ByDr. Atri Roy Sengupta

Pay & benefits for international assignees Subsidiary workforces in multiple countries Employees from many different countries

(such as inpatriates, HCNs, and TCNs) Varying country approaches to and levels of

pay and benefits Dealing with multiple currencies, exchange

rates, inflation rates, tax systems and rates, and differing standards and costs of living

Attraction and retention of employees who are qualified for foreign assignments (from the perspective of the parent company, but includes the perspectives of the PCNs, HCNs, and TCNs)

Facilitation of transfers between foreign affiliates, between foreign affiliates and the parent company (usually headquarters), and between parent-company and foreign locations.

Establishment and maintenance of a consistent and reasonable relationship between the compensation of employees of all affiliates, both at home and abroad.

Maintenance of compensation that is reasonable in relation to the practices of competitors yet minimizes costs to the extent possible.

Milkovich and Newman (2008) believe that employee compensation design hinges on the variations presented by four key factors:

1. Institutional -- political structures and cultural traditions along with social contracts and trade union power

2. Economic -- integrated in the existing level of competitiveness and the degree of market development, the differences in ownership structures of the organizations and the characteristics of the tax systems

3. Organisation -- the degree of autonomy enjoyed by the employees, the level of technology and innovation, and strategic aims

4. Individual -- demographic characteristics, level of knowledge and skills, attitudes, motivations and preferences of the international employees

Cultural Factors & Compensation Design: compensation design varies across cultural dimensions.

Hofstede Model (1983) – culture can be explained in terms of four dimensions:

1. Power Distance -- The greater the power distance, the more noticeable the difference between superiors and subordinates (e.g. Mexico, Arab nations, Malaysia). In contrast, individuals in societies of short power distance (e.g. Netherlands, Sweden, Australia) will probably be less tolerant of inequalities between levels and job categories than in countries where greater power distance is considered as normal.

Gomez-Mejia and Welbourne (1991) indicate that countries with a high power distance require hierarchical compensation systems with large differences in earnings which reflect differences in status and position between superiors and subordinates. Countries with a low power distance require more egalitarian systems which reflect small differences in earnings and with shared incentives (profit sharing).

Cultural Factors & Compensation Design: compensation design varies across cultural dimensions.

Hofstede Model (1983) – culture can be explained in terms of four dimensions:

2. Uncertainty Avoidance -- A low level of uncertainty avoidance supposes a higher tolerance to risk and to the unknown resulting in lower levels of stress in the individuals of this culture (e.g. Greece, Portugal, Italy). A high level of uncertainty avoidance is related to countries where the citizens constantly seek to minimize risks and to control uncertainty resulting in striving to maintain security individuals in such societies suffer more tension and stress (e.g. Sweden, Denmark, Singapore).

Countries with uncertainty avoidance usually give a lot of weight to fixed pay and systems are characterized by being centralized and very oriented towards internal equity. For countries with low uncertainty avoidance, variable pay is a key element in the compensation mix, the systems are very decentralized and flexible and there is a lot more emphasis on the quest for external equity.

Cultural Factors & Compensation Design: compensation design varies across cultural dimensions.

Hofstede Model (1983) – culture can be explained in terms of four dimensions:

3. Individualism vs. Collectivism -- Countries with high individualism positively value and give weight to goals, autonomy and personal privacy (e.g. USA, United Kingdom, Canada). In contrast, a high level of collectivism (or low individualism) is found in countries where central values are established on the basis of group loyalty, commitment to the rules of the group, participation in group activities, social cohesion and intense participation (e.g. Japan, South Korea, Indonesia).

Compensation based on individual performance and personal achievements, the use of exclusively extrinsic rewards and the quest for external equity are the most appropriate practices for countries with an individualist culture. On the other hand, compensation based on group performance, the use of intrinsic rewards (as well as extrinsic ones) and an emphasis on internal equity is best for the collectivist culture.

Cultural Factors & Compensation Design: compensation design varies across cultural dimensions.

Hofstede Model (1983) – culture can be explained in terms of four dimensions:

4. Masculinity vs. Femininity -- Masculinity countries (e.g. Germany, Austria, USA) accept the philosophy of male dominated business dealings along with highly aspects such as material possessions and aggression in the search for greater wealth. Feminine societies (e.g. Norway, Finland, the Netherlands) puts emphasis on behaviors directed towards care and health, the quality of their lives than to material possessions. Women are given a wider range of opportunities.

The more masculine societies are characterized by compensation policies which favor inequalities according to gender and usually reward masculine characteristics and stereotypes both financially and when it comes to promotion. Feminine societies foster more egalitarian compensation systems which do not make sexual discriminations and in which access to reward and promotion are not dependent on one’s meeting a certain stereotype.

