Chapter Twelve
International Compensation
Types of Int’l Assignments
Host country nationals
 Third country nationals
 Expatriates


Current trend towards shorter and
more frequent int’l assignments:
“virtual expatriates.”
Factors to be taken into account




Term of int’l assignment:
» Short (1 year or less-do not require substantial
modification of domestic compensation) vs.
long-term (require housing allowances,
educational expenses, and protection against
double taxation)
Staff mobility: compensation for disruptive effects.
Equity: Pay referent group (e.g., expatriates return
to the US and thus US pairs are their referent
group)
Maintain purchasing power: currency stabilization
and inflation.
Discussion Question 12-1
Methods for setting expatriate base pay: describe the pros
and cons of each method.
Method
Home country-based: amount they would
receive if they were performing similar work in
the U.S.
Host country-based method: compensation
based on host country pay scales
Headquarters-based: compensates all
employees according to global scales.
Pros?
Cons?
Table 12-1
U.S. Expatriates’ Compensation Package
Components


Core Compensation
» Base pay
» Incentive compensation
– Foreign service premium
– Hardship allowance
– Mobility premium
Fringe Compensation
» Standard benefits
– Protection programs
– Pay for time-not-worked
» Enhanced benefits
– Relocation assistance: distance, length of assignment, rank.
– Educational reimbursement for expatriates’ children
– Home leave and travel reimbursement
– Rest and relaxation leave allowance
Table 12-2
Annual Inflation Rates (%) for Selected Countries, 1995-1999
COUNTRY
1995
1996
1997
1998
1999
Germany
France
Japan
Sweden
1.7
1.7
-0.1
2.9
1.4
2.0
0.2
0.8
1.9
1.2
1.7
0.9
1.0
0.7
0.6
0.4
0.6
0.5
----0.3
Source: Consumer Prices in Nine Countries (Washington D.C.: U.S. Bureau of Labor Statistics, 2000).
Table 12-4
Relocation Assistance Payments

The relocation allowance or reimbursement provides
employees with money for:
» Temporary quarters prior to departure because the
expatriate’s house has been sold or rented
» Transportation to the foreign post for employees and
their families
» Reasonable expenses incurred by the family during
travel
» Temporary quarters while waiting for delivery of
household goods or while looking for suitable housing
» Moving household goods to the foreign post
» Storing household goods in the United States
Table 12-7
Discretionary Income Expenditures

Pension contributions

Savings and investment

Insurance payments

Equity portion of mortgage payments

Alimony payments

Child support

Student loan payments

Car payments
Cash and Noncash Income Exclusions:
Internal Revenue Code Section 911



Goal: Prevent double-taxation of expatriates
Allows exclusion of up to $70,000 of foreign earned income:
» Salaries and wages, Bonuses, Sales commissions,
Incentives, Professional fees.
» E.g., $150,000 (foreign earned income ) - $70,000
(allowance) = $ 80,000 (taxable income)
Allows exclusion of Noncash elements such as:
» Housing
» Meals
» Cars
» Allowances for cost of living differentials, education, home
leave, tax reimbursements, children’s education, and moving
expenses
Tax Protection vs. Tax Equalization


Tax Protection: employers calculate a
hypothetical tax based on US income tax
laws, excluding foreign allowances.
Employers then reimburse expatriates for the
difference between the actual and the
hypothetical income tax.
Tax equalization: employers take
responsibility for paying US tax on behalf of
expatriates, and reimburse expatriates for the
difference with the actual tax if needed.
The Balance Sheet Approach
Provides the standard of living they normally enjoy in the U.S.
(which becomes the standard for all payments).
ANNUAL EXPENSE
CHICAGO, U.S.A.
BRUSSELS, BELGIUM
(U.S. S EQUIVALENT)
ALLOWANCE
Housing and utilities
$35,000
$ 67,600
$32,600
Goods and services
$ 6,000
$
9,500
$ 3,500
Taxes
$22,400
$ 56,000
$33,600
Discretionary income
$10,000
$ 10,000
$
Total
$73,400
$143,100
$69,700
0
Case Study:
Global Consistency in Pay Structures
McKinsey-World Bank: survey conducted in year 2000
shows that investors are willing to pay up to 28%
premium for good corporate governance.
High-performing companies are paying more attention
to oversight of rewards. This implies:
•A consistent base pay framework
•Adequate job leveling
Both of these imply creating
global consistency in pay
structures!
Case Study: Company
Newell Rubbermaid effort to achieve global consistency
in pay structures.
Newell Rubbermaid is a leading consumer & commercial
products in the world, with sales of more than $7B in
2002.
Approximately 12 M&A transactions in 20 years.
Approximately 47,000 employees in 55 countries.
Divisions:
Rubbermaid
Blue Ice
Parker
LittleTikes
Paper-Mate
Levolor
Graco
Irwin
Case Study: Goals
•Newell Rubbermaid’s effort to achieve global
consistency in pay structures and, in doing so:
•Improve integration of recently acquired businesses.
•Provide consistency in remuneration and other HR
practices across units.
•Align compensation with unified company culture.
•Benchmark labor market.
•Attract & retain top talent.
•Create a global-minded workforce.
Case Study (continued)
Advantages of global consistency in pay structures:
•Internal equity
•Talent mobility
•Common culture
•Improved governance and transparency
•Reduced administrative costs
Barriers:
•Clash between company/country culture
(e.g., perks are different and have different
meaning in different cultures)
•Different labor markets
•Different value system
Case Study: What they did
•Audited pay and benefit practices in North
America, Latin America, Asia-Pacific, South Africa.
•Evaluated jobs using a global tool.
•Grouped jobs of similar contribution according to 7
global factors.
•Market-priced benchmark jobs (involved local
mgmt. and local market data).
•Developed geographically sensitive salary
structures.
Case Study: Lessons Learned
Global consistency in pay structures paid off for
Newell Rubbermaid in terms of:
•Improved ability to integrate following mergers and
acquisitions.
•Decrease cycle time to make offers and hire new
employees.
•Integrate related practices such as eligibility for
perquisites, long-term incentives, benefits.
•Develop local and local career pathing and
development.
•Reduce turnover
Discussion Question 12-2


Visit the Department of State web site at
http://www.state.gov/m/a/als/qtrpt/
Study the info provided at this web site, so
that you learn how to estimate the annual
compensation that international assignments
receive. Make sure to understand the process
of determining living quarters allowance, costof-living allowance, spendable income,
currency stabilization allowance, hardship
differential allowance, and danger pay.