International Compensation Chapter Seven International Compensation

Chapter Learning Objectives After reading this chapter, you should be able to: explain 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 explain the special problem areas of taxation, valid international living cost data and the problem of managing TCN compensation discuss recent developments and global compensation issues

Terms Allowances: 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

Opening Vignette International Compensation at RBC wide range of compensation variables

Complexity of International Compensation Policies management of more activities from a broader perspective greater involvement in the lives of employees and families balancethe needs of PCNs, HCNs and TCNs control exposure to financial and political risks increased awareness of and responsiveness to host country and regional influences

Global Compensation seen as a mechanism to develop and reinforce a global corporate culture

Global Compensation Increased complexities growing use of outsourced activities and subsequent labour pricing needs balancing centralization and decentralization of incentives, benefits and pensions balancing the need for more accurate and detailed performance metrics

Two Primary Areas of Focus manage highly complex local details building a unified, strategic pattern of compensation policies, practices, and values

Total Compensation Management Requires knowledge of employment and taxation law customs, environment, and employment practices currency fluctuations and the effect of inflation special allowances

Global Compensation Programs Facilitate and manage global expansion efforts labour costs internal equity effective governance

Global Compensation Programs ( IHRM Today 7.2) Key areas pay in relation to the market short and long-term incentive policies consistent processes of job grading and leveling

Objectives of International Compensation Organizational consistent with the overall strategy, structure, and business needs attract and retain staff; competitive, incentives for foreign service, tax equalization facilitate the cost-effective transfer of international employees equitable and easy to administer

Objectives of International Compensation Individual financial protection in terms of benefits, social security and living costs opportunities for financial advancement through income and/or savings housing, education of children and recreation issues

International Compensation Program Components base salary foreign service inducement/hardship premium allowances benefits

Base Salary primary component of a package of allowances, many of which are directly related to base salary, as well as the basis for in‑service benefits and pension contributions

Foreign Service Inducement/ Hardship Premium Salary premium ( 5-40% of base pay) to accept a foreign assignment compensation for hardship caused by the transfer vary depending on type and length of assignment, hardship, tax consequences, differentials

Foreign Service Inducement/ Hardship Premium Must address the definition of hardship eligibility for the premium amount and timing of payment

Allowances encourage employees to take international assignments to keep employees ‘whole’ relative to home standards

Cost‑Of‑Living Allowance (COLA) payment to compensate for differences in expenditures between the home country and the foreign country (inflation differentials) may include payments for housing and utilities, personal income tax, or discretionary items

Housing Allowances maintain home‑country living standards often paid on either an assessed or an actual basis financial assistance and/or protection in connection with the sale or leasing of an expatriate's former residence other alternatives include company‑provided housing, a fixed housing allowance; or an assessment of a portion of income

Home Leave Allowances expense of trips back to the home country each year purpose is to give expatriates the opportunity to renew family and business ties

Education Allowances tuition language class tuition enrolment fees books and supplies transportation room and board uniforms local/boarding school or university

Relocation Allowances Contingent upon tax‑equalization policies and practices in both the home and the host countries, include: moving, shipping, and storage charges temporary living expenses subsidies regarding appliance or car purchases down payments or lease‑related charges.

Spouse Assistance offset income lost by an expatriate's spouse as a result of relocating abroad

Tax‑Equalized Housing Allowance to discourage the purchase of housing and/or to compensate for higher housing costs

Benefits national practices vary considerably transportability of pension plans, medical coverage, and social security benefits are very difficult to normalize

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

Approaches to International Compensation Two main options Going Rate Approach (Market Rate Approach) linked to host country salary structure Balance Sheet Approach (Build-up Approach) linked the home-country the salary structure

Going Rate Approach (Table 7-1) 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

Advantages and Disadvantages of the Going Rate Approach (IHRM Notebook 7.1) equality with local nationals simplicity identification with host country equity amongst different nationalities Disadvantages variation between assignments for same employee expatriates of same nationality in different countries potential re-entry problems

The Balance Sheet Approach (Table 7-2) 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

Key Categories of Expatriate Outlays ( IHRM Notebook 7.2) 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.

Expatriate Compensation Worksheet (Table 7-3)

Advantages and Disadvantages of the Balance Sheet Approach (IHRM Notebook 7.3)

Tax Equalization MNEs withhold an amount equal to the home‑country tax obligation of the PCN, and pay all taxes in the host country.

Tax Protection employee pays up to the amount of taxes he or she would pay on compensation in the home country

Maximum Marginal Federal Tax Rates (Table 7.4) 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

Expatriate Benefits (IHRM Notebook 7.4) 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?

Social Security Contributions By Employers and Employees (Table 7.5)

Range of Working Times Required to Buy One Big Mac (Table 7.6)

Differentiating Between PCNs and TCNs TCNs have a great deal of international experience; often move from country to country in the employ of one MNE MNEs use a home-country balance sheet approach for TCNs can be less expensive than paying all expatriates on a PCN scale; could lead to perceived inequities the reduction in expenses outweighs the difficulty of justifying any pay differentials

Differentiating Between PCNs and TCNs TCN employees are valuable; firms may need to rethink their approach; establishing a system of international base pay for key managers multinational firms need to match their compensation policies with their staffing policies and general IHRM philosophy

Complexity, Challenges and Choices in Global Pay (Figure 7.1)

Discussion Questions What should be the main objectives for a multinational firm with regard to its compensation policies? 2. Describe the main differences in the Going Rate and Balance Sheet Approaches to international compensation.

Discussion Questions 3. What are the key differences in salary compensation for PCNs and TCNs? Do these differences matter? 4. What are the main points that MNEs must consider when deciding how to provide benefits?

Case: Going to India If Geoff’s whole family is coming with him to India, should Geoff maintain or sever his residency in Canada? Discuss the advantages and disadvantages of both options – put yourself in Geoff’s shoes. In your decision consider also taxation implications. 2. If you were Geoff, would you prefer a going rate approach or a balance sheet approach to negotiate your base salary? What kind of approach to determine the base salary will Andrew opt for? Why?

Case: Going to India 3. Create an expatriate compensation worksheet that outlines a package proposal with details of all components, currencies, etc. In your package you need to consider Geoff’s personal circumstances and the fact that the whole family will come after having sold their house in Canada.