7/31/2019 Carlton ihrm 6
1/50
CHAPTER 6
COMPENSATION
7/31/2019 Carlton ihrm 6
2/50
COMPENSATION
Because of high cost HR managers spend agreat deal of time developing effectivecompensation and benefit programs forinternational employees.
A survey by the conference board reportedthat an expatriate costs;
29% reported 22.9 times salary.
50% reported 33.9 times salary.18% reported 44.9 times salary.
7/31/2019 Carlton ihrm 6
3/50
COMPENSATION
A recent report in Fortune on doing businessin
China, reported that hiring a local Chinese
Manager with 15 years experience would cost
less than US $70000; a US expatriate wouldcost
US $300000.
7/31/2019 Carlton ihrm 6
4/50
COMPENSATIONFor multinational firms, successful
management ofcompensation and benefits requires: knowledge of the taxation laws,
customs, environment, employment practices of many foreign
countries, familiarity with currency fluctuations, the effect of inflation on compensation,
understanding of why and when specialallowances must be supplied and whichallowances are necessary in what countries.
shifting political, economic and socialconditions.
7/31/2019 Carlton ihrm 6
5/50
Aims of compensation policy
The policy should be consistent with theover all strategy, structure, and businessneeds.
Must be able to attract and retain staff.
Should be able to facilitate transfer of
international employees.
Must take care of equity and ease ofadministration.
7/31/2019 Carlton ihrm 6
6/50
Expectations of employees
Financial protection in terms of benefits,social security, cost of living.
Opportunities for financial advancementthrough savings.
Issues such as housing, education, and
recreation would be taken care.
Career advancement opportunities.
7/31/2019 Carlton ihrm 6
7/50
OBJECTIVES OF INTERNATIONALCOMPENSATION
The expectations of both sides could createpossible problems, since some of theobjectives cannot be maximized and couldlead to a complex situation.
This is more so because three categories ofemployees are involved.
Fundamentally there is not much differencein the expectations of both in formulatingdomestic compensation package.
7/31/2019 Carlton ihrm 6
8/50
Key components of international
compensation
Base Salary
Base salary is the foundation block forinternational compensation.
Other benefits depend on the rate of basesalary.
It may be paid home or local currency.
Major differences can occur depending upon
whether the base salary is linked to homecountry, of PCN or TCN or whether an
international rate is paid.
7/31/2019 Carlton ihrm 6
9/50
Key components of international compensation
Foreign Service Inducement / Hardshipallowance
PCNs often receive a salary premium asinducement or as compensation for anyhardship caused.
These are generally made in percentage ofsalary, usually 5 to 50 % of the base pay.Depending on;
the assignment actual hardship tax consequences length of assignments
host countrys work week
7/31/2019 Carlton ihrm 6
10/50
Key components of international compensation
Allowances
Cost of Living Allowance (COLA)It is important to note that these payments are morecommonly paid to PCNs than TCNs.
Cola receives most attention, involves a payment tocompensate for the differences in expendituresbetween the home country and the foreign country(on account of inflation differentials). Often thisallowance is difficult to determine, so companies
may use the services of other organizations, such asOrganization Resource Counselors, Inc. etc.
COLA may also include payment for housing and
utilities, personal income tax, or discretionary items.
K t f i t ti l
7/31/2019 Carlton ihrm 6
11/50
Key components of international
compensationAllowances
Housing Often paid on either an assessed or actual basis.
Other alternatives include company providedhousing, either
mandatory or optional a fixed housing allowance, or
assessment of a portion of income, out of whichactual housing
costs are paid.
K t f i t ti l
7/31/2019 Carlton ihrm 6
12/50
Key components of international
compensationAllowances
Other Housing Issues
Companies usually pay a tax-equalized housing
allowance in order to discourage the purchase of
housing and/or to compensate for higher housing
costs; this allowance is adjusted periodically, basedon
estimates of both local and foreign housing costs.
7/31/2019 Carlton ihrm 6
13/50
Key components of international compensation
Allowances
Other Housing Issues Housing issues are often addressed on a case to
case basis, but as firm internationalizes, formalpolicies become more necessary and efficient.
