INTERNATIONAL HUMAN RESOURCE MANAGEMENT Week 6 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Expatriate Compensation & Benefits Employment and Taxation Laws Organization’s Com- pensation Policy Competitors Standard of Living Political and Social Environment Allowances Economic Conditions 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan Expatriate Costs Expatriate costs may pose a multiple-fold expense in relation to employees who are not sent as expatriates to foreign destinations, and are usually significantly higher than the compensation accorded to HCNs and TCNs Example: a Chinese manager with 15 years experience costs less than USD 70,000 per annum, while a US expatriate manager with corresponding expertise would cost his or her organization USD 300,000 per year 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Goals of an International Organization’s Compensation Policy (1) Policy should be consistent with the overall strategy, structure and business needs of the international organization Policy must work to attract and retain staff in those areas where the international organization has the greatest needs and opportunities. As a consequence, the policy must be competitive and recognize factors such as incentive for serving in a foreign location, tax equalization and reimbursement for reasonable costs 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Goals of an International Organization’s Compensation Policy (2) Policy should facilitate transfer of international employees in the most cost-effective manner Policy must give due consideration to equity and ease of administration 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Employee Expectations and International Organization’s Compensation Policy Financial protection in terms of benefits, social security and cost of living in the foreign location Foreign assignment offers opportunities for advancement through income and/or savings Issues such as housing, education of the children and recreation are addressed Note that the expectations of the employees often do not coincide with the interests of the organization 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Base Salary The base salary is usually the main component in international compensation, and is the main benchmark used for other elements in an expatriate compensation package, such as bonuses and benefits The base salary is either paid in the expatriate’s home or parent country currency, or in the currency of the expatriate’s host country The base salary can be quite a controversial issue, i.e. when it is linked to the different home countries of the respective HCNs and TCNs working in an international organization 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Hardship Premium For expatriate’s (usually PCNs, TCNs) who will encounter “hardships” caused by the transfer to a foreign location, determining the appropriate level of payment can be difficult Factors determining the hardship premium, usually expressed in terms of an expatriate’s base pay, are typically: Assignment Actual hardship Tax consequences Length of assignment 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Allowances: There are many types of allowances in an international compensation package: Cost of Living Allowance – Payment made to the expatriate with a view to compensating for differences in expenditure between the home or parent country and the host country. Factors such as inflation differentials and the price level need to be considered. Often, the cost of living allowance is difficult to determine 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Housing Allowance – Payment made to the expatriate with a view to ensuring that he or she can maintain their home-country living standard in the host country. Alternatively, an organization may provide housing facilities on a mandatory or optional basis. Also, support services may be provided to the expatriate, for example, by helping sell or rent the expatriate’s house in the home country Home Leave Allowance – Payment made to the expatriate with a view to facilitating their visit back to the home country, once or twice a year. Home leave enables the expatriate to renew business, family and social ties, and thus avoid adjustment problems subsequent to repatriation 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Education Allowance – Payment made with a view to supporting the education of the expatriate’s children, i.e. tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment, room and boarding, school uniforms etc. Problems regarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations Relocation Allowance – Payment made with a view to enable the relocation of the expatriate to the assignment location. Includes moving, shipping, storage costs, subsidies for purchase of appliances and (possibly) an automobile 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Miscellaneous Allowances – Depending on the level of seniority of the expatriate, payments to him or her for club memberships, sport associations, maintenance of household staff etc. may be rendered In addition, the organization may render financial assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Key Components of International Compensation Programme for Expatriates Benefits – Support rendered to an expatriate in addition to the allowances provided. There are several types of benefits, more prominent examples being: Social Security Benefits (home country or host country?) Paid Vacations for expatriate and family Rest and Rehabilitation leave (especially for expatriates based in “hardship” assignment locations) Emergency Cases (severe illness, death) 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Calculating International Compensation There are two basic approaches used to determine an international compensation package: The Going Rate Approach The Balance Sheet Approach 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

The Going-Rate Approach Based on local market rates Relies on survey comparisons 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 Example: Should a Pakistani bank operating in London use local British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreign banks operating in London as the reference point for the base salary offered 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Disadvantages of the Going-Rate Approach Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities DISADVANTAGES Variation between assignments for the same employee Rivalry between expatriates of same nationality in getting assignments to some countries Potential reentry problems in the home country 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Logic of the Balance Sheet Approach The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country, and to provide incentives t offset qualitative differences between assignment locations 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

The Balance Sheet Approach The balance sheet approach is widely used by international organizations to determine the compensation package for expatriates: Basic objective is the 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 the host country Financial incentives (expatriate / hardship premium) added to make the package attractive 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Outlays Considered in the Balance Sheet Approach The balance sheet approach considers four types of outlays which are incurred by expatriates: Goods and services – Outlays incurred in the home country for food, personal care, clothing, household furnishings, recreation, transportation and medical care Housing – All major costs associated with housing in the host country Income Taxes – Parent country and host country income tax expenditures Reserve – Contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc. Where costs of host country > costs of home country  organization pays the expatriate to make up the difference 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan

Disadvantages of the Balance-Sheet Approach Equality between assignments and between expatriates of the same nationality Facilitates expatriate reentry Easy to communicate To employees DISADVANTAGES Can result in considerable disparities between expatriates of different nationalities and local nationals Can be quite complex to administer (e.g. changing economic conditions, taxation) 12 November 2018 IHRM (MBA III) Course Instructor: Dr. Aurangzeb Z. Khan