Prentice Hall, Inc. © A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 12 International Compensation

Prentice Hall, Inc. © Compensation Challenges  Further corporate interests abroad  Encourage employee expatriation  Minimize workers’ financial risks  Enhance overseas experiences  Repatriation issues  Promoting lowest - cost strategies  Promoting differentiation strategies

Prentice Hall, Inc. © International Employees  Host country nationals (HCNs)  Citizens work for U.S. company in own country  Third country nationals (TCNs)  Citizens of one country work for a U.S. company in another country  Expatriates  U.S. citizens work for a U.S. company in another country

Prentice Hall, Inc. © Compensation Factors  Length of overseas assignments  Short-term Extended-term  Staff mobility  One or more foreign assignments  Equity: pay referent groups  Domestic workers  Host country workers

Prentice Hall, Inc. © Compensation Components  Core compensation  Base pay  Incentive compensation  Fringe compensation  Standard benefits  Enhanced benefits

Prentice Hall, Inc. © Setting Base Pay  Home country-based  Similar to domestic employees  Host country-based  Similar to employees in foreign sites  Headquarters-based  Not based on home or host country’s pay levels

Prentice Hall, Inc. © Purchasing Power  Stability of currency  U.S. dollar & foreign money  Exchange rate fluctuations  Inflation  Increase in prices of goods & services  Increase in inflation lowers purchasing power

Prentice Hall, Inc. © Incentive Compensation  Foreign service premiums  To Encourage Expatriate Assignments  Hardship allowances  For tough work & living conditions  Mobility premiums  For willingness to relocate to an assignment

Prentice Hall, Inc. © Hardship Allowances  Set by U.S. State Dept based on:  Foreign living conditions  Physical challenges like climate  Poor health conditions  Over 150 countries designated  Supplements between 10% - 25% of base pay

Prentice Hall, Inc. © International Fringe Compensation  2 Types  Standard  Enhanced  Considerations  Total remuneration  Benefit adequacy  Tax effectiveness  Recognizing local customs & practices

Prentice Hall, Inc. © ENHANCED BENEFITS  Relocation assistance  Education reimbursement  Home leave & travel reimbursement  Rest & relaxation leave and allowance

Prentice Hall, Inc. © Relocation Assistance  Temporary quarters before moving  Transportation expenses  Reasonable traveling expenses  Temporary quarters upon arrival  Moving & storing household goods

Prentice Hall, Inc. © Balance Sheet Approach  To determine compensation packages  To provide similar standard of living  Strategic value  Protects expatriates’ standard of living  Allows companies to control costs

Prentice Hall, Inc. © Appropriateness  Home country is referent point  Expatriates keep close ties to USA  Assignment is of limited duration  Repatriation after assignment  Guarantee of no financial hardship

Prentice Hall, Inc. © Major Expenditures  Housing & utilities  Goods & services  Discretionary income  Taxes Information Sources  Returning expatriates  Consulting & research companies  U.S. State Dept. indexes

Prentice Hall, Inc. © Discretionary Income Expenditures  Pension contributions  Savings & investments  Insurance payments  Mortgage equity payments  Alimony  Child support  Student loans  Car payments

Prentice Hall, Inc. © Tax Considerations  Double taxation relief  IRC Section 901  IRC Section 911  Tax protection  Tax equalization

Prentice Hall, Inc. © IRC Section 901  Can credit foreign taxes from U.S. tax  If U.S. tax is greater  Expatriates pay difference to IRS  If foreign tax is greater  Expatriates can deduct excess to future U.S. taxes  For up to 5 years

Prentice Hall, Inc. © IRC Section 911  Can Exclude up to $70,000 of Income Exclusions  Cash Income Professional fees Incentives Bonuses Sales commissions  Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living

Prentice Hall, Inc. © Tax Protection  Employers reimburse expatriates when actual tax is greater  Expatriates pay entire tax when actual tax is less or equal

Prentice Hall, Inc. © Tax Equalization  Employers deduct hypothetical tax  Employers pay real tax from hypothetical  Reimbursements settled after payment  Equitable treatment any assignment

Prentice Hall, Inc. © Repatriation Concerns  Losing supplements & allowances  Work experience not valued  Reintegration into domestic workforce  Leaving company