CH 8.intl - Compensation

Chapter 8
INTERNATIONAL
COMPENSATION
Chapter 8
For use with International Human Resource Management 7e ISBN-10: 1473719026
By Peter J. Dowling, Marion Festing, and Allen D. Engle, Sr. © Cengage Learning
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Chapter 8
INTERNATIONAL
COMPENSATION
C O N T E N T S
START
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 Vocabulary
go to its section.
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cover below to
 Objectives return to this table
of contents.
 Introduction
O F
 Key components of an international compensation

program for expatriates
TA B L E
 Approaches to international compensation

of expatriates
 Tentative conclusions:
patterns in complexity, challenges, and choices
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Vocabulary
 compensation
 HRIS = HR information system
 base salary
 hardship premium
 foreign service inducements
 COLA = cost-of-living allowance
 housing allowance
 home leave allowances
 education allowances
 relocation allowances
 spouse assistance
 balance sheet, going rate, & local plus approaches
 tax equalization
 tax protection, ad hoc & laissez-faire approaches
 international base pay
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 pay strategies
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Objectives
In this chapter we:
1. Examine the complexities caused by moving compensation
from a domestic to an international context
2. Detail components of a international compensation program
3. Outline the two main approaches to international
compensation and the advantages/disadvantages of each
4. Introduce a third emerging approach: Local Plus
5. Examine the special problem areas of taxation, valid
international living cost data, and the problem of managing
TCN compensation
6. Examine recent developments and
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global compensation issues
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Introduction
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Compensation is increasingly seen as
 Mechanism to
develop and reinforce
a global corporate culture
 Primary source of corporate control
 Explicitly linking
performance outcomes
with associated costs
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International
compensation complexities
 Growing use of outsourced activities and
subsequent labor-pricing needs
 Challenges to universal applicability of
incentive pay programs
 Greater choice with novel or unrecognized
pay practices
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Objectives of
international compensation
The policy:
 should be consistent with overall strategy, structure,
and business needs of the MNE
 must attract and retain staff in areas where the MNE
has the greatest needs and opportunities
 should facilitate the transfer of international employees
in the most cost-effective way for the firm
 must give due consideration to equity
and ease of administration
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International employee
expectations
1. Financial protection in terms of benefits, social
security, and living costs in the foreign location
2. Opportunities for financial advancement through
income and/or savings
3. Housing, children’s education, and home leave will be
addressed in the policy
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Key components of international
compensation for expatriates
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Key components for expatriates
1. Base salary
2. Foreign service inducement

and hardship premium
3. Allowances
COLA, housing, home leave, education,
relocation, spouse assistance
4. Benefits
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Approaches to international
compensation of expatriates
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Three approaches to
international compensation
1. Going rate approach
2. Balance sheet approach
3. Local plus approach
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Table 8.1
Going rate approach
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Table 8.2
Advantages and disadvantages of the going rate approach
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Table 8.3
The balance sheet approach
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4 balance sheet approach categories
1. Goods and services
2. Housing
3. Income taxes
PC and HC income taxes
4. Reserve
Contributions to savings, payments for
benefits, pension contributions, investments,
education expenses, social security
taxes, etc.
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Table 8.4
Expatriation compensation worksheet
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Local plus approach
The expatriate employee is paid according to prevailing
salary levels, structure, and administrative guidelines of
the home country…
expatriate-type benefits in recognition of foreign status

Does not typically include:
COLA, mobility premiums, hardship allowances,
familiarization visits, home leave, cross-cultural
training, other pre-departure or spouse assistance
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Table 8.5
Advantages and disadvantages of the Balance Sheet approach
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Table 8.6a
Compensation approaches and strategies for long-term international assignments
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8
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Table 8.6b
Compensation approaches & strategies for long-term international assignments
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Table 8.6c
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Table 8.6d
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MNE approaches to
international taxation
 Tax equalization
MNE withholds tax obligation & then pays all
taxes in HC
 Tax protection
Employee pays up to amount s/he would pay on
compensation in HC
 ad hoc – each expatriate handled differently
 laissez-faire – each is on their own
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Table 8.7
Maximum marginal federal tax rates (as of 2014)
Max. marginal Max. marginal
Country % rate Country % rate
Australia 46.5 Mexico 35.0
Belgium 45.3 Netherlands 50.1
Canada 49.5 New Zealand 33.0
Chile 39.5 Poland 40.00
Denmark 55.6 Spain 20.9
France 54.0 Sweden 56.9
Germany 47.5 Switzerland 36.1
Italy 47.8 Turkey 35.8
Japan 50.5 United Kingdom 45.0
Korea 39.4 United States 46.3
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Table 8.8
Social security contributions by employers and employees
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Table 8.9
Range of working times required to buy one Big Mac (as of 2015)
Notes: Price of one Big Mac divided by weighted average hourly pay across 14 professions
Source: UBS, Prices and Earnings, 2015.
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Tentative conclusions:
patterns in complexity,
challenges, and choices
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Figure 8.1
Complexity, challenges and choices in global pay
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Chapter 8

Click on the book

 Key components of an international compensation

 Approaches to international compensation

2. Foreign service inducement

2. Balance sheet approach

3. Local plus approach

expatriate-type benefits in recognition of foreign status

Belgium 45.3 Netherlands 50.1

Canada 49.5 New Zealand 33.0

Chile 39.5 Poland 40.00

Denmark 55.6 Spain 20.9

France 54.0 Sweden 56.9

Germany 47.5 Switzerland 36.1

Italy 47.8 Turkey 35.8

Japan 50.5 United Kingdom 45.0

Korea 39.4 United States 46.3

Complexity, challenges and choices in global pay

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