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International compensation

Presented BySneha-53

Shilpi-51

JinalManali

Ritesh

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Introduction

In the introductory we described IHR managers as grappling

with complex issues:

Manage more activities from a broader perspective,

Be more involved in the lives of their far-flung

employees

Balance the needs of PCNs, HCNs and TCNs

Be increasingly aware of and responsive to host-country and regional influences.

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Introduction

Global compensation managers

increasingly deal with two areas of

focus. ± They must manage highly complex and

turbulent local details, while

± Concurrently building and maintaining a

unified, strategic pattern of compensation

policies, practices and values.

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Objectives

Examine the complexities that arise when firms move from

compensation at the domestic level to compensation in an

International context.

Detail the key components of international compensation. Outline the two main approaches to international

compensation and the advantages and disadvantages of

each approach.

Examine the special problem areas of taxation, valid

international living cost data Examine the recent developments and global

compensation issues.

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Requirements for Successful

Compensation and Benefits

Knowledge of employment and taxation law,

customs, environment and employment

practices of many foreign countries

Familiarity with currency fluctuations and theeffect of inflation on compensation, and

A good understanding of why and when special

allowances must be supplied and which

allowances are necessary in what countries

Allwithin the context of shifting political,

economic and social conditions.

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Expatriate Compensation &

Benefits

Compensation

Benefits

Employment and

Taxation Laws

Organization¶s Com-

pensation Policy

Competitors

Standard of LivingPolitical and Social

Environment

Allowances Economic

Conditions

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Expatriate Costs

Expatriate costs may pose a multiple-

fold expense in relation to employees

who are not sent as expatriates toforeign destinations, and are usually

significantly higher than the

compensation accorded to HCNs andTCNs

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Example:

a Chinese manager with 15 years experiencecosts less than USD 70,000 per annum, while

a US expatriate manager with corresponding

expertise would cost his or her organizationUSD 300,000 per year

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Goals of an International Organization¶s

Compensation Policy (1)

1) Policy should be consistent with the overall

strategy, structure and business needs of the

international organization

2) Policy must work to attract and retain staff in those

areas where the international organization has the

greatest needs and opportunities. As a

consequence, the policy must be competitive andrecognize factors such as incentive for serving in a

foreign location, tax equalization and reimbursement

for reasonable costs

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Goals of an International Organization¶s

Compensation Policy (2)

3)Policy should facilitate transfer of

international employees in the most

cost-effective manner

4)Policy must give due consideration to

equity and ease of administration

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Employee Expectations and International

Organization¶s Compensation Policy

Financial protection in terms of benefits, social

security and cost of living in the foreign location

Foreign assignment offers opportunities for

advancement through income and/or savings

Issues such as housing, education of the children

and recreation are addressed

Note that the expectations of the employees often do not

coincide with the interests of the organization

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Key Components of

International Compensation The area of international compensation is complex,

primarily because multinationals must cater to three

categories of employees:

± PCNs, TCNs and HCNs ± Key Components:

Base salary

Foreign services inducement

Hardship premium

Allowances

Benefits

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Key Components of International

Compensation Programme for Expatriates

Base Salary

The base salary is usually the main

component in international compensation,

and is the main benchmark used for other

elements in an expatriate compensation

package, such as bonuses and benefits

The base salary is either paid in the

expatriate¶s home or parent country

currency, or in the currency of the

expatriate¶s host country 13

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Compensation Programme for

Expatriates Hardship Premium

For expatriate¶s (usually PCNs, TCNs)

who will encounter ³hardships´ caused

by the transfer to a foreign location,

determining the appropriate level of

payment can be difficult

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Factors determining the hardship premium,

usually expressed in terms of an expatriate¶s

base pay, are typically:

Assignment

Actual hardship

Tax consequencesLength of assignment

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Allowances: There are many types of allowances in

an international compensation package:

Cost of Living Allowance ± Payment made to theexpatriate with a view to compensating for

differences in expenditure between the home or

parent country and the host country. Factors such

as inflation differentials and the price level need tobe considered. Often, the cost of living allowance

is difficult to determine

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Housing Allowance ± Payment made to the expatriate witha view to ensuring that he or she can maintain their home-country living standard in the host country. Alternatively,an organization may provide housing facilities on amandatory or optional basis. Also, support services maybe provided to the expatriate, for example, by helping sellor rent the expatriate¶s house in the home country

Home Leave Allowance ± Payment made to the expatriate

with a view to facilitating their visit back to the homecountry, once or twice a year. Home leave enables theexpatriate to renew business, family and social ties, andthus avoid adjustment problems subsequent to repatriation

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Education Allowance ± Payment made with a view tosupporting the education of the expatriate¶s children, i.e.tuition, language class, school enrollment fees, books andsupplies, transportation to educational establishment,room and boarding, school uniforms etc. Problemsregarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations

Relocation Allowance ± Payment made with a view toenable the relocation of the expatriate to the assignmentlocation. Includes moving, shipping, storage costs,subsidies for purchase of appliances and (possibly) anautomobile

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Miscellaneous Allowances ± Depending on the

level of seniority of the expatriate, payments to

him or her for club memberships, sport

associations, maintenance of household staff etc.

may be rendered

In addition, the organization may render financial

assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate

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Benefits ± Support rendered to an expatriate in addition to

the allowances provided. There are several types of

benefits, more prominent examples being:

Social Security Benefits (home country or host country?)

