Welcome to the Session

COMPENSATION
CHAPTER 6
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CHAPTER OBJECTIVES
In the introductory chapter we described IHR managers as grappling with complex issues:
     Manage more activities from a broader perspective, Be more involved in the lives of their far-flung employees Balance the needs of PCNs, HCNs and TCNs Control exposure to financial and political risks and Be increasingly aware of and responsive to host-country and regional influences.

In this chapter, all of these issues and concerns are brought out in a discussion of compensation issues. (cont.)
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CHAPTER OBJECTIVES (CONT.)

 

Examine the complexities that arise when firms move from compensation at the domestic level to compensation in an International context. Detail the key components of international compensation. Outline the two main approaches to international compensation and the advantages and disadvantages of each approach. Examine the special problem areas of taxation, valid international living cost data and the problem of managing TCN compensation. Examine the recent developments and global compensation issues. 3

IBUS 618 Dr. Yang

INTRODUCTION
Probably one of the most complex functions of IHRM is  the design and implementation of an equitable compensation program.  to determine if one policy will apply to all employees or if Parent country nationals (PCNs), Host country nationals (HCNs), and Third country nationals (TCNs) will be treated differently.

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TWO AREAS OF FOCUS.
Global compensation managers increasingly deal with two major areas of focus:  They must manage highly complex and turbulent local details, while  Concurrently building and maintaining a unified, strategic pattern of compensation policies, practices and values.

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environment and employment practices of many foreign countries  Familiarity with currency fluctuations and the effect of inflation on compensation.REQUIREMENTS FOR SUCCESSFUL COMPENSATION AND BENEFITS Knowledge of employment and taxation law. 6 . customs. and  A good understanding of why and when special allowances must be supplied and which allowances are necessary in what countries  Allwithin the context of shifting political. economic and social conditions.

structure and business needs of the multinational. Should facilitate the transfer of international employees in the most cost-effective manner for the firm. 7 . Must give due consideration to equity and ease of administration. hence must be competitive and recognize factors such as incentive for foreign service. tax equalization and reimbursement for reasonable costs.OBJECTIVES OF INTERNATIONAL COMPENSATION Should be consistent with the overall strategy. Must work to attract and retain staff in the areas where the multinational has the greatest needs and opportunities.

social security and living costs in the foreign location. education of children and recreation to be addressed in the policy.  Issues such as housing.  8 .EXPATRIATE EXPECTATIONS Financial protection in terms of benefits.  Career advancement and repatriation.  Opportunities for financial advancement through income and/or savings.

PROBLEMS REGARDING INTERNATIONAL COMPENSATION • Discrepancies in pay between parent. depending on the 'lifecycle' of the expatriate's family • Remuneration issues related to re-entry into the parent country organization. host. Yang 9 . • The need to vary expatriate compensation. and third-country nationals. • Using remuneration programs that had not changed sufficiently over time to deal adequately with the new international business environment IBUS 618 Dr.

KEY COMPONENTS OF INTERNATIONAL COMPENSATION The area of international compensation is complex. primarily because multinationals must cater to three categories of employees:  PCNs. TCNs and HCNs  Key Components:  Base salary  Foreign services inducement  Hardship premium  Allowances  Benefits 10 .

foreign service premium. 11 .g. many allowances are directly related to base salary -e. base salary denotes the amount of cash compensation serving as a benchmark for other compensation elements -such as bonuses and benefits  For expatriates.BASE SALARY  In a domestic context. housing allowance  It is the basis for in-service benefits and pension contributions  It may be paid in home or local-country currency. cost-of-living allowance.

or whether an international rate is paid.  Where substantial differences exist in the tax rates the actual loss in net income will occur  Almost all multinational corporations have some tax protection plan so that the expatriate pays no more taxes than they were in their home country. 12 .BASE SALARY  The base salary is the foundation block for international compensation whether the employee is a PCN or TCN.  Major differences can occur in the employee’s package depending on whether the base salary is linked to the home country of the PCN or TCN.

U.S. The definition of hardship. eligibility for the premium and amount and timing of payment must be addressed.  13 .FOREIGN SERVICE INDUCEMENT AND HARDSHIP PREMIUM Parent-country nationals often receive a salary premium as an inducement to accept a foreign assignment or as compensation for any hardship caused by the transfer.  In cases in which hardship is determined.S. firms often refer to the U. Department of State’s Hardship Post Differentials Guidelines to determine an appropriate level of payment.

) Foreign service inducements are usually made in the form of a percentage of salary.FOREIGN SERVICE INDUCEMENT AND HARDSHIP PREMIUM (CONT. tax consequences and length of assignment. 14 . actual hardship. 5-40% of base pay. depending upon the assignment.  Such payments vary. More commonly paid to PCNs than to TCNs.

such as:       Cost-of-living allowance Housing allowance Relocation allowance Education allowance Home leave allowance Hardship allowance 15 . partly because of the various forms of allowances.ALLOWANCES Establishing an overall compensation policy can be very challenging.

