International Compensation Policies

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Managing an Supporting International Assignments – Chapter 6

INTERNATIONAL

COMPENSATION POLICIES

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Employer’s Objectives

Consistent with over all strategy

Must attract and retain staff

Facilitate transfer of international employees

Employees’ Objectives

Financial protection (benefits,social security,living costs in a foreign country)

Assignment to offer opportunities for financial advancement (income/savings) www.company.com

Issues like housing, education, recreation policies to be addressed by the company

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Managing an Supporting International Assignments – Chapter 6

KEY COMPONENTS OF AN

INTERNATIONAL COMPENSATION

PROGRAM

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Base Salary

• Serves as benchmark for primary components of package – foreign service premium, costof-living, housing allowance

Basis for in-service benefits and pension contributions

May be paid in home or local currency www.company.com

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Foreign Service Inducement/Hardship

Premium

• Salary premium as an inducement or as

Compensation for any hardship caused by transfer

More commonly paid to TCNs than PCNs

Made in the form of percentage of salary (5-

40% of base pay)

Differentials are considered (eg. Host country work week and hence over time)

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Allowances

• Cost of Living Allowance

Difference on expenditure between home and foreign country

Help of specialized organizations like

‘Organization Resource Counsellors’

Includes Payment of housing, utilities, personal income tax etc.

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Allowances

• Housing Allowance

To enable maintenance of home country living standards

Company provided houses, fixed HRA

Assistance in sale or leasing of residence, payment of closing costs, rent protection, equity protection etc.

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Allowances

• Home Leave Allowance (one or more trips to back home to prevent adjustment problems)

• Education Allowance (language tuition,children education)

Relocation Allowance ( moving, shipping, temporary living, purchase of car etc.

Spouse assistance (an allowance to make up for the spouse’s lost income)

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Benefits

• Maintaining expatriates in home country programs in case of no tax deductions

Option of enrolling expatriates in host country benefits and/or making up for any difference

Home country v/s Host country social security benefits

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Managing an Supporting International Assignments – Chapter 6

APPROACHES TO INTERNATIONAL

COMPENSATION

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The Going Rate Approach

• Based on Local Market Rates

Relies on Survey Comparisons among:

– Local nationals (HCNs)

Expatriates of same nationality

– Expatriates of all nationalities

Compensation based on the selected survey comparison

Additional Payments for low-pay countires

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The Going Rate Approach

DISADVANTAGES

Variation between assignments for same employee

Variation between expatriates of same nationality in different countries

• Potential re-entry problems

ADVANTAGES

Equality with local nationals

Simplicity

Identification with host country

Equity amongst different nationalities

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Balance sheet approach

According to Reynolds..

The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living overseas and in the home country , and to provide incentives to offset the qualitative differences between assignment locations.

• Assumption : Foreign assignees should not suffer a material loss due to their transfer www.company.com

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Balance Sheet Approach

• Most common system used by multinational firms

Objective: maintenance of home country living standard + financial inducement

Focus on home country pay and benefits

• Adjustments to balance additional expenditure in host country

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

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Balance Sheet Approach

• Major categories of outlays

Goods and Services : home country outlays for food, personal care , clothing, household furnishings , recreation, transportation, medical care

Housing : cost associated in host country

Income taxes: parent country and host country income taxes

Reserve: contribution to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes etc. www.company.com

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Advantages and Disadvantages

• Advantages

– Equity

• Between

Assignments

• Between expatriates of the same nationality

– Facilitates expatriate reentry

– Easy to communicate to employees

• Disadvantages

– Can result in great disparities

• Between expatriates of different nationalities

• Between expatriates and local nationals

– Can be complex to administer

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Taxation

Problems , Issues and Challenges

– Dual tax cost : Expatriates paying taxes in both home and host country.

Need to consider personal and corporate taxes in addition to income tax

Modifying compensation packages to provide the most tax-effective, appropriate rewards within the overall compensation framework

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Taxation

Issues while considering benefits

Whether or not to maintain expatriates in home country programs, particularly if the company does not receive tax deduction for it

– Whether companies have the option of enrolling expatriates in host-country benefit programs and

/or making up any difference in coverage

– Whether host-country legislation regarding termination affects benefit entitlement

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Taxation

Issues while considering benefits

Whether expatriates should receive home country or host country social security benefits

Whether benefits should be maintained on home country or host country basis, who is responsible for the cost, whether other benefits should be used to offset any shortfall and whether home country benefit programs should be exported to local nationals in foreign countries

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Approaches to International Taxation

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Tax equalization

Firms withhold an amount equal to home country tax obligation, and pay all taxes in the host country

By far the more common taxation policy used by multinationals

– Tax payments equal to liability of home country tax payer with same income and family status are imposed on employee’s salary and bonus

– Additional premiums or allowances are paid tax free

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Approaches to International Taxation

Tax protection

– Employee pays up to the amount of taxes he or she would pay on compensation in the home country

Employee is entitled to any windfall received if total taxes are less in the host country than in the home country

Ad-hoc

Each expatriate handled differently , depending upon individual package agreed to with the firm

Laissez Faire

– Employees are ‘on their own’ in conforming to host-country and home country taxation laws and practices

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International living costs data

Obtaining upto-date information on international living costs is a constant issue for MNEs

The MNEs take the services of consulting firms

These firms conduct regular surveys calculating a cost-of-living index that is updated in terms of currency exchange rates

This data is a very important issue to expatriate employees and forms the basis of many complaints if there are updating lags on compensation package rise

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International living costs data

• MNEs must also respond to unexpected events such as currency and stock market crash. For eg (Asian crisis)

Such events have a dramatic impact on prices and the cost of living

MNEs must also decide what to include in the

‘basket-of-goods’ which the consulting firms use to decide the living costs

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International living costs data

• Another option is to look at wider Business

Costs rather than living costs for expatriates

• The Economist calculates such indices which measure the costs of doing business in different economies – wages, air travel costs, taxes, perceived corruption levels

Generally, developed countries tend to rank more expensive because of their wage costs

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Differentiating between PCNs & TCNs

• Balance Sheet approach : Salary according to

Home-country base salary

Balance sheet approach is most commonly used for TCN which is the basis for differentiation between TCN & PCN

• However, as firms expand internationally, it is likely that TCN employees will become more valuable and firms may need to rethink their approach to compensating TCNs

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Differentiating between PCNs & TCNs

• MNE firms need to match their compensation policies with their staffing policies and general HR philosophy.

Eg: If firm has an ethnocentric staffing policy, its compensation policy should be such that

TCNs’ and PCNs’ salaries are relative.

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Tentative Conclusions: Patterns in complexity

• Global pay issues have found to operate in three different levels:

– Cultural values and assumptions

Level of pay strategy, practices and systems design

Level of pay administration and form www.company.com

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complexity

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Universal Pay Level Local

•Firm

•Nation

•Group

•Job

•Person

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