COMPENSATION CHALLENGES

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STRATEGIC COMPENSATION
A Human Resource
Management Approach
Chapter 12
International Compensation
12-1
Prentice Hall, Inc. © 2006
Prepared by David Oakes
Compensation Challenges
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Further corporate interests abroad
Encourage employee expatriation
Minimize workers’ financial risks
Enhance overseas experiences
Repatriation issues
Promoting lowest - cost strategies
Promoting differentiation strategies
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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
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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
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Compensation Components
 Core compensation
 Base pay
 Incentive compensation
 Fringe compensation
 Standard benefits
 Enhanced benefits
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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
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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
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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
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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
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International Fringe Compensation
 2 Types
 Standard
 Enhanced
 Considerations
 Total remuneration
 Benefit adequacy
 Tax effectiveness
 Recognizing local customs & practices
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ENHANCED BENEFITS
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Relocation assistance
Education reimbursement
Home leave & travel reimbursement
Rest & relaxation leave and allowance
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Relocation Assistance
 Temporary quarters before moving
 Transportation expenses
 Reasonable traveling expenses
 Temporary quarters upon arrival
 Moving & storing household goods
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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
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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
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Major Expenditures
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Housing & utilities
Goods & services
Discretionary income
Taxes
Information Sources
 Returning expatriates
 Consulting & research companies
 U.S. State Dept. indexes
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Discretionary Income Expenditures
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Pension contributions
Savings & investments
Insurance payments
Mortgage equity payments
Alimony
Child support
Student loans
Car payments
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Tax Considerations
 Double taxation relief
 IRC Section 901
 IRC Section 911
 Tax protection
 Tax equalization
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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
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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
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Tax Protection
 Employers reimburse expatriates
when actual tax is greater
 Expatriates pay entire tax when
actual tax is less or equal
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Tax Equalization
 Employers deduct hypothetical tax
 Employers pay real tax from hypothetical
 Reimbursements settled after payment
 Equitable treatment any assignment
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Repatriation Concerns
 Losing supplements & allowances
 Work experience not valued
 Reintegration into domestic workforce
 Leaving company
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