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International Compensation.

introduction
Organizations typically offer a
variety of returns, both financial
and non-financial, with the
expectation that they will
somehow contribute to
organization effectiveness
a wide variety of total returns are
offered. These can include total
remuneration (cash, allowances,
and long-term incentives) as well
as employment security
conditions, flexible work
schedules, opportunities to learn,
and so on
Compensation
Among all the set of HR problems more vexing
is the international compensation plan
Compensation, as Geringer and Frayne (1990)
have defined it, includes those rewards
monetary and non-monetary, direct and
indirect,that an organization exchanges for
the contributions of its employees, both job
performance and personal contributions
International Compensation.
International compensation management is
the most time consuming and strategically
important HRM activity in multinational
enterprises
Compensation is one of the most visible
aspects
Knowledge required
Mechanics of compensation such as
employment and taxation law, customs,
environment, employment practices,
familiarity with currency fluctuations, and
the effect of inflation on compensation all
within the context of shifting political,
economic, and social conditions
Complexities of Intl.Compensations.
Country perspectives
Varying Local conditions
Varying inflation rates
Varying Tax rates
Fluctuations in Exchange Rates
Varying Requirement of Facilities
Varying cost of living
Employees expectations
Consistency and Equity requirement
The objective is
the three primary objectives of international
compensation plan are no different than a domestic-
only plan
to attract, retain, and motivate those employees qualified
for overseas employment
Facilitate the transfers between foreign affiliates, home
country and host countries operations.
Maintain consistent relationship between the
compensation of employees of affiliates both at home and
abroad.
Maintain compensation that is concurrent with
competitors in the industry.
employees to achieve competitive advantage
The process.
HR managers first take
local practices into consideration, and
then investigate what is possible and practical
from the host-country perspective
Balancing the centralised and decentralised
benefits incentives and pensions given the
technical capabilities of the HRIS programmes
The approaches to Intl.Compensation
A preferred approach might be
to first identify pay and benefit practices that are
desired by employees in the respective nations
and cultures.
Once employee needs and desires are
appropriately identified, then the mechanics of
selectively adopting existing programs to a
variety of operations might be addressed
and the need to develop new programs
identified.
Two main approaches of Intl Compensation.
1. Balances sheet approach(home country approach)
2. Going rate approach(host country approach)

