Having been involved with expatriate programs for 25 years - as an expatriate, as a human resources manager, and as a consultant - I've experienced more than my fair share of disasters. Over the years, managing international assignment programs has clearly become an increasingly difficult task, with more and more nationalities, locations, and types of assignment to support. In many cases, only a very limited HR staff are expected to deal with this daunting management challenge.

Although it is both interesting and important to discuss best practices in the field, it is equally as useful to understand the problem areas and the pitfalls HR should try to avoid. This article will focus on those areas within international compensation that are most susceptible to trouble. (See Chart, "How Not to Manage International Compensation.")

One of our clients' expatriates from Chicago literally tried to rent a "castle" in the U.K. The assignee's manager in the United States had apparently said something to the effect that "housing is cheap in the Manchester area, so rent whatever accommodations you feel are appropriate." On a pre-assignment trip, the expatriate and spouse quite happily selected an eight-bedroom, six-bathroom, country mansion with several acres of property, just for the two of them! The cost? About £ 6,000 (roughly US$ 9,000) a month in rental fees.

This choice by the expatriate caused a "certain degree of consternation" with both management in the United States and abroad, particularly with the newly acquired subsidiary in the U.K. for which the assignee was going to work as controller. All parties (excluding the expatriate, of course) thought the selection was more than slightly excessive, resulting in major embarrassment and bad feelings all around.

Of course, this situation should never occur, but all too often it does. In a frantic hurry to get assignees on a plane, managers tell them to find "acceptable" or "comparable" housing.

Companies will sometimes try to simplify their administration process - particularly if they have a large expatriate population scattered all over the globe - by establishing a system of fixed housing allowances. By paying cash allowances, HR leaves rent-spending decisions to the expatriate. Inevitably, however, these companies seem to end up incurring more foreign housing costs - for the following reasons:

• Cash allowances for housing are not tax effective in a significant number of countries, particularly in Asia. For example, company-provided housing in countries such as Singapore and Japan receives highly favorable tax treatment.
• Most expatriate rental housing markets are volatile, so fixing a set amount to pay out can be very difficult. If the amount is too high, the expatriate is likely to say nothing and pocket the difference. If the amount is too low, the expatriate is more than likely to complain until management increases the allowance.

As a general practice, it is always safer to have the company pay the actual rent directly to the landlord.

Nothing infuriates local employees more than having expatriates sit in the office and plan how to use their home leave to vacation in Fiji or Bali, while the locals pay for their own vacation. The situation is exacerbated when local staff are expected to order travel brochures and make the arrangements for their assignee boss.

If the company does not want to insist that assignees use home leave to return to their home country - as intended - why not allow them to take cash in lieu of airfare and encourage them to make their own arrangements outside the office? Some major multinationals have, in fact, established cost-effective policies that allow cash payments, but limit the amount to 70 to 75 percent of the value of airfare back home.

Here is the usual argument: "We're sending an expatriate to the U.K. as part of the top management team. All members of the team receive a company car, so the new expatriate should get one, too." Although it is probably appropriate under the circumstances, it can become very costly if the total compensation package does not consider the company car.

The "Transportation Savings" chart illustrates the hypothetical cost savings (US$ 6,090) to the company between the use of a standard expatriate index (and resulting goods and services differential) and a modified index (and resulting differential). Most goods and services differentials include the operating costs of personal automobiles. The differential in the example is adjusted downward to consider that the employee receives a company car.

In addition, why not have the expatriate make a contribution toward operating costs? This practice is not unreasonable, particularly if the assignee did not receive a company car back home. Multinational companies that follow this philosophy typically charge a flat amount, such as US$ 200 - 250 per month, without getting too many complaints from assignees.

A number of large multinational organizations automatically apply their domestic relocation policies to their international assignees. The argument is that if they relocated the employee within the home country (especially the United States), they would be helping them sell their residence by paying all legal and realtor fees. If necessary, they might also arrange for the employee's home to be purchased by a third party, and then take a step further to reimburse any losses on sale (vs. the appraised market value).

The underlying problem with this philosophy is that international assignments are not usually permanent moves. Consequently, HR needs to examine its pattern of assignments to see what makes sense.

Taking expatriate homes into company inventory can be extremely costly. One of ORC's clients, with more than 1,000 expatriates, realized the high cost when they determined that 80 percent of their assignees return to the same location. If an organization has that same pattern of repatriation, it is probably more cost-effective to help assignees rent out and manage their homes during the assignment.

Many companies searching for simplified administration have attempted this "utopian dream." Unfortunately, the net result is often the following:

• Expatriates quickly become totally confused.
• The lump-sum payments made are not tax-effective, especially when housing allowances are thrown into the mix.
• Exchange rate problems create havoc when there is any weakening in the currency in which the global payment is made.

In almost all cases, companies end up unraveling those programs, usually after significant additional cost and considerable embarrassment.

