International Compensation

Objectives

Recruitment and Retention of suitable Employees:

MNCs design and practice compensation

and benefits in order to attract, and retain suitable employees in terms of job
efficiency and cultural adaptability.
Consistency and Equity:
MNCs design the salary and benefits package to secure
consistency between pay and performance and equity among employees of different
nationalities and categories, and employees of subsidiaries and parent company.

Facilitate Mobility:
MNCs design pay package in order to enable the
employees to move from the parent company to foreign subsidiaries and from one foreign
subsidiary to another foreign subsidiary.
.
Adaptability to Foreign Cultures and Environment:
MNCs design pay package that
motivates employees and his/her family members to willingly
adapt to the cultures and environment of the foreign countries. For
example, providing comfortable housing, highly reliable medical
facilities, security facilities against odds and international
standards schooling facilities encourage employee’s family
members to adapt to the foreign country cultures and environment
and allow the employee to concentrate on the job.
Organisational performance:
MNCs pay package should
work as motivator to enhance employee job performance,
learning latest skills and contribute to the enhancement of
organisational performance. In fact, performance based pay
package enhances organisational performance
 Key components of International Compensation
Program
 Base salary
 the term base salary means the primary component of a package of
allowances which are:
 (a) Cost-of-living allowance,
 (b) Housing and utility allowance,
 (c) 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.
Allowances:
Various allowances are paid to expatriates
depending upon the assignment. They include:
(a) The cost-of-living allowance (COLA)
It involves a payment to compensate the
differences in expenditures between the home country and the
foreign country.
(b) Housing allowance:
Implies that employees should be entitled to
maintain their home-country living standards (or, in some cases,
receive accommodations)
(c) Home leaves and travel allowances:
Is given to cover the expense of trips (usually
once in a year) back home. These trips allow the expatriates the
opportunity to renew family and business ties, thereby helping
them to avoid adjustment problems when they are repatriated.
:
Education Allowances for Children:
Education allowances are given towards fees for the education of
expatriates’ children. Education allowances include items such as tuition,
language class tuition, books, transportation and uniforms.
Relocation Allowances and Moving:
Relocation allowances usually cover moving, shipping; temporary living
expenses, and down payments or lease-related charges.
Tax Equalisation Payments:
Many international compensation plans attempt to protect the expatriate
from negative tax consequences by using a tax equalisation plan. Under
this plan, the company adjusts an employee’s base income so that the
expatriates will not pay any more or less tax than if they had stayed in the
home country.
Spouse Assistance:
To help guard against or offset income lost by an expatriate’s spouse as a
result of relocating abroad. Multinationals generally pay allowances in
order to encourage employees to take up international assignments.
Approaches
 Going rate approaches
 This is based on the local market rates. It relies on comparisons of
survey of the local nationals, expatriates of same nationality and
expatriates of all nationalities’ pay packages. In this approach, the
compensation is based on the selected survey comparison. The base
pay and benefits may be supplemented by additional payments for
low pay countries.
The advantages of Going Rate Approach are,
 Equality with local nationals
 Simplicity
 Identification with the host country
 Equity amongst different nationalities
The disadvantages of Going Rate Approach are,
 Variation between assignments for the same employees
 Rivalry between expatriates of the same nationality in getting
assignments to some countries
 Potential re-entry problems in the home country
 Balance sheet approaches
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 and to provide
incentives to offset qualitative differences between assignment locations. The
balance sheet approach is widely used by international organizations to
determine the compensation package of the expatriates. The basic objective is
the maintenance of living standards of the
home country plus financial inducement.
 Goods and Services: Outlays incurred in the home country for food,
personal care, clothing, household furnishing, recreation, 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: Contribution to savings, payments for benefits, pension
contributions, investments, education expenses, social security taxes etc.
The advantages of the Balance Sheet Approach are:
1.Equality between assignments and between expatriates of the
same nationality.
2.Facilitates expatriate re entry
3.Easy to communicate to the employees
The disadvantages of the Balance Sheet Approach are:
1.It can result in considerable disparities between the expatriates of
different nationalities and between expatriates and local nationals.
2.It can be quite complex to administer due to changing economic
conditions, taxation etc.
Performance management of Expatriates
International labour relation and key
issues