Types of expatriates for purposes of compensation:1. Temporaries -- employees who are on short-term

assignments, typically less than six months2. Young, relatively inexperienced expats – employees, with

assignments from six months to five years, who can be compensated and managed similar to local hires

3. Older, experienced expats – employees, relocated for their technical or managerial skills, who are compensated with incentives, add-ons, and adjustments

4. International cadre -- expats from throughout the firm who move from one foreign assignment to another and need to be compensated with a global salary and benefits

5. Permanent expats – employees posted to a foreign country but who stay there for an extended period – beyond the normal five-year limit for expats and who need to be reclassified as locals

There are seven basic approaches followed by global enterprises to compensate their expats:

1. Negotiation/ad hoc Useful at the early stages of “going international”

of the firm when best expats are sent in the assignments.

The firm does whatever it takes to get the person relocated and pays whatever costs arise because of the inexperience of the IHR managers and a tendency to design this compensation equitable with domestic one.

There are seven basic approaches followed by global enterprises to compensate their expats:

2. Balance Sheet Followed by most multinationals when their international

business expands to the point where the firm has a larger number of expats.

The firm, at this stage will seek a more standard approach and will begin to make policy about what will and what will not be covered.

It involves an effort by the multinational to ensure that its expatriates are “made whole.” Ideally, the compensation package not only should make the expatriate whole but also should provide incentive to take the foreign assignment, to remove any worry about compensation issues while on that assignment, and to ensure that the individual and his or her family feel good about having been on the assignment.

There are seven basic approaches followed by global enterprises to compensate their expats:

2. Balance Sheet Model

Base compensation• Salary• Benefits• Other forms

Incentive components• Housing allowance• Displacement allowance:Unfamiliar country;Uncomfortable environment• Relocation expenses• Education; language training Allowance

Equalization adjustments• Cost-of-living adjustments• Tax equalization allowance• Employee benefits adjustments• Other forms

Foreign compensation• Base pay• Benefits

2. Balance Sheet Components

Incentive components● Overseas/foreign service premiums● Compensation for life adjustments (displacement allowances: unfamiliar country, uncomfortable/harsh/dangerous environment)● Relocation/travel expenses; house-hunting expenses; shipment and storage of household goods; furnishings for foreign housing; home sale protection or rental assistance; automobile shipping or sale protection● Temporary living expenses● Housing allowance: comparable to original home; comparable to foreign peers; utilities allowance● Education allowance for self, children, spouse; language and cultural training allowance● Spousal support: education, income replacement, employment services and career planning● Perquisites, e.g., club memberships, home leave, R&R leave, company car and driver● Tax preparation assistance● Financial advice● Expatriation counseling● Home-country career support and counseling● Repatriation assistance and planning

2. Balance Sheet Components

Equalization adjustments● Cost-of-living adjustment (COLA)● Reimbursement for payments into host-country welfare plans● Income taxes – withheld for home taxes, pay local taxes; equalization and protection● Protection for fluctuation in exchange rates; inflation● Employee benefits adjustments (pension, retirement savings plans, health care)

There are seven basic approaches followed by global enterprises to compensate their expats:

2. Balance Sheet Base Salary Determination Home-country salaries (this is the most common

base for the balance sheet approach). International (usually based on headquarters)

standard. Regional standard (e.g., the EU, US and Canada,

Latin America, South East Asia). Host-country (or destination) salaries; or the

salaries of other expatriates while on assignment – peers and/or colleagues – in the host location.

Better of home or host approach.

There are seven basic approaches followed by global enterprises to compensate their expats:

2. Balance Sheet Incentives Determination Most common incentives are “overseas premium”

used to compensate the expatriate for all the adjustments

that s/he will need to make compensate the expatriate and her/his family for

the “dislocation” of having to move to an unfamiliar country and to live in what might be seen as an uncomfortable (i.e., different) environment

provide an incentive to take the foreign assignment keep up with the practices of other MNEs These premiums used to average about 15 to 25

percent of the expatriate’s base pay

There are seven basic approaches followed by global enterprises to compensate their expats:

2. Balance Sheet Incentives Determination Additional forms of incentive include premiums for

“hardship” postings and dangerous postings, which could include many assignments to developing countries, locations where the threat of kidnapping or terrorist activity is high, or to remote locations (such as the outback in Indonesia or on an ocean oil drilling platform) or locations with primitive conditions. The three broad areas typically considered in evaluating the extent of hardship include physical threat, level of discomfort, and inconvenience.