Here is a common problem HR faces: attempting to trade off under-generous and highly-visible compensation elements with over-generous, invisible elements. For example, HR might say, "we may not provide a foreign service premium to our expatriates, unlike our competitors, but we don't adjust goods and services allowances when the expatriate gets a company car." This trade off might make sense to HR administrators, but it probably means little or nothing to most assignees.

When employees are offered an international assignment, they quickly learn that any good negotiator insists on wrangling over every element of an agreement to ensure that it is competitive, reasonable, and understandable. Trade offs do not, in general, work. HR must be able to explain to employees that each individual element of the compensation package is fair and competitive.

ORC is frequently asked to design expatriate policies that are consistent but flexible - or, "flexibly consistent." There is always room for exceptions in any program, but too many individual deals can result in unhappy employees and frustrated managers. In general, HR should apply core expatriate allowances - housing, goods and services, home leave - as consistently as possible. It is probably best to address exceptional needs through relocation bonuses or totally separate allowances that fall outside the balance sheet.

Outsourcing expatriate administration has been a popular phenomenon in recent years. Some outsourcing arrangements work well. Unfortunately, because there is a tremendous shortage of qualified international compensation specialists, many outsourcing arrangements have proved less than satisfactory. Before jumping into an outsourcing arrangement, it is vital to carry out a careful check of the individuals who will actually service your account and make sure they really are capable of providing the outsourced support promised.

Many expatriates are unhappy with the lack of relocation support provided by their companies in areas such as orientation and destination services. If the family is uncomfortable and unhappy overseas, the expatriate's productivity will inevitably suffer - risking assignment failure at a very high cost. Generous compensation policies are not the answer to this particular problem. If the company itself does not have the internal resources to provide such support, it can link with any number of firms that do.

Expatriates who receive all their spendable income in home-country currency exert a lot of time and energy dealing with exchange rate problems. It is probably one of the most common concerns for ORC's clients.

Very often, HR will tell expatriates that their goods and services differential is "x" amount, which can fluctuate because of changes in exchange rates and movement in prices. And that is all the explanation they receive. Consequently, when the home-country currency strengthens against local currency, the goods and services index drops, along with the differential. At this point, expatriate complaints are loud and clear.

Expatriates do not always understand that through the balance sheet approach to compensation, what is in fact being guaranteed is not the differential but an amount in local currency that the expatriate needs to spend on goods and services abroad (the assignment-location spendable income). Companies that deliver this host spendable amount all in home-country currency must, of necessity, not only explain the facts to expatriates before they go abroad, but also remind them on a regular basis how the policy works.

Time and again, expatriates express a common complaint that sits at the top of a long list of concerns. Inadequate and inaccurate communications - between assignees and HR, between assignees and host- or home-country management, and with other functions and departments - often hamper an expatriate's performance throughout the assignment. What this means for international compensation is simply this:

   very rich programs
+ poor communications
= unhappy expatriates

Some of the best international assignment programs exist in companies with relatively frugal policies. Yet, these companies do an excellent job of explaining the general policy, an individual's package, and any subsequent changes in either policy or package.

Avoiding the cardinal sins presented here will help an organization avoid - or, at least, minimize - a number of needless complications and morale issues. Developing a sensible expatriate compensation policy, in conjunction with ensuring excellent communications throughout all levels of the organization at home and abroad, is purely good business sense. Such proactive behavior clearly gives the organization a competitive advantage that will help boost the company's performance in the global marketplace, inevitably benefiting both management and assignees.

To optimize the company's expatriate compensation program without creating employee problems, be sure to avoid these bad habits:

• Don't send an expatriate and family on a pre-assignment house-hunting trip without setting limits on rental costs; you'll only be surprised.
• Don't seek the easy way out by paying cash allowances for housing instead of basing reimbursements on actual costs; you'll end up paying more.
• Don't allow an expatriate to use home leave for purposes other than home leave, such as a family vacation to an exotic location; if you do, remind them not to flaunt it.
• Don't pay double by providing a car but forgetting to modify the index or charge an expatriate for personal use of that company car.
• Don't assume that the domestic housing policy can automatically be applied to international assignments; domestic relocation policies are intended for permanent moves, not temporary assignments.
• Don't attempt to simplify the administration process by paying one global allowance; it rarely works.
• Try not to be left justifying policy weaknesses by using a trade-off argument; expatriates are rarely convinced.
• Don't tolerate inconsistency; your employees won't.
• Don't just outsource your administration without doing your homework; you may not get what you're paying for.
• Don't ignore the critical relocation issues; expatriate families need orientation and settling-in services when going to unfamiliar locations.
• Don't think it's easier to pay all compensation in home-country currency; employee complaints will make that very clear.
• Don't assume your assignees understand how the compensation package works; chances are, they won't.

U.S. expatriate in London, with family size 4, and base salary of US$ 100,000.

Roger Herod is senior vice president, international compensation services consulting, in ORC's Chicago office.