimes even
when it tenders stock options or shares) to employees of its own overseas affiliates,
headquarters risks becoming a co-/dual-/joint employer jointly liable, along with the local in-
country employer affiliate, for local employment claims. A local employee only need argue to a
local labor court something to the effect of: I’m being paid by two bosses, so obviously I’m
working simultaneously for both of them. One solution here is for headquarters to have each of
its local affiliates tender the bonus or benefit to its own staff, even if behind the scenes
headquarters funds the grant and reimburses its local affiliates. But this solution can be
cumbersome in administering equity/stock plans. And in countries like India and Singapore,
having headquarters directly tender the consideration actually offers certain advantages
regarding enforceability of clawbacks and choice-of-headquarters-country-law clauses.
Ripple Effects
Total compensation includes base pay, bonuses and often the value of some fringe
benefits. Accordingly, many countries roll bonuses and even benefits into their definition of
total compensation for calculating local mandatory extras like vacation pay, overtime pay, social
security contributions, “thirteenth-month pay,” pension contributions and severance pay. This
can make a global bonus/benefits plan much more expensive than bargained for.
Multinationals sometimes try to solve this problem by inserting into an international plan a
clause that purports to exclude plan pay-outs from these other calculations. But not
surprisingly, local law in many places ignores these clauses. Be sure to account for ripple effects
when granting pay or benefits in a foreign country.
Definitions Matter
Any global pay, bonus or benefits plan should clearly define all key terms—even terms with
meanings that seem obvious back at headquarters. For example, an American multinational’s
global plan might link eligibility to “regular” “full-time” status, or to being a “salaried” “exempt”
employee, or to being neither “retired” nor dismissed for “good cause” during a plan year.
These terms mean different things abroad. Be sure to define them in the international plan
document.
Also, be precise in characterizing what plan payments are for—characterize payments in a way
that works as intended in every relevant jurisdiction. This can be a big-ticket issue. For example,
if a plan sponsor wants payouts under a global separation pay plan to count as down payments
toward employer severance pay or notice pay obligations under local dismissal law, then make
the plan terms explicit. In December 2013, the Supreme Court of Canada refused to let an
employer characterize pension payments to a laid-off employee as severance/notice pay
because neither the employment contract nor the plan terms characterized the payments as
severance.
Cross-Border Alignment
We mentioned that a multinational’s headquarters human resources team sometimes
looks at its headquarters compensation and benefits offerings and decides that fairness, good
HR and a strong business case militate for extending some offerings internationally. For
example, American headquarters employees might get employer-provided medical insurance,
dental insurance, an employee assistance program, an adoption-reimbursement plan, even a
company severance pay plan. Meanwhile, headquarters executives at a multinational based in
France might get a profit-sharing plan and company cars. Headquarters will inevitably wonder:
Isn’t it only fair to extend these offerings to our teams across our overseas offices?
Maybe, maybe not. When considering whether to internationalize some local
compensation term or benefit, first verify that the underlying business case really does reach
abroad. For example, American employers offer medical insurance and employee assistance
programs because the United States has no broad-based socialized government medical care
system—Obamacare notwithstanding. And some U.S. employers offer severance pay plans
because U.S. employment-at-will does not require severance pay. The environment is very
different abroad, making the need, overseas, for these particular offerings far less urgent.
Meanwhile, Continental European multinationals give their headquarters executives company
cars because cars are expected and sometimes tax-advantaged in Europe. Of course, while staff
everywhere appreciates a free car, in markets like the United States, benchmarking and tax
analysis usually militate against a benefit so expensive. In short, when expanding a benefit
beyond its indigenous market, be sure to align with overseas environments. Does expanding it
justify the cost?
Eligibility and Local Pay Laws
Be sure the eligibility criteria for a cross-border pay/bonus/benefits plan select participants
in the target jurisdictions in a way that is legal and consistent with foreign pay discrimination
laws. For example, pay discrimination laws in Europe and elsewhere can actually force an
employer giving a benefit to one class of workers to offer that same benefit to all equivalent-or-
higher employee groups.
Further, laws in Europe bar the common U.S. practice of limiting a benefit (medical
insurance, for example) to full-time staff. Laws in the Middle East prohibit compensating
foreigners, including even inbound expatriates, more than locals. And equal protection laws in
Germany and South Africa may effectively impose an “objectively reasonable” rule for selecting
bonus and benefits plan participants.
In addition, bonus and compensation plans that pay a significant percentage of employee
compensation can trigger quirky local pay laws. Always check whether each affected jurisdiction
imposes any local pay regulations that reach the proposed global offering. The poster boy
example is the financial services industry bonus cap across Europe.
Labor Consultation
In many countries, to propose a new bonus or benefits plan (even one limited to
management) amounts to a mandatory subject of consultation or bargaining with local worker
representatives—works councils or trade union committees. Be sure to involve local worker
representatives, as required, in any decision to launch or expand—and particularly in any
decision to reduce or discontinue—a bonus or benefit. That said, there are some exceptions.
Austria, for example, empowers works councils with broad consultation rights but excludes
“competence” over pay and benefits offerings.
Employees and their representatives usually welcome new compensation and benefits
programs, so worker reps rarely object when their employer rolls out a new plan. But they
sometimes push for tweaks or start horse-trading for different benefits. And again, collective
consultation becomes a huge issue when a multinational wants to amend, cut or discontinue
some element of compensation or benefits.