2. Balance Sheet Incentives Determination -- US State Department indexes for cost-of-living and housing allowances for selected cities

Location COL index (DC = 100)

Maximum annual housing allowance ($)

Hardship (%)

Danger (%)

Canberra, Australia 105

Brussels, Belgium 121 30,700

Rio de Janeiro, Brazil 127

Beijing, China 122 20

Cairo, Egypt 87 15

Paris, France 136 55,700

Munich, Germany 126 25,000

Hong Kong 176 5

New Delhi, India 95 15

Jakarta, Indonesia 100 20

Tel Aviv, Israel 146 10 20

Tokyo, Japan 183 80,000

Nairobi, Kenya 121 25

2. Balance Sheet Incentives Determination -- US State Department indexes for cost-of-living and housing allowances for selected cities

Location COL index (DC = 100)

Maximum annual housing allowance ($)

Hardship (%)

Danger (%)

Seoul, Korea 121 46,300

Kuwait City, Kuwait 117 15 15

Mexico City, Mexico 120 37,500 15

Moscow, Russia 130 15

Riyadh, Saudi Arabia 116 25

Singapore 129 35,900

Johannesburg, S. Africa

85

Madrid, Spain 105 29,700

Stockholm, Sweden 144

Geneva, Switzerland 164 64,000

Istanbul, Turkey 132 10

London, UK 144 64,800

Caracas, Venezuela 120 52,000 15

2. Balance Sheet Incentives & Adjustments Determination -- Compensation for expat relocation from New Jersey to Paris, first year (US$) selected cities

Basic compensationSalary 100,000Bonuses 20,000Stock options 0Miscellaneous salary adjustments 0Employer pension contribution 20,000Total compensation 140,000

2. Balance Sheet Incentives & Adjustments Determination -- Compensation for expat relocation from New Jersey to Paris, first year (US$) selected cities

AllowancesCost-of-living allowance 35,000Net housing allowance 35,000Automobile 4,500Moving expense reimbursement 10,000Home leave 15,000Children (two)/Spouse education allowance 25,000Cultural/Language training allowance 5,000Expatriate premium 12,000Hardship premium 0Danger premium 0Home management/maintenance 0Club membership/fees 5,000Tax services provided 0Other allowances 0Mobility premium 0Relocation allowance, first year only 5,000Other earned income 0Loan bonus interest 0Nontaxable assignment costs 0Other adjustments to salary/allowance detail 0Total allowances 151,500

2. Balance Sheet Incentives & Adjustments Determination -- Compensation for expat relocation from New Jersey to Paris, first year (US$) selected cities

Tax costsActual tax liabilitiesUS federal 3,713US FICA 8,034New Jersey 552France income 101,150France social insurance 0Total actual tax 113,449Less hypothetical taxUS federal (23,834)US FICA (5,580)New Jersey (3,374)Total hypothetical tax (31,788)Employer’s social insurance, US 8,034Employer’s social insurance, France 0Other corporate taxes 0Tax cost to company 89,695Total costs 361,195

There are seven basic approaches followed by global enterprises to compensate their expats:

3. Localization This approach is being used to address problems of

high cost and perceived inequity among staff in foreign subsidiaries.

Here the expatriates (usually individuals who are early in their career and who are being posted overseas for relatively long-term assignments or are TCNs or are returnees) are paid comparably to local nationals.

There are seven basic approaches followed by global enterprises to compensate their expats:

4. Lump sum In this approach the firm determines (sometimes in

negotiation with the expat candidate) a total salary for the expat, to cover all the major incentives and adjustments, and then lets the expat determine how to spend it, for example, on housing, transportation, travel, home visits, education, lifestyle, and so forth.

This lump sum allowance is a single payment, made at the start of the relocation process, to the transferring expat to cover all of the above, or only the costs associated with the relocation, itself. Or, sometimes, the lump sum payment is split between payment at the outset of the assignment and the remainder paid upon successful completion of the assignment (as an incentive to perform successfully and to stay with the firm until the end of the assignment).

There are seven basic approaches followed by global enterprises to compensate their expats:

5. Cafeteria An approach which is increasingly being used for

very highly salaried expat executives is to provide a set of “cafeteria” choices of benefits, up to a predetermined monetary limit in value.

The advantages are primarily related to the tax coverage of benefits and perquisites as compared to cash income (pay check).

Since the individual doesn’t need as much cash (since most expenses are paid for by the firm), this approach enables the expat to gain benefits such as a company car, insurance, company-provided housing, and the like that do not increase the expat’s income for tax purposes.

There are seven basic approaches followed by global enterprises to compensate their expats:

6. Regional systems For expats who make a commitment to job

assignments within a particular region of the world, some firms are developing a regional compensation and benefits system to maintain equity within that region.

If such individuals are later moved to another region, their pay will be transferred to one of the other regional systems, depending on what is used there, such as the balance sheet approach.

