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STRATEGIC

COMPENSATION
A Human Resource Management Approach

Chapter 14:
Compensating
Expatriates

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Learning Objective 1 and Summary:
Competitive Strategies and Global
Markets

• Lowest-cost producers’ relocations to


cheaper areas

• Differentiation and the search for new


global markets

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Learning Objective 2

How globalization affects HR


departments

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How Globalization Affects HR
Departments

• Establish and operate satellite plants


and offices
• Training (e.g., cultural values)

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Compensation Challenges
• How to further corporate interests abroad and
encourage employees to take foreign
assignments
• How to minimize financial risks to employees
and make their (and their families)
experiences as pleasant as possible
• How to promote a smooth transition back to
life in the United States after completing
assignment overseas (repatriation)
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Compensation Challenges
(Cont’d)
• How to promote their lowest-cost and
differentiation strategies in foreign markets
• Must reasonably adhere to U.S.
employment law for U.S. workers working
for U.S. companies abroad, which is
sometimes difficult with foreign laws and
policies

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International Employees
• Host country nationals (HCNs)
– Citizens work for U.S. company in own country
– Ex: Japanese citizens work for GE in Japan
• Third country nationals (TCNs)
– Citizens of one country work for a U.S.
company in another country
– Ex: Australian citizens working for GE in China
• Expatriates
– U.S. citizens work for a U.S. company in
another country
– Ex: U.S. citizens employed in Citibank’s London
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Compensation Factors
• Length of overseas assignments
– Short-term
– Extended-term
• Staff mobility
– One or more foreign assignments
• Equity: pay referent groups
– Domestic workers
– Host country workers

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Summary
Learning Objective 2
• How globalization affects HR departments
• Compensation challenges
• International employees
• Compensation factors

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Learning Objective 3

Methods for setting expatriates’ base


pay

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Compensation Components for
U.S. Expatriates
• Core compensation
– Base pay
– Incentive compensation
• Foreign service premium
• Hardship allowance
• Mobility premium

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Compensation Components for
U.S. Expatriates (Cont’d)
• Employee Benefits
– Standard benefits
• Protection programs
• Paid time off
– Enhanced benefits
• Relocation assistance
• Education reimbursements for expatriates’
children
• Home leave benefits and travel
reimbursements
• Rest and relaxation leave and allowance
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Setting Base Pay

• Home country-based
– Similar to domestic employees

• Host country-based
– Similar to employees in foreign sites

• Headquarters-based
– Not based on home or host country’s pay levels

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Purchasing Power
• Stability of currency
– U.S. dollar and foreign money
– Exchange rate fluctuations
• Inflation
– Increase in prices of goods and services
– Increase in inflation lowers purchasing
power

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Summary
Learning Objective 3
• Compensation components for U.S.
expatriates
• Setting base pay
• Purchasing power

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Learning Objective 4

Incentive compensation for expatriates

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Incentive Compensation
• Foreign service premiums
– To encourage expatriate assignments
• Hardship allowances
– For tough work and living conditions
• Mobility premiums
– For willingness to relocate to an
assignment
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Hardship Allowances
• Set by U.S. State Department based
on:
– Foreign living conditions
– Physical challenges like climate
– Poor health conditions
• Over 150 countries designated
• Supplements between 5%–35% of
base pay
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Summary
Learning Objective 4
• Incentive compensation
• Hardship allowances

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Learning Objective 5

Employee benefits for expatriates

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International Employee
Benefits
• Two Types
– Standard
– Enhanced
• Considerations
– Total remuneration
– Benefit adequacy
– Tax effectiveness
– Recognizing local customs and practices
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Standard Benefits
• Expatriates continue to participate in social
security program
– Retirement insurance, benefits for
dependents, and Medicare
• Family and Medical Leave Act also applies
to expatriates
• State workers’ compensation laws
generally do not apply
• Expatriates typically receive the same
annual vacation benefits as do their
domestic counterparts
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Enhanced Benefits

• Relocation assistance
• Education reimbursement
• Home leave and travel reimbursement
• Rest and relaxation leave and
allowance

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Relocation Assistance

• Temporary quarters before moving


• Transportation expenses
• Reasonable traveling expenses
• Temporary quarters upon arrival
• Moving and storing household goods

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Summary
Learning Objective 5
• International employee benefits
• Standard benefits
• Enhanced benefits
• Relocation assistance

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Learning Objective 6

The balance sheet approach

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Balance Sheet Approach

• To determine compensation packages


• To provide similar standard of living
• Strategic value
– Protects expatriates’ standard of living
– Allows companies to control costs

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Appropriateness
• Home country is referent point
• Expatriates keep close ties to the
United States
• Assignment is of limited duration
• Repatriation after assignment
• Guarantee of no financial hardship

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Major Expenditures
• Housing and utilities
• Goods and services
• Discretionary income
• Taxes
Information Sources
• Returning expatriates
• Consulting and research companies
• U.S. State Department indexes
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Discretionary Income
Expenditures
• Pension contributions
• Savings and investments
• Insurance payments
• Mortgage equity payments
• Alimony
• Child support
• Student loans
• Car payments
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Tax Considerations

• Tax protection

• Tax equalization

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Tax Protection

• Employers reimburse expatriates


when actual tax is greater

• Expatriates pay entire tax when


actual tax is less or equal

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Tax Equalization

• Employers deduct hypothetical tax


• Employers pay real tax from
hypothetical
• Reimbursements settled after payment
• Equitable treatment any assignment

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Summary
Learning Objective 6
• Balance sheet approach
• Appropriateness
• Major expenditures
• Discretionary income expenditures
• Tax considerations
• Tax protection
• Tax equalization

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Learning Objective 7 and Summary:
Repatriation Issues
• Losing supplements and allowances
• Work experience not valued
• Reintegration into domestic workforce
• Leaving company

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means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

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