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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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