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A law firm is ready to go global. It has found lawyers willing to go abroad to work with its operations, as well as host country nationals in its destination country who will work for it. It has conducted an exhaustive study of the demographics of its new market and is convinced that it has an audience for its product or service. It’s ready to go. Or is it? Global markets are opening almost daily, but in spite of the increase in U.S. trade abroad, many firms are behind the times in their compensation practices for U.S. employees who live in foreign countries. Firms tend to ship their domestic compensation packages outside of the United States along with their products, services and employees. Firms must become compensation-smart — they have to learn how to design and implement appropriate compensation programs overseas. COMPENSATION ABROAD: A DIFFERENT POINT OF VIEW The major differences between compensation in the United States and compensation abroad — at least in democratically ruled capital-driven countries — is that there’s no Securities Exchange Commission, Congress or Financial Accounting Standards Board in these countries to scrutinize compensation procedures. The only institutions involved when it comes to compensation are the national banks of each country, many of which require information to be reported only when an employee is awarded a stock option package from an American company. COMPENSATION 101 Although each international situation is different, when it comes to compensation plans, there are basics that fit almost anywhere. Quality compensation plans should be structured to motivate attorneys to achieve annual planned results, reward attorneys directly for their performance, pay competitive total compensation, attract qualified legal help and enhance teamwork. A sensible compensation program should also include relevant performance measures that are industry-specific and that take into account the life cycle of a firm. For example, employees in a startup firm are likely to be motivated more by the idea of goal attainment than by competitive benchmarks. Any compensation planning with an international flavor should have the input of multinational employees. These individuals are working abroad and they already know many of the pitfalls that can destroy a weak compensation plan. THE INTERNATIONAL WORK FORCE From the perspective of the United States, the international work force is actually two work forces. The first one consists of U.S. expatriates who are sent abroad for a specific amount of time to oversee the firm’s operations. The other consists of nationals of the country in which the firm is setting up operations. Although these two groups work side by side, the compensation structures for each group are different. EXPATRIATES The first thing any multinational firm should be aware of is the home country philosophy for compensating expatriates. According to this philosophy, attorneys sent overseas are to be paid the same salary and compensation that they would earn while on U.S. soil. It’s not fair, for example, to send a U.S. citizen to Brazil and expect that person to accept the same pay earned by a Brazilian counterpart. The home country philosophy can be disconcerting to a firm going into a foreign market because they expect the labor to be cheaper � but learn that U.S. employees expect to receive the same compensation abroad as they do at home. Typically, expatriates are compensated under this philosophy until they have worked overseas for two years. After that time, they are usually considered residents of the country in which they are working. Firms structuring a compensation package for workers abroad also need to bear in mind that the IRS still has its fingers in expatriates’ pockets. When U.S. attorneys work overseas, they’re expected to pay income taxes both to Uncle Sam and to the country in which they are working. To avoid double taxation on a U.S. employees’ incomes, the U.S. government has enacted bilateral double-taxation treaties with most of its trading partners. Treaty countries agree to exchange pertinent income and expense information about the U.S. firms doing business on their soil, and agree to permit U.S. employees to avoid double taxation by allowing them deductions for foreign tax credits. In doing this, the multinational firm has to report compensation information to both the U.S. government and to the government of the country in which the firm is operating. In addition to this, U.S. multinational firms need to take foreign tax credits and IRC � 91.1 exclusions into account. It’s easy to see that firms using U.S. expatriates to staff operations in foreign countries find keeping up with the tax paperwork an arduous task. HOST NATIONALS The home country philosophy that is so appealing to U.S. expatriates is a burden to host national employees of a U.S. firm. In our example of a U.S. attorney in Brazil, the economies of scale are dreadfully unfair. The expatriate earns the same salary he would get in the United States, but the host national is paid at the going rate in Brazil — which means a considerably lower salary than his or her expatriate counterpart is earning. This can lead to jealousy and resentment toward the expatriate on the part of the host national work force, which can affect firm morale overseas. Imagine trying to “team together” on the preparation of a brief or prospectus, for example. MAKING EVERYBODY HAPPY “If everyone liked the same things, there’d be a shortage of oatmeal,” an old Scottish saying asserts. The same can’t be said for multinational compensation packages. The ultimate goal is to create a one-world compensation system so firms can focus on their business operations instead of on developing ways to reward employees that are suitable not only to the employee’s performance, but also to the country in which they are working. Until that single-compensation system is developed, however, U.S. corporations will be challenged to come up with appropriate ways to reward, attract and retain valuable employees, no matter where they may be working.

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