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Case Presentation

Jul 05, 2014

Compensation Problemswith a Global Workforce

Group 9:Rijul BhardwajRashmi ChauhanSureshkumar A.

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IT Multinational Company faces specific challenges due to its globaloperations

Global workforce mobility General Problems

> PCNs, TCNs and HCNs complaining aboutallowances

> HQ complaining that costs of global mobilityare high

Specific Problem

> Employee from Manila In Philippines: $25,000

In US: $25,000 + Cost of Living Adj

> Employee from Bangkok In Thailand: $30,000

In US: $30,000 + Cost of Living Adj

> Employee in US: $60,000

> Allowances neither reflect home country norhost country

> Discontent over salary post repatriation

Subsidaries

Intl Workforce

United States

Philippines

Bolivia

Japan

Thailand

Headquarters

GlobalWorkspaces

United States

Source: Case Author

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Tackling them requires asking specific questions to decidecompensation and allowances

> Not all assignees, types and locations are alike

> Different compensation systems are necessary> In some cases, combination of compensation systems is also useful

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Keeping nature of international workforce in mind, Balance Sheetapproach is chosen for compensation design

Choosing the approach

> IT MNC is already well established with global operations and considerable employee mobility

> Localization needs are limited due to contract assignments being the norm

> Global movement involves not only management but also field engineers

Compensation Systems

Negotiations/Ad Hoc

> Negotiations decide allowances

> First international assignments

> Few IAs

Lump sum

> Payment method

> Impacts taxation

Balance Sheet

> Cost of Living Adjustment

> Established expatriation program

Cafeteria

> Choice of benefits

> Only for fundamental benefits

Localization

> No equalizers

> Applicable to young expats

> For business or personal reasons

Regional and Global Plans

> Systems specific to regions ordecided centrally

> For IAs above certain pay level

Balance Sheet approach best caters to all the above requirements

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Balance Sheet approach requires estimation of base salary

Base salary has to be identified based on several factors

> Home-country salaries

> HQ salaries

> Regional salary standard> Host country salaries

> Better of home or host

Factors that decide base salary

> Long assignments and transferbetween locations

> HQ-based balanced sheet> Based on PC base, if

MNE from a high-wagecountry

> Short foreign postings andreturning

> Home country base

> For regional focus of a globalfirm

> Regional base

Effect of Location

> Well defined operations in

developed countries> Need to maintain equity among

workers

> Host-country base

Effect of job profile

Manila$25,000

Bangkok$30,000

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Adjustment of salary requires component-wise breakup

Components of Base Salary

[SERIES

NAME]

[SERIES

NAME]

[SERIES

NAME]

[SERIES

NAME]

> Deposit accounts and personal reserves

> Dedicated for contingent spending

> Day to day goods and services, such as food and clothing

> Depends on home-country CPI, inflation and local purchasing power

> Average expense for housing in the home country

> Depends on real estate, rent and mortgage markets

> Income taxes are calculated slabwise or at a flat rate

> Reduces overall disposable income

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For the two employees, salary breakup in home-country isestimated

[VALUE]

[VALUE]

[VALUE]

[VALUE]

$25,000

Manila

Bangkok

[VALUE]

[VALUE]

[VAL

UE]

[VALUE]

$30,000

> Income taxes rate falls under 25% slab according toFY 2013 rules

> Expenditure on spendables is close to ~40%

> Income taxes is at 33% flat rate with no deductions

> About 33% spending on goods and services

Taxes

Housing

Goods and Services

Savings

Source: Numbeo Database, Case Author

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Balance sheet is built-up stepwise to estimate final salary andallowances

Manila

Bangkok

~113%[VALUE] $5,000 $5,000 $5,000

[VALUE]$20,931

$14,652[VALUE]

$19,320

$11,592[VALUE]

$11,300

$6,250$5,624

$25,000 $56,551 $37,494 $43,118

Premium

Taxes

Housing

Goods and Services

Savings

$6,250

$11,592

$14,652

[VALUE] $5,100 $5,100 $5,100

[VALUE]$19,537

$13,676[VALUE]

$18,082

$10,849[VALUE]

$10,683

$9,900

$5,929

$30,000 $53,402 $39,525 $45,454

$9,900

$10,849

$13,676~96%

Home CountryHome-Host

AdjustmentSharing of Costs

Premiums andAllowances

Source: Numbeo Database

~258%

~394%

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Issues related with repatriation

What compensation toprovide on return to

home country

What should be therole andresponsibilities of therepatriate

What methods canhelp in knowledgetransfer of theexperience on theinternationalassignment

What type of trainingshould be provided to

help adapt back to theprevious culture

How does therepatriate compares

himself with the peers& what all assistanceneeds to be providedto his/her family.

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Additional Important IA Compensation Issues

SocialSecurity

Method of Payment Local host-country currency

Homecountry currency

Splitpay combination

Taxes on ExpatriateIncome

Hypothetical Tax is covered by the MNE

Tax Strategies

Exchange RateFluctuations &

Inflation

Affects the differential of home and host country spendable

Need for explanation to IA regarding corresponding pay change Pay adjustment done on fluctuations reaching a certain bar

Territoriality Rule

Detached Worker RuleTotalization Agreements

To avoid double taxation related to social security

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Additional Important IA Compensation Issues

Laissez- faire

Ad HocTax Protection

Tax Equalization

IA pays home & hosttaxes

Hypothetical tax iscompared with actualtaxes

Windfall gain ispossible

MNE pays actual taxminus hypothetical tax

Reduces non-

compliance

IA takes care of his orher taxation

IA may not be in

compliance with taxpayments

Done with thenegotiation approach

Case- to case basis

Tax Strategies

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US Issues in IA taxation

Taxation of US InternationalAssignees

Compensation for ForeignMultinationals in US

Compensation & Taxationfor foreign nationals in US

Limited tax liability forUS IA duringemployment abroad.

The exclusions are pro-rated based on thenumber of days in ayear for which IA staysabroad

Foreign tax credit canbe availed to reduce UStax liabilities

Foreign firms need toadapt to US executivecompensation practices

to stay competitive Current reliance is more

on base salarycompared to bonus &incentives

Need to adapt to this USframework.

Classification of foreignnationals is an area ofconcern

Immigrant /Non-immigrant visa

Tax equalization treatypresent or not

Resident-aliens vs non-resident aliens

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Complexity of International C&B Management

Standard payroll systemdoes not accountlanguage, dependents etc.type of expenses

Salary Data

BenchmarkingCost Concerns

Payroll Maintenance Data Privacy

Difficult to get valid countryspecific C&B data

C&BIssues

Countries have lawsagainst transfer of privateemployee information

Downsizing involving IA

C&B Systems for cross-border JVs , M&As,preventing discrimination

Comparing yourself withthe prevailing trend in theindustry