The balance Sheet approach also known as build up


approach.
The basis rationale in this that the expats pay must equalize
the purchasing power across countries.
The basic assumption of this approach is that the expatriate
employees must continue to enjoy the same standard of
living they would have enjoyed in their parent nation
Balances sheet approach(home country
approach)
The home country pay and benefits of the expatriates employees
forms the basis of this approach
In addition to the home-country benefits, the expatriate
employees are also provided with substantial financial
inducements to make the compensation package complete and
attractive
In this approach, the company compares four groups of expenses
between the home country and the host country and compensates
the expatriates if they are adversely affected by the differences in
these expenses.
These four groups of expenses are
income taxes,
housing,
goods and services, and
discretionary expenses.
Advantages and Disadvantages
The major advantages of this approach are:
(i) It ensures equity in the fixation of compensation for
expatriates belonging to the same nation.
(ii) It motivates the employees to undertake expatriate
assignments
(iii)It ensures that almost the same standard of living for
the expatriates, irrespective of their place of employment.
However this method has a few limitations
(i) It may lead to discrimination in the pay fixation of
employees who perform identical jobs but belong to
different nations.
(ii) Compensation administration could be difficult and
cumbersome.
Balances sheet approach(home
country approach)
Companies using the Balance Sheet Approach
need to regularly
Update compensation packages with new data on
living costs
Need to respond to unexpected events such as
currency devaluation or a stock market crach-
WHICH MAY SUSTANTIALLY INFLUENCE THE
PRICES AND LIVING COSTS .
Going Rate Approach-THE HOST
COUNTRY COMPENSATION APPROACH
When compensation packages of the expatriates
are determined on the basis of the salary
structure prevailing in the host nation, it is called
the going rate approach or market rate approach.
The salary in this method is determined on the
basis of the survey undertaken in the host
country where the business is located.
However Intl Co., usually grant additional pay and
benefits to expats if they happen to work in
nations where their pay is low.
Advantage and disadvantages
It ensures equity in pay scale for employees performing
similar jobs, irrespective of their nationalities.
It is simple and easy to administer.
It keeps the morale of the host country employees high as
they suffer no discrimination.
Limitations are
Collecting information in the local country and conducting
survey is not possible always
There may be discrimination between the package of the
home country nationals working in different host countries.
Indians in US are better paid than Indians in South Africa of
the same company
.
disadvantages
The re-entry problem arisessince the employee
may find the home salary less than the expat pay
on his return home
The pay determined by this method may
discourage employees from undertaking
expatriates assignment in low pay countries.
Employees clamor for glamorous stations rather
than underdeveloped countries
LESS THAN 10% OF MNCS USE THIS METHOD AS
PER E&Y SURVERY 2009
Components of Compensation:
components of international compensation
comprises
the base salary,
incentives,
benefits,
allowances,
foreign service inducement/ hardship premium,
long term benefits and taxes etc.
Base Salary:
Base salary is the amount of money that an expatriate normally
receives in the home country.
In the united states, this was around $ 175,000 for upper-middle
managers in the late 1990s, and this rate was similar to that paid to
managers in both Japan and Germany. The exchange rates, of
course, also affect the real wage.
Expatriate salaries typically are set according to the base pay of the
home countries. Therefore, a German Manager working for a US
MNC and assigned to Spain would have a base salary that reflects
the salary structure in Germany.
The salaries usually are paid in Home currency, local currency, or a
combination of the two.
The base pay also serves as the benchmarks against which
bonuses and benefits are calculated.
Benefits:
Alternatively known as indirect compensation,
Benefits constitute a substantial portion of international
compensation ( approx. one third of compensation for regular
employees is benefits).
Benefits include a suit of programmes such as: Entertainment,
Festival celebrations, Gifts, Use of club facilities, provision of
hospitality including food and beverage, employee welfare, use of
health club, Conveyance tour and travel, Hotel Board and Lodging,
vehicles, telephone and other telecommunication facilities,
Sponsorship of children.
Basically an employee tends to join and stay with an org. which
guarantees an attractive benefits programme.
Vacation along with holidays and rest breaks help employees
mitigate fatigue and enhance productivity during the hours
employees actually work.
Allowance:
It is an inevitable feature of International compensation.
The most common allowance relates to the cost of living
COLA an adjustment for different in the cost of living
between the home country and foreign country
assignment.
This allowance is designed to provide the expatriate with
the same standard of living that he or she enjoyed in the
home country.
Spouse assistance, housing allowance, home leave
allowance, relocation allowance and educational
allowance are the popular in expats. Compensation.
These allowances are often contingent upon tax
equalization policies and practices in both the home and
the host countries.
Incentives:
An additional payment (or other remuneration) to employees as a means of
increasing output. Increasingly, MNCs these days are designing special
incentive programmes for keeping expatriates motivated.
In the process, a growing number of firms have dropped the ongoing
premium for overseas assignments and replaced it with a one time,
lump-sum premium.
The lump sum payment has at least three advantages:
First, expatriates realizes that they are paid this only once and that too
when they accept an overseas assignment. So the payment tends to
retain its motivational value.
Second: costs to the company are less because there is only one payment
and no future financial commitment. This is so because incentive is a
separate payment, distinguishable from a regular pay, and it is more
rapidly for saving or spending.
Third, less chances for pre mature repatriation
Foreign Service / Hardship Premium:
This is often 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 salaries depend upon the assignment, actual hardship, tax
consequences and length of assignment.
In addition, if the work week in the host country is longer than in
the home country , the assignee will be paid for the extra hours
worked.
Certain countries are highly hostile to foreigners staying and
working. Indians engaged in road construction work in
Afghanistan, for example, face constant threat lives.
In fact, ten such emigrants got killed in recent times (2006-2007).
Expatriates in such environments are paid 2-3 times more than
their domestic salaries
Long term Benefits:
The most common long term benefits offered to employees of MNCs are
Employee Stock Option Schemes (ESOS).
Traditionally E-SOS were used as means to reward top management or
key people of the MNCs.
Some of the commonly used stock option schemes are: -
Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved
for purchase and issuance to key employees. Such shares serve as
incentive for employees to build long term value for the company.
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 restrictions generally lifts in 3-5 years when the stock vests
Employee Stock Purchase Plan (ESPP) This is a plan wherein the
company sells shares to its employees usually, at a discount. Importantly,
the company deducts the purchase price of these shares every month
from the employees salary
Taxes:
The final component of the expatriates remuneration
relates to taxes. MNCs generally select one of the
following approaches to handle international taxes:
1. Tax equalization: Firms withhold an amount equal to
the home country tax obligation of the expatriate, and
pay all taxes in the host country.
2. 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 total taxes are
less in the foreign country than in the home country.
Performance Appraisal in International
Context
Highly challenges?- International circumstances not understood by the
appraiser- far away from the appraisee.
Difficulties due to Goal incongruence and information asymmetry
between parent and subsidiary- information needed and available
Understanding the variables that affect the expats performances are to be
understood by the local office
Environmental differences between the two creates even more
difficulties-PESTLE, isolate job factors, job standards differences between
the two.
Marketing concepts would be different, market development would be
different and difficult in the host country
Knowledge Assymetry between PCN/TCN, PCN/HCN, HCN/TCN
The subsidiary may or may not contribute to the revenues of the host or
might be a independent unit..SO FINANCIAL INFORMATION MAY NOT BE
THE CORRECT YARDSTICK FOR MEASURING PERFORMANCES OF
EMPLOYEES.
Firm specfic factors and diversity factors were
also effect the employees on the personal
level impacting their performances.
Europes MNEs do not have a formal structure
for evalution , Finnish MNEs usually use the
already set goals as key criteria for analysis.
Who should appraise?
There is a debate
Host or Home
HCNs- using them helps to create and
develop a good suitable appraisal system that
helps to talk the diversity and cultural issues
and adaptation.
Ex-Ex