Cost Saving Measures for Multi-Nationals
By: Patrick Longhurst & Gerry Winters
Multi-national companies can still keep a handle on their benefit and pension costs over both the short- and long-term. Patrick Longhurst and Gerry Winters, of Watson Wyatt, have some ideas on how they can go about doing this.
In this still sluggish global economy, companies are investigating any and all means to reduce expenses in an effort to help their bottom lines. Multinational companies are uniquely positioned to do so and there are three reasons for this:
- Multi-nationals tend to have a larger bucket of HR issues and offerings to manage
- Globalization presents opportunities for consolidation in several areas of human resources
- Most multi-national companies have yet to fully exploit the opportunities that do exist
These factors mean that multi-national companies can – through a sharp focus on their foreign operations and associated human resource activities – take specific short- and long-term actions to reduce bottom- line expenses. Short-term actions can result in a company realizing savings in two years or sooner while long-term actions can generate savings over a two-tofour- year period.
Short-term Actions Mandate
Annual Salary Increases by Country Does your corporate office ‘manage’ annual salary increases globally? Have you bench-marked your salary increase practices by country, against your targeted competition? Companies that do often find they are overly competitive in some major markets. While industry practice in a given country may dictate a certain per cent increase for non-management positions, companies often find that their own increases have averaged out to be slightly higher than the norm. Are these ‘abovemarket’ increases driving performance? The answer is typically unclear.
To understand this point, consider a company with annual payroll costs outside of Canada of roughly $200 million. If the benchmark median increase, averaged across countries, is four per cent, while company practice reflects an average increase of 4.5 per cent, then that equates to $1 million in excess payroll above what would be considered market practice.
To prevent this, some multi-nationals mandate salary increases by country. By using market practice survey data for their target industry, the corporate office sets salary increases in each country of operation.
Consolidate Employee Benefit Programs by Country
Has your company grown largely through acquisition in recent years? Do different business entities operate within a single country? If so, your company may provide separate employee benefit plans for each employee base. Aside from causing consistency problems from a human resource perspective (employees of the same company in the same country receiving different benefits programs), you are doubling up on administrative costs and losing out on true experience rating for your membership insurance base.
Companies can see immediate savings by consolidating their employee benefit offerings under single plans in each country.
Pool Insured Benefits Globally (with pro-active management) With multi-national pooling, you can experience rate your global employee benefit population under one accounting system and potentially produce annual multi-national dividends. Industry research has consistently shown that pro-actively managed pools can generate annual dividends of five to 10 per cent of total premiums. For a company with global insurance premiums of $5 million, this would equate to a conservatively estimated $500,000 in annual cost savings.
The important caveat is that this research assumes pro-active management of company pools. This means regular and aggressive monitoring of pool performance, including decisions on excluding contracts from annual experience rating and annual negotiation with your network on rates and dividend sharing. If your company currently uses multi-national pooling but has not seen the desired financial results, pro-active management can result in improved performance and healthier dividend realization.
Review Policies on DB Pension Increases and Assumptions If your organization has numerous Defined Benefit (DB) plans outside of Canada, investigate your current state for contributions and benefit payments. Specifically:
- Contributions: Scrutinize your actuarial assumptions (for both funding and accounting purposes) relative to your competition and your corporate objectives. Slight changes to expected asset returns or salary increase assumptions can significantly lessen annual funding requirements for these obligations.
- Benefit Payments: As global economies enter deep recessionary periods, negative price inflation becomes more likely. Companies should review their pension increase provisions everywhere a deflationary environment exists to determine if reduced pension increases are likely. Shift toward Variable Pay/Utilization of Deferred Compensation
Many multi-nationals are using the current economic downturn to push their senior management to accept reductions in certain fixed compensation arrangements globally. For example:
- Recent years have seen an increase in global bonus/profit-sharing plans, often at the expense of other fixed bonus arrangements (such as 13th and 14th month payments).