Vested/Acquired Rights
We have been discussing formally installed, ongoing compensation and benefits plans. But
sometimes a multinational offers a special or ad hoc one-off cross-border bonus or benefit—
say, a one-time broad-based stock grant that the employer may re-grant again the next year
and maybe even yet again the following year. In many jurisdictions employees might be able to
claim they acquire a vested right to receive these offerings forever. So any international one-
time-only grant or fixed-term pay plan with an end date needs to declare its temporary status
loudly and clearly.
Ideally, have employees or their representatives acknowledge that they accept the one-off
award knowing they may never get another. That said, as time goes by, this acknowledgement
may not prove enforceable. Consider the ramifications of vested rights.
Consents
As mentioned, cross-border compensation and benefits grants often include participant
acknowledgments consenting to plan terms for each beneficiary to sign. Sometimes the plan
terms being consented to even pepper in substantive changes to employment terms unrelated
to plan administration—for example, stock option or equity plan grants sometimes add in a
noncompete provision.
While employee consents can prove vital, a consent is worth little when the law will not
enforce it. Employee consents outside the pay and benefits plan context (particularly in
Northern Europe and parts of Latin America) can be susceptible to being held invalid as
inherently coerced—the theory is that when a manager asks a subordinate to sign a consent,
the subordinate has little choice. The good news is that even in jurisdictions skeptical of
employee consents, a consent should be fully enforceable where it links to an extra bonus or
benefit the employee was free to reject. That is, most jurisdictions should enforce an employee
acknowledgement where the employer can show the employee was free to withhold consent at
absolutely no detriment other than nonparticipation in the plan.
Rescission of Prior Plans
Often an updated version of a pay/bonus/benefits plan replaces an earlier arrangement.
This is particularly common, for example, among employers that launch annual commission
plans and annual variable pay plans across regions. Trading in an old international pay or
benefit plan for this year’s model raises a number of issues including the need to rescind the old
plan completely.
Launching the new plan alone is never enough: What if overseas staff later point to the old
plan and argue that it remains in force alongside the new one? Take the steps necessary under
local law formally to revoke the earlier plan—notice, board resolution, employee consents,
worker representative consultations and the like.
Clawbacks
Clawback clauses are common in bonus and benefits plans because they disincentivize
undesired employee behaviors. Think, for example, of retention bonuses that require
employees who quit early or get fired for cause to pay back part of the bonus. Or sales
commission plans that let the employer claw back paid but unearned commissions. Or tuition
reimbursement programs that let the employer claw back tuition from a participant who flunks
or drops out of the course early, or who quits his job upon graduation.
But actually enforcing employee clawbacks can be particularly tough in many countries,
including Denmark, France, Japan, Korea, Sweden and much of Latin America. An even bigger
challenge is enforcing a clawback provision that purports to let an employer deduct clawback-
owed funds from paychecks or severance payouts. Before drafting clawback and pay-deduction
clauses, understand the enforceability challenges under applicable law.
Choice-of-Law and Dispute Resolution
In most countries, choice-of-foreign-law clauses in employment agreements tend not to be
enforceable. But choice-of-headquarters-country law clauses can sometimes actually be
enforceable in cross-border bonus and compensation plans, at least as to plan administration
topics that do not touch on fundamental employee rights. For example, a choice-of-
headquarters-country law clause is obviously a vital term in an international equity or stock
plan administered under the law of the jurisdiction that issues and trades the stock shares. Still,
countries like Argentina and Chile may hold even these choice-of-law clauses void if a dispute
over the plan arises locally and lands in a local labor court.
Separately, dispute resolution provisions in compensation and benefits plans will likely be
held void in most jurisdictions outside the United States, because local labor courts usually
enjoy mandatory jurisdiction over employment disputes, including even compensation and
benefits disputes. In the compensation and benefits context, an employer will usually be able to
enforce a choice-of-foreign forum clause only by convincing a local court that the dispute is
over a plan that is separate from employment. So think carefully before including a choice-of-
foreign-forum clause in international employee pay or benefits plans.
Language
Laws in Chile, Belgium, France, Quebec, Poland, Portugal, Turkey and elsewhere require
that most all employee communications—including written compensation and benefits plans—
be communicated locally in the local language. For a multinational to have declared “English is
our official company language” is no excuse to flout those laws. Be sure to translate cross-
border plan documents and communications at least in those jurisdictions that require
translations.
Cross-Border Data Transfers
Administering a global compensation plan, particularly an employee equity/stock plan, can
require transmitting local participant data back upstream to headquarters, so headquarters can
administer the plan and track employee grants. But in Argentina, Canada, Europe, Israel, Hong
Kong, Mexico, the Philippines, Uruguay and a growing pool of other jurisdictions, “exports” of
plan participant data require special legal channels—like (in Europe) model contractual clauses,
safe harbor and binding corporate rules. Otherwise, have plan participants sign data processing
consents as part of the enrollment process.
Equity Plans
Cross-border employee equity plans— stock options, restricted stock, phantom stock,
stock purchase plans—raise their own additional list of equity-specific legal issues in both the
headquarters jurisdiction that issues the stock shares and in local plan participants’ home
countries. These issues include securities law, insider trading, foreign exchange, the social
security effect of grants, and the tax treatment of grants both for the grantor employer and for
plan participants. When launching or updating any global employee equity plan, be sure to
cover equity-plan-specific topics.
