Chapter Twelve International Compensation

Types of Int’l Assignments l Host country nationals l Third country nationals l Expatriates l Current trend towards shorter and more frequent int’l assignments: “virtual expatriates.”

Factors to be taken into account l Term of int’l assignment: »Short (1 year or less-do not require substantial modification of domestic compensation) vs. long-term (require housing allowances, educational expenses, and protection against double taxation) l Staff mobility: compensation for disruptive effects. l Equity: Pay referent group (e.g., expatriates return to the US and thus US pairs are their referent group) l Maintain purchasing power: currency stabilization and inflation.

MethodPros?Cons? Home country-based: amount they would receive if they were performing similar work in the U.S. Host country-based method: compensation based on host country pay scales Headquarters-based: compensates all employees according to global scales. Methods for setting expatriate base pay: describe the pros and cons of each method. Discussion Question 12-1

Table 12-1 U.S. Expatriates’ Compensation Package Components l Core Compensation »Base pay »Incentive compensation –Foreign service premium –Hardship allowance –Mobility premium l Fringe Compensation »Standard benefits –Protection programs –Pay for time-not-worked »Enhanced benefits –Relocation assistance: distance, length of assignment, rank. –Educational reimbursement for expatriates’ children –Home leave and travel reimbursement –Rest and relaxation leave allowance

Table 12-2 Annual Inflation Rates (%) for Selected Countries, COUNTRY Germany France Japan Sweden Source: Consumer Prices in Nine Countries (Washington D.C.: U.S. Bureau of Labor Statistics, 2000).

Table 12-4 Relocation Assistance Payments l The relocation allowance or reimbursement provides employees with money for: »Temporary quarters prior to departure because the expatriate’s house has been sold or rented »Transportation to the foreign post for employees and their families »Reasonable expenses incurred by the family during travel »Temporary quarters while waiting for delivery of household goods or while looking for suitable housing »Moving household goods to the foreign post »Storing household goods in the United States

Table 12-7 Discretionary Income Expenditures l Pension contributions l Savings and investment l Insurance payments l Equity portion of mortgage payments l Alimony payments l Child support l Student loan payments l Car payments

Cash and Noncash Income Exclusions: Internal Revenue Code Section 911 l Goal: Prevent double-taxation of expatriates l Allows exclusion of up to $70,000 of foreign earned income: »Salaries and wages, Bonuses, Sales commissions, Incentives, Professional fees. »E.g., $150,000 (foreign earned income ) - $70,000 (allowance) = $ 80,000 (taxable income) l Allows exclusion of Noncash elements such as: »Housing »Meals »Cars »Allowances for cost of living differentials, education, home leave, tax reimbursements, children’s education, and moving expenses

Tax Protection vs. Tax Equalization l Tax Protection: employers calculate a hypothetical tax based on US income tax laws, excluding foreign allowances. Employers then reimburse expatriates for the difference between the actual and the hypothetical income tax. l Tax equalization: employers take responsibility for paying US tax on behalf of expatriates, and reimburse expatriates for the difference with the actual tax if needed.

The Balance Sheet Approach ANNUAL EXPENSE Housing and utilities Goods and services Taxes Discretionary income Total BRUSSELS, BELGIUM (U.S. S EQUIVALENT) ALLOWANCECHICAGO, U.S.A. $35,000 $ 6,000 $22,400 $10,000 $73,400 $ 67,600 $ 9,500 $ 56,000 $ 10,000 $143,100 $32,600 $ 3,500 $33,600 $ 0 $69,700 Provides the standard of living they normally enjoy in the U.S. (which becomes the standard for all payments).

Case Study: Global Consistency in Pay Structures McKinsey-World Bank: survey conducted in year 2000 shows that investors are willing to pay up to 28% premium for good corporate governance. High-performing companies are paying more attention to oversight of rewards. This implies: A consistent base pay framework Adequate job leveling Both of these imply creating global consistency in pay structures!

Case Study: Company Newell Rubbermaid effort to achieve global consistency in pay structures. Newell Rubbermaid is a leading consumer & commercial products in the world, with sales of more than $7B in Approximately 12 M&A transactions in 20 years. Approximately 47,000 employees in 55 countries. Divisions: RubbermaidBlue IceParker LittleTikesPaper-MateLevolor GracoIrwin

Case Study: Goals Newell Rubbermaid’s effort to achieve global consistency in pay structures and, in doing so: Improve integration of recently acquired businesses. Provide consistency in remuneration and other HR practices across units. Align compensation with unified company culture. Benchmark labor market. Attract & retain top talent. Create a global-minded workforce.

Case Study (continued) Advantages of global consistency in pay structures: Internal equity Talent mobility Common culture Improved governance and transparency Reduced administrative costs Barriers: Clash between company/country culture (e.g., perks are different and have different meaning in different cultures) Different labor markets Different value system

Case Study: What they did Audited pay and benefit practices in North America, Latin America, Asia-Pacific, South Africa. Evaluated jobs using a global tool. Grouped jobs of similar contribution according to 7 global factors. Market-priced benchmark jobs (involved local mgmt. and local market data). Developed geographically sensitive salary structures.

Case Study: Lessons Learned Global consistency in pay structures paid off for Newell Rubbermaid in terms of: Improved ability to integrate following mergers and acquisitions. Decrease cycle time to make offers and hire new employees. Integrate related practices such as eligibility for perquisites, long-term incentives, benefits. Develop local and local career pathing and development. Reduce turnover

Discussion Question 12-2 l Visit the Department of State web site at l Study the info provided at this web site, so that you learn how to estimate the annual compensation that international assignments receive. Make sure to understand the process of determining living quarters allowance, cost- of-living allowance, spendable income, currency stabilization allowance, hardship differential allowance, and danger pay.