STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 14: Compensating Expatriates Copyright © 2015 Pearson Education, Inc.14-1

Learning Objectives 1.Summarize the four reasons international activities facilitate the attainment of competitive advantage. 2.Describe and explain the four preliminary considerations compensation professionals should take under advisement before designing international compensation programs. 3.List the three main components of international compensation programs and provide a specific example of each one. Copyright © 2015 Pearson Education, Inc.14-2

Learning Objectives 4.Explain the three approaches available to companies for setting expatriate employees’ base pay. 5.Summarize the three types of incentive payments that are commonly used in international compensation programs. 6.Give a description of two standard employee benefits and two illustrations of enhanced benefits for U.S. employees. 7.Describe the issue of repatriation. Copyright © 2015 Pearson Education, Inc.14-3

Learning Objective 1 Summarize the four reasons international activities facilitate the attainment of competitive advantage. Copyright © 2015 Pearson Education, Inc.14-4

International Activities and Competitive Advantage Lowest cost producers’ relocations to cheaper production areas Differentiation and the search for new global markets How globalization is affecting HR departments Complexity of international compensation programs Copyright © 2015 Pearson Education, Inc. 14-5

Lowest Cost Producers’ Relocations to Cheaper Production Areas Many U.S. businesses have established manufacturing and production facilities in Asian countries and in Mexico because labor is significantly less expensive than it is in the United States Copyright © 2015 Pearson Education, Inc. 14-6

Lowest Cost Producers’ Relocations to Cheaper Production Areas Three key reasons for the cost difference: Labor unions generally do not have much bargaining power in developing Asian countries or in Mexico Asian governments historically have not valued individual employee rights as much as does the U.S. government The National Labor Relations Act requires management to bargain with labor unions over terms of employment, including some benefits Copyright © 2015 Pearson Education, Inc. 14-7

Differentiation and the Search for New Global Markets Coke and Pepsi could distinguish themselves from competing companies by taking on new initiatives that depart from “business as usual” and meet specific market needs China possesses a definite need for bottled spring water because it does not maintain adequate water purification plants Coke and Pepsi could distinguish themselves from other competitors by marketing spring water along with their regular soft drink products Copyright © 2015 Pearson Education, Inc. 14-8

How Globalization Is Affecting HR Department Employee selection –Culturally sensitive? –Are families willing to adjust? Training –Crosscultural –In-house or outsourced Consulting firms conduct extensive research for client companies to ensure the most effective deployment of expatriates worldwide focusing on pay and benefits issues for expatriates Copyright © 2015 Pearson Education, Inc. 14-9

Complexity of International Compensation Programs How to further corporate interests abroad and encourage employees to take foreign assignments How to minimize financial risks to employees and make their (and their families’) experiences as pleasant as possible How to promote a smooth transition back to life in the United States after completing assignment overseas (repatriation) Copyright © 2015 Pearson Education, Inc

Complexity of International Compensation Programs (cont’d) How to promote their lowest-cost and differentiation strategies in foreign markets Must reasonably adhere to U.S. employment law for U.S. workers working for U.S. companies abroad, which is sometimes difficult with foreign laws and policies Copyright © 2015 Pearson Education, Inc.14-11

Learning Objective 2 Describe and explain the four preliminary considerations compensation professionals should take under advisement before designing international compensation programs. Copyright © 2015 Pearson Education, Inc.14-12

Preliminary Considerations Defining international employees: host country nationals, third country nationals, and expatriates Term of international assignment Staff mobility Equity: pay referent groups Copyright © 2015 Pearson Education, Inc.14-13

International Employees Host country nationals (HCNs) –Citizens work for U.S. company in own country –Ex: Japanese citizens work for GE in Japan Third country nationals (TCNs) –Citizens of one country work for a U.S. company in another country –Ex: Australian citizens working for GE in China Expatriates –U.S. citizens work for a U.S. company in another country –Ex: U.S. citizens employed in Citibank’s London office Copyright © 2015 Pearson Education, Inc

Term of International Assignment Short term –Less than one year –Do not require major changes in domestic compensation packages Extended (long) term –More than one year –Necessitates changes to promote a sense of stability and comfort (ex., housing allowances, educational expense coverage for children) Copyright © 2015 Pearson Education, Inc

Staff Mobility From the United States to host country and back From the United States to one host country and then to another host country May require financial incentives (ex. relocation bonuses) Copyright © 2015 Pearson Education, Inc

Equity: Pay Referent Groups Domestic employees Host country employees Commensurate with performance or knowledge attainment Copyright © 2015 Pearson Education, Inc

