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Module 6 Ref: Peter J Dowling IHRM Book
Forms of compensation and factors that
influence compensation policy Key components of international compensation Approaches to international compensation Compensation practices across the countries Social security systems across the countries Global compensation: emerging issues.
Compensation is not just about paying the employee For MNCs successfully to manage compensation
and benefits requires knowledge of employment and taxation law, customs, environment and employment practices of many foreign countries, familiarity with currency fluctuations and the effect of inflation on compensation and an understanding of why and when special allowances must be supplied and which allowances are necessary in what countries [awareness about political, economic and social conditions] Fixing and managing compensation for an expat is M6-International Compensation always complex because they are high cost
Objectives of International compensation
Compensation policy should be consistent with
the overall strategy of MNC
Policy must work to attract and retain competent
staff in the locations where MNC has greatest needs and opportunities
Policy should facilitate the transfer of international
employees in the most cost –effective manner for the firm
Policy must give due consideration to equity and
4 M6-International Compensation
easy administration [should be fair and easy to
pension. benefits like company car. related to job satisfaction of the employee Extrinsic: financial nature 2.Forms of Compensation 1. interest in work and career aspects. expense allowance Sum of direct and indirect compensation makes M6-International Compensation up organizations’ total compensation program 5 . Intrinsic & Extrinsic Compensation Intrinsic : non financial related nature of work. insurance. Direct & Indirect Compensation Direct: an employee’s fixed and variable annual income Indirect: consists of all deferred income.
Factors influencing compensation policy 1.fall in wage Organizational cost strategy Performance based culture encourage good or high pay rates for better performance. means organization’s culture influences compensation structure M6-International Compensation . Labour Shortage-. Internal business factors Margin for wage costs. depends on profit 6 generated by company Labour shortage or surplus influences pay rates. labour surplus--.rise in pay rates.
Social factors Wage bargaining power [national and industry level] Labour unions Cultural/ social factors/ characteristics like Japan.Factors influencing.collectivism culture-group appraisal Germany..high uncertainty avoidance-performance related Compensation pay will not be much encouraged. Purchasing power and prosperity Level of economy Economy prosperity and cost of living 3. they M6-International focus on fixed salary 7 . 2. Contd….
Key components of an international compensation Base Salary Foreign service inducement/hardship premium Allowances Benefits Vacations and special leaves Bonuses 8 M6-International Compensation .
HRA etc] For expats it is the primary component of a package of allowances. foreign service premium. benefits. Base salary In 9 domestic context base salary denotes the amount of cash compensation serving as a benchmark for other compensation elements [like bonuses. or whether an home country . many of which are directly related to base salary [ cost of living allowance COLA. housing allowance] It will be the basis for in service benefits and pension contributions It may be paid in home or local country currency Differences may occur in compensation package depending on whether base salary is linked to the M6-International Compensation of PCN or TCN.1.
Foreign Service Inducement / Hardship Premium PCNs often receive salary premium as 10 an inducement to accept foreign assignment or as compensation for any hardship caused by transfer More commonly paid to PCNs than TCNs Usually 5 to 40% of base pay will be paid as Foreign Service Inducement Payment may vary depending upon M6-International Compensation assignment. tax . actual hardship.2.
so most of the MNCs prefer to take help of agencies or consultancies who can provide updates and information to them M6-International Compensation It may also include payments for utilities. .3. Cost of living allowance[COLA] Payment made to compensate the differences in cost of living between home and foreign country Difficult to determine. Allowances MNCs generally pay allowances to motivate 11 employees to accept international assignments A.
