Dr. Jhansi Rani M R, Dr. M. R. Jhansi Rani, Approaches of international compensation, key components of an International compensation program, executive compensation.

1. MODULE - 4
International
Compensation
Dr. Jhansi Rani M R

2. International Compensation
 International compensation refers to all forms of financial returns and tangible benefits that employees
of an international organization receive from their employer in exchange for providing their labor and
commitment.
 For the most part, traditional methods of compensation involve set pay levels (wage or salary) with
regular increases. Increases can be given for a variety of reasons, but are typically given for
promotions, merit increases, or cost of living increases.
 An international assignment compensation system has to be finely balanced, adequately rewarding and
motivating expatriates while keeping costs under control for corporate headquarters.
 Because of the enormous investment, developing a comprehensive global compensation system for
expatriates is one of the most critical challenges facing by global human resource management.

3. Objectives of International Compensation
 It can be extremely expensive to live in some countries. Therefore determining equitable wage rates in many countries is not a simple matter of equality
in pay. Most expatriate compensation plans are designed to achieve four major objectives:
1. Attract employees who are qualified and interested in international assignments. Thus the compensation policy works to attract and retain staff
in the areas where the multinational has the greatest needs and opportunities.
2. Facilitate the movement of expatriates from one subsidiary to another, from home to subsidiaries, and from subsidiaries back home. To achieve
this policy must be competitive and recognize factors such as incentives for Foreign Service, tax equalization, and reimbursement for reasonable
costs.
3. Provide a consistent and reasonable relationship between the pay levels of employees at headquarters, domestic affiliates, and foreign
subsidiaries and
4. The policy must be made cost-effective by reducing unnecessary expenses. It must give due consideration to equity and ease of administration.

4. Objectives of International Employee
 The employee will expect that the policy offers financial protection in terms of benefits,
social security, and living costs in the foreign location.
 The employee will expect that a foreign assignment will offer opportunities for financial
advancement through income and/or savings.
 The employees will expect that issues such as housing, education of children and
recreation will be addressed in the policy.

5. Basic Approaches To Compensation
 Determining equitable wage rates in many countries is no simple matter. One of the greatest difficulties in managing total
compensation on a multinational level is establishing a consistent compensation measure between countries that builds credibility
both at home and abroad. There are four basic approaches to compensation:
1. HQ-based model: Expatriates are paid according to the headquarters compensation structure.
2. Modified home-country model: Expatriates are paid according to their home- country salary structures, and their living
standard is protected so as to be comparable to the home country or some other chosen standard.
3. Better of home or host model: Expatriates receive the higher of the home-country system or the host-country system
4. Host-country/local-market package: Expatriates are paid according to the host- country compensation structure.

6. Key Components of International Compensation Program
 The area of international compensation is complex primarily because multinationals must cater for three categories of employees:
PCNs, TCNs, and HCNs. The key components of international compensation include base salary, Foreign Service inducement/hardship
programme, allowances, benefits and taxation.
1. Base Salary: The term base salary acquires a different meaning when employees go abroad.
 In a domestic context, base salary denotes the amount of cash compensation that serves as a benchmark for other
compensation elements (example, bonuses and benefits).
 For expatriates, it is the primary component of a package of allowances, many of which are directly related to base salary
(example, Foreign Service premium, cost-of-living allowance, and housing allowance) as well as the basis for in-service
benefits and pension contributions

7. Key Components of International Compensation Programme
2. Foreign Service Inducement/Hardship Premium
 Parent-country nationals often receive a salary premium as an inducement to accept a foreign assignment as
compensation for any hardship caused by the transfer.
 Under such circumstances, the definition of hardship, eligibility for the premium, and amount and timing of
payment must be addressed.
3. Premiums and allowances
 Housing allowance
 Hardship and hazard/danger pay
 Cost-of-living adjustments
 Educational assistance
 Relocation allowances
 Home leave
 Spouse assistance allowance

