CHAPTER 8

INTERNATIONAL
COMPENSATION
 Kelompok 6

1 TERRY LUANA A.

2 KEVIN IMANTAKA

3 KHOIROTUN NISA

4 ENDRAWAN DEWO P

5
 Chapter Objectives
In this chapter we discuss:

• 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 an international compensation program.
• Outline the two main approaches to international compensation (Going Rate and Balance
Sheet Approach) and the advantages and disadvantages of each approach.
• Introduce a third emerging approach to international compensation: Local Plus.
• Examine the special problem areas of taxation, valid international living cost data and the
problem of managing TCN compensation.
• Examine recent developments and global compensation issues.
Introduction

What is the definition of compensation?

What is the definition of international compensation?
Why compensation must be done?
Why an international compensation program is needed?
 Objectives of international compensation
FIRST
The policy should be consistent
with the overall strategy,
structure and business needs of
the multinational.
THIRD
The policy should facilitate the
transfer of international
employees in the most cost-
effective manner for the firm
SECOND
Second, the policy must work to
attract and retain staff in the
areas where the MNE has the
greatest needs and
opportunities.
FOURTH
The policy must give due
consideration to equity and ease
of administration.
 KEY COMPONENTS OF AN INTERNATIONAL
COMPENSATION PROGRAM FOR EXPATRIATES

1. Base Salary

 For expatriates, the term base salary means the primary component of a
package of allowance which are
a) Foreign service premium,
b) Cost-of-living allowance,
c) Housing and utility allowance
d) Basis for in service benefits and pension contributions

 Base salary may be paid in home or local currency or in some hard

currency like pound or dollar
2. 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. Such payments vary depending upon the assignment, actual
hardship, tax paid to foreign governments and length of the assignment
 3.ALLOWANCE

1 2 Housing 3
Cost-of-living allowance Home leave
allowance. allowances

4 5 Relocation 6
Education allowances. Spouse
allowances. assistance.
4. Benefits

The complexity inherent in international benefits often brings more difficulties

than when dealing with compensation. Expatriate ‘benefits’ includes health
care, pension plans/social security,life insurance, child allowances and profit
sharing/stock option plans.
 Approaches to International Compensation
There are two main options in the area of international compensation

Going Rate Approach (also Balance Sheet Approach (also

referred to as the Market Rate known as the Build-up Approach).
Approach)

• 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.
• The basic objective is to ‘keep the expatriate
whole’ through maintenance of home-country
living standard plus a financial inducement to
make the package attractive.
• Home-country pay and benefits are the
foundations of this approach
• Adjustments to home package to balance
additional expenditure in host country
• Financial incentives (e.g., expatriate/hardship
premium) added to make the package attractive
• Most common system in usage by multinationals
 Advantages Disadvantages

Variation between assignments for

Equity withy local nationals same employee
Variation between expatriates of
Simplicity same nationality in different
countries
Equity among different
Potential re-entry problems
nationalities

Going Rate Approach

 Major Categories Incorporated
in the Balance Sheet Approach

Goods and services

Home-country outlays for items such as food,
personal care, clothing, household furnishings,
recreation, transportation, and medical care.
.
Housing
Major costs associated with housing in the host
country.

Reserve
Contributions to savings, payments for benefits,
pension contributions, investments, education
expenses, social security taxes, etc.

Income taxes
Parent-country and host-country income taxes.
 Advantages Disadvantages
Can result in great disparities
Equity • Between expatriates of different
 Between assignments nationalities
 Between Expatriates of the same • Between expatriates and local nationals
nationality

Facilitate re-entry Can be complex to administer

Easy to communicate to May entail difficulty to attract

employees human capital

Balance Sheet Approach

 Approaches to Handling International Taxation:
Laissez faire
Expatriates are expected to take care
of their own taxation, even if this
means tax obligations in both the
home countries and host countries.
Tax Equalization
Firms withhold an amount equal to the
home-country tax obligation of the
PCN, and pay all taxes in the host
country.
Tax Protection
The employee pays up to the amount of taxes he
or she would pay on compensation 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.
Ad hoc Policy
Each expatriate is handled differently,
depending upon the individual
package agreed to with the MNE
Expatriation compensation worksheet
Compensation approaches & strategies for long-term
international assignments
Compensation approaches & strategies for long-term
international assignments
Compensation approaches & strategies for long-term
international assignments
Compensation approaches & strategies for long-term
international assignments
International living costs data

Consequently, many MNEs retain the services of consulting firms that may offer a broad range of services or provide
highly specialized services relevant to HRM in a multinational context. With regard to international living costs, a
number of consulting firms offer regular surveys calculating a cost-of-living index that can be updated in of currency
exchange rates.
Differentiating between PCNs and TCNs

As we have indicated, one of the outcomes of the balance sheet approach is to produce differentiation between
expatriate employees of different nationalities because of the use of nationality to determine the relevant home-country
base salary.
Thank You for Watching!

Any Questions?