International compensation

Presented By
Sneha-53
Shilpi-51
Jinal
Manali
Ritesh
 Introduction

In the introductory we described IHR managers as grappling

with complex issues:
 Manage more activities from a broader perspective,
 Be more involved in the lives of their far-flung
employees
 Balance the needs of PCNs, HCNs and TCNs
 Be increasingly aware of and responsive to host-
country and regional influences.

1–2
 Introduction
• Global compensation managers
increasingly deal with two areas of
focus.
– They must manage highly complex and
turbulent local details, while
– Concurrently building and maintaining a
unified, strategic pattern of compensation
policies, practices and values.

1–3
 Objectives
•• Examine
Examinethe thecomplexities
complexitiesthat
thatarise
arisewhen
whenfirms
firmsmove
movefrom
from
compensation
compensationat atthe
thedomestic
domesticlevel
levelto
tocompensation
compensationin inan
an
International
Internationalcontext.
context.
•• Detail
Detailthe
thekey
keycomponents
componentsof ofinternational
internationalcompensation.
compensation.
•• Outline
Outlinethe
thetwo
twomain
mainapproaches
approachesto tointernational
international
compensation
compensationand andthe
theadvantages
advantagesandanddisadvantages
disadvantagesof of
each
eachapproach.
approach.
•• Examine
Examinethe thespecial
specialproblem
problemareas
areasofoftaxation,
taxation,valid
valid
international
internationalliving
livingcost
costdata
data
•• Examine
Examinethe therecent
recentdevelopments
developmentsand andglobal
global
compensation
compensationissues.
issues.

1–4
 Requirements for Successful
Compensation and Benefits
• Knowledge of employment and taxation law,
customs, environment and employment practices
of many foreign countries
• Familiarity with currency fluctuations and the
effect of inflation on compensation, and
• A good understanding of why and when special
allowances must be supplied and which
allowances are necessary in what countries

Allwithin
Allwithin the
the context
context of
of shifting
shifting political,
political,
economic
economic andand social
social conditions.
conditions.
1–5
 Expatriate Compensation &
Benefits
Organization’s Com-
pensation Policy

Employment and Competitors

Taxation Laws

Compensation
Compensation
Allowances Benefits
Benefits Economic
Conditions

Political and Social

Standard of Living
Environment

6
 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

7
•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

8
Goals of an International Organization’s
Compensation Policy (1)

1) Policy should be consistent with the overall

strategy, structure and business needs of the
international organization

2) 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
9
Goals of an International Organization’s
Compensation Policy (2)

3)Policy should facilitate transfer of

international employees in the most
cost-effective manner

4)Policy must give due consideration to

equity and ease of administration

10
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

11
 Key Components of
International Compensation
The
Thearea
areaof
ofinternational
internationalcompensation
compensationisis complex,
complex,
primarily
primarilybecause
becausemultinationals
multinationalsmust
mustcater
catertotothree
three
categories
categoriesofofemployees:
employees:
–– PCNs,
PCNs, TCNs
TCNsandandHCNs
HCNs
–– Key
KeyComponents:
Components:
Base

Basesalary
salary
Foreign

Foreign services
servicesinducement
inducement
Hardship

Hardshippremium
premium
Allowances

Allowances
Benefits

Benefits
1–12
 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
13
 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

14
• 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

15
 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

16
 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

17
 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
18
 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

19
 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)

20
 International Costs of Living
•• Multinationals
Multinationalsusing
usingthe
the •• AArecent
recentsurvey
surveyofof
Balance
BalanceSheet
SheetApproach
Approachmust
must living
livingcosts
costsranked
ranked
constantly
constantlyupdate the
update the1010 most
most
compensation
compensationpackages
packageswithwith expensive
new expensivecities
citiesas:
as:
newdata
dataon
onliving
livingcosts,
costs,which
which 1.
isisan 1. Tokyo
Tokyo
anon-going
on-goingadministrative
administrative 2.
requirement. 2. Moscow
Moscow
requirement.
3.
3. Osaka
Osaka
•• Must
Mustalso
alsobe
beable
abletotorespond
respondtoto 4.
4. Hong
HongKong
Kong
unexpected
unexpectedevents,
events,such
suchas asthe
the
currency 5.
5. Beijing
Beijing
currencyandandstock
stockmarket
market
crash, 6.
6. Geneva
crash,which
whichsuddenly
suddenlyunfolded
unfolded Geneva
ininaanumber
numberof ofAsian
Asiancountries
countries 7.
7. London
London
ininlate
late1997.
1997. 8.
8. Seoul
Seoul
•• The
Thelevel
levelof
oflocal
localknowledge
knowledge 9.
9. Zurich
Zurich
requires
requiresspecialist
specialistadvice.
advice. 10.
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NewYork
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1–21
 Maximum marginal federal tax rates
Country Maximum marginal
rate (%)

Argentina 35.00
Australia 47.00
Belgium 50.00
Brazil 27.50
Canada 29.00
China (Hong Kong) 20.00
China 45.00
France 48.09
Germany 42.00
India 33.66
Italy 43.00
Japan 37.00
Malaysia 28.00

22
Calculating International Compensation

There are two basic approaches used

to determine an international
compensation package:

The Going Rate Approach

The Balance Sheet Approach

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 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

24
Disadvantages of the Going-Rate Approach
ADVANTAGES
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
25
 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
26
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  27

organization pays the expatriate to make up the difference
 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

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 Disadvantages of the
Balance-Sheet Approach
DISADVANTAGES
ADVANTAGES
Can result in considerable
Equality between assignments disparities between expatriates
and between expatriates of different nationalities
of the same nationality and between expatriates
and local nationals
Facilitates expatriate
reentry Can be quite complex
to administer (e.g. changing
Easy to communicate economic conditions,
To employees taxation)

29
 Conclusion
• We have examined the complexities arising
when firms move from compensation at the
domestic level to compensation in an
international context.
• It is evident from our review that
compensation policy becomes a much less
precise process than is the case in the
domestic HR context.
• To demonstrate this complexity, we have:

1–30
 Conclusion (cont.)
• Outlined special problem areas such as taxation, obtaining
valid international living costs data, and the problems of
managing TCN compensation.
• Presented a model of global pay that highlights the complexity
and yet familiarity of pay practices in the global context.
• The combination of pay decisions based on strategic global
standardization and sensitivity to changing local and regional
conditions that characterizes the state of international pay
practices.

1–31
Thank you

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