Financial assistance and /or protection inconnection with the sale or leasing of anexpatriates former residence are offered by many
multinationals. Those in the banking and financialindustry tend to be more generous, offeringassistance in sale or leasing, payment of closingcosts, payment of leasing management fees, rentprotection, and equity protection.
7/31/2019 Carlton ihrm 6
14/50
Key components of international compensation
Allowances
Leave allowance
To cover the expenses of one or more trips back tohome country each year.
The purpose of paying for such trips is to giveexpatriates the opportunity to review family andbusiness ties, there by helping them to avoid
adjustment problems when they are repatriated.
7/31/2019 Carlton ihrm 6
15/50
Key components of international compensation
Allowances
Leave allowance Some firms give expatriates the option of applying
the allowance to foreign travel rather thanreturning home.
Firms allowing use of home leave allowance needto be aware that expatriates with limitedinternational experience who opt for foreign travel
rather than returning home may become homesick than the other expatriates who return homefor a reality check with fellow employees andfriends.
7/31/2019 Carlton ihrm 6
16/50
Key components of international compensation
Allowances
Education allowance
For expatriates children are also an integral partof any international compensation policy.
The level of education provided for, the adequacyof local schools, and transportation of dependentswho are being educated in other locations maypresent problems for the multinationals.
PCNs and TCNs usually receive the same
treatment concerning educational expenses. Attendance at a university may also be provided
for when deemed necessary.
7/31/2019 Carlton ihrm 6
17/50
Key components of international compensation
Allowances
Relocation allowance
Usually cover moving, shipping and storagecharges, temporary living expenses, subsidiesregarding appliances or car purchase (or sales),and down payments or lease related charges.
Allowances regarding perquisites (cars, clubmemberships, servants, etc) may also be neededto be considered (usually for more seniorpositions, but this varies according to location).
These allowances are often contingent upon tax equalization policies and practices in both homeand the host countries.
7/31/2019 Carlton ihrm 6
18/50
Key components of international compensation
Allowances
Spouse assistance
To help guard against or offset income lost by anexpatriates spouse as a result of relocatingabroad.
Although some firms may pay up an allowance tomake up for spouses loss income.
US firms are beginning to focus on providingspouses with employment opportunities abroad,either by offering job search assistance oremployment in the firms foreign unit (subject towork visa being available).
7/31/2019 Carlton ihrm 6
19/50
Key components of international compensation
Benefits
There is inherent complexity in internationalbenefits.
Companies need to address many issues while
considering benefits. Some of
these are:
Whether to maintain expatriates in home countryprograms, particularly if the firm does not receiveany tax benefits for it.
Whether firms have the option of enrollingexpatriates in home country benefits and / ormaking up any differences in coverage.
Whether expatriates should receive home-country
or host country benefits.
7/31/2019 Carlton ihrm 6
20/50
Key components of international compensation
Benefits
Most US PCNs typically remain under their homecountrys benefits plan. In some countries,expatriates cannot opt out of local securityprograms; in such circumstances, the firm
normally pays for these additional costs.
European PCNs and TCNs enjoy portable socialsecurity benefits within European Union.
7/31/2019 Carlton ihrm 6
21/50
Key components of international compensation
Benefits
Pension plans
difficult to deal with country to country becausenational
practices vary considerably. Transportability ofpension
plans, medical coverage, and social security benefitsare
very difficult to normalize.
