Chapter 13: Compensating Expatriates Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. Learning Objectives 13-1. Discuss competitive advantage and how international activities fit in. 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. 13-3. List the main components of international compensation programs. Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. Learning Objectives 13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages. 13-5. Describe repatriation issues. Copyright © 2017 Pearson Education, Inc.

International Activities and Competitive Advantage LO 13-1 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 © 2017 Pearson Education, Inc.

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 © 2017 Pearson Education, Inc.

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 © 2017 Pearson Education, Inc.

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 © 2017 Pearson Education, Inc.

How Globalization Is Affecting HR Departments Employee selection Culturally sensitive Are families willing to adjust Training Cross cultural 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 © 2017 Pearson Education, Inc.

Complexity of International Compensation Programs LO 13-1 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 © 2017 Pearson Education, Inc.

Complexity of International Compensation Programs (cont’d) LO 13-1 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 © 2017 Pearson Education, Inc.

Preliminary Considerations LO 13-2 Preliminary Considerations Defining international employees: host country nationals, third country nationals, and expatriates Term of international assignment Staff mobility Equity: pay referent groups Copyright © 2017 Pearson Education, Inc.

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 © 2017 Pearson Education, Inc.

Term of International Assignment LO 13-2 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 © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-2 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 © 2017 Pearson Education, Inc.

Equity: Pay Referent Groups LO 13-2 Equity: Pay Referent Groups Domestic employees Host country employees Commensurate with performance or knowledge attainment Copyright © 2017 Pearson Education, Inc.

Compensation Components for U.S. Expatriates LO 13-3 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 © 2017 Pearson Education, Inc.

Compensation Components for U.S. Expatriates (cont’d) LO 13-3 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 © 2017 Pearson Education, Inc.

Methods for Setting Base Pay LO 13-3 Methods for 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 © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-3 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 © 2017 Pearson Education, Inc.

Annual Inflation Rates LO 13-3 Annual Inflation Rates Copyright © 2017 Pearson Education, Inc.

Incentive Compensation LO 13-3 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 © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-3 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 © 2017 Pearson Education, Inc.

Hardship Location Differentials Copyright © 2017 Pearson Education, Inc.

International Employee Benefits Two types: Standard Enhanced Considerations Total remuneration Benefit adequacy Tax effectiveness Recognizing local customs and practices Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-3 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 © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-3 Enhanced Benefits Relocation assistance Education reimbursement Home leave and travel reimbursement Rest and relaxation leave and allowance Copyright © 2017 Pearson Education, Inc.

Relocation Assistance Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving and storing household goods Copyright © 2017 Pearson Education, Inc.

Balance Sheet Approach LO 13-4 Balance Sheet Approach To protect an employee’s standard of living Strategic value Protects expatriates’standard of living Allows companies to control costs Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-4 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 © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-4 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 © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-4 Quarters Allowances Copyright © 2017 Pearson Education, Inc.

Discretionary Income Expenditures LO 13-4 Discretionary Income Expenditures Pension contributions Savings and investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-4 Tax Considerations Tax protection Tax equalization Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-4 Tax Protection Employers reimburse expatriates when actual tax is greater Expatriates pay entire tax when actual tax is less or equal Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-4 Tax Equalization Employers deduct hypothetical tax Employers pay real tax from hypothetical Reimbursements settled after payment Equitable treatment any assignment Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. LO 13-5 Repatriation Issues Losing supplements and allowances International work experience not valued Reintegration into domestic workforce Leaving company Copyright © 2017 Pearson Education, Inc.

Copyright © 2017 Pearson Education, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2017 Pearson Education, Inc.