International Remuneration

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International Remuneration

y The importance of competent workforce increases

many fold for an international enterprise becausethey have to operate at global level facing muchmore complex and competitive environment.

y Different countries have different norms for employeecompensation.


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Managing Across Bordersy International corporation a domestic firm that uses its

existing capabilities to move into overseas markets.

y Multinational corporation a firm with fully autonomousunits operating in multiple countries.

y Global corporation a firm that has integratedworldwide operations through a centralized home office.

y Transnational corporation a firm that attempts tobalance local responsiveness and global scale via anetwork of specialized operating units.


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Kinds of Overseas Workforce

yExpatriates or home-country nationals or parent-countrynationals:

Employees from the home country who are on internationalassignment.

E

g:I

ndian company operating in US, sendI

ndian nationalsto US office.

y Host-country nationals:

Employees who are natives of the host country.

E

g: US nationalsy Third-country nationals:

Employees who are natives of a country other than the homecountry or the host country.

Eg: German natives


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International Remuneration


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Introduction

yGlobal compensation managersincreasingly deal with two areas of focus.y They must manage highly complex and turbulent

local details, while

y Concurrently building and maintaining a unified,

strategic pattern of compensation policies,practices and values.


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Requirements for Successful Compensation and

Benefits

y Knowledge of employment and taxation law, customs,environment and employment practices of many foreigncountries

y Familiarity with currency fluctuations and the effect ofinflation on compensation, and

y A good understanding of why and when special allowancesmust be supplied and which allowances are necessary inwhat countries

Allwithin the context of shifting political,economic and social conditions.


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Objectives of International Compensation

Should be consistent with the overall strategy, structure and

business needs of the multinational.

Must work to attract and retain staff in the areas where the

multinationalh

as th

e greatest needs and opportunities,hence must be competitive and recognize factors such as

incentive for foreign service, tax equalization and

reimbursement for reasonable costs.

Should facilitate the transfer of international employees in

the most cost-effective manner for the firm.

Must give due consideration to equity and ease of

administration.


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Compensation

yTwo issues:

How to adjust compensation to reflectnational differences in economiccircumstances and compensation practices.

How expatriate managers should be paid.


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Compensation Issues

EthnocentricHow much home-countryexpatriates should be paid

Polycentric

Pay can and should becountry-specific

Geocentric/Transnational

May have to pay itsinternational cadre ofmanagers the same


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Types of International Compensation Systems

y Home-based pay pay based on an expatriates homecountrys compensation practices.

y

Balance-sheet approach a system designed toequalize the purchasing power of employees atcomparable positions living overseas and in thehome country.

y Host-based pay expatriate pay comparable to thatearned by employees in a host country.


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Expatriate Expectationsy Financial protection in terms of benefits, social security

and living costs in the foreign location.

y

Opportunities for financial advancement throughincome and/or savings.

y Issues such as housing, education of children and

recreation to be addressed in the policy.

y Career advancement and repatriation.


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Key Components of International

Compensation

The area of international compensation is complex, primarilybecause multinationals must cater to three categories ofemployees:

y PCNs, TCNs and HCNsy Key Components:

Base salary

Foreign services inducement

Hardship premiumAllowances

Benefits


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Base Salaryy In a domestic context, base salary denotes the amount of cash

compensation serving as a benchmark for other compensationelements (such as bonuses and benefits).

y For expatriates, many allowances are directly related to basesalary (e.g. foreign service premium, cost-of-living allowance,

housing allowance)y It is the basis for in-service benefits and pension contributions

may be paid in home or local-country currency.

y The base salary is the foundation block for international

compensation whether the employee is a PCN or TCN.y Major differences can occur in the employees package

depending on whether the base salary is linked to the homecountry of the PCN or TCN, or whether an international rate ispaid.