7/31/2019 Carlton ihrm 6
22/50
APPROACHES TO INTERNATIONAL
COMPENSATION
There are two main options in the area ofinternational compensation;
Going rate approach (market rate approach)
Balance rate approach (build up approach)
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
23/50
APPROACHES TO INTERNATIONAL
COMPENSATION Going rate approach Based on local market rates
Relies on survey comparisons Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities
Compensation based on selected surveycomparison
Base pay and benefits may be
supplemented by additional payments forlow pay countries
EG Japanese bank in NY would need to decide
whether its reference point would be local USsalaries, other Japanese competitors or all
7/31/2019 Carlton ihrm 6
24/50
APPROACHES TO INTERNATIONALCOMPENSATION-Going rate approach
Advantages
Equality with localnationals
Simplicity Identification with
host country
Equity amongst
different nationals
Disadvantages
Variation betweenassignments for
some employees Variation between
expatriates of somenationality indifferent countries
Potential re-entryproblems
7/31/2019 Carlton ihrm 6
25/50
APPROACHES TO INTERNATIONAL
COMPENSATION-Going rate approach
COUNTRY CEO COMPENSATION INUS $
US 901,181
Hong Kong 672,877Singapore 572,414France 523,511Britain 489,710Australia 476,700
Switzerland 465,180Canada 440,886Germany 423,898Malaysia 342,151
Survey by Towers Perrin of total compensation around the world
7/31/2019 Carlton ihrm 6
26/50
APPROACHES TO INTERNATIONAL
COMPENSATION
The balance sheet approach
The basic objective is to keep the expatriate
whole.
The foreign assignees should not suffermaterial loss due to their transfer
7/31/2019 Carlton ihrm 6
27/50
COMPENSATION -The balance sheetapproach
Principles
Maintenance of home country livingstandard, plus financial inducement.
Home country pay and benefits are thefoundations of this approach.
Adjustment to home package to balanceadditional expenditure in host country.
Financial incentives (expatriate hardshippremium) added to make the packageattractive.
Most common system in usage bymultinational firms.
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
28/50
APPROACHES TO INTERNATIONALCOMPENSATION -The balance sheet
approach There are 4 major categories of outlays incurred by
expatriates that are incorporated in the balance sheetapproach.
Goods and services---home country outlays for itemssuch as food, personal care, clothing, house holdfurnishings, recreation, transportation and medicalcare.
Housing---major cost associated with housing in hostcountry
Income-taxes---parent country and host countryincome taxes
Reserve---contributions to savings, payment forbenefits, pension contributions, investments,education expenses, social security taxes, and so on
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
29/50
APPROACHES TO INTERNATIONALCOMPENSATION -The balance sheet
approach
Expatriate Compensation Worksheet
Employee Brain Smith
Position Marketing Manager Country New Euphoria
Reason for change New Assignment
Effective date of change February 1998
7/31/2019 Carlton ihrm 6
30/50
APPROACHES TO INTERNATIONAL
COMPENSATION -The balance sheet approach
Items Amounts
A$ P.A.
Paid in
A$ P.A.
Paid in
localcurrency
Base salary 123,000
COLA 33,750
Overseas service premium(20%) 27,000
Hardship allowance(20%) 27,000
Housing deduction - 9,450
Tax deduction -51,079
TOTAL 162,221
67,500
27,000
27,000
- 9,450-51,079
60,971
1,01,250
50,625
151,875
COLA Index = 150
7/31/2019 Carlton ihrm 6
31/50
APPROACHES TO INTERNATIONAL
COMPENSATION -The balance sheet approach
Advantages and disadvantages of the balance
sheet approach.dvantages Disadvantages
Equity
-between assignments
-between expatriates of samenationality
Facilitates expatriate re-entry
Easy to communicate toemployees
Can result in disparities
-between expatriates of differentnationalities
-can be quite complex toadminister
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
32/50
APPROACHES TO INTERNATIONAL
COMPENSATION -Taxation
Taxation probably causes the most concern to HR
practitioners and expatriates (both PCNs and TCNs)since it generally evokes emotional responses.
To illustrate a potential problems, for US
expatriate anassignment abroad can mean being double-taxed
both
in the country of assignment and in the US. This tax
cost, combined with all other expatriate costs,makes
some US multinationals think twice before makinguse
of expatriates.