There are seven basic approaches followed by global enterprises to compensate their expats:

7. Global An approach being followed, at least for expats above a

certain pay level (i.e., therefore, for professional/technical/managerial employees), is to implement a common global pay and benefits package for each covered job classification applied to everyone in that classification, worldwide.

For many specialized occupations, there is in fact a global labor market, with qualified specialists from anywhere and everywhere in the world all applying for the same jobs.

In this approach, MNEs will have two general pay classifications: local employees below a defined level and international.

The international level will almost always include a performance-based component. The standard used is usually the level paid for those occupations at the firm’s headquarters.

Biggest challenges are that employees who move from one country to another are confronted with widely disparate tax systems, philosophies, and rates. And to make things even more difficult, tax systems and rates are constantly changing, often every year.

An effective tax rate (ETR) can be defined as a measure intended to estimate the real tax burden on an economic activity.

Expatriates (or their firms) are responsible for taxes on their (expatriates’) incomes. (This can mean in both their home countries and their host countries.)

Since typical MNE policies establish that the firm will cover these costs for their expatriates (at least any differential over what the expatriate would pay in her or his home country), the use of parent-country expats can be very expensive.

National income tax rates: approximations, ranked from high to low (annual salary US$150,000, married filing jointly:

Country Total tax liability (US$)

Effective tax rate (%)

Sweden 79,076 54.02

Netherlands 69,304 46.20

Japan 47,908 45.00

Australia 66,287 44.19

South Africa 64,061 42.71

Germany 53,844 35.35

UK 48,810 34.13

Mexico 48,954 32.66

France 46,815 32.00

Thailand 43,094 29.32

Brazil 37,209 24.96

US 34,051 34,051

MNEs follow one of four strategies: laissez-faire, tax equalization, tax protection, or an ad hoc policy

1. Laissez-faire -- This approach is uncommon, but smaller employers and those employers just beginning to conduct international business may fall into this category with their taxation policies.

In essence, under this approach the expatriate is expected to take care of his or her own taxation, even if it means tax obligations in both home and host countries.

2. Tax equalization -- Under this strategy, the firm withholds from the expatriate’s income the tax obligation in the home country (that they would otherwise have to pay, anyway) and then pays the taxes in the host country.

The taxes that the expatriate must pay are equalized between home and host countries, with the expatriate obligated only for their home-country taxes.

MNEs follow one of four strategies: laissez-faire, tax equalization, tax protection, or an ad hoc policy

3. Tax protection -- The employee pays his or her taxes up to the amount that would be owed in the home country, with the employer paying the difference.

The employer pays the expatriate any excess of foreign income tax over the home-country income tax.

4. Ad hoc -- each expatriate is handled differently depending on the individual package she or he has been able to negotiate with her or his employer.

The typical allowances paid to expatriates are often viewed as taxable income.

Surveys find that at least 75 percent of responding firms provide the following benefits tax-free to their employees on foreign assignment (usually by adding to the pay check the costs of the taxes for these items – referred to as “grossing up” the salary):

Tax reimbursement payments International premium. Cost-of-living adjustment. Housing allowances. Automobile reimbursements (for business use). Emergency leave. Moving expenses. Dependent education.

The MNE’s efforts to design a global compensation program will have to address the followings:

Under which country’s benefit and compensation programs should employees be covered – home country, host country (for those who relocate), or some specially designed program for everyone?

How should potential gaps or inequities in pension and health care coverage be bridged? Can employees be covered under a single plan throughout their careers?

Is benefits coverage adequate for all employees? What’s more, is the benefits package equitable when compared with the benefits of peers in other countries, both within and without the parent firm? Should employees be covered under the provisions of selected home and foreign programs?

How can the cost of providing social benefits be minimized? Can coverage under employees’ home-country social programs be maintained, even as they move around? Should there be a global umbrella program to provide equitable coverage for everyone?

What are the tax effects to employers and employees of special benefit arrangements for all global employees?

The MNE’s efforts to design a global compensation program will have to address the followings:

Under which country’s benefit and compensation programs should employees be covered – home country, host country (for those who relocate), or some specially designed program for everyone?

How should potential gaps or inequities in pension and health care coverage be bridged? Can employees be covered under a single plan throughout their careers?

Is benefits coverage adequate for all employees? What’s more, is the benefits package equitable when compared with the benefits of peers in other countries, both within and without the parent firm? Should employees be covered under the provisions of selected home and foreign programs?

How can the cost of providing social benefits be minimized? Can coverage under employees’ home-country social programs be maintained, even as they move around? Should there be a global umbrella program to provide equitable coverage for everyone?

What are the tax effects to employers and employees of special benefit arrangements for all global employees?