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SESSION 6 - Employees Benefits Expatriate Compensation p. 1 Employees Benefits Employees Benefits
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Employees BenefitsEmployees Benefits
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Reward SystemReward System
Reward SystemReward System
Job AnalysisJob Analysis
Jpb EvaluationJpb Evaluation
Managing BasePay
Managing BasePay
Job DescriptionJob Description BenefitsBenefits
Working conditionsWorking
conditions
Variable PayVariable Pay
RecognitionAwards
RecognitionAwards
Long-termIncentivesLong-termIncentives
RecruitmentRecruitment
Training & Dev’mtTraining & Dev’mt
Perf. evaluationPerf. evaluation
HR PlanningHR Planning
Selection & HiringSelection & Hiring
Career planningCareer planning
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DefinitionDefinition
Employee benefits are that part of the total compensation package, other than pay for the time worked, provided to
employees in whole or part by employer
e.g.
Life insurance
Pension
Workers’ compensation
Working hours
Vacation
Holidays
. . .
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Changes in Benefit Costs over TimeChanges in Benefit Costs over Time
From 1955 to 1975– Benefit costs rose at a rate almost 4 times greater
than employee wages or the consumer price index
From 1963 to 1987– The rate of growth had slowed to 2 times greater than
employee wages
From 1993 to 1999– Cost of benefits has stabilized
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Most full-time employees in the Western World receive benefits.
Virtually all employers offer some health insurance coverage.
Benefits are a major expense (about one-third of wages and salaries) for employers. Could go up to two-third in some countries.
The Benefits Picture TodayThe Benefits Picture Today
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Benefit Costs PerspectiveBenefit Costs Perspective
Even though the cost of benefits is rising more slowly, some serious issues at the horizon
– Health care costs alone are raising more than 6-8 times the rate of general inflation in the US and EU
– Pension financed with companies stocks in deep trouble with the declining stock market
– Growing rate of retirees
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Annual Health Care Cost Increases Annual Health Care Cost Increases (US figures)(US figures)
Figure 13–1 Source: Eric Parmenter, “Controlling Health-Care Costs,” Compensation and Benefits Review, September/ October 2002, p. 44
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Why the Growth in Employee Benefits ? Why the Growth in Employee Benefits ?
The Unions played a strong role after 2nd World War– Some strong unions such as Metal or Steelworkers have set a number
of benefits due to little freedom to raise wages during the War– Pension plans– Supplementary unemployment compensation– Extended vacation plans
The Employers– Many of the benefits in existence today were provided at employer
initiative– Longer working hours triggered health as well as motivation issues– Management was genuinely concerned for their welfare– Employer had a major play in the social environment– Human capital (labor) was crucial for the main industries until the
computer age (1980)
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Why the Growth in Employee Benefits ?Why the Growth in Employee Benefits ?
Government in most countries has played an important role in the growth of employee benefits
• Mandatory plans mostly found in western world:
– Social Security Coverage– Workers’ Compensation– Unemployment Insurances
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Cost Effectiveness of BenefitsCost Effectiveness of Benefits
Most employee benefits are not taxable
– Provision of a benefit in lieu of pay increase avoids (or at least defer) taxes for both the employee and the employer
– Due to governmental endless debts, more an more threats of taxing a number of benefits
Group based benefits
– Can be obtained at lower rate– Easy qualification standards
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Benefit Administration IssuesBenefit Administration Issues
Four major administration issues in setting up a benefit package
– Who should be protected?
– How much choice should employees have among an
array of benefits?
– How should benefits be financed?
– Are your benefits legally defensible?
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Who should be protected?Who should be protected?
What probationary periods should be used for various types of benefits?
Which dependents of active employees should be covered?
Should retirees (as well as spouses and perhaps other dependents) be covered?
Should survivors or deceased employees (and/or retirees) be covered? If so, for which benefits?
What coverage, if any, should be extended to disable employees?
What coverage, if any, during layoffs, leaves of absence, strikes, and so forth?
Should coverage be limited to full-time employees?