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Foreign Service Inducement and Hardship Premium

y Parent-country nationals often receive a salary premium as aninducement to accept a foreign assignment or as compensation forany hardship caused by the transfer.

yy The definition of hardship, eligibility for the premium andThe definition of hardship, eligibility for the premium andamount and timing of payment must be addressed.amount and timing of payment must be addressed.

yy In cases in which hardship is determined, U.S. firms often refer toIn cases in which hardship is determined, U.S. firms often refer tothe U.S. Department of Statesthe U.S. Department of States Hardship Post DifferentialsHardship Post DifferentialsGuidelinesGuidelines to determine an appropriate level of payment.to determine an appropriate level of payment.

y Foreign service inducements are usually made in the form of apercentage of salary, 5-40% of base pay.yy Such payments vary, depending upon the assignment, actual hardship,Such payments vary, depending upon the assignment, actual hardship,

tax consequences and length of assignment.tax consequences and length of assignment.

y More commonly paid to PCNs than to TCNs.


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Allowances

y Multinationals generally pay allowances in order toencourage employees to take international assignmentsand to keep employees whole relative to home standards.

y Establishing an overall compensation policy can be very

challenging, partly because of the various forms ofallowances, such as:

y Cost-of-living allowance

y Housing allowance

y Relocation allowance

y Education allowance

y Home leave allowance

y Hardship allowance


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Cost-of-living Allowances (COLA)

y COLA receives the most attention, to compensate for

differences in expenditures between the home country and theforeign country (e.g., to account for inflation differentials,currency f luctuations, etc.).

y The COLA may also include payments for housing andutilities, personal income tax or discretionary items.

y The provision of a housing allowance implies that employeesshould be entitled to maintain their home-country livingstandards (or, in some cases, receive accommodation that isequivalent to that provided for similar foreign employees and

peers).

y International comparison of cost of living is difficult and canbe problematic.


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Relocation Allowances

y

Usually cover moving, shipping and storage charges,temporary living expenses, subsidies regardingappliance or car purchases (or sales) and downpayments or lease-related charges.

y Allowances regarding perquisites (cars, club memberships,servants and so on) may also need to be considered (usuallyfor more senior positions, but this varies according tolocation).

y These allowances are often contingent upon tax-equalizationpolicies and practices in both the home and the hostcountries.


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Education Allowances

y Expatriates children are an integral part of anyinternational compensation policy.

yAllowances for education can cover items such astuition, language class tuition, enrolment fees, booksand supplies, transportation, room and board anduniforms.

y PCNs and TCNs usually receive the same treatmentconcerning educational expenses.


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Allowances for Spouse Assistance

y To help guard against or offset income lost by anexpatriates spouse as a result of relocating abroad.

y Some firms may pay an allowance to make up for aspouses lost income.

y U.S. firms are beginning to focus on providingspouses with employment opportunities abroad,either by offering job-search assistance oremployment in the firms foreign office (subject toa work visa being available).


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Alternative Allowances

y Housing alternatives may include:y Company-provides housing, either mandatory or

optional

yA fixed housing allowance

y Home leave alternatives:

yAllow foreign travel rather than returning home

y Expatriates may become more homesick thanothers who return home for a reality check withfellow employees and friends.


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Benefits

y I

n addition to the already discussed benefits,multinationals also provide vacations and specialleave.y Annual home leave usually provides airfares for families to

return to their home countries.

y Emergency provisions are available in case of a death orillness in the family.

y Employees in hardship locations often receive additionalleave expense payments or rest and rehabilitation periods.


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yGoing Rate Approach (also referred to asthe Market Rate Approach)

yBalance Sheet Approach (also known as

the Build-up Approach).

