International Human Resource Management IHRM Chapter 7 International Human Resource Management Managing people in a multinational context International compensation

Chapter Objectives In this chapter we: Examine the complexities that arise when firms move from compensation at the domestic level to compensation in an international context. Detail the key components of an international compensation program. Outline the two main approaches to international compensation and the advantages and disadvantages of each approach. Examine the special problem areas of taxation, valid international living cost data and the problem of managing TCN compensation. Examine recent developments and global compensation issues. IHRM Chapter 7

Terms HRIS repatriation base salary benefits Tax equalization Tax protection allowances: COLA housing home leave education relocation spouse assistance global corporate culture International base pay going rate approach balance sheet approach IHRM Chapter 7 3

Issues when considering benefits Whether or not to maintain expatriates in home-country programs, particularly if the firm does not receive a tax deduction for it. Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage. Whether expatriates should receive home-country or host-country social security benefits. IHRM Chapter 7 4

Based on local market rates Relies on survey comparisons among: Table 7-1 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 Base pay and benefits may be supplemented by additional payments for low-pay countries IHRM Chapter 7 5

Advantages and disadvantages of the Going Rate Approach Table 7-2 Advantages and disadvantages of the Going Rate Approach Advantages Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities Disadvantages Variation between assignments for same employee Variation between expatriates of same nationality in different countries Potential re-entry problems IHRM Chapter 7 6

The Balance Sheet Approach Table 7-3 The Balance Sheet Approach Basic objective is maintenance of home-country living standard plus financial inducement Home-country pay and benefits are the foundations of this approach Adjustments to home package to balance additional expenditure in host country Financial incentives (expatriate/hardship premium) added to make the package attractive Most common system in usage by multinational firms IHRM Chapter 7 7

Four Balance Sheet Approach categories Goods and services – home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care. Housing – the major costs associated with housing in the host country. Income taxes – parent-country and host-country income taxes. Reserve – contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc. IHRM Chapter 7 8

Expatriate compensation worksheet Table 7-4 Expatriate compensation worksheet IHRM Chapter 7 9

Advantages and disadvantages of the Balance Sheet Approach Table 7-5 Advantages and disadvantages of the Balance Sheet Approach IHRM Chapter 7 10

Maximum marginal federal tax rates Table 7-6 Maximum marginal federal tax rates Country Argentina Australia Belgium Brazil Canada China (Hong Kong) China France Germany India Italy Japan Malaysia Maximum marginal rate (%) 35.00 47.00 50.00 27.50 29.00 20.00 45.00 48.09 42.00 33.66 43.00 37.00 28.00 Maximum marginal rate (%) 33.00 52.00 40.00 22.00 35.00 29.16 26.00 11.50 34.00 Country Mexico Netherlands Poland Singapore South Africa South Korea Spain Sweden Switzerland Taiwan United Kingdom United States Venezuela IHRM Chapter 7 11

Some issues when considering benefits Keep expatriates in home-country programs, particularly if the company does not receive a tax deductions for it? Enroll expatriates in host-country benefit programs and/or making up coverage differences? Does host-country legislation regarding termination affects benefit entitlement? Do expatriates receive home-country or host-country social security benefits? Should benefits be maintained on a home-country or host-country basis? Who is responsible for the cost? Should other benefits offset any shortfall in coverage? Should home-country benefit programs be exported to local nationals in foreign countries? IHRM Chapter 7 12

Social security contributions by employers and employees Table 7-7 Social security contributions by employers and employees IHRM Chapter 7 13

Range of working times required to buy one Big Mac Table 7-8 Range of working times required to buy one Big Mac IHRM Chapter 7 14

Complexity, challenges and choices in global pay Figure 7-1 Complexity, challenges and choices in global pay IHRM Chapter 7 15

Discussion Questions What should be the main objectives for a multinational firm with regard to its compensation policies? Describe the main differences in the Going Rate and Balance Sheet Approaches to international compensation. What are the key differences in salary compensation for PCNs and TCNs? Do these differences matter? What are the main points that MNEs must consider when deciding how to provide benefits? Why is it important for MNEs to understand the compensation practices of other countries? Explain how balancing the interests of global and local, occupational and functional perspectives might play out in a compensation decision scenario. IHRM Chapter 7 16