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Choice FlexibilityChoice Flexibility
Cafeteria style or flexible benefit plan
– Employees permitted great flexibility in choosing the benefit options of greatest value to them
– Even companies that are not considering a flexible benefit program are offering greater flexibility and choice, e.g.
– Optional levels of group term life insurance
– Availability of death or disability benefits under pension or profit-sharing plans
– Choices of covering dependents under group medical expense coverage
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Administering the Benefits ProgramAdministering the Benefits Program
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25k 25k14K
Flexible Benefits: How Does it Work? Flexible Benefits: How Does it Work?
1. Employer: Your Benefits package is worth £25’000
2. Employee: Some of it is fixed
3. Employer: The rest is flexible -how would you like it spent?
4. Employee: Like this
5. Employer: OK
25k25k
25k 25k 11k
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Flexible Benefit ProgramsFlexible Benefit Programs
Advantages
– Employees choose package that best satisfy their unique needs
– Flexible benefits help firms meet the changing needs of a changing work force
– Increased involvement of employees and families improves understanding of benefits
– Flexible plans make introduction of new benefits less costly
– Cost containment: Organization sets spending ceiling; employee chooses within that constraint
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Flexible Benefit ProgramsFlexible Benefit Programs
Disadvantages
– Employees make bad choice and find themselves not covered for predictable emergencies
– Young employees might undervalue the need for a decent retirement plan and neglect contributions to such plan
– Adverse selection: Employees pick only benefits they will use; the subsequent high-benefits utilization increases its cost
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How should benefits be financed?How should benefits be financed?
Alternatives include :– Non-contributory (employer pays total costs)– Contributory (costs are shared between employer and
employee)– Employee financed (employee pays total costs for
some benefits - by law the organization must bear the cost for certain benefits)
Usually benefit options are contributory– With the cost of benefits rising considerably,
employers are increasingly turning to ways for cutting their costs
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Are your benefits legally defensible?Are your benefits legally defensible?
Benefits have to comply with hundreds of complex sections of the tax code and other “devils”.
Because there are so many rules and regulations, benefits have to be administrated through a benefit administrator who is often a certified actuary
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Attraction, Retention, & MotivationAttraction, Retention, & Motivation
Employee benefits are widely claimed to help in the retention of workers as benefits increase with years of service.
Equally, the amount of vacation time increases with years of service.
Decrease of employee satisfaction over the last 20 years especially regarding disability, life and health insurance.
– Why: employers shifting costs to employees or reducing coverage to stabilize expenses
Increase perception of a company’s caring attitude– When: introducing day care, elder care, on-site fitness centers,weight
loss program, health program (alcohol and drug treatment programs for employees), etc…
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Cost ContainmentCost Containment
Most prevalent practices include:• Probationary period
– Excluding new employees from benefit coverage during probation period
• Benefit limitations– Limit disability income payments to a maximum % of
income and to limit medical/dental coverage to s certain fixed amount
• Copay– Requiring that employees pay a fixed or percentage
amount for coverage
• Administrative cost containment– Controlling costs through policies such as seeking
competitive bids for program delivery
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Cost Containment TerminologyCost Containment Terminology
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US Private-Sector Employer Compensation Costs, June 2003US Private-Sector Employer Compensation Costs, June 2003
Source: “Total Employer Costs Rose to 22.61 in Second Quarter,”BNA Bulletin to Management, September 11, 2003, p. 293
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Types of Employee BenefitsTypes of Employee Benefits
Pay for time not worked• Vacations, holidays, unemployment
insurance, sick leave, parental leave, severance pay, Supplemental unemployment benefits (lay-offs)
Insurance benefits• Workers compensation,