COST-OF-LIVING ALLOWANCES (COLA)  COLA receives the most attention  It compensate for differences in expenditures between the home country and the foreign country  It may also include payments for housing and utilities. personal income tax or discretionary items. 16 .  The provision of a housing allowance implies that employees should be entitled to maintain their homecountry living standards  International comparison of cost of living is difficult and can be problematic.

out of which actual housing costs are paid. Yang .HOUSING ALLOWANCE It implies that the employees should be entitled to maintain their home-country living standards.  17 IBUS 618 Dr.  Other Housing alternatives may include:  Company-provided housing. either mandatory or optional  A fixed housing allowance  Or assessments of a portion of income.  Such allowances are often paid on either an assessed or an actual basis.

HOME LEAVE ALLOWANCE  Many employers cover the expense of one or more trips back to the home country each year. The purpose of paying for such trips is .to give expatriates the opportunity to renew family and business ties Thereby helping them to avoid adjustment problems when they are repatriated.   18 .

19 IBUS 618 Dr.HOME LEAVE ALLOWANCE (CONT. Yang .)  Other Home leaves alternatives are:  Allow foreign travel rather than returning home  Expatriates may become more homesick than others who return home for a ‘reality check’ with fellow employees and friends.

but this varies according to location. -club memberships -servants and so on usually for more senior positions. -temporary living expenses -subsidies regarding appliance or car purchases -down payments or lease-related charges.RELOCATION ALLOWANCES  Usually cover  -moving. shipping and storage charges. -  20 . Allowances regarding perquisites -cars.

EDUCATION ALLOWANCES Expatriates’ children are an integral part of any international compensation policy. board and uniforms.books and supplies .  Allowances for education can cover items such as -tuition & language class tuition -enrolment fees .  . PCNs and TCNs usually receive the same treatment 21 concerning educational expenses.transportation. room.

 U. firms are beginning to focus on providing spouses with employment opportunities abroad  By offering job-search assistance or employment in the firm’s foreign office  22 IBUS 618 Dr.ALLOWANCES FOR SPOUSE ASSISTANCE  To help guard against or offset income lost by an expatriate’s spouse as a result of relocating abroad. Yang . Some firms may pay an allowance to make up for a spouse’s lost income.S.

BENEFITS In addition to the already discussed benefits. multinationals also provide vacations and special leave. Some types of them are     Annual home leave Rest and rehabilitation Emergency provisions Additional leave expense payments or rest and rehabilitation periods for employees in hardship locations 23 .

ISSUES CONCERNING BENEFITS  Very difficult to deal with country-to-country. as national practices vary considerably:    Transportability of pension plans Medical coverage Social security benefits 24 .

 25 . including: Whether or not to maintain expatriates in home-country benefit programs  Whether firms have the option of enrolling expatriates in host-country benefit programs  Whether expatriates should receive home-country or hostcountry social security benefits.ISSUES CONCERNING BENEFITS  Firms need to address many issues.

)  In some countries.ISSUES CONCERNING BENEFITS (CONT.  26 . but this is generally less the case for TCNs. In such circumstances. the firm normally pays for these additional costs. Multinationals have generally done a good job of planning for the retirement needs of their PCNs. expatriates cannot opt out of local social security programs.

APPROACHES TO INTERNATIONAL COMPENSATION There are two main options in the area of international compensation  Going Rate Approach (also referred to as the Market Rate Approach)  Balance Sheet Approach (also known as the Build-up Approach) 27 .

the expatriates are paid according to the host country salary structures.  28 . additional salary payments are made to the expatriates. Where salary structures in host countries are lower.GOING RATE APPROACH  In this approach.

GOING RATE APPROACH (CHARACTERISTICS) 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.  29 .

ADVANTAGES OF THE GOING RATE APPROACH  Advantages Equity with local nationals  Simplicity  Identification with host country  Equity among different nationalities  30 .

DISADVANTAGES OF THE GOING RATE APPROACH  Disadvantages Variation between assignments for same employee  Variation between expatriates of same nationality in different countries  Potential re-entry problems  31 .

JERIN HAQUE MBA SL no-138 .

THE BALANCE SHEET APPROACH .

The approach links the base salary for PCNs and TCNs.     It is the most widely used approach for international compensation. . The basic objective is to “keep the expatriate whole” It maintains the home country living standard And provides financial incumbent to make the package attractive.

Goods and Services Housing Income taxes Reserve . 4. 3.FOUR MAJOR CATEGORIES OF OUTLAYS : 1. 2.

.ACCORDING TO REYNOLDS: The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living overseas and in the home country and to provide incentives to offset qualitative differences between assignment locations.

Financial incentives added to make the package attractive. Most common system in usage by multinational firms. . Adjustments to home package to balance additional expenditure in host country.THE KEY CHARACTERISTICS ARE:     Home-country pay and benefits are the foundation of this approach.

Between expatriates of the same nationality.  .ADVANTAGES:  Equity   Between assignments.  Easy to communicate to employees. Facilitates expatriate re-entry.

