STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 12 International Compensation 12-1 Prentice Hall, Inc. © 2006 Prepared by David Oakes Compensation Challenges Further corporate interests abroad Encourage employee expatriation Minimize workers’ financial risks Enhance overseas experiences Repatriation issues Promoting lowest - cost strategies Promoting differentiation strategies 12-2 Prentice Hall, Inc. © 2006 International Employees Host country nationals (HCNs) Citizens work for U.S. company in own country Third country nationals (TCNs) Citizens of one country work for a U.S. company in another country Expatriates U.S. citizens work for a U.S. company in another country 12-3 Prentice Hall, Inc. © 2006 Compensation Factors Length of overseas assignments Short-term Extended-term Staff mobility One or more foreign assignments Equity: pay referent groups Domestic workers Host country workers 12-4 Prentice Hall, Inc. © 2006 Compensation Components Core compensation Base pay Incentive compensation Fringe compensation Standard benefits Enhanced benefits 12-5 Prentice Hall, Inc. © 2006 Setting Base Pay Home country-based Similar to domestic employees Host country-based Similar to employees in foreign sites Headquarters-based Not based on home or host country’s pay levels 12-6 Prentice Hall, Inc. © 2006 Purchasing Power Stability of currency U.S. dollar & foreign money Exchange rate fluctuations Inflation Increase in prices of goods & services Increase in inflation lowers purchasing power 12-7 Prentice Hall, Inc. © 2006 Incentive Compensation Foreign service premiums To Encourage Expatriate Assignments Hardship allowances For tough work & living conditions Mobility premiums For willingness to relocate to an assignment 12-8 Prentice Hall, Inc. © 2006 Hardship Allowances Set by U.S. State Dept based on: Foreign living conditions Physical challenges like climate Poor health conditions Over 150 countries designated Supplements between 10% - 25% of base pay 12-9 Prentice Hall, Inc. © 2006 International Fringe Compensation 2 Types Standard Enhanced Considerations Total remuneration Benefit adequacy Tax effectiveness Recognizing local customs & practices 12-10 Prentice Hall, Inc. © 2006 ENHANCED BENEFITS Relocation assistance Education reimbursement Home leave & travel reimbursement Rest & relaxation leave and allowance 12-11 Prentice Hall, Inc. © 2006 Relocation Assistance Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving & storing household goods 12-12 Prentice Hall, Inc. © 2006 Balance Sheet Approach To determine compensation packages To provide similar standard of living Strategic value Protects expatriates’ standard of living Allows companies to control costs 12-13 Prentice Hall, Inc. © 2006 Appropriateness Home country is referent point Expatriates keep close ties to USA Assignment is of limited duration Repatriation after assignment Guarantee of no financial hardship 12-14 Prentice Hall, Inc. © 2006 Major Expenditures Housing & utilities Goods & services Discretionary income Taxes Information Sources Returning expatriates Consulting & research companies U.S. State Dept. indexes 12-15 Prentice Hall, Inc. © 2006 Discretionary Income Expenditures Pension contributions Savings & investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments 12-16 Prentice Hall, Inc. © 2006 Tax Considerations Double taxation relief IRC Section 901 IRC Section 911 Tax protection Tax equalization 12-17 Prentice Hall, Inc. © 2006 IRC Section 901 Can credit foreign taxes from U.S. tax If U.S. tax is greater Expatriates pay difference to IRS If foreign tax is greater Expatriates can deduct excess to future U.S. taxes For up to 5 years 12-18 Prentice Hall, Inc. © 2006 IRC Section 911 Can Exclude up to $70,000 of Income Exclusions Cash Income Bonuses Professional fees Incentives Sales commissions Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living 12-19 Prentice Hall, Inc. © 2006 Tax Protection Employers reimburse expatriates when actual tax is greater Expatriates pay entire tax when actual tax is less or equal 12-20 Prentice Hall, Inc. © 2006 Tax Equalization Employers deduct hypothetical tax Employers pay real tax from hypothetical Reimbursements settled after payment Equitable treatment any assignment 12-21 Prentice Hall, Inc. © 2006 Repatriation Concerns Losing supplements & allowances Work experience not valued Reintegration into domestic workforce Leaving company 12-22 Prentice Hall, Inc. © 2006