316 CASE 6 EXPATRIATE COMPENSATION AT ROBERT BOS GMBH: COPING WITH MODERN MOBILITY CHAL

316 CASE 6 EXPATRIATE COMPENSATION AT ROBERT BOS GMBH: COPING WITH MODERN MOBILITY CHAL By Ihar Sahakiants, Marion Festing, Manfred Froehlecke the report, which described the highlights of 2010 with respect to new markets, particularly noting: January 18. New presence in Southeast Asia: Bosch Communication Center opens branch in the Philippine capital Manila May 13. Bosch steps up its activities in Southeast Asia: new headquarters opened in Singapore July 5. Indian software subsidiary expands its operations: Robert Bosch Engineering and Busi- ness Solutions opens location in Vietnam ""I would rather lose money than trust."" Robert Bosch It was raining in Stuttgart. The new task which Klaus Meier, an employee of Robert Bosch GmbH's Ger- man headquarters' central International Assignments department, received last week from his direct super- visor Michael Stein was simultaneously interest- ing and extremely challenging: a new international assignment policy had to be designed for the whole Bosch Group. The importance of a new international assignment policy is hard to overestimate. First it may be useful to take a look at some statistics for 2010 from the latest annual report of the Bosch Group. The report, citing 2010 as 'a year of historic recovery' after recession on a historic scale', highlighted that Bosch Group sales had skyrocketed by about 24 per cent to 47.3 billion euros. About 41 per cent of the company's total sales were made outside Europe (see Figure 1). Out of 283,597 worldwide employees, 169,950 - or about 60 per cent of the total headcount - were located outside Germany, the home country of the corporation. Moreover, 34.18 per cent of these per- sonnel were located outside Europe (see Figure 2). Statistics on the importance of international oper ations for Robert Bosch were indeed impressive. but the figures on international mobility within the Beach Group were even more so. In 2010, there were approximately 2200 managers on international projects requiring relocation to a foreign country and lastiver two years, while the number of inpathates from Asia, the Americas, and Europe on assignments or the same two-year period reached 400 employees Fach new location and new market meant addi tinnal flow of evoatriate and inpatriate employees within the Bosch group, Klaus opened pages 12-13 of September 13. Market entry in China. Bosch delivers 40.000 start-stop systems to the auto- maker Changan October 11. Bosch builds new plant in India: Packaging Technology invests four million euros in a facility near Goa; SB LiMotive opens a new production plant in Ulsan, Korea, lithium-ion battery cells for hybrid and electric vehicles will be manufactured November 16. New proving ground in Japan: in the north of Hokkaido, an extended proving ground has been inaugurated - twice as big as the predecessor (Robert Bosch GmbH, 2011: pp. 12-13). Although a whole range of issues related to international mobility needed to be addressed in the new international assignment policy. Klaus wanted to start with the finan. cial aspects of the operation. As an international mobility professional himself, he knew only too well about the high costs of expatriation. These costs included not only expensive expatriate compensation packages but also huge administration expenses and the costs of expatriate lanure, e.g. the premature termination of an soignment. These total costs had the potential to make long-term assignments prohibitively e

