Employee benefits are among the most significant costs to an organisation after salaries. They are also probably the element of the reward programme that differs the most across Europe as differences in legislation, tax, social security and culture have given rise to vastly different benefit environments.
However, these diverse environments are beginning to converge. The most visible cause of this is the replacement of local currencies by the euro in 11 countries across Europe from 1 January 2002. The greater transparency afforded by the introduction of the euro will make it more difficult for multinational companies to justify differences in benefits offered across Europe.
Less visibly, the European Commission has been pursuing the goal that occupational pension funds and other similar institutions “must be able to benefit fully from the advantages of the single market and the euro without being hampered by unnecessary restrictions”. The first step towards this goal has been the proposal to issue a directive on the prudential supervision of pension funds and thus harmonise the prudential requirements on pension funds across Europe, and to promote cross-border membership of pension plans.
The second step the Commission has undertaken is to address the taxation of cross-border pension benefits. The Commission believes that discriminatory taxation practices in respect of cross-border pension benefits are in breach of existing treaty freedoms. The Commission has said that it will monitor the rules of member states and take the necessary steps to ensure compliance with the treaty. In practice, this seems to consist of providing support to suitable test cases at the European Court of Justice rather than direct prosecution of the member states. Although harmonisation of benefit taxation across Europe is not on the agenda, greater co-ordination of taxation across borders will make it much simpler to provide benefits consistently across Europe.
Overall, the Commission views discriminatory treatment of cross-border pension benefits as a barrier to mobility and is committed to removing obstacles to free movement related to supplementary pensions.
As a result, organisations that in the past were resigned to the fact that benefit programmes across Europe would always be different are beginning to realise that change is in the air and the pace for incorporating more consistency in benefit programmes is quickening.
As far as businesses are concerned, awareness is increasing that Europe is becoming a single market place and, as multinational organisations in Europe are increasingly managing their businesses on a Europe-wide basis, they are also looking to manage benefits on a multinational basis. The ultimate winners in a business climate demanding speed-to-market, flexibility and efficiency must manage the performance and cost of employees right across Europe. Developing and implementing a Europe-wide benefit strategy can be a pragmatic way to achieve this goal.
However, there are significant obstacles to overcome for the multinational organisation intending to consider cross-border benefit provision, particularly differences in taxation, regulatory requirements and state benefit provision. Despite the Commission’s continuing efforts to eliminate these differences, these issues still pose challenges when developing a benefit approach, which is suitable across borders. Differences in culture and attitude to benefit provision are equally challenging, especially when the multinational group faces competition for staff from well-established local organisations.
Given all these headaches, why would any multinational organisation wish to adopt a benefit strategy that crosses borders? It would appear to be simpler to allow the subsidiary operating at a local level the freedom to decide and establish benefit programmes that work in the local market. However, this approach may not be the best answer for the organisation as a whole.
Local autonomy on benefits issues can result in a fragmented and inconsistent approach to benefits in different parts of the organisation and can make it difficult to articulate the philosophy behind (or defend, if necessary) the benefits provided in a particular location.
There are a number of advantages for an organisation that establishes a cross-border benefit strategy. Such a strategy:
q achieves greater consistency of local benefit provision with corporate globalisation goals;
q shares learning and experience across different local operations facing similar challenges;
q facilitates mobility of employees across borders;
q improves purchasing power (for example, through pooling of risk benefits or appointment of preferred providers across the region);
q promotes equity and transparency in benefit provision for all employees;
q results in fewer systems and less administrative complexity (and by extension, requires less management time);
q improves effectiveness of corporate communication; and
q reduces risks to the organisation’s reputation arising from poor management of employee benefits.
In addition to these fairly generic advantages, organisations can shape a cross-border benefit strategy to achieve their own specific objectives, such as realigning the mix of employees’ total reward packages, repositioning the benefits offered to employees relative to competitors or introducing cost-sharing with employees.
Our recent global survey on worldwide benefits management, almost 50% of companies cited consistency of benefits across the globe as being one of the key reasons to establish a global benefit strategy. A similar number believe that this significantly aids recruitment and retention of key talent. With European markets coming closer together, these advantages are even more pronounced in a European context.
Organisations that implement multinational benefit strategies tend not to impose strict criteria that need to be adopted in each location. This is because, despite the discussions around the promotion of a harmonised European social security and tax system, there is still some way to go before this is made possible.
However, a common approach that recognises local market conditions and still allows organisations to use a consistent approach across borders is to adopt a number of overarching benefit principles.
An organisation’s benefit principles should reflect the way the organisation would like to provide benefits. The principles should reflect the benefit philosophy without compromise to take into account constraints imposed by outside factors.
To develop these principles, organisations need to address a wide range of policy areas, for example:
q cost sharing with employees (where permitted);
q risk sharing with employees (typically through the form of the benefits provided);
q integration with mandatory and/or social security benefits (subject to legislative requirements in the different countries);
q minimum overall target benefits (allowing for mandatory benefits);
q standardisation of benefits across the organisation (the extent to which the organisation recognises how its position in the market varies by location, if at all);
q selection of advisers (on a local level or co-ordinated in some way – for example, through preferred provider appointment); and
q employee education and communication regarding benefits.
A multinational benefits strategy is only as good as its implementation and management. A good governance framework will indicate who is responsible for what and ensure that corporate benefit principles are complied with to keep benefits aligned with business goals.
Once a governance framework for the implementation of the cross-border benefit strategy has been developed, the corporate benefit principles need to be applied to benefit provision in each local market.
For each market, the benefit principles will be modified to take into account the particular constraints and features of the market. The result is that, although benefit provision may vary from market to market, the fundamental basis on which benefits are provided is common in all locations.
The ability to implement a single set of benefit plans across Europe is still some way off. However, as Europe continues to move closer to the ‘single market’ ideal, multinationals will increasingly make business decisions on a regional rather than national basis. Organisations that take on the challenge of putting in place a cross-border benefits strategy to reflect the way their businesses operate will reap the rewards that come from the alignment of employee benefits and business goals.
Val Vardy is a partner and Rob Lockley is a senior consultant with Towers Perrin in London