Approaches to International Compensation

There are two main options in the area ofinternational compensation


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Going Rate Approachy Based on local market rates

y Relies on survey comparisons amongy Local nationals (HCNs)

y Expatriates of same nationality

y Expatriates of all nationalities

y Compensation based on the selected survey comparison

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

Going Rate Approach


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Adv t g s d Dis dv t g s f th G i g R t

Appr ch

yAdvantagesy Equity with local

nationals

y Simplicity

y Identification withhost country

y Equity among differentnationalities

yDisadvantages

yVariation betweenassignments for sameemployee

yVariation betweenexpatriates of samenationality in different

countries

y Potential re-entryproblems


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The Balance Sheet Approach

The basic objective is to keep the expatriate wholethrough maintenance of home-country livingstandard plus a financial inducement to make thepackage attractive.

Home-country pay and benefits are the foundations of thisapproach

Adjustments to home package to balance additionalexpenditure in host country

Financial incentives (e.g., expatriate/hardship premium)added to make the package attractive

Most common system in usage by multinationals


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The Balance Sheet ApproachEqualizes purchasing power across countries.

Provides financial incentives to offset qualitativedifferences between assignment locations.


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Major Categories Incorporated in the Balance

Sheet Approach(cont.)

Goods and services Home-country outlays for items such as food, personal care,

clothing, household furnishings, recreation, transportation, andmedical care.

Housing Major costs associated with housing in the host country.

Income taxes

P

arent-country and host-country income taxes. Reserve

Contributions to savings, payments for benefits, pensioncontributions, investments, education expenses, social securitytaxes, etc.


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Expatriate Compensation Worksheet


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Example of an Expatriate Compensation

yAn expatriate working in a U.S. branch may receive:y Base pay: $1,400/mon

y Housing: up to $1,400/mon (Optional)

y Itemized reimbursement: $500/mon

y Discretionary expense (e.g., gifts & gratuity to clientsand partners): $1000/special holidays

y Benefits: Social security/Medicare (Optional)

y Health care: $200/mon paid by employer

y Unemployment coverageyWorkers comp


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yA U.S. expatriate working for a Chinese university:y Base pay variation: $1,500-$10,000/mon

y Housing: Free for initial 6 months or up to a lump sumsubsidy of $1,500-10,000 for a contract of 3 years or above(optional)

y Benefits: Pension coverage for a 5 year contract or paid at theoption of the expatriate

y Health care: Completely paid by employer or optionalincentive to the expatriate

y Home leave 1-2 times/Yr

y Paid vacations and observed Chinese holidays

y Initial research launch grant: $10,000

An U.S. Expatriate Compensation


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Advantages and isadvantages of the Balance

Sheet Approach

yAdvantages:

y Equity

Between assignments

Between Expatriatesof the samenationality

y Facilitate re-entry

y Easy to communicate toemployees

y Disadvantages:y Can result in great

disparities

y

Between expatriatesof differentnationalities

y Between expatriatesand local nationals

y Can be complex toadminister

y May entail difficulty toattract human capital


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Compensation

yTwo issues:How to adjust compensation to reflect

national differences in economiccircumstances and compensationpractices.

How expatriate managers should be paid.


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C

ompensation Issues

EthnocentricHow much home-countryexpatriates should be paid

PolycentricPay can and should becountry-speci ic

Geocentric/Transnational May have to pay itsinternational cadre omanagers the same


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Compensation

Country CEO HRDirector

Accountant Mfg.Employee

Japan $545,233 $235,536 $59, 107 $51, 994

Canada 742,228 188, 070 44,866 36,289

Germany 421,622 189,785 61,375 36,934

Taiwan 179,486 102,491 30,652 11,924

UnitedKingdom

719,665 268,302 107,839 28,874

UnitedStates

1,403,899 306,181 66,377 44,680


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Issues Concerning Benefitsy

Very difficult to deal with country-to-country, as nationalpractices vary considerably:y Transportability of pension plans

y Medical coverage

y Social security benefits

y Firms need to address many issues, including:y Whether or not to maintain expatriates in home-country benefit

programs, particularly if the firm does not receive a tax deductionfor it.

y

Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference incoverage.

y Whether expatriates should receive home-country or host-countrysocial security benefits.

International Remuneration

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