3.. it can be optional or mandatory Are often paid on either an assessed or an actual basis This can be a fixed allowance or some portion of income out of which actual housing costs are paid C. and can build up their morale level 12 . B. Housing Allowance Objective is to help expat manager to maintain his/her standard of living in the foreign country Sometimes accommodations are provided by MNC. Allowances contd. friends and M6-International Compensation relatives. Home leave allowances Many employers cover the expense of one or more trips back to the home country each year Expats will get opportunity to meet family.
shipping and storage charges. board and uniforms etc E. enrolment fees.. Allowances contd. Education Allowances Allowances for expat’s children education includes tuition fees. Spouse Assistance This will be given to offset income lost by an expat’s spouse as a result of relocating abroad Alternative to this compensation. room. books. Relocation Allowances Covers moving.3. D. transportation. car expenses etc F. MNC can also provide employment opportunities abroad by offeringCompensation job research assistance or in their foreign M6-International subsidiary office 13 .
M6-International Compensation Most US PCN remain under their home country . Whether expatriates should receive home-country or host-country social security benefits. Benefits Ex: pension plans It is very difficult to determine It comprise approximately 1/3rd of compensation 14 package Issues when considering benefits 1.4. Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage. particularly if the firm does not receive a tax deduction for it. 2. 3. Whether or not to maintain expatriates in homecountry programs.
A percentage is added to base pay ranging from 10% to 30% of base pay Lump sum payment at the beginning or end of foreign assignment or combination of first two M6-International Compensation .15 5. Apart from all these. MNCs also give vacations and special leaves to expatriates 6. Bonuses There are three approaches to provide bonuses.
Approaches to International compensation There are two main options in the area of international compensation Going Rate Approach [also known as Market rate Approach] The Balance Sheet Approach [also known as Build up Approach] 16 M6-International Compensation .
Expatriates of same nationality .Local nationals (HCNs) .Expatriates of all nationalities • Compensation based on the selected survey comparison • MNC obtains information from local compensation surveys • Base pay and benefits may be supplemented by additional payments for low-pay countries M6-International Compensation 17 .Going Rate Approach[Market Rate Approach] • Based on local market rates • Relies on survey comparisons among: .
Contd.. For ex: Japanese bank operating in New York would need to decide whether its reference point would be Local US salaries or Other Japanese competitors in New York or All foreign banks operating in New York If location is in a low pay country. MNC usually adds additional benefits and payments with base pay. 18 M6-International Compensation .
Merits & Demerits of Going Rate Approach Advantages • Equality with local nationals • Simplicity • Identification with host country • Equity amongst different nationalities 19 M6-International Compensation Disadvantages • Variation between assignments for same employee • Variation between expatriates of same nationality in different countries • Potential re-entry problems .
Balance Sheet or Build Up Approach Objective is to keep the expatriate whole 20 [maintaining home country living standard plus financial inducement to make package attractive] Home country pay and benefits are foundations of this pay Adjustments to home package to balance additional expenditure in host country Financial incentives are added Most common system in usage by MNC firms Expats will not suffer from material loss M6-International Compensation .
Four Balance Sheet Approach categories 1. clothing. Reserve – contributions to savings. transportation and medical care. 3. M6-International Compensation 21 . pension contributions. Income taxes – parent-country and hostcountry income taxes. recreation. 2. Goods and services – home-country outlays for items such as food. investments. payments for benefits. Housing – the major costs associated with housing in the host country. etc. education expenses. 4. household furnishings. social security taxes. personal care.
Merits & Demerits of balance Sheet Approach 22 M6-International Compensation .
Expatriate Compensation Worksheet sample 23 M6-International Compensation .
If the two are less than the hypothetical tax calculation. if the actual home tax plus the host country tax is greater than the hypothetical tax calculation.International taxation There are two approaches for international taxation 1. the company reimburses the expatriate for the difference. the expatriate gets to keep the difference. Tax protection In this approach. M6-International Compensation 24 .
2.International Taxation contd. M6-International Compensation 25 . If the actual tax is less. Tax equalization In this approach the company pays both the home and host country taxes for the expatriate.. If the actual tax is more than has been deducted. The company calculates the hypothetical tax and makes the deductions from the person's paycheck on that basis. then the expatriate reimburses the company for the difference. the company reimburses the expatriate for the over-deduction.