Paid Vacations for expatriate and family

Rest and Rehabilitation leave (especially for expatriates

based in ³hardship´ assignment locations)

Emergency Cases (severe illness, death)

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International Costs of Living Multinationals using the

Balance Sheet Approach mustconstantly update

compensation packages with

new data on living costs, which

is an on-going administrative

requirement.

Must also be able to respond to

unexpected events, such as the

currency and stock market

crash, which suddenly unfolded

in a number of Asian countries

in late 1997.

The level of local knowledge

requires specialist advice.

A recent survey of

living costs ranked

the 10 most

expensive cities as:

1. Tokyo

2. Moscow3. Osaka

4. Hong Kong

5. Beijing

6. Geneva

7. London

8. Seoul

9. Zurich

10.New York

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Maximum marginal federal tax rates

Country

Argentina

Australia

Belgium

Brazil

Canada

China (Hong Kong)

China

France

Germany

India

Italy

Japan

Malaysia

Maximum marginal

rate (%)

35.00

47.00

50.00

27.50

29.00

20.00

45.00

48.09

42.00

33.66

43.00

37.00

28.00

Maximum marginal

rate (%)

33.00

52.00

40.00

22.0040.00

35.00

29.16

26.00

11.5040.00

40.00

35.00

34.00

Country

Mexico

Netherlands

Poland

SingaporeSouth Africa

South Korea

Spain

Sweden

SwitzerlandTaiwan

United

Kingdom

United States

Venezuela

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Calculating International Compensation

There are two basic approaches used

to determine an international

compensation package:

The Going Rate Approach

The Balance Sheet Approach

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The 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 the selected survey comparison

Base pay and benefits may be supplemented by additionalpayments for low-pay countries

Example: Should a Pakistani bank operating in London uselocal British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreignbanks operating in London as the reference point for the basesalary offered

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Disadvantages of the Going-Rate Approach

ADVANTAGES

Equality with local nationals

Simplicity

Identification with host country

Equity amongst different

nationalities

DISADVANTAGES

Variation between assignmentsfor the same employee

Rivalry between expatriates

of same nationality in

getting assignments

to some countries

Potential reentry problems in

the home country

DISADVANTAGES

Variation between assignmentsfor the same employee

Rivalry between expatriates

of same nationality in

getting assignments

to some countries

Potential reentry problems in

the home country

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The Balance Sheet Approach

The balance sheet approach is widely used byinternational organizations to determine thecompensation package for expatriates:

Basic objective is the maintenance of home-countryliving standard, plus financial inducement

Home-country pay and benefits are the foundations of this approach

Adjustments to home package to balance additionalexpenditure in the host country

Financial incentives (expatriate / hardship premium)added to make the package attractive

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Outlays Considered in the Balance Sheet Approach

The balance sheet approach considers four types of outlays

which are incurred by expatriates:

Goods and services ± Outlays incurred in the home country for food, personal care, clothing, household furnishings, recreation,transportation and medical care

Housing ± All major costs associated with housing in the hostcountry

Income Taxes ± Parent country and host country income taxexpenditures

Reserve ± Contributions to savings, payments for benefits,pension contributions, investments, education expenses, socialsecurity taxes, etc.

Where costs of host country > costs of home countryorganization pays the expatriate to make up the difference

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Logic of the Balance Sheet Approach

The balance sheet approach to

international compensation is a system

designed to equalize the purchasing power

of employees at comparable position levels

living abroad and in the home country, and

to provide incentives t offset qualitative

differences between assignment locations

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Disadvantages of the

Balance-Sheet Approach

ADVANTAGES

Equality between assignmentsand between expatriates

of the same nationality

Facilitates expatriate

reentry

Easy to communicate

To employees

DISADVANTAGES

Can result in considerable

disparities between expatriates

of different nationalities

and between expatriates

and local nationals

Can be quite complexto administer (e.g. changing

economic conditions,

taxation)

DISADVANTAGES

Can result in considerable

disparities between expatriates

of different nationalities

and between expatriates

and local nationals

Can be quite complexto administer (e.g. changing

economic conditions,

taxation)

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Conclusion

We have examined the complexities arising

when firms move from compensation at the

domestic level to compensation in an

international context.

It is evident from our review that

compensation policy becomes a much less

precise process than is the case in the

domestic HR context.

To demonstrate this complexity, we have:

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Conclusion (c ont.)

Outlined special problem areas such as taxation, obtaining

valid international living costs data, and the problems of

managing TCN compensation.

Presented a model of global pay that highlights the complexity

and yet familiarity of pay practices in the global context. The combination of pay decisions based on strategic global

standardization and sensitivity to changing local and regional

conditions that characterizes the state of international pay

practices.

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Thank you

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