INTERNATIONAL HUMAN RESOURCE MANAGEMENT Compensation & Benefits

Expatriate Compensation & Benefits
Organization¶s Compensation Policy Employment and Taxation Laws Competitors

Allowances

Compensation Benefits

Economic Conditions

Political and Social Environment

Standard of Living
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Expatriate Costs ‡ Expatriate costs may pose a multiplefold expense in relation to employees who are not sent as expatriates to foreign destinations. and are usually significantly higher than the compensation accorded to HCNs and TCNs 3 .

while ‡a US expatriate manager with corresponding expertise would cost his or her organization USD 300.000 per annum.‡Example: ‡a Chinese manager with 15 years experience costs less than USD 70.000 per year 4 .

tax equalization and reimbursement for reasonable costs 5 . As a consequence. the policy must be competitive and recognize factors such as incentive for serving in a foreign location.Goals of an International Organization¶s Compensation Policy (1) 1) Policy should be consistent with the overall strategy. structure and business needs of the international organization 2) Policy must work to attract and retain staff in those areas where the international organization has the greatest needs and opportunities.

Goals of an International Organization¶s Compensation Policy (2) 3)Policy should facilitate transfer of international employees in the most cost-effective manner 4)Policy must give due consideration to equity and ease of administration 6 .

social security and cost of living in the foreign location  Foreign assignment offers opportunities for advancement through income and/or savings  Issues such as housing.Employee Expectations and International Organization¶s Compensation Policy  Financial protection in terms of benefits. education of the children and recreation are addressed Note that the expectations of the employees often do not coincide with the interests of the organization 7 .

Key Components of International Compensation Programme for Expatriates ‡ Base Salary ‡ The base salary is usually the main component in international compensation. and is the main benchmark used for other elements in an expatriate compensation package. or in the currency of the expatriate¶s host country 8 . such as bonuses and benefits ‡ The base salary is either paid in the expatriate¶s home or parent country currency.

determining the appropriate level of payment can be difficult 9 . TCNs) who will encounter ³hardships´ caused by the transfer to a foreign location.Key Components of International Compensation Programme for Expatriates ‡ Hardship Premium ‡ For expatriate¶s (usually PCNs.

usually expressed in terms of an expatriate¶s base pay. are typically: Assignment Actual hardship Tax consequences Length of assignment 10 .‡ Factors determining the hardship premium.

Factors such as inflation differentials and the price level need to be considered. Often. the cost of living allowance is difficult to determine 11 .Key Components of International Compensation Programme for Expatriates Allowances: There are many types of allowances in an international compensation package:  Cost of Living Allowance ± Payment made to the expatriate with a view to compensating for differences in expenditure between the home or parent country and the host country.

for example. family and social ties. Home leave enables the expatriate to renew business. Alternatively. Also. support services may be provided to the expatriate. by helping sell or rent the expatriate¶s house in the home country  Home Leave Allowance ± Payment made to the expatriate with a view to facilitating their visit back to the home country.Key Components of International Compensation Programme for Expatriates  Housing Allowance ± Payment made to the expatriate with a view to ensuring that he or she can maintain their homecountry living standard in the host country. and thus avoid adjustment problems subsequent to repatriation 12 . an organization may provide housing facilities on a mandatory or optional basis. once or twice a year.

Key Components of International Compensation Programme for Expatriates  Education Allowance ± Payment made with a view to supporting the education of the expatriate¶s children. school uniforms etc. room and boarding. Problems regarding the level of education required and adequacy of schools in the host country. i. storage costs. tuition. shipping. Includes moving. language class.e. subsidies for purchase of appliances and (possibly) an automobile 13 . transportation to educational establishment. school enrollment fees. and transportation to other localities may pose significant problems for organizations  Relocation Allowance ± Payment made with a view to enable the relocation of the expatriate to the assignment location. books and supplies.

Key Components of International Compensation Programme for Expatriates  Miscellaneous Allowances ± Depending on the level of seniority of the expatriate. payments to him or her for club memberships. may be rendered In addition. maintenance of household staff etc. sport associations. the organization may render financial assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate 14 .

Key Components of International Compensation Programme for Expatriates  Benefits ± Support rendered to an expatriate in addition to the allowances provided. more prominent examples being:  Social Security Benefits (home country or host country?)  Paid Vacations for expatriate and family  Rest and Rehabilitation leave (especially for expatriates based in ³hardship´ assignment locations)  Emergency Cases (severe illness. There are several types of benefits. death) 15 .

Calculating International Compensation There are two basic approaches used to determine an international compensation package: The Going Rate Approach The Balance Sheet Approach 16 .

The Going-Rate Approach  Based on local market rates  Relies on survey comparisons ± 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  Example: Should a Pakistani bank operating in London use local British salaries. the salaries other Pakistani competitor banks in London or the average salary offered by all foreign banks operating in London as the reference point for the base salary offered 17 .

Disadvantages of the Going-Rate Approach DISADVANTAGES ADVANTAGES Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities Variation between assignments for the same employee Rivalry between expatriates of same nationality in getting assignments to some countries Potential reentry problems in the home country 18 .

and to provide incentives t offset qualitative differences between assignment locations 19 .Logic of the Balance Sheet Approach ‡ The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country.

plus financial inducement  Home-country pay and benefits are the foundations of this approach  Adjustments to home package to balance additional expenditure in the host country  Financial incentives (expatriate / hardship premium) added to make the package attractive 20 .The Balance Sheet Approach The balance sheet approach is widely used by international organizations to determine the compensation package for expatriates:  Basic objective is the maintenance of home-country living standard.

Outlays Considered in the Balance Sheet Approach The balance sheet approach considers four types of outlays which are incurred by expatriates:  Goods and services ± Outlays incurred in the home country for food. clothing. recreation. payments for benefits. social security taxes. Where costs of host country > costs of home country organization pays the expatriate to make up the difference 21 . transportation and medical care  Housing ± All major costs associated with housing in the host country  Income Taxes ± Parent country and host country income tax expenditures  Reserve ± Contributions to savings. etc. pension contributions. investments. household furnishings. education expenses. personal care.

taxation) 22 .Disadvantages of the Balance-Sheet Approach ADVANTAGES Equality between assignments and between expatriates of the same nationality Facilitates expatriate reentry Easy to communicate To employees DISADVANTAGES Can result in considerable disparities between expatriates of different nationalities and between expatriates and local nationals Can be quite complex to administer (e. changing economic conditions.g.

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