Hospitalization, health, and disability insurance, HMOs, PPOs, mental health, COBRA, life insurance, part-time worker benefits, pregnancy benefits
Retirement benefits• Social Security, Medicare, 401(k),
Employee stock ownership plans, Services
• Credit unions, Employee assistance programs
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Other BenefitsOther Benefits
On-site or subsidized child care
Elder care Fitness and medical
facilities Food services Flexible work scheduling Telecommuting Educational subsidies Sabbaticals Loan programs for home
office equipment Concierge services Trauma counseling
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Pension PlanPension Plan
What is a Pension Plan
– An arrangement between an employer and employee for the payment of post- employment income, hereafter called pension benefits
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Types of Pensions PlansTypes of Pensions Plans
Defined Benefit Plans
– Specifies the benefit workers will get at retirement
– Employer contributes annually an amount into a trust fund
– Guaranteed annuity or lump sum upon retirement
Defined Contribution Plans
– Specifies the employer’s contribution
– Cannot predetermine the employee’s actual pension benefit
– Contributions are invested and projected benefits are offered
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Types of Pensions PlansTypes of Pensions Plans
Defined Benefit Plans• Employer provides a specific pension level defined in terms
of – Fixed dollar amount or– Percentage-of-earnings amount that may vary with years of
seniority
• Employer finances this obligation by– Following an actuarially determined benefits formula and– Making current payments that will yield the future pension
benefit for a retiring employee
• Determination of benefit levels– Average earnings at end of tenure (last 3-5 years) or– Average career earnings or– Fixed dollar amount not dependent on earnings benefits are
offered
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Types of Pensions PlansTypes of Pensions Plans
Defined Contribution Plans
• Benefit is defined as the future value of pension fund contributions made on an employee’s behalf
• Exact value is unknown prior to retirement ; – depends on future earnings of fund investments
• Benefits are solely a function of accumulated contributions; – therefore, the term defined contribution
• Value of benefits is variable, dependent on contribution levels and earnings made on invested contributions
– Example in the US: 401 (k) plan
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Pension AlternativesPension Alternatives
Defined Benefit Plan
1. Provides an explicit benefit which is easily communicated
2. Company absorbs risk associated with changes in inflation and interest rates which affect costs
3. More favorable to long-service employees
4. Employer costs unknown
Defined Contribution Plan
Unknown benefit level is difficult to communicate
Employees assume these risks
More favorable to short-term employees
Employer costs known up front
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Pension: Demographic EvolutionPension: Demographic Evolution
When Bismarck invented the state pension, with a retirement age of 65, average life expectancy was only 45.
Now, in the OECD, life expectancy is 76 and rising--yet state pensions can still be claimed at 65 or even less.
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Trends Affecting Retirement Trends Affecting Retirement
• The number of people age 65 and older tripled to about 34 million between 1940 and 1995.
• According to U.S. census projections, people age 65 and older are expected to number 80 million by 2050.
• In 1960, 45.4 percent of male workers over age 65 were still in the labor force; in 1990, only 27.4 percent were still working.While the labor force participation rates of women between ages 55 and 64 have been rising, further increases are not expected.
• Eight baby boomers turn 50 every ten minutes.
• The U.S. net national savings rate was relatively stable at about 7 percent of GDP from 1951 to 1980. It has collapsed since 1980, most recently dropping to less than 1 percent of GDP. Although to a lesser extent in Europe, the trend still affect EU countries.
• In 1940, a 65-year-old had a normal life expectancy of 12.7 more years. Currently, it is about 17 more years.
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Value of Employee Benefits Value of Employee Benefits
Expect benefits as part of their total compensation
Do not understand true value of benefits
Often undervalue their benefits
Often take benefits for granted
Often cannot list all benefits received
Have preferences regarding types of benefits they want
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Creating a Relationship OrganizationCreating a Relationship Organization
Sources:McKinsey: The War for Talent
& Gallup: First Break All The Rules
Why would a talented person want to work and stay here?