7/31/2019 Carlton ihrm 6
33/50
APPROACHES TO INTERNATIONAL
COMPENSATION -Taxation Multinationals generally select one of the following approaches to
handle international taxation: Tax equalizationfirms withhold an amount equal to the home
country tax obligation of the PCN, and pay all the taxes in thehost country. It is far more common taxation practice used bymultinationals. Thus for a PCN, tax payments equal to the liability
of a home country tax payer with the same income and familystatus are imposed on the employees salary and bonus. Thefirm typically pays any additional premiums or allowances, taxfree to the employee. As the multinationals operate in more andmore countries, they are subject to widely discrepant income taxrates. It is important to note that just focusing on the income tax
can be misleading because the shares of both social securitycontributions and consumption taxes are rising in the OECDcountries.
(org. for eco. dev. & coop.)
7/31/2019 Carlton ihrm 6
34/50
APPROACHES TO INTERNATIONAL
COMPENSATION -Taxation
Tax protectionthe employee pays up to theamount of taxes he or she would pay on
compensation in the home country. In such a
situation the employee is entitled to anywindfall
received if the total taxes are less in foreign
country than in the home country.
7/31/2019 Carlton ihrm 6
35/50
APPROACHES TO INTERNATIONAL
COMPENSATION -Taxation
Stuart adds two other approaches;
Ad-hoc, each expatriate is handled differently,depending on the individual package agreed withthe firm.
Laissez faire employees are on their own inconfirming to host country and home countrytaxation laws and practices.
When multinationals plan compensation packages,they need to consider to what extent specificpractices can be modified in each country toprovide for the most tax-effective, appropriaterewards for PCNs, HCNs, and TCNs within the
overall compensation policy of the firm.
7/31/2019 Carlton ihrm 6
36/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
Obtaining up-to-date information on international
living costs is a constant issue for themultinationals.
Many multinationals retain the services of
consultingfirms that may offer a broad range of services. A
number
of consulting firms offer regular surveys that
calculatethe COLA index and are updated in terms of
currency
exchange rates.
7/31/2019 Carlton ihrm 6
37/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
A recent survey of living costs in selected cities ranked 10most expensive cities as;
Tokyo Reykjavik (Iceland)
Geneva Oslo Libreville (Gabon) Copenhagen Berlin Helsinki Stockholm and Munich.
7/31/2019 Carlton ihrm 6
38/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
Multinationals using the balance sheetapproach
must constantly update compensationpackages
with new data on living costs, an on going
administrative requirement. This is an issue to
which expatriate employees pay greatattention,
and forms basis of many complaints ifupdating
substantially lags behind any rise in living
costs.
7/31/2019 Carlton ihrm 6
39/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
Multinationals must also be able to respondto
unexpected events, such as currency andstock
market crash that suddenly unfolded in anumber
of Asian countries in late 1977. somecountries,
such as Indonesia, faced a devaluation of theircurrency by over 50% as against US $ in amatter
of weeks, which had a dramatic impact onprices
and cost of living.
7/31/2019 Carlton ihrm 6
40/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
The economist has developed its own bench mark ofliving costs based on the cost of a Mc Donalds Big Macaround the world.
There are also considerable disparities in purchasingpower around the world. The exhibit shows a range ofdata to illustrate this point with the purchasing power ofworking time shown for a range of factors. While the USworkers do not have the highest hourly earnings, the
purchasing power of the working time is high in terms ofless working time required to pay for items such as petrol,income tax liability, consumer durables and food items.
7/31/2019 Carlton ihrm 6
41/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
A recent study by Economist Intelligence unitcalculated an index that measures the relativecost of doing business in 27 economies bycompiling statistics relating to wages, costs forexpatriate staff, air travel and subsistence,
corporate taxes, perceived corruption levels, officeand industrial rents, and road transport. The top10 most expensive countries in terms of businesscosts in 1997 were;
1. Germany 2. US
3. Belgium 4. Britain 5. France 6. The Netherlands 7. Sweden 8. Australia 9. Italy 10. Singapore
7/31/2019 Carlton ihrm 6
42/50
APPROACHES TO INTERNATIONAL COMPENSATION
the purchasing power of working time.
ustralia
Canada
Germany
USA
Korea
Bread/KG
mins
6.5
6.5
5
3.5
18
Coffee/KG
h. Mins
2 11
47.5
20
36.5
4 15.5
MensShoes/pair
H mins
4 10
3 45
2 38
4 56.5
10 8
Petrol/ litre
H mins
2.5
1.5
2
1
7.5
Rent 4 rms
H mins
26 47.5
28 32
15 25.5
54 56.5
69 46
Color TV
H mins
22 34
14 16
35
16 29
101 20
I-T P.A.
