International Compensation Policies Managing an Supporting International Assignments – Chapter 6 International Compensation Policies

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

Key components of an international compensation program Managing an Supporting International Assignments – Chapter 6 Key components of an international compensation program

Base Salary Serves as benchmark for primary components of package – foreign service premium, cost-of-living, housing allowance Basis for in-service benefits and pension contributions May be paid in home or local currency

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)

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.

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.

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)

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

Approaches to international compensation Managing an Supporting International Assignments – Chapter 6 Approaches to international compensation

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

The Going Rate Approach DISADVANTAGES ADVANTAGES Variation between assignments for same employee Variation between expatriates of same nationality in different countries Potential re-entry problems Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities

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

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

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.

Advantages and Disadvantages 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 Repatriation of expatriates is facilitated by emphasis on equity with the parent country as the expatriate compensation remains anchored to the compensation system in the parent country Problems arise when international staff are paid different amounts for performing same/similar job in the host location according to their different home base salary. Resentment arises due to “foreigners’ perceived to be excessively compensated and blocking career opportunities for locals. It can also be the other way round, where expatriates can feel they are majorly underpaid. Eg USA

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 Major cause of concern to both HR practitioners and expatriates

Issues while considering benefits 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

Issues while considering benefits 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

Approaches to International Taxation 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

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

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

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

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

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

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.

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

Tentative Conclusions: Patterns in complexity Increasing Standardization and Portability of benefits Increasing standardi- -zation and portability of pensions Universal Pay Level Local Strategy composite Firm Nation Group Job Person Context Basis of pay Hierarchical pay Vs egalitarian pay