1. Mobile Employee Dual and Shadow Payrolls
October 2017

2. Agenda Introduction / Case Study Payroll Delivery Home Based
Host Based
Split
Shadow Payroll
Trends
Forward Looking Compensation Process
Questions
Wrap up

3. Introduction and Case Study

4. Case Study
A company sends a US employee to work in its Tokyo office. Where should he be paid?
Is the deployment permanent or temporary?
What is the company’s philosophy toward compensation?
What is the employee’s preference?
Where will the employee’s family live?
Where does he plan to retire?
Who absorbs the currency exchange risk?
Where will the employee pay taxes?
Which country sets the salary?
Will he continue to have US expenses?
Will he own a home? Where?
Assumptions for case study:
Salary = GBP 10,000 / month
Salary structure is comparable in both locations. (This is rarely the case, but net pay calculations and setting relative salaries is a different topic.)
We are not discussing type of withholding for the purpose of this exercise. Tax w/h could be actual, hypo, or a combination of the two – also a different topic for a different session.
Bottom line is that there is some basic compensation, some move-based compensation, and some deductions.
Payroll for a mobile employee is more than just the technical matters of running the payroll

5. No “Right” Answer
There are many ways to administer payroll for cross-border employees.
Common approaches include:
Home-based Pay
Host-based Pay
Split Pay
There are sub-categories within each approach.
Each company must establish its own pay policies based on corporate philosophy, intent of the move, administrative ability, cost considerations, employee expectations, and industry norms.

6. Payroll Delivery

7. Scenario One: Home Based Payroll
Line Item
Home Payroll
Host Payroll
Salary
Housing
Tax w/h
$ 16,000
$ 8,500
($ 10,000) —
Net Pay
$ 14,500
Typically a good fit when the employee:
Is on a temporary assignment
Remains employed by the home country
Remains on a home country salary structure
Maintains a “home base” in the home location
Wishes to stay in home country social security
Is tax equalized
Consider:
Employee will still need currency in host country
International wire fees – who pays?
What happens if host costs fluctuate?
How does spending power equate to host peers?
Most common approach for expatriates
Keeps in home salary structure, facilitates repatriation
Employee usually responsible for wire / bank fees (may be covered by an allowance such as COLA or FSP – not usually reimbursed directly)
May be less appropriate for assignments from very low-cost to relatively high-cost locations (e.g., Colombia to US, India to UK) – may make more sense to pay at host.

8. Scenario Two: Host Based Payroll
Line Item
Home Payroll
Host Payroll
Salary
Housing
Tax w/h —
¥ 1,800,000
¥ ,000
(¥ 1,100,000)
Net Pay
¥ 1,620,000
Using spot exchange rate. Figures are rounded for ease of discussion.
Typically a good fit when the employee:
Is transferring permanently or semi-permanently
Becomes employed by the host country entity
Adopts the host country salary structure
Is responsible for paying own housing, etc. at host
Wishes to participate in country social security
Is responsible for own host country taxes
Consider:
Employee may still need currency in home country
International wire fees – who pays?
What happens if exchange rate fluctuates?
Can host social security contributions be recovered?
Potential reintegration issues if returns to the US
Most common approach for transfers
Makes the employee equitable with host peer group (in terms of purchasing power, etc.).
Works best when employee is on the host performance management and compensation review program.
Works best if employee can break home country tax residency and will pay own host taxes. Minimizes need for equalization after year of transfer.
Possible drawback: employee may be required to contribute to host social security. Some programs have a mechanism to refund contributions to temporary workers, others do not.
Can become a barrier to repatriation, especially if repatriation creates a real or perceived loss of income.

9. Scenario Three: Split Payroll
Line Item
Home Payroll
Host Payroll
Salary
Housing
Tax w/h
Gross-up
$ 16,000 —
($ 10,000)
¥ ,000
(¥ ,000)
¥ 275,000
Net Pay
$ 6,000
Using spot exchange rate. Figures are rounded for ease of discussion.
Typically a good fit when the employee:
Is on a temporary assignment
Remains employed by the home country
Has some living expenses in both locations
Wishes to stay in home country social security
Is tax equalized
Consider:
Who determines the split (employee or company)?
How often can split be changed?
Significantly increases payroll administration
Likely need for cross-reporting of income (either through an ongoing shadow payroll or at year-end)
Split payroll takes the administrative burden of moving money off of the employee, and shifts it to the company.
This is attractive to most employees, but it creates considerable additional work from a payroll administration perspective.

10. Who Determines the Split?A
Required Split: Company administers a standard split structure for all employees.
Line Item
Home Payroll
Host Payroll
Salary 
Housing
Transportation
COLA
Taxes (GU / WH)
Net Pay
Allows delivery of funds in both locations
Maintains a level of standardization
Offers “best practice” guide to employee
Elevated payroll admin. time
May not meet individual needs
Single approach may not fit all countries
Likely cross-reporting requirement
May not meet the individual needs of employees. If that happens, you’ve increased your administration time and employees will still continue to incur costs moving money back and forth.

11. Who Determines the Split?B
Recommended Split: Company administers a standard structure, but allows employees to make adjustments.
Line Item
Home Payroll
Host Payroll
Salary 
Housing
Transportation
COLA
Taxes (GU / WH)
Adjustment
()
Net Pay
Allows delivery of funds in both locations
Gives employee control over net result
Offers guidance + flexibility
Significantly elevated payroll admin. time
Can add unnecessary process complexity
Likely cross-reporting requirement
Typically not an efficient approach. Example: Payroll admin is calculating COLA, doing f/x conversion, etc. to put it on the host balance sheet—employee adjustment may reverse that entry and move it to the home location. Wasted administrative time.
Recommendation: Companies who utilize this methodology should limit how often employees can change the Adjustment amount. Otherwise, you risk frequent adjustments (e.g., employees who are trying to benefit from f/x) and payroll admin time can spiral out of control.