H mins
265 30.5
481 3
135 42
129 24
95 11.5
Net earn/ H.1995
$ US
12.53
16.73
27.06
18.2
6.17
7/31/2019 Carlton ihrm 6
43/50
APPROACHES TO INTERNATIONAL
COMPENSATION -International living costs data.
Germany is the most expensive countryoverall because of its very high basic wages,while the second most expensive rank for theUS is in large part because of high executive
salaries. In general, developed countriesrank as more expensive than developingcountries because their wage costs arehigher.
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
44/50
APPROACHES TO INTERNATIONAL
COMPENSATION - Differentiating Between PCNs
and TCNs One of the outcomes of balance approach is
to produce differentiation betweenexpatriate employees of differentnationalities because of the use of
nationality to determine the relevant homecountry base salary. In effect, this is adifferentiation between PCNs and TCNs.Many TCNs have great deal of international
experience because they often from countryto country in the employee of onemultinational.
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
45/50
APPROACHES TO INTERNATIONAL
COMPENSATION - Differentiating Between PCNs
and TCNs Reynolds has observed, that there is no
doubt that paying TCNs according to theirhome country base salary can be lessexpensive than paying all expatriates on aPCN scale (particularly if the multinational ishead quartered in a country such as US orGermany, which has both high managerialsalaries and a strong currency), butjustifying these differences can be very
difficult. the reduction in expensesoutweighs the difficulty of justifying any paydifferentials.
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
46/50
APPROACHES TO INTERNATIONAL
COMPENSATION - Differentiating Between PCNs
and TCNs However, as firms expand internationally, it
is likely that TCN employees will becomemore valuable and firms may need to rethinktheir approach to compensating TCNs.
As a starting point, multinationals need tomatch their compensation policies with thestaffing policies and general HR philosophy.
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
47/50
APPROACHES TO INTERNATIONAL
COMPENSATION - Differentiating Between PCNs
and TCNs If a firm has an ethnocentric staffing policy,
its compensation policy should be one ofkeeping the expatriate whole (ie maintainingrelativity to PCN colleagues plus
compensating for the costs of internationalservice).
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
48/50
APPROACHES TO INTERNATIONAL
COMPENSATION - Differentiating Between PCNs
and TCNs If however staffing policy follows a
geocentric approach (ie, staffing a positionwith the best person regardless ofnationality) there may be no clear home
for the TCN, and the firm will need toconsider establishing a system ofinternational base pay for key managers paidin a major reserved currency, such as US $ or
Deutsche Mark. This allows the firm to dealwith considerable variation in base salariesfor managers.
APPROACHES TO INTERNATIONAL
7/31/2019 Carlton ihrm 6
49/50
Researchers have argued that Thenationality or national systems thinkinghas had an excessive influence on managingcompensation and reward systemsinternationally, and propose a strategicflexibility model, shown below.
This model groups forms of totalcompensation into 3 sets: core, crafted and
choice.
Specific practices in the core section mayvary according to the market and local
conditions but must be consistent with thecore olicies.
APPROACHES TO INTERNATIONAL
COMPENSATION - Differentiating Between
PCNs and TCNs
Strategic Flexibility of International Compensation
7/31/2019 Carlton ihrm 6
50/50
Strategic Flexibility of International Compensation
Assignments Stock PurchasesCHOICE
Tax Deferral Base / bonus Mix
CUSTOMIZE
Base/BonusMix
Stock Options
Benefit Choices
FlexibleSchedules
CORECompetitive Cash
Basic BenefitsPerformance Based
EmployabilityWork Based