CASE 6 EXPATRIATE COMPENSATION AT ROBERT BOSCH GBH 319 FIGURE 1 Bosch Group sales by region, 2010 FIGURE 2 Headcount at Bosch Group by region, as per 1 January 2011 Americas 2396 Europe 5996 Germany 113,557 Rest of Europe 73,045 Asia Pacific 18% ""Including other countries To gain an overview of the situation at Bosch, Klaus Americas planned to study the details of several actual assign- 33,689 ments in various locations. First of all, he examined the Asia Pacific/ personnel file of Hendryk van den Bosch, an old friend 63,216 or his. He took the first and the last balance sheet cal including other countries culations prepared for Hendryk's international assign Source: Robert Bosch GmbH (201120 ments: an inpatriate assignment to Germany in 1999 and an expatriate assignment to Korea in 2009. issue in many other countries, where the exchange Hendryk van den Bosch started his career at Robert rate of local currencies fluctuated significantly in rela- Bosch BV, Noofddorp (Netherlands) as a SAP projecttion to the Deutsche mark or euro. coordinator in 1994. In only two years he became The host-country component of Hendryk's not manager of the data processing department for the salary (65 per cent of the salary paid in host-country regional subsidiary in Holland. From 1997, he was currency) was adjusted for cost-of-living expenses, responsible for the whole Benelux region (Belgium, the on top of which a foreign assignment bonus was pro- Netherlands, and Luxembourg). In 1999, he accepted vided. There were no further costs related to the for the position of system planning department manager eign assignment in the host country. It was Hendryk's at the company's cou n tgart, Germany. decision to remain in the Dutch social security system The balance shell new position in accordance with Regulation (EEC) No. 1408/71. in Germany was a t or expatriate while housing expenses in Germany were covered by assignments within the so u roup (see Figure 3 the employer. As the rent costs in the home country overleaf). At that time, there was no single currency in had been previously borne by Hendryk from his net Europe. Thus, according to the company rule, expatri income, and would not be incurred during his assign- ate compensation had to be paid in the host countryment in Germany, a housing expenses 'Rent in Home although was calculated both in Holland florins (HFL) Country equivalent fi.e. an equivalent apartment rent and Deutsche marks (DEM) - the national currencies in the home country to the amount of 18,600 HFL) before the Euro. In doing so, 35 per cent of the net was deducted from the benefits component. Hend- income was guaranteed in the home-country currency ryk's rent in the host country was therefore zero because, in line with the assignments guideline, this in order to minimize any currency exchange risks for amount was paid directly by Bosch the expatriate employee. The host-country currency On 1 September 2003, Hendryk van den Bosch portion of pay was adjusted at the end of each year returned to Stuttgart, Germany as the Head of the to eliminate possible negative effects arising from Organization and Information Systems unit from his exchange rate fluctuations. Klaus knew about the most recent assignment in Brazil, in 2009, he was importance of currency adiustment for expatriates. expatriated again, this time to Korea as Regional Sales Although the exchange rate between HFL and DEM Director. had been relatively stable over the years, it was a big