- Some companies have offered their global executives deferred compensation plans to entice them to defer part of their base salary before the beginning of a new fiscal year. This allows the employee to avoid paying taxes on the deferred salary and the company to reduce its current-year payroll costs.
With each of these two actions, it is important to understand that they are not pure cost-savers, but rather cost-shifters. For companies looking to quickly reduce short-term costs, however, they are quick, effective measures.
Consolidate Vendors Globally Review your global vendor relationships (for example, insurance companies and data providers). Consolidating these relationships globally can bring a multitude of advantages from both a financial and non-financial perspective, such as:
- Improved co-ordination of services
- Leveraging of data and improved reporting for multi-country forecasting needs (global actuarial data for longterm pension projecting)
- Significant reductions in overall fees resulting from added purchasing power Shift to Defined Contribution Financing of Global Benefits
Do you have a large number of DB plans globally? The time may be right to move toward DC financing of your global pensions, as one of the strongest market trends has been the shift away from pure DB plans. Countries traditionally averse to such financing have begun opening up to the idea of DC, particularly hybrid style plans. While shifting away from DB does not directly equate to lower costs, it provides more certainty and predictability to global pension funding and can eliminate the need for certain valuation and administrative layers.
Any action in this area should be considered in concert with your company’s global benefit funding philosophies.
Reduce Dependence on Expatriates
Does your company employ a large number of expatriates? Consider that expatriates cost two to three times as much to employ as do equally situated local nationals. It is for this reason that multi-nationals have sought to lessen their dependence on expatriates.
Specific actions can include:
- Use of local nationals for future hires
- Localization of current expatriates
- Repatriation of current expatriates
While each tactic will lead to some increased costs in the short-term, the longterm advantage of reducing your expatriate population will be substantial.
The important consideration with any of these actions is getting the process right. Localization, for example, has proven a costly endeavour for those not using best practices. Companies must address compliance and internal equity issues and prevent negotiations with employees from continuing for extended periods. Getting the process right from the outset can help you to avoid many problems.
Identify Overpaid Staff in International Positions
Companies that grow by acquisition and that have not integrated their businesses tend to have a large number of above-market international positions. The reasons for this are many, including the reality that some selling companies will increase employee salaries immediately prior to a sale. Such actions are not always detected by the buyer.
A global compensation leveling/pricing exercise is the most effective means for multi-nationals to identify and address this problem. Such a process allows the company to determine a position’s value to the organization and to compare positions across countries. It also could make it easier for you to identify any significant above-market positions in your global organization.
Relocate Operations to Low Cost Poles
With the global marketplace opening up in more parts of the world, there is greater opportunity to relocate some business operations to countries with lower employment costs (low cost poles). One of the mistakes companies often make in this regard is focusing on only the compensation side and ignoring other elements of the employment equation (mandatory benefits and exit costs).
When making the decision to enter a country, make sure you fully understand the following ‘employment costs’:
- Social insurance program contributions
- Legally mandated company provisions
- Market competitive company provisions
- Exit costs, including mandatory severance and other provisions masked as retirement benefits, but effectively payable for any type of employment termination
Companies that have effectively managed the transition of operations to such low-cost-pole countries as Hungary, China, and Indonesia have cut their total labour costs by as much as 70 per cent.
Your organization’s ability to take advantage of these highlighted cost-saving measures is directly related to your answers to the following questions:
- How many employees do you have outside of Canada? In how many different countries do you operate? How many buckets of HR issues and offerings do you manage?
- To what degree are your global operations (and HR functions specifically) centralized? What are your company’s attitudes towards centralization and the potential consolidation of various HR activities/offerings?
- In the past, how focused has your corporate office been on your international operations? To what degree has your company exploited the opportunities for global cost savings?
The larger and more decentralized your company is currently, the greater are your opportunities to explore and benefit from these tactics.
Patrick Longhurst is a senior actuary in the Toronto office and Gerry Winters is an international consultant in the Chicago office of Watson Wyatt Worldwide.
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