1. Chapter 13: Compensating Expatriates
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Learning Objectives
13-1. Discuss competitive advantage and how international activities fit in Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs List the main components of international compensation programs.
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Learning Objectives
13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages Describe repatriation issues.
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4. 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
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5. 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
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6. 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
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7. 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
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8. 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
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9. 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)
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10. 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
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11. 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
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12. 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.
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13. 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)
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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)
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15. Equity: Pay Referent Groups
LO 13-2
Equity: Pay Referent Groups
Domestic employees
Host country employees
Commensurate with performance or knowledge attainment
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16. 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
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17. 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
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18. 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
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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
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20. Annual Inflation Rates
LO 13-3
Annual Inflation Rates
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21. 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
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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
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23. Hardship Location Differentials
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24. International Employee Benefits
Two types:
Standard
Enhanced
Considerations
Total remuneration
Benefit adequacy
Tax effectiveness
Recognizing local customs and practices
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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
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LO 13-3
Enhanced Benefits
Relocation assistance
Education reimbursement
Home leave and travel reimbursement
Rest and relaxation leave and allowance
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27. Relocation Assistance
Temporary quarters before moving
Transportation expenses
Reasonable traveling expenses
Temporary quarters upon arrival
Moving and storing household goods
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28. 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
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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
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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
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LO 13-4
Quarters Allowances
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32. 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
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LO 13-4
Tax Considerations
Tax protection
Tax equalization
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LO 13-4
Tax Protection
Employers reimburse expatriates when actual tax is greater
Expatriates pay entire tax when actual tax is less or equal
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LO 13-4
Tax Equalization
Employers deduct hypothetical tax
Employers pay real tax from hypothetical
Reimbursements settled after payment
Equitable treatment any assignment
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LO 13-5
Repatriation Issues
Losing supplements and allowances
International work experience not valued
Reintegration into domestic workforce
Leaving company
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