CASE 8 EXPATRATE COMPENSATION AN SCH GMBH 321 The pay calculation for his assignment to Korea short-tem was more complex (see Figure 4 overleaft. At that year, frequent point, Hendryk had two children, which meant additional assignme tional expenses in the host country as well as the loss Many of these of child allowance in Germany (then 1848 euros per popular que child, per year). However, the latter was compensated nication to by Robert Bosch GmbH in accordance with internal explicit goals of th company policy, while housing expenses in the host country were again borne by the company A couple of years prior to that, several changes were to introduced in the assignment policy, triggered initially as by increasingly refined market data comparisons, Forpos Korea short-term International assignments lasting up to one At that year, frequent flyer assignments, commuter and rota additional assignments, global virtual teams, and so on well as the loss Many of these forms were becoming more and more uros per popular due to the rapid development of telecommu compensatednication technologies and transport, and they were ince with internal being used increasingly at Bosch. Moreover, one of the ng expenses in the host explicit goals of the Bosch Group was to increase the percentage of local senior executives in its foreign loca- hat, several changes were tions to at least 80 per cent. However, although it was ent policy, triggered initially a strong cost-reducing factor, this measure could not instance, a change of the cost-of-living data provider ket data comparisons, For possibly hinder the rapid increase of standard expatri- le cost-of-living data provider ate assignments given the importance of international ate assignments to make a differentiated use of indices markets. Thus, Klaus had to consider first and fore- ally sophisticated and detailed calculations, most a number of cost reduction opportunities related Although this also contributed to a reduction in assign to standard expatriate assignments: ment costs for the Bosch Group, the primary goal of Based on an analysis of multiple sources stemming Most changes in the compensation policy was to offer from the academic literature, as well as management assignment conditions in line with local market conditions, consulting and practitioner publications, Klaus made According to the new policy, the foreign assignment a list of feasible potential cost-reducing solutions. allowate was determined and frozen at the beginning in order to form an idea of the prevalence of these of signment. As such, cost-of-living calculations measures among leading international companies, he We s ed on two indices: a more generous Standard checked the latest Global Assignment Policies and He Base Index and a so- Cost Effective Home Practices' survey by KPMG."" He started his analysis BERS (CEHB) Index. The Home Base Index with the top five positions on the list: was used in the first and years of the assign Relocation allowance. A way to reduce costs ment, whereas, only start the third yer wat related to the relocation allowance is to provide ate compensation was called based on a lump-sum payments at the beginning and at Index. The decision to use the latter index was the end of an assignment. According to the the the assumption that cost of living decreases KPMG survey about 54 per cent of all compa- nies, including 47 per cent of European partic- course of an assignment. This logic was based on the ipants, implement this policy. Only 13 per cent notion that, over time, an expatriate employee would be of respondents worldwide do not provide any expected to use less expensive shopping opportunities relocation allowance at all. and to refrain from expensive imports by increasingly Efficient calculations of the cost-of-living using cheaper local products. However, calculations allowance. There is a clear trend among multi- for the first year were also based on the CEHB Index nationals to increasingly implement an efficient in order to indicate to the expatriate his future income purchaser index' in their cost-of-living calcula- and to make clear that using the Standard Home Base tions. According to the KPMG survey, 32 per Index represented more generous support at the start cent of all responding companies use this index, of an international assignment. Therefore, the differ- a 10 per cent increase since 2003 ce between CEHB-based and Standard Home Base Cap on allowances. Capping expatriate allow- adex-based income was compensated as a cost-of- ances makes it possible to reduce significantly the iving supplement. Furthermore, lump-sum payments overall costs of foreign assignments. All allowances, were used in order to facilitate cost control. including the cost-of-living, hardship, or other com- Klaus knew all too well how a group discussion on pany-specifio allowances, can be frozen for expatri- ways to reduce expatriation costs might proceed. One ates with an expatriate income exceeding a certain of the proposed solutions was to use increasingly aiter- level. The KMPG survey shows that the majority of native forms of international assignments, including companies stil do not cap the major allowances.

- BUSCH GBH 323 Housing allowance and/or costs. There are several ways to reduce housing costs. is to select residence areas comparab e housing costs. One way areas comparable to those used by local employees in comparable posi- tions, thus avoiding expensive residence areas being used mainly by expatriate employees Another way is to follow the recommendations of housing data providers and to offer additional Incentives for finding housing less expensive than the standard cost recommendations. However, as reported by KPMG, the overwhelming majority of companies (82 per cent) still do not provide this type of incentive. Travel expenses. There is a trend to provide 'economy-class travels to expatriate employees. About 56 per cent of companies surveyed by KMPG implement such a policy, 3 per cent more The rain had passed through the city and shafts of sunlight appeared through the grey clouds, Klaus recalled the themes of 'courage, curiosity, and change at the recent corporate meeting he had attended in Berlin. The Berlin conference was one of some 850 activities staged worldwide in 2011 to mark the 125th anniversary of the Bosch company and the 150th anniversary of Robert Bosch's birth. He returned to his desk and began working to apply these themes Questions: than in 2010. Many of the above cost reduction measures were already being implemented at Bosch. Apart from the allowances, yearly economy-class Flights to the home country had become the standard option for com- pany travel. However, longer flights for business rea- sons could still be carried out using business class. The challenge, however, was to further improve exist- ing policies by comparing several cost options, data providers, and outsourcing alternatives. This would be just the first step towards cosigning an all-encompass ing assignment policy, aster steps would analyze tax-efficient ways of providi x patriate perquisites, as well as organize taxation an social security cover- age during international assignments in co-operation with a team of international legal advisors. Nevertheless, enthusiastic and confident of success as he was, Klaus knew that designing a new interna- tional assignment policy was going to be a long and drawn-out process involving multiple calculations as well as negotiations with colleagues and external mobility services providers. This was especially the case because the cost issue was only one aspect of the wider issue of the co-ordinated and strategi- cally effective use of international assignments. There were many more related concerns - such as motivat- ing potential expatriates, the impact of international assignments on professional careers, repatriation management, dual-career issues, and family income. The more Klaus thought about it, the more he saw the linkages and implications operating across multiple HR practices and multiple product and geographic units. 1 Why did Bosch state the cost-of-living allowance amount as a CEHB-based sum and a separate cost-of-living supplement in the first and the sec- ond years of the assignment in the balance sheet for Korea? 2 Which expatriate compensation elements at Bosch Group were already based on cost-reduction con siderations listed in the case study? Please suggest ways in which these could be improved further 3 What further cost-reduction measures could be implemented? 4 Do you believe it is possible to design a Bosch Group international assignment policy covering both expatriate and inpatriate employees at all international locations? 5 One of the measures used to reduce the costs of expatriation was to outsource elements of the administration function to external service provid- ers. Please discuss the advantages and disadvan- tages of such a policy. 6 Do you believe that alternative assignments can substitute for traditional expatriate assignments in the long run? Please discuss the major opportuni- ties and barriers. 7 What are the mat barriers to the localization of expatriate managers? 8 Many international companies do not provide any additional foreign assignment allowances (e.g. relocation or hardship allowance). Do you think it would have been feasible to implement this system at Bosch? What would be the related advantages and disadvantages?"