12. Who Determines the Split?C
Flexible Split: Company allows employees to set desired net pay at home / host.
Line Item
Home Payroll
Host Payroll
Salary 
Housing
Transportation
COLA
Taxes (GU / WH)
Adjustment
()
Net Pay
Allows delivery of funds in both locations
Gives employee control over net result
Manages payroll admin. Effort
Option of local draw versus split pay
Lack of guidance to the employee
Likely cross-reporting requirement
Companies that take this option may want to offer standard guidance to employees about which items to receive at home versus host, and not to transfer any more money to host than is needed for routine living expenses (f/x risk, portability considerations).
For ease of administration, suggest entering adjustment into payroll system as a fixed amount, regardless of how employee calculated it. Otherwise you potentially get involved with moving specific line items and maintaining percentage calculations.

13. Shadow Payroll

14. With Home-Based Payroll
Shadow Payroll
With Home-Based Payroll
With Split Payroll
Line Item
Home Payroll
Host Payroll
Salary
Housing
Tax w/h
$ 16,000
$ 8,500
($ 10,000)
¥ 1,800,000
¥ ,000
(¥ 1,100,000)
Net Pay
$ 14,500 —
Gross Income
¥ 1,620,000
Line Item
Home Payroll
Host Payroll
Salary
Housing
Tax (Home)
Tax (Host)
Gross-up
$ 16,000
$ 8,500
($ 10,000)
($ 2,500)
$ 2,500
¥ 1,800,000
¥ ,000
(¥ 1,100,000)
(¥ ,000)
¥ 275,000
Net Pay
$ 6,000
¥ ,000
Gross Income
$ 14,500
¥ 1,620,000
Shadow payroll is the act of confirming earnings paid outside a given payroll, and recording them as imputed earnings for tax reporting purposes.
Taxable imputed earnings are normally grossed-up in the non-payroll location.

15. Shadow Payroll
The shadow payroll process typically occurs one pay cycle in arrears.
Taxes paid on shadow earnings must, in turn, be reported back to the alternate location. Taxes paid by the company are an earning; taxes paid by the employee are considered a deduction.
There are various approaches to year-end: estimate and reconcile, special accounting year.

16. Trends

17. Mobility compensation challenges—Environmental trends
Operational efficiency
Desire to consolidate operations and implement standardized processes, tools and reporting solutions and cut costs
Compliance
Increased information sharing between authorities, coupled with an increased tax audits and shift to electronic filings
Global data
Stringent enforcement of reporting requirements coupled with evolving legislation and increase audit activity require expertise and more financial transparency
Global workforce
Multi-source payroll and tax reporting in various formats and language to meet different compliance requirements at local, national and international levels requires enhancements in payroll process

18. Regulatory uncertainty
What is driving the conversation?
Brexit
Permanent Establishment (PE) risk management
US Tax Reform
Immigration Reform
Tax and Social Security
Mobility policy implications
Impact on FX rates
Scrutiny over business travel in:
China UK
Canada US
Potential increased cost of tax equalization
Restrictions on offshoring
Changes to H-1B visa process
Travel restrictions
Additional content on Biz travel in EU? LS to confirm

19. Forward looking compensation process

20. Mobility compensation—The end-to-end process1
Pre-payroll collation 2
Payroll instruction 3
Local payroll processing 5
Reporting 4
Results and validation
Assignee/
assignment data
Recurring compensation details
One-time payments
Relocation expenses
Tax and social security data
Location 1
Location 2
Location 3
Location 4
Location 5
Technology hub
Reconciliation process
Global pay statements
Tax return compensation reports
Total cost/budget to actual reporting
Shadow payroll data
Global taxability determination
Do we need to have a 6th bubble for compliance and a 7th for customer experience (EE, finance, etc)

21. Building blocks for an efficient compensation process
Mobility compensation is comprised of many intertwined parts and players taking part in a carefully orchestrated process underpinned by technology and specialized knowledge. Designing an efficient process is instrumental to transforming the way employees, business leaders and process partners experience mobility. Gaining a clear understanding of formal and informal roles is the foundation for confirming all aspects of the process will be tended to.
Data
masters
Mobility
Compensation
process
Global
compliance
Operators
Data
Security
Assignment
planning
Cost
planning
Systems
interface
Data
analytics
Update text to explain the graphic. Roles exist (Formal/informal). Do you have all bases covered? Does everyone understand their role?
Communication
specialists
Compliance
gurus
Payroll
administration
Employee
communication
Expense
management

22. 01 04 02 05 03 06 Technology trends Automation
Increasing speed and accuracy
Real Time Information (RTI)
Enhanced expectations on compliance and reporting 02 05
Integration
Leveraging connection points between HRIS, finance and other systems
Reduction in data sources
Consolidation of data points to streamline reporting process 03 06
Globalization
Introduction of global payroll systems and aggregators
Transparency to employee
Sharing of compensation inputs and tax compliance support with employees

23. Policy decision making/
Data analytics
Data that comes from the comp process that can be used for other purposes
Cost
forecasting
and modeling
Finance reporting
Policy decision making/
benchmarking
I suggest we discuss data analytics before robotics if we want to raise less advance to more advanced tech trends.
Equal pay reporting
Compliance reporting

24. Questions

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