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Prentice Hall, Inc. © A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 12 International Compensation
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © Compensation Components Core compensation Base pay Incentive compensation Fringe compensation Standard benefits Enhanced benefits
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © International Fringe Compensation 2 Types Standard Enhanced Considerations Total remuneration Benefit adequacy Tax effectiveness Recognizing local customs & practices
Prentice Hall, Inc. © ENHANCED BENEFITS Relocation assistance Education reimbursement Home leave & travel reimbursement Rest & relaxation leave and allowance
Prentice Hall, Inc. © Relocation Assistance Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving & storing household goods
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © Major Expenditures Housing & utilities Goods & services Discretionary income Taxes Information Sources Returning expatriates Consulting & research companies U.S. State Dept. indexes
Prentice Hall, Inc. © Discretionary Income Expenditures Pension contributions Savings & investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments
Prentice Hall, Inc. © Tax Considerations Double taxation relief IRC Section 901 IRC Section 911 Tax protection Tax equalization
Prentice Hall, Inc. © 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
Prentice Hall, Inc. © IRC Section 911 Can Exclude up to $70,000 of Income Exclusions Cash Income Professional fees Incentives Bonuses Sales commissions Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living
Prentice Hall, Inc. © Tax Protection Employers reimburse expatriates when actual tax is greater Expatriates pay entire tax when actual tax is less or equal
Prentice Hall, Inc. © Tax Equalization Employers deduct hypothetical tax Employers pay real tax from hypothetical Reimbursements settled after payment Equitable treatment any assignment
Prentice Hall, Inc. © Repatriation Concerns Losing supplements & allowances Work experience not valued Reintegration into domestic workforce Leaving company
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