1. Why did Bosch state the cost-of-living allowance amount as a CEHB-based sum and a separate cost-of-living supplement in the first and second years of the assignment in the balance sheet for Korea can be explained as follows.

 Answer:

 Bosch applied CEHB (Cost Effective Home Base) Index and another COLA for the first two years of the assignment because the former allows higher initial costs to be offset and more reasonable subsequent annual changes. To balance the first loss where people may have high moving costs and other cost of establishment, CEHB Index offered more forgiving baseline. The different cost-of-living supplement was intended to compensate variable over-time cost of living differences. Such two-level hierarchy proved useful for Bosch in providing sufficient support at the stage of beginning the assignment, and at the same time, controlling expenditures as the assignment was ongoing.

 

 2. Which of the cost reduction considerations arteady included in the case study being taken by Bosch group while designing the expatriate compensation elements? It therefore would be important to suggest how these could be made even better.

 Answer:

 Cost-reduction elements already implemented:

 

 Lump-sum Payments: Bosch made cash payments for reimbursement of costs incurred during the relocation and for any assignment expenses to make the process less bureaucratic and to assess increased costs.

 Standard Home Base Index: Applied at a first level of higher support and recalculated as the support progresses.

 Capped Allowances: This was through freezing of allowances for housing as well as other facilities in order to cut costs.

 Suggestions for further improvement:

 

 Enhanced Data Analytics: Minimize expenses by worrying about the cost of living and provide the right allowance by using state-of-the-art analytics.

 Local Market Adjustments: Time-based update of compensation policies can be done much more precisely according to the real-time data in the current market.

 Incentives for Cost-Saving: Offer incentives for expatriates to look for accommodation that does not meet the standard recommendations so as to save cash.

 3. Additional possible cost-saving initiatives:

 Answer:

 

 Outsourcing Administration: Outsource more in an effort to cut on overhead expenses that may be incurred in undertaking administrative operations.

 Economy-Class Travel: Company policy should only allow certain planned economy air travel for expatriates with the rest being for only business essential travel.

 Home Country Benefits Optimization: Negotiate how much you can offer in terms of benefits from home country to avoid hiking costs but still be able to support them.

 Flexible Assignment Types: Increase usage of short term or rotor assignments in a bid to shorten duration and costs that come with them.