Great Company
Great Job
Great Comp& Ben
Great Manager
Your Employment Brand
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Expatriate ManagementExpatriate Management
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Definition: Expatriates Definition: Expatriates
Expatriate (EXPAT)
=Third Country National
(TCN)=
International Mobile Employee (IME)
A citizen of one country living and working in another country
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Definition: Repatriation Definition: Repatriation
Repatriation is the term given to the return of the home country manager
• Reasons for repatriation:
– The time of the overseas assignment is up
– Children’s education
– Unhappy with the assignment
– Family unhappiness
– Failure
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Expatriate Types Expatriate Types
Traditional Expatriate:– Maintain control of host country operations by having home
country manager
Technological Transfer:– Introduce new technology/practices from home country to host
country
Career Relocation:– have high potential employee gain global experience
Country Startup: – Establish presence in host country while maintaining home
country organization culture, processes, approaches, competitive advantage
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Traditional Expatriate Traditional Expatriate
Long term:– 3 years -permanent
Employee career stage: – Middle
Need for family relocation:– Standard and costly
Need to accommodate spouse career continuation: – Standard and costly
Need for extensive acculturation: – Standard, required for entire family
Mentoring and reintegration critical
Most paid under a balance sheet approach
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Technological Transfer Technological Transfer
Short term -– 6 months or so – Examples: New HRIS, New production technique, New service approach
Employee career stage: – Any
Need for family relocation: – None
Need to accommodate spouse career continuation: – None
Need for extensive acculturation: – None
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Technological Transfer Technological Transfer (continued)(continued)
Need for extensive acculturation– None
Maintain home country salary and benefits
Add bonus for extra efforts
Put up in hotel, service apartment
Provide cost of living allowance
Provide emergency health coverage
Provide one or more trips for family and/or employee
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Career Relocation Career Relocation
Middle term: 2 to 3 years
Purpose: have high potential employee gain global experience– Examples: International finance, Manufacturer with offshore production, Global service provider
Employee career stage: – Early
Need for family relocation:– If married, but usually no school age children
Need to accommodate spouse career continuation: – Mixed
Need for extensive acculturation: – Some, but younger, less settled employees more adventurous
Balance sheet approach, but less costly because of life stage: – Salary, Tax equalization,– Housing allowance,
– Frequent trips to home country offices
Mentoring, reintegration plans critical for these employees
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Country Startup Country Startup
Long term: 3-5 years
Purpose: – Establish presence in host country while maintaining home country organization culture,
processes, approaches, competitive advantage
Major goal: – Find and develop host country national to take over as GM Examples: GM of new manufacturing
facility, GM of new hotel
Employee career stage: – Late (maybe last assignment)
Need for family relocation: – Limited-usually empty-nesters, spouse takes retirement
Need to accommodate spouse career continuation: – Mixed
Need for extensive acculturation: – Yes, but little need for mentoring, reintegration
Balance sheet approach, but less costly because of life stage: – Salary, Tax equalization, Benefits, Housing allowance.
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Critical Factors in Expatriate Selection Critical Factors in Expatriate Selection
ACCEPTING FOREIGN ASSIGNMENTS
– DISCUSSIONS WITH SPOUSE/FAMILY SIGNIFICANT OTHERS
– CONSIDERATIONS OF PERSONAL/FAMILY RESPONSIBILITIES/OBLIGATIONS
–
– PLANNING FOR CARE OF DEPENDANTS
–
– CONSIDERING IMPACTS OF JOBS ON PROFESSIONAL DEVELOPMENT AND CARREER PROGRESSIONS
– LEARNING ABOUT CULTURAL DIFFERENCES BEFORE GOIN ABROAD.
