1. International Compensation
Chapter Seven
International Compensation

2. 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

3. 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

4. Opening Vignette International Compensation at RBC
wide range of compensation variables

5. 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

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

7. 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

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

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

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

11. 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

12. 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

13. 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

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

15. 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

16. 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

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

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

19. 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

20. 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

21. 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

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

23. 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.

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

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

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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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.

33. Expatriate Compensation Worksheet (Table 7-3)

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

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

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

37. 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

38. 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?

39. Social Security Contributions By Employers and Employees (Table 7.5)

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

41. 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

42. 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

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

44. 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.

45. 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?

46. 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?

47. 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.