Learning Objective 3 List the three main components of international compensation programs and provide a specific example of each one. Copyright © 2015 Pearson Education, Inc.14-18

Compensation Components for U.S. Expatriates Core compensation –Base pay –Incentive compensation Foreign service premium Hardship allowance Mobility premium Standard employee benefits –Protection programs –Paid time off Copyright © 2015 Pearson Education, Inc

Compensation Components for U.S. Expatriates (cont’d) Enhanced benefits –Relocation assistance –Education reimbursements for expatriates’ children –Home leave benefits and travel reimbursements –Rest and relaxation leave and allowance Copyright © 2015 Pearson Education, Inc.14-20

Learning Objective 4 Explain the three approaches available to companies for setting expatriate employees’ base pay. Copyright © 2015 Pearson Education, Inc.14-21

Setting Base Pay Home country based –Similar to pay norms for domestic employees Host country based –Similar to pay norms for native employees Headquarters based –Neither based on home nor host country’s pay levels, but on pay norms in the company’s headquarters Copyright © 2015 Pearson Education, Inc

Purchasing Power Stability of currency –U.S. dollar and foreign money –Exchange rate fluctuations Inflation –Increase in prices of goods and services –Increase in inflation lowers purchasing power Copyright © 2015 Pearson Education, Inc

Balance Sheet Approach To protect an employee’s standard of living Strategic value –Protects expatriates’standard of living –Allows companies to control costs Copyright © 2015 Pearson Education, Inc

Inflation Rates Copyright © 2015 Pearson Education, Inc.14-25

Appropriateness Home country is referent point Expatriates keep close ties to the United States Assignment is of limited duration Repatriation after assignment Guarantee of no financial hardship Copyright © 2015 Pearson Education, Inc

Major Expenditures Housing and utilities Goods and services Discretionary income Taxes Information sources Returning expatriates Consulting and research companies U.S. State Department indexes Copyright © 2015 Pearson Education, Inc

Quarters Allowances Copyright © 2015 Pearson Education, Inc.14-28

Discretionary Income Expenditures Pension contributions Savings and investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments Copyright © 2015 Pearson Education, Inc

Tax Considerations Tax protection Tax equalization Copyright © 2015 Pearson Education, Inc

Tax Protection Employers reimburse expatriates when actual tax is greater Expatriates pay entire tax when actual tax is less or equal Copyright © 2015 Pearson Education, Inc

Tax Equalization Employers deduct hypothetical tax Employers pay real tax from hypothetical Reimbursements settled after payment Equitable treatment any assignment Copyright © 2015 Pearson Education, Inc

Learning Objective 5 Summarize the three types of incentive payments that are commonly used in international compensation programs. Copyright © 2015 Pearson Education, Inc.14-33

Incentive Compensation Foreign service premiums –To encourage expatriate assignments Hardship allowances –For tough work and living conditions Mobility premiums –For willingness to relocate to an assignment Copyright © 2015 Pearson Education, Inc

Hardship Allowances Set by U.S. State Department based on: –Foreign living conditions –Physical challenges like climate –Poor health conditions Over 150 countries designated Supplements between 5% and 35% of base pay Copyright © 2015 Pearson Education, Inc

Hardship Location Differentials Copyright © 2015 Pearson Education, Inc.14-36

Learning Objective 6 Give a description of two standard employee benefits and two illustrations of enhanced benefits for U.S. employees. Copyright © 2015 Pearson Education, Inc.14-37

International Employee Benefits Two types –Standard –Enhanced Considerations –Total remuneration –Benefit adequacy –Tax effectiveness –Recognizing local customs and practices Copyright © 2015 Pearson Education, Inc

Standard Benefits Expatriates continue to participate in Social Security program –Retirement insurance, benefits for dependents, and Medicare Family and Medical Leave Act also applies to expatriates State workers’ compensation laws generally do not apply Expatriates typically receive the same annual vacation benefits as do their domestic counterparts Copyright © 2015 Pearson Education, Inc.14-39

Enhanced Benefits Relocation assistance Education reimbursement Home leave and travel reimbursement Rest and relaxation leave and allowance Copyright © 2015 Pearson Education, Inc

Relocation Assistance Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving and storing household goods Copyright © 2015 Pearson Education, Inc

Learning Objective 7 Describe the issue of repatriation. Copyright © 2015 Pearson Education, Inc.14-42

Repatriation Issues Losing supplements and allowances International work experience not valued Reintegration into domestic workforce Leaving company Copyright © 2015 Pearson Education, Inc.14-43

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