International Compensation

Week 8

Copyright 2006, Sharon L. O'Sullivan 1

 International Compensation
Week 8
• EARLIER TODAY
• Objectives for Int’l
What enables people to perform? Compensation
( & What Challenges do Expatriates – The Firm’s perspective
face when interpretating – The Int’l Employees’
performance expectations?) perspective
• Key Components of an Int’l
What Challenges do Firms face in Compensation program
accurately appraising international
• Two Approaches to Int’l comp (
performance? + pros/cons):
– The Going Rate Approach
What additional cultural/ logistical – The Balance Sheet Approach
challenges arise in managing
• Four special Problem Areas
international performance? (taxation, COLA,TCN pay)
• Summary

Copyright 2006, Sharon L. O'Sullivan 2

 The Firm’s objectives for Int’l
Compensation
• Consistent
• Competitive
• Cost-Effective
facilitation of
transfers
• Equitable
• Administratively
manageable
Copyright 2006, Sharon L. O'Sullivan 3
 Int’l Employees’ Objectives for
Int’l Compensation
• Financial protection
• Financial advancement
• Logistics
• Career advancement perks

Copyright 2006, Sharon L. O'Sullivan 4

 Key Components of an Int’l
Compensation Program
• Base Salary
• Foreign Service Inducement / Hardship Premium
• Allowances
• COLA (Cost of living)
• Housing
• Home Leave Allowance
• Education Allowance
• Relocation Allowance
• Spousal Assistance
• Benefits

Copyright 2006, Sharon L. O'Sullivan 5

Approaches to Int’l compensation:
The Going Rate Approach
(a/k/a the “Market Rate approach”; adapted
from Text Table 6-1)

• Based on local market rates

• Relies on survey comparisons among:
– Local nationals (HCNs)
– Expatriates of same nationality
– Expatriates of all nationalities
• Compensation based on the selected
survey comparison
• Base pay and benefits may be
supplemented by additional payments for
low-pay countries

Copyright 2006, Sharon L. O'Sullivan 6

Approaches to Int’l compensation:
The Going Rate Approach (con’d)
(Advantages & Disadvantages, adapted from Text Table 6-2)

Advantages Disadvantages
• Equality with local • Variation between
nationals assignments for same
•Simplicity employee
• Identification with host •Variation between
country expatriates of same
•Equity amongst different nationality in different
countries
nationalities
• Potential re-entry
problems
Copyright 2006, Sharon L. O'Sullivan 7
Approaches to Int’l compensation:

The Balance Sheet Approach

• Popularity: Most common system in usage by MNCs
• Basis: Home-country pay + benefits are the foundations of this
approach
• Objective: Maintenance of home-country living standard +
financial inducement
• Home package is adjusted to balance additional expenditure needed in
host country
• Financial incentives (hardship/”expatriate” premium) are added to make
the package more attractive
• Main Categories of Outlays:
1. Goods & Services
2. Housing
3. Income Taxes
4. Reserve

Copyright 2006, Sharon L. O'Sullivan 8

 Approaches to Int’l compensation:
The Balance Sheet Approach (con’d)
Advantages
• Equity between foreign
assignments for same employee
•Equity between expatriates of
same nationality in different
countries
• Repatriation is facilitated by the
fact that expat compensation
remains anchored to the parent-
country compensation system
• Simple to communicate
Copyright 2006, Sharon L. O'Sullivan
Disadvantages
•Not necessarily equality amongst
different nationalities – PCNs may
get paid more than local nationals
(HCNs) or TCNs (expats of
different nationalities) for doing the
same work
•Not necessarily simple to
administer
• Unclear whether it promotes
identification with home or host
country
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 Four Special Problem Areas
1. Taxation
– Tax Equalization
– Tax Protection
– Not-recommended Variations:
» Ad-hoc
» Laissez-faire

2. Pension & Other Benefits Issues

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 Four Special Problem Areas
(con’d)
3. Valid int’l living cost data (COLA)
(vs. Cost of doing business)

4. Managing TCN compensation

Copyright 2006, Sharon L. O'Sullivan 11

Points to Reflect On…
1. What should be the objectives
of international compensation?
How might pay
norms/assumptions (about
hierarchical pay structures vs
egalitarianism, for example)
influence objectives?
2. What would be the most
important component of an int’l
compensation system for YOU?
3. Which of the 2 approaches to
int’l compensation makes more
sense to you? Why?
4. If you were an expat, how would
you like your employer to
address the 4 special problem
areas? And if you were the
employer?
Copyright 2006, Sharon L. O'Sullivan 12