 4. Can an effective Bosch Group international assignment policy for both expatriate and inpatriate Bosch employees in all those international Bosch affiliated locations be developed?

 Answer:

 Yes, it is but not easy… A comprehensive policy would need to address:A comprehensive policy would need to address:

 

 Diverse Needs: Whereas such employees require different compensations depending on the location, the job they are assigned to do, and the length of their assignment.

 Legal and Tax Compliance: Prerequisite to make sure that policies you put in place are in conformance with different local laws.

 Flexibility: Have additional elements that can be used depending on the situations at work and the positions that people have.

 Coordination: Good organization of various areas and subfields to formulate and execute the same tactic.

 5. Among these was the outsourcing of some particular aspects of the administration function to outside service providers as a way of minimizing the costs of expatriation. Kindly expound the lone of such a policy as well as the strengths and weaknesses of the policy.

 Answer:

 Advantages:

 

 Cost Efficiency: When compared to internal handling the level of bureaucracy is lowered and may end up being more cheaper.

 Expertise: Uses the services of numerous specialized providers who are familiar with the current legislation and standards.

 Focus: Enables internal HR department to concentrate more on strategic aspects and not on more operational issues.

 Disadvantages:

 

 Control Issues: Uncertainty of the level and time of delivery of services.

 Communication Barriers: Can cause poor interaction between outside vendors and firm’s employees.

 Confidentiality Risks: Outsourcing of services might lead to some forms of risks especially with regard to the confidentiality of the data of the employees.

 6. Can you postulate that there are other routines that can replace the conventional expatriate assignments in the long haul? Kindly highlight the detailed opportunities and threats that are major.

 Answer:

 Opportunities:

 

 Cost Savings: If long-term expatriation has certain drawbacks, there are other assignments that may be applied – reduced costs connected with virtual teams and short-term assignments.

 Flexibility: It has a certain level of versatility since the business can handle tributary concerns without a permanent move.

 Technology Utilization: Technology has enabled people to work together with so much ease due to the improvement in technology in the realm of communication.

 Barriers:

 

 Cultural Integration: Other assignments can be less effective than extended assignments since they cannot be cultural as much as long-term mission positions can.

 Effectiveness: Virtual teams are likely to face problems of time zone including communication breakdowns.

 Employee Development: Few tangible chances for prime practical exposure and nurturing of human assets of enterprise.

 7. More specifically, what are the significant obstacles to the process of localisation of expatriate managers?

 Answer:

 

 Resistance to Change: Sometimes expatriates have rigid mindsets that make them do not want to move or accept local positions.

 Skill Shortages: Some of the organizational Human Resource Management challenges that might cause the firm’slabour productivity to decline are: Absence of a competent pool of local talent to fill higher level jobs.

 Cultural Differences: Experiences that expatriates have learnt may be detached from the local corporate culture and how to manage local employees.

 Career Development: Fear from HR about expatriates’ career mobility if some localized positions are not possible.

 8. Most MNEs have restricted additional foreign assignment allowances (such as relocation or hardship allowance). Lastly you may ask yourself if it would have been possible to work this system at Bosch? What might the a�iliate benefits and losses be?

 Answer:

 Feasibility:

 

 Well, yes, it can be done, but there is a need for proper degree of planning and change in some or most of the existing policies.

 Advantages:

 

 Cost Reduction: To remove extra allowances and may also contribute a lot to reducing expenditures.

 Simplified Administration: Simplifies the process of dealing with the benefits of the expatriates.

 Disadvantages:

 

 Employee Attraction: May reduce the ability of the organisation to attract the best candidates for international postings.

 Employee Satisfaction: Might be unhelpful for expatriates’ job satisfaction and organizational commitment if they do not feel organizational support.

 Competitiveness: It is also expected that Bosch might be less competitive vis-à-vis companies providing competitive allowances.

 To sum up, creating the international assignment policy means having a right scale of costs while maintaining enough expatriate and inpatriate support. This involves signing firm cost, compensation market, cost cutting and a number of alternative models for assignment.