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Critical Factors in Expatriate Selection Critical Factors in Expatriate Selection (Cont’d)(Cont’d)
SPOUSE AND FAMILY SUPPORT
– PROVIDING SUPPORT TO FAMILY & RECEIVING SUPPORT FROM FAMILY
– WILLINGNESS TO MAKE SACRIFICES FOR FAMILY MEMBERS
– ATTENTIVENESS TO NEEDS OF FAMILY MEMBERS
KNOWLEDGE OF FOREIGN LANGUAGE
– ABILITY TO UNDERSTAND AND COMMUNICATE ORALLY IN THE FOREIGN
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Critical Factors in Expatriate Selection Critical Factors in Expatriate Selection (Cont’d)(Cont’d)
ADJUSTMENT TO LIVING ABROAD
– SENSITIVITY AND ACCEPTANCE OF CULTURAL DIFFERENCES
– ACCEPTANCE OF DIFFENENT MORES (VALUES, BEHAVIORS,ATTITUDES)
– INVOLVING IN HOST COMMUNITY
– COPING WITH DIFFERENT/ DIFFICULT CIRCUMSTANCES
– LOCATING RESOURCES (HOUSING. FOOD ETC) IN
FOREIGN COUNTRIES
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Critical Factors in Expatriate Selection Critical Factors in Expatriate Selection (Cont’d)(Cont’d)
ADJUSTMENT TO FOREIGN BUSINESS PRACTICES
– KNOWLEDGE OF FOREIGN BUSINESS PRACTICES
– SENSITIVITY TO APPROPRIATE BUSINESS PROTOCOL/PRACTICES
ESTABLISHING/MAINTAINING BUSINESS CONTACTS
– MAINTAIN RAPPORT WITH CONTACTS, CLIENTS AND CO-WORKERS BEING OPEN AND HONEST IN DEALING WITH OTHERS
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Overall Quality of Living - RankingOverall Quality of Living - Ranking
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BIG MAC IndexBIG MAC Index
http://www.angelfire.com/id/SergioDaSilva/bigmacppp.html
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Sourc
es
: M
ER
CE
R
Sourc
es
: U
BS
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COL IndexCOL Index
http://www.bestplaces.net/col/
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Salary ComparisonSalary Comparison
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Why International Assignments Fail Why International Assignments Fail
Career blockage
Cultural shock
Lack of pre-departure cross-cultural training
Overemphasis on technical qualifications
Getting rid of a troublesome employee
Family problems
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Upon Return Upon Return
Loss of Status
Poor Planning for Return Position
Reverse Culture Shock
Lack of Respect for Acquired Skills
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Advantages of Using Expatriates Advantages of Using Expatriates
Cultural similarity with parent company ensures transfer of business practices
Closer control /coordination of international subsidiaries
Employees get multinational orientation
Creates pool of internationally experienced executives
Local talent may not yet add value
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Disadvantages of Using Expatriates Disadvantages of Using Expatriates
Creates problems of adaptability to foreign environment and culture
Increases “foreignness” of subsidiary
Involve high transfer, salary and added costs
May result in personal and family problems
May lower moral and motivation of local management
Subject to local government restrictions
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Trend based on Trend based on Company Company NationalitiesNationalities
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Built-up MethodBuilt-up Method
Annual Base Salary
Benefits+
Income Tax+
Net Income=
Housing contribution-
SpendableIncome=
Home Country
COLAAdjustmentX Spendable
Income=
Housing contribution+
ExpatriateAllowance+
Net Income=
Annual Base Salary
Benefits-
Income Tax-
Host Country
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Expatriate Compensation Model - Expatriate Compensation Model - DefinitionDefinition
x Cost of living
The annual GBR is defined according to
comparable positions. If the transfer involves
promotion, it will be taken into consideration.
Contributions to State Social Security, Pension
schemes, medical and hospitalization benefits.
A deduction of rent or mortage (min.15% - max.
25% of base salary).
Translation to host country cost of living to guaran-
tee equivalent spendable income, using COLA
Index. Negative adjustment factors will be consi-
dered as 0 adjustment.
Compensates an employee for leaving the home
country and in recognition of personal and family
adjustments required to adapt to a foreign
environment. Equal to 10% of Base remuneration.
Is the disposable income in the host country
following the application of the COLA index.
Home country:
Gross Base Remuneration
(GBR)
Social Security
Housing
Host country
Expatriation
Allowance
Housing
Income Tax
Social Benefits
Expatriate Compensation model
=
=
=
=
+
-
+
+
Income tax to be paid on taxable income in the
home country.
20% of gross income.
Income tax to be paid on taxable income in the
host country.
Contributions to State Social Security, Pension
schemes, medical and hospitalization benefits.
adjustment (COLA)
_
_
_
Net Income
_
Income Tax
= Spendable Income
Net Income
Gross Income
Spendable Income
