Contemporary strategic compensation challenges

1. Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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2. Compensation & Benefits

3. Organization’s Com-
pensation Policy
Employment and Competitors
Taxation Laws
Compensation
Compensation
Allowances & Benefits
& Benefits Economic
Conditions
Political and Social
Standard of Living
Environment
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4.  E xpatriate costs may pose a multiple-fold
expense in relation to employees who are
not sent as expatriates to foreign
destinations
 Costs significantly higher than the
compensation accorded to Host Country
Nationals (HCNs) and Third Country
Nationals (TCNs)
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5. •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
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6. 1) Policy should be consistent with overall
strategy, structure and business needs of
international organization
2) Policy must work to attract and retain staff in
those areas where international organization
has greatest needs and opportunities.
3) Policy must be competitive and recognize
factors such as incentive for serving in a
foreign location, tax equalization and
reimbursement for reasonable costs
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7. 3) Policy should facilitate transfer of
international employees in most cost-
effective manner
4) Policy must give due consideration to
equity and ease of administration
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8.  Financial protection in terms of benefits, social
security and cost of living in foreign location
 Foreign assignment offers opportunities for
advancement through income and/or savings
 Issues such as housing, education of children
and recreation are addressed
Note that the expectations of the employees often do not
coincide with the interests of the organization
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9.  Base Salary
 Base salary - main component in
international compensation
 It is used as main benchmark for other
elements in expatriate compensation
package, such as, bonuses and benefits
 Base salary is either paid in expatriate’s
home or parent country currency, or in
currency of expatriate’s host country
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10.  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
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11. • Factors determining hardship premium,
usually expressed in terms of an expatriate’s
base pay:
Assignment
Actual hardship
Tax consequences
Length of assignment
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12. 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 home or
parent country and host country
 Factors such as inflation differentials and
price level need to be considered
 Often, cost of living allowance is difficult to
determine
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13.  Housing Allowance – Payment made to expatriate with a
view to ensuring that he or she can maintain their home-
country living standard in host country.
 Organization may provide
- Housing facilities on a mandatory or optional basis
- Support services to expatriate for selling or renting
expatriate’s house in home country
 Home Leave Allowance – Payment made to expatriate
with a view to facilitating their visit back to home country,
once or twice a year.
 Home leave allowance enables expatriate to renew
business, family and social ties, avoiding adjustment
problems subsequent to repatriation
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14.  Education Allowance – Payment made with a view to
supporting education of 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 level of education required and
adequacy of schools in host country & transportation
costs may pose significant problems for
organizations
 Relocation Allowance – Payment made with a view to
enable relocation of expatriate to assignment
location includes moving, shipping, storage costs,
subsidies for purchase of appliances and automobile
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15.  Miscellaneous Allowances – Depending on
level of seniority of expatriate, payments to
him for club memberships, sport associations,
maintenance of household staff, etc. may be
provided
 Organization may provide financial assistance
to spouse for loss of income as a result of
transfer of expatriate
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16.  Benefits – Support rendered to expatriate in addition
to allowances:
 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)
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17. Two basic approaches used to determine
an international compensation package:
Going Rate Approach
Balance Sheet Approach
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18.  Based on local market rates
 Relies on survey comparisons
◦ Local nationals (HCNs)
◦ Expatriates of same nationality
◦ Expatriates of all nationalities
 Compensation based on selected survey comparison
 Base pay and benefits may be supplemented by additional
payments for low-pay countries
 Example: Should a Indian bank operating in London use
local British salaries, salaries of other Indian competitor
banks in London or average salary offered by all foreign
banks operating in London as reference point for base salary
offered
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19. ADVANTAGES DISADVANTAGES
- Equality with local nationals - Variation between assignments
of same employee
- Simplicity
- Rivalry between expatriates
- Identification with host country of same nationality in
getting assignments
- Equity amongst different to some countries
nationalities
- Potential reentry problems in
home country
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20.  Balance sheet approach to international
compensation is a system designed to equalize
purchasing power of employees at comparable
position levels living abroad and in home
country, and to provide incentives to offset
qualitative differences between assignment
locations
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21. Balance sheet approach is widely used by
international organizations to determine
compensation package for expatriates:
 Basic objective is maintenance of home-country
living standard, plus financial inducement
 Home-country pay and benefits are foundations of
this approach
 Adjustments to home package to balance
additional expenditure in host country
 Financial incentives (expatriate / hardship
premium) added to make package attractive
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22. Balance sheet approach considers four types of outlays which
are incurred by expatriates:
 Goods and services – Outlays incurred in home country for food,
personal care, clothing, household furnishings, recreation,
transportation and medical care
 Housing – All major costs associated with housing in 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
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23. DISADVANTAGES
ADVANTAGES
- Can result in considerable
- Equality between assignments disparities between expatriates
and between expatriates of different nationalities
Of 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)
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