 Can be complex to administer. . Between expatriate and local nationals.DISADVANTAGES:  Can result in great disparities   Between expatriates of different nationalities.

expatriate is taxed both in the country of assignment and in the USA. This dual tax cost.S.  An assignment abroad can mean that a U. multinationals think twice about making use of expatriates.TAXATION  This aspect of international compensation probably causes the most concern to HR practitioners and expatriates (both PCNs and TCNs).S. combined with all of the other expatriate costs. as taxation generally evokes emotional responses. makes some U. and this issue can be very time consuming for both the firm and the expatriate. No one enjoys paying taxes. Yang . 40 IBUS 618 Dr.

the employee is entitled to any windfall received if total taxes are less in the foreign country than in the home country. IBUS 618 Dr. In such a situation.APPROACHES TO HANDLING INTERNATIONAL TAXATION:  Tax Equalization  Firms withhold an amount equal to the homecountry tax obligation of the PCN. and pay all taxes in the host country. The employee pays up to the amount of taxes he or she would pay on compensation in the home country. Yang  Tax Protection  41 .

Yang   For a PCN. tax payments equal to the liability of a homecountry taxpayer with the same income and family status are imposed on the employee’s salary and bonus. they are subject to widely discrepant income tax rates. as the shares of both personal and corporate taxes are rising in the OECD countries.  As multinationals operate in more and more countries. 42 . tax-free to the employee.TAX EQUALIZATION  By far the more common taxation policy used by multinationals.  Just focusing on income tax can be misleading. IBUS 618 Dr. Any additional premiums or allowances are typically paid by the firm.

DIVERSITY IN NATIONAL TAXATION  If we look at total tax revenues as a percentage of GDP. and Germany. 12th. . Denmark. firms are also outsourcing the provisions of further aspects of the total expatriate compensation packages including a variety of destination services in lieu 43 of providing payment in a package. the “top five” highest taxation countries are: IBUS 618 Dr. 16th. Yang    Sweden.  International accounting firms may provide advice and prepare host-country and home-country tax returns for their expatriates. Finland. Britain. 26th.  Increasingly. France and Belgium The United States is 25th with the other large advanced economies towards the bottom of the list Japan.

appropriate rewards for PCNs. 44 . as cultural practices vary endlessly. HCNs and TCNs within the framework of the overall compensation policy of the firm.APPROACHES TO INTERNATIONAL COMPENSATION  Multinationals need to consider the extent to which specific practices can be modified in each country to provide the most tax-effective.  The difficulties in international compensation “are not compensation so much as benefits”:   Pension plans are very difficult to compare or equalize across nations. Transportability of pension plans. medical coverage and social security benefits are very difficult to normalize.

Whether host-country legislation regarding termination affects benefit entitlement. particularly if the company does not receive a tax deduction for it. Yang     Whether companies have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage. Whether benefits should be maintained on a home-country or host-country basis.ISSUES CONCERNING BENEFITS  Companies need to address whether or not to maintain expatriates in home-country programs.  IBUS 618 Dr. Whether other benefits should be used to offset any shortfall in coverage and whether home-country benefit programs should be exported to local nationals in foreign countries. 45 . who is responsible for the cost. Whether expatriates should receive home-country or host-country social security benefits.

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.SOME TENTATIVE CONCLUSIONS: PATTERNS IN COMPLEXITY Although international al compensation requires a lot more brain work then domestic compensation. there are some similarities in pattern or form.

Level of pay strategy. C. . practices and system design. Basic level of culture values and assumptions. B. Level of pay administration and form.Recent global pay issues seen to operate in three distinct levels A.

PATTERNS OF INTERNATIONAL PAY Level 3 : Pay forms and administration Level 2 : Pay strategy. practice and system Firms Nations Group Job Person Universal PAY LEVEL Strategy Context Local composite Basi s of pay Level 1 : Pay norms and assumptions Hierarchical pay VS Egalitarian pay .

BASIC LEVEL OF CULTURE VALUES AND ASSUMPTIONS : Regarding cultural values an ongoing debate is Hierarchical pay Vs Egalitarian pay In hierarchical pay system large pay differences are there for executives In egalitarian pay system more shared group or firm wide reward practice is used. .A.

B. Business environment or strategic requirements may move a global strategy to more local or from local to more global in practice. LEVEL OF PAY STRATEGY. PRACTICES AND SYSTEM DESIGN: Increased complexity can be understood by using a Horizontal and a Vertical dimension. . Horizontally. universal pay system is preferred by corporate planners rather than dealing with a local system.

Group paid as task group or plant level of aggregation. National level customization of pay. Jobs that are traditionally standardized across the geographic regions. Firm based pay for all employees with core standardized payments.Vertically. numbers of levels of analysis have emerged to supplement or augment job-based pay like:      Person paid for his/ her performance. .

C. despite national difference in tax system and role of public versus private source of the form may still remain as a administrative burden. . administrative difficulties may be minimized to some extent because of standardization. LEVEL OF PAY ADMINISTRATION AND FORM: Increased standardization and portability of benefit program and pension plan is a evidence of pay standardization.

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