1. International Compensation Policies
Managing an Supporting International Assignments – Chapter 6
International Compensation Policies

2. Employer’s Objectives
Consistent with over all strategy
Must attract and retain staff
Facilitate transfer of international employees
Employees’ Objectives
Financial protection (benefits,social security,living costs in a foreign country)
Assignment to offer opportunities for financial advancement (income/savings)
Issues like housing, education, recreation policies to be addressed by the company

3. Key components of an international compensation program
Managing an Supporting International Assignments – Chapter 6
Key components of an international compensation program

4. Base Salary
Serves as benchmark for primary components of package – foreign service premium, cost-of-living, housing allowance
Basis for in-service benefits and pension contributions
May be paid in home or local currency

5. Foreign Service Inducement/Hardship Premium
Salary premium as an inducement or as Compensation for any hardship caused by transfer
More commonly paid to TCNs than PCNs
Made in the form of percentage of salary (5-40% of base pay)
Differentials are considered (eg. Host country work week and hence over time)

6. Allowances Cost of Living Allowance
Difference on expenditure between home and foreign country
Help of specialized organizations like ‘Organization Resource Counsellors’
Includes Payment of housing, utilities, personal income tax etc.

7. Allowances Housing Allowance
To enable maintenance of home country living standards
Company provided houses, fixed HRA
Assistance in sale or leasing of residence, payment of closing costs, rent protection, equity protection etc.

8. Allowances
Home Leave Allowance (one or more trips to back home to prevent adjustment problems)
Education Allowance (language tuition,children education)
Relocation Allowance ( moving, shipping, temporary living, purchase of car etc.
Spouse assistance (an allowance to make up for the spouse’s lost income)

9. Benefits
Maintaining expatriates in home country programs in case of no tax deductions
Option of enrolling expatriates in host country benefits and/or making up for any difference
Home country v/s Host country social security benefits

10. Approaches to international compensation
Managing an Supporting International Assignments – Chapter 6
Approaches to international compensation

11. The Going Rate Approach
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
Additional Payments for low-pay countires

12. The Going Rate Approach
DISADVANTAGES
ADVANTAGES
Variation between assignments for same employee
Variation between expatriates of same nationality in different countries
Potential re-entry problems
Equality with local nationals
Simplicity
Identification with host country
Equity amongst different nationalities

13. Balance sheet approach
According to Reynolds..
The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living overseas and in the home country , and to provide incentives to offset the qualitative differences between assignment locations.
Assumption : Foreign assignees should not suffer a material loss due to their transfer

14. Balance Sheet Approach
Most common system used by multinational firms
Objective: maintenance of home country living standard + financial inducement
Focus on home country pay and benefits
Adjustments to balance additional expenditure in host country
Financial incentives(expatriate/hardship premium) added to make package attractive

15. Balance Sheet Approach
Major categories of outlays
Goods and Services : home country outlays for food, personal care , clothing, household furnishings , recreation, transportation, medical care
Housing : cost associated in host country
Income taxes: parent country and host country income taxes
Reserve: contribution to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes etc.

16. Advantages and Disadvantages
Equity
Between Assignments
Between expatriates of the same nationality
Facilitates expatriate reentry
Easy to communicate to employees
Disadvantages
Can result in great disparities
Between expatriates of different nationalities
Between expatriates and local nationals
Can be complex to administer
Repatriation of expatriates is facilitated by emphasis on equity with the parent country as the expatriate compensation remains anchored to the compensation system in the parent country
Problems arise when international staff are paid different amounts for performing same/similar job in the host location according to their different home base salary. Resentment arises due to “foreigners’ perceived to be excessively compensated and blocking career opportunities for locals. It can also be the other way round, where expatriates can feel they are majorly underpaid. Eg USA

17. Taxation Problems , Issues and Challenges
Dual tax cost : Expatriates paying taxes in both home and host country.
Need to consider personal and corporate taxes in addition to income tax
Modifying compensation packages to provide the most tax-effective, appropriate rewards within the overall compensation framework
Major cause of concern to both HR practitioners and expatriates

18. Issues while considering benefits
Taxation
Issues while considering benefits
Whether or not to maintain expatriates in home country programs, particularly if the company does not receive tax deduction for it
Whether companies have the option of enrolling expatriates in host-country benefit programs and /or making up any difference in coverage
Whether host-country legislation regarding termination affects benefit entitlement

19. Issues while considering benefits
Taxation
Issues while considering benefits
Whether expatriates should receive home country or host country social security benefits
Whether benefits should be maintained on home country or host country basis, who is responsible for the cost, whether other benefits should be used to offset any shortfall and whether home country benefit programs should be exported to local nationals in foreign countries

20. Approaches to International Taxation
Tax equalization
Firms withhold an amount equal to home country tax obligation, and pay all taxes in the host country
By far the more common taxation policy used by multinationals
Tax payments equal to liability of home country tax payer with same income and family status are imposed on employee’s salary and bonus
Additional premiums or allowances are paid tax free

21. Approaches to International Taxation
Tax protection
Employee pays up to the amount of taxes he or she would pay on compensation in the home country
Employee is entitled to any windfall received if total taxes are less in the host country than in the home country
Ad-hoc
Each expatriate handled differently , depending upon individual package agreed to with the firm
Laissez Faire
Employees are ‘on their own’ in conforming to host-country and home country taxation laws and practices

22. International living costs data
Obtaining upto-date information on international living costs is a constant issue for MNEs
The MNEs take the services of consulting firms
These firms conduct regular surveys calculating a cost-of-living index that is updated in terms of currency exchange rates
This data is a very important issue to expatriate employees and forms the basis of many complaints if there are updating lags on compensation package rise

23. International living costs data
MNEs must also respond to unexpected events such as currency and stock market crash. For eg (Asian crisis)
Such events have a dramatic impact on prices and the cost of living
MNEs must also decide what to include in the ‘basket-of-goods’ which the consulting firms use to decide the living costs

24. International living costs data
Another option is to look at wider Business Costs rather than living costs for expatriates
The Economist calculates such indices which measure the costs of doing business in different economies – wages, air travel costs, taxes, perceived corruption levels
Generally, developed countries tend to rank more expensive because of their wage costs

25. Differentiating between PCNs & TCNs
Balance Sheet approach : Salary according to Home-country base salary
Balance sheet approach is most commonly used for TCN which is the basis for differentiation between TCN & PCN
However, as firms expand internationally, it is likely that TCN employees will become more valuable and firms may need to rethink their approach to compensating TCNs

26. Differentiating between PCNs & TCNs
MNE firms need to match their compensation policies with their staffing policies and general HR philosophy.
Eg: If firm has an ethnocentric staffing policy, its compensation policy should be such that TCNs’ and PCNs’ salaries are relative.

27. Tentative Conclusions: Patterns in complexity
Global pay issues have found to operate in three different levels:
Cultural values and assumptions
Level of pay strategy, practices and systems design
Level of pay administration and form

28. Tentative Conclusions: Patterns in complexity
Increasing
Standardization and Portability of benefits
Increasing standardi-
-zation and portability
of pensions
Universal Pay Level Local
Strategy
composite
Firm
Nation
Group
Job
Person
Context
Basis of pay
Hierarchical pay Vs egalitarian pay