Tokyo. which is an ongoing administrative requirement There is also much debate about what should be in the ‘basket of goods’ which consulting firms use as the basis for calculating living costs around the world For example the Swiss Bank UBS uses the ‘Big Mac Index’ to measure the living costs around the world According to the Index. 26 M6-International Compensation . In Los Angeles. it takes more than 3 hours for the average worker in Nairobi to earn enough for a Big Mac. the global burger can be bought for a mere 10 minutes’ effort.International living costs data MNCs using the balance sheet approach must constantly update compensation packages with new data on living costs.
Range of working times required to buy one Big Mac 27 M6-International Compensation .
experience needed for job. training needed.Compensation practices across the countries INDIA Basic wage corresponds with Fair Wages Committee  and 15th labour conference  recommendations Criteria for determining basic wage are: skills. difficulty of work [both mental and physical]. Pay M6-International Compensation Commissions for fixing & revising wages. responsibilities involved and hazardous nature of job DA is linked with AICPA [All India Consumer Price Index Government has set up Wage Boards. 28 .
Administrative oversight: an adjustment to an individuals pay. Alignment: is used to adjust pay of individuals whose salary is low in comparison to pay of similarly performing employees within the peer group 3.US Basic compensation package comprises of a base salary. compulsory benefit contributions and voluntary benefit contributions During the fiscal year salary adjustments are warranted. frequently occurring shortly after the effective date of annual merit increase 2. these are known as ‘interim’ increases & generally classified into 3 ways 1. long term cash incentives. a variable performance linked bonus. Retention: is used to reward employees who are M6-International 29 critical to Compensation the success of an organization’s mission or a .
life insurance and so M6-International Compensation on . medical insurance.Russia Having a good fixed salary is important in 30 compensation package The optimal compensation package combines bonus and non monetary benefits In most cases bonus varies 20% to 40% of total salary The most common type of bonus is the payment of ‘thirteen month of salary’. if certain objectives have been achieved by the company Apart from above. Russians have been used to receive non-monetary benefits such as good lunches.
Japan Japan has seniority based wage system. which has 2 features The amount of pay goes up according to the length of service and age Wages are not set separately for individual jobs Bonuses are paid in summer and winter Allowances are paid when worker leaves the company Basic salary is determined according to job related qualifications and competence. ranks within a job category Pay hikes on base salary are given every year in M6-International Compensation 31 April .
food. companies provide benefits and allowances to their Saudi and expatriate employees Includes housing. auto allowances. bonuses will be provided 32 M6-International Compensation . vacation tickets to home country.Saudi Arabia In addition to base monthly salaries. school fees etc Some benefits are mandated by Saudi Labour Law and others are granted by discretion of company Apart from this.
China A nationally unified wage system was structured in 33 1956 for both blue and white collar employees Under this system. there were 8 grades for workers. 15 grades for technical person and 25 grades for managers and administrative personnel Reform of compensation system began at enterprise level Enterprise Law was issued in 1988 and related regulations during 1990s provided separation of an enterprise from its controlling authority so that enterprise had autonomy and incentives A state regulated wage systems have now replaced by diversified wage packages with more focus on enterprise profitability and individual performance M6-International Compensation .
Social Security Schemes According to International Labour Organization [ILO]. maternity. old age and death” 34 M6-International Compensation . The risks are sickness. “ social security is security furnished by the society through appropriate organization against certain risks to which its members are exposed.
