International Human Resources Management

International Compensation Management

Objectives of Compensation
Attract

individuals who are competent and interested in international assignments Facilitate movement of expatriates from one subsidiary to another, from the home country to subsidiaries and from subsidiaries back to home country Provide a consistent and reasonable relationship between the pay levels of employees at the headquarters, domestic affiliates and foreign subsidiaries Be cost-effective by minimizing unnecessary expenses Be consistent with the overall strategy, structure 2

Compensation Philosophy
Compensation philosophy is the set of values and beliefs that an organization has with regards to monetary and non-monetary benefits payable to employees
What

are the goals of the organizations compensation system? What percentage of compensation should be linked to individual/ unit performance and what should be the base salary? What is the role of performance appraisal in disbursing compensation, bonus, merit hike etc.? How to target the positioning of compensation of employees relative to market?
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Theories of Compensation
Contingency Resource The

theory

based Theory

agency Theory Theory

Equity

Compensation Strategy

Strategic business and operating inputs obtained from the subsidiaries business plan and objectives and the operating targets and resources requirements

Industry and labor market practices and trends to assess demand-supply relationships Employee inputs and preferences to ascertain the degree to which compensation is fixed- structure based vs. negotiable 5 based on competency/skill

Aligning Compensation Strategy by Michaiel H. Schuster

A S S E S S M E N T

EMPLOYEE Inputs and Preferences

Business And Operating Inputs

Industry And Labor Market Practices & Trends

D E S I G N

Compensation Philosophy and Objectives Based upon Business, Operating & Human Resource Requirements
Organisations Performance Or Variable Pay Non- Monetary& Other Monetary Rewards & Recognitions

Base Pay Delivery

Fringe Benefits

Compensation Mangement

Components of Compensation
Elements of compensation
Base

Salary
Variable pay

Incentives/

Allowances
Long

Term Benefits

Taxes

Base Salary
Its

common in any compensation strategy- domestic or foreign. The base salary is the foundation block of international compensation whether the employee is a PCN or TCN.

Incentives/Variable Pay
A

growing number of MNCs have dropped the ongoing premium for overseas assignments and replaces it with a one time, lump- sum premium Even in domestic Bs MNCs are preferring one- time premiums to periodic salaries.

Incentives/Variable Pay contd.

Yahoo. Com has dropped CEOs salary to some % but they are entitled to benefit from a discretionary bonus in the form of a fully vested stock option of up to 1 million shares / annum. Google Inc. has also done a similar thing.

Incentives/Variable Pay contd.

Referral Bonus:
It is a popular way of bringing in new talent by employees introducing friends, relatives and acquaintances to the company. Eligibility to receive a hiring bonus varies across job levels, but is relatively un affected by companies size or industry sector.

Incentives/Variable Pay contd.

Use of Retention Bonuses/ Rises for employees

Is common in industries like IT/BPO and in the services industry. Surveys indicate that about one third of technology and life sciences companies use a formal or discretionary retention bonus plan to retain key employee. The practice is more common in large industry but does not vary by industry sector.

Allowances
They are an inevitable feature of international compensation. One common allowance relate to the cost of living- an adjustment for differences in the cost of living between the home country and foreign assignment.

Popular Allowances are

Spouse

assistance Housing allowance Home leave allowance Relocation allowance( to cover expenses as moving, shipping and storage charges, temporary living expenses, subsidies regarding appliance or car purchase and lease related charges etc.) Educational allowance( to the children & trailing spouse)

Allowances contd.
Foreign

Service/Hardship Premium This is perceived as an inducement in the form of a salary premium to accept an overseas assignment. Generally salary premiums vary from 540 % of the base salary. Actual salary depends upon the assignment, actual hardship, tax consequences and length of assignment.

Use of Long Term benefits

Employee

Stock Option Plan (ESOP)

This is plan established by a company wherein a certain no. of shares are reserved for purchase and issuance to key employees. Such shares usually vest over a certain period to serve as an incentive for employees to build long-term value for the company.

Use of Long Term benefits contd.

Restricted Stock Unit ( RSU) This is a plan established by a company, wherein units of stocks are provided with restrictions on when they can be exercised. It is usually issued as partial compensation for employees. The restriction generally lifts in 3-5 years when the stock vests. IT companies are increasingly using RSUs as incentives since they afford a lot more flexibility.

Use of Long Term benefits contd

Employee Stock Purchase Plan ( ESPP)

This is a plan wherein a company sells shares to its employees usually, at a discount. The company deducts the purchase price of these shares every month from employees salary.

Taxes
MNCs generally select one of the following approaches to tackle international taxation. TAX EQUALISATION TAX PROTECTION

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TAX EQUALISATION
Organisations

withhold an amount equal to the home country tax obligation of the PCN and pay all taxes in the host country.

TAX PROTECTION
The employee pays up to the amount of taxes he or she would pay on remuneration in the home country. In such a situation, the employee is entitled to any windfall received if the total taxes are less in the foreign country than in the home country.

Variables influencing Compensation

Goal Orientation profit making vs. service oriented Parent company philosophy Industry type Capacity to pay Local labor market characteristics

Local Culture
Government and statutory provisions
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International Compensation Packages

Going

Rate Approach Sheet Approach

Balance

Other

Approaches

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Going Rate Approach

Executives

are paid according to the host country salary structures. When salary structures in host country are lower, additional salary payments are made to the expatriates.

Balance Sheet Approach

Majority of MNCs follow the balance sheet approach to determine expatriate compensation. This method provides a compensation package that attempts to equate or balance the expatriates purchasing power in the host country as compared to the home country.

Income Tax
Housing Goods& Services

Home & Host Country Income Taxes Housing

Income Tax Housing Goods& Services

Premium & Incentives Income Tax

Housing Goods& Services Reserve
Home Country Equivalent Purchasing Power

Goods& Services Reserve

Home Country Costs

Reserve

Reserve
Host country costs paid by orgn. & from salary

Home country Salary

International Citizens Approach

In

this approach an international basket of goods is used for all expatriates, regardless of country of origin, It includes food, clothing, housing and so forth. Expatriates are not provided salary adjustments that would allow them to purchase exactly the same items in the host country as in the home country. Rather they receive adjustments that would allow them to purchase a comparable local product of same nature and use.

Global Salary Systems

International Citizens Approach is alternatively called globalsalary systems. This is appropriate when an MNC has a team of dedicated international managersEuropeans, Americans or Asians who are ready to move to any part of Globe. It seeks to provide worldwide equity in rewards and allow managers to move between countries with minimal effects on life style.

Compensation Administration
Establish Salary Bands Salary Increases / reviews

Compensation Administration
Developing Rates of pay for Jobs Linkages to performance Appraisal Starting Salary for New Employees

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Issues in International compensation

Impact of the human resources demand-supply equation at the parent country / host country Increasing usage of international compensation and benefits consultants Use of compensation benchmarking Surveys at local and global levels Outsourcing Compensation management/ payroll processing 30