1

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

• HRIS

• repatriation

• base salary

• benefits

• tax equalization

• tax protection

Allowances:COLAhousinghome leaveeducationrelocationspouse assistance

going rate approachbalance sheet approach

global corporate culture

International base pay

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

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

Issues When Considering 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

• equality with local nationals

• simplicity• identification with host

country• equity amongst different

nationalities

Disadvantages

• variation between assignments for same employee• variation between expatriates of same nationality in different

countries• potential re-entry problems

Advantages and Disadvantages of the Going Rate Approach (IHRM Notebook 7.1)

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)

1. Goods and services-home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care

2. Housing-the major costs associated with housing in the host country

3. Income taxes-parent-country and host-country income taxes

4. 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

ArgentinaAustraliaBelgiumBrazilCanadaChina (Hong Kong)

ChinaFranceGermanyIndiaItalyJapanMalaysia

Maximum marginal rate (%)

35.0047.0050.0027.5029.0020.00

45.0048.0942.0033.6643.0037.0028.00

38

1. Keep expatriates in home-country programs, particularly if the company does not receive a tax deductions for it?

2. Enroll expatriates in host-country benefit programs and/or making up coverage differences?

3. Does host-country legislation regarding termination affects benefit entitlement?

4. Do expatriates receive home-country or host-country social security benefits?

5. 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?

Expatriate Benefits (IHRM Notebook 7.4)

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

1. 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

45

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?

Discussion Questions

46

Case: Going to India

1. 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.