3. Tripartite financing [(government)treasury. Benefits of services are provided in 2 ways. They are statutorily established by the government 2. disablement etc Social assistance. disabled etc .Contd. Social insurance to contributors during old age. financial institution and bank] has been accepted by many countries as a mechanism for financing the social security insurance system 4. injury at work etc. aged. non-contributory benefits towards the M6-International Compensation 35 maintenance of children. maternity. Scope of social security programs differs from country to country and they have 4 common features in common: 1.. They provide some form of payment to individuals to compensate part of the lost income due to contingencies such as unemployment. women. sickness.
and Invalidity and Old age Protection 1889. hospital treatment. the Accident Insurance Act 1884. The statutory sickness insurance scheme provides benefit in the form of early detection of diseases. 1883. sickness benefits. etc Under the Occupational Safety Act 1974.Social Security Schemes in different countries Germany Wage earners come under compulsory insurance through Wage Earner’s Sickness Insurance Act. employers are required to appoint industrial medical officers and occupational safety specialists 36 M6-International Compensation .
sickness benefit and non contributory benefits like guardians allowance.Great Britain: social security schemes The Workmen’s Compensation Act of 1987 made 37 earnings related compensation. The Old Age Pensions Act of 1908 made provision of means-tested pension. payable to those who were injured at workplace. widow’s benefit. unemployment benefits. provides contributory benefits like retirement pensions. to people aged over 70 The 1934 Unemployment Act introduced to provide benefits for those unemployed but not covered by national insurance Social Security and Housing Benefits Act of 1982. child benefit etc M6-International Compensation Social security expenditure is 10% of gross national .
The Old Age and Survivors Insurance (OASI) program The Disability Insurance (DI) program The Hospital Insurance (HI) program The Supplementary Medical Insurance (SMI) There are union negotiated welfare plans which are M6-International Compensation 38 financed by the employers .US: Social security schemes Social security system was introduced in 1935 as a program of insurance protection for the workers and his family against complete loss of income through old age or death In 1950 it was extended to cover farm and household employees and other persons The following social security programs provide financial security to workers and their families.
Japan adopted Health Insurance Scheme for employees of large companies in 1992. followed by national.Japan: Social Security Schemes Being the first country to establish a social insurance system. seaman’s insurance in 1939 and employees pension program in 1941 The contributory employees’ pension program covers regular employees. seaman. A number of pension programs also exist for special groups M6-International Compensation 39 such as civil servants. The national pension program has a contributory as well as a non contributory segment. health insurance in 1938. and private school . Contributory segment has a compulsory and voluntary part.
the law was amended in 1975 to make the coverage compulsory for all industrial and M6-International Compensation 40 commercial firms with more than 5 employees. It is designed to cover the oldest. The second one is National Health Insurance Plan. Japan has had unemployment insurance. which covers residents not insured as a result of their employment. mining and retail establishments with 5 or more employees . poorest and most sick segments of Japanese society Since 1947. . Japan has 2 main health insurance programs: one is Compulsory Employees Health Insurance Plan for workers employed in manufacturing.Contd..
1972 41 M6-International Compensation .India: social security schemes The social security legislation in India regarding the industrial field consists of following enactments Workmen’s Compensation Act 1923 Minimum Wages Act 1948 Payment of Wages Act 1936 Industrial Disputes Act 1947 Employees Provident Fund and Miscellaneous Provisions Act 1952 Payment of Bonus Act 1965 Maternity Benefit Act 1961 The Payment of Gratuity Act.
It involves consolidation of the existing pay grades into a small number of wide bands. This consolidation results in broad minimum to maximum spread attached to it. some use it as a contingent pay. 42 M6-International Compensation .Global Compensation: Emerging Issues Skill based pay: as technology progress newer skills are required. Broad banding: it can be defined as delayering of pay structure. Such pay structures are better suited to the needs of today’s flexible. Team incentives are most appropriate when jobs are highly interrelated. Team rewards: team rewards provide an opportunity for each team member to receive a bonus based on the output of the team as a whole. It forms a part of base pay. flatter and performance –oriented organizations Variable pay: it is a financially measurable reward paid to an individual based on his or her overall performance. Skill based pay can help organizations pay its people based on skills that are currently in need.
43 M6-International Compensation .
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