8. Key Components of International Compensation Programme
4. Benefits
 International benefits bring more difficulties while dealing with compensation for the employees. Pension plans are very difficult to deal with country
to country because national practices vary considerably.
 Transportability of pension/retirement plans, medical coverage/health care plans, and social security benefits are very difficult to normalize.
 Multinationals also provide vacations and special leave. Included as part of the employee’s regular vacation, annual home leave usually provides
airfares for families to return to their home countries.
5. Taxation:
 Tax equalization: firms withhold an amount equal to the home country tax obligation of the PCN, and pay all taxes in the host country.
 Tax protection: the employee pays up to the amount of taxes he or she would pay on compensation in the home country. In such a situation, the
employee is entitled to any windfall received if total taxes less in the foreign country than in the home country.

9. Executive Compensation
 Executive compensation refers to the compensation received by the top executives of business corporations. This includes a basic salary, bonuses, shares, options and
other company benefits. Because of the changing economic conditions, it is very difficult to find and retain the executives who can motivate the people and lead the
company to the heights by clearly communicating and achieving the vision of the organization.
 It is a common trend that the executives are swayed by the unique and the challenging opportunity rather than the attractive compensation packages. But, over the
past three decades, executive compensation has risen dramatically beyond the rising levels of an average worker’s wage.
 Executive compensation is an important part of corporate governance, and is often determined by a company’s board of directors. Overall compensation is very
important as the qualified candidate enjoys more negotiating power.
 So, the company needs to have a flexible compensation packages for their executives. Executive compensation packages can be designed by studying the competitors
offerings as well.

10. Components of Executive Compensation
 The basic components of the executive compensation includes the base salary, short-term incentives or bonuses, long-term incentive
plans, employee benefits, perks and compensation protection (golden parachute).
 Long-term incentive plan comes in the form of performance shares or matching shares of the company.
 In addition to it, the executives participate in “broad based” employee benefit plans and receives special benefits like life insurance
and supplemental retirement’s plans.
 The compensation package of the executives is very flexible as the components of their compensation packages may vary from equity,
restricted stock, flexible schedules, deferred compensation, performance incentives and other kind of compensation.

11. Components of Executive Compensation
1. Equity or stock options are the contracts which give the recipient the right to buy the share of the stock at a
“pre-specified” exercise price for a pre-specified term. The amount of the stock option given by the company to
its executive depends on the industry and the valuation of the stock. They typically become exercisable over
time. They are normally non-tradable and are forfeited if the executive leaves the firms before exercising.
2. Restricted stock are the stocks given to an executive that cannot be sold until certain conditions are met and
has the same value as the market price of the stock at the time of grant. As the size of stock option grants have
been reduced, the number of companies granting restricted stock either with stock options or instead of has
increased.

12. Components of Executive Compensation
3. Now a day’s international companies have started adding flexible schedules to the executives pay packages.
Employers offering the flexi time or compressed workweeks, in geography (telecommuting or satellite workplaces),
in time off (floating holidays or vacations carry over) and in career paths (job-sharing) have an added advantage in
attracting the talent pool.
4. Deferred compensation plans are effective tools for retaining employees because they reward employees based
on the company’s performance over time (typically three to five years). They are an investment vehicle that allows
people to defer taxation of both the initial contribution and the earnings on the deferred assets.

13. Components of Executive Compensation
5. Performance incentives are special incentives – shares of stock, cash, vacations, or other bonuses –
tied to the performance of the department or business area that the executive manages. Performance
incentives linked to long-term goals create vision that can inspire an executive to remain committed to a
company.
6. Other benefits like car allowances, life insurance, relocation payments, flexible start dates, signing
bonuses, use of company-owned vacation property, health-club membership, tuition reimbursements,
etc. Offering non-monetary incentives also helps in attracting the talented candidates for the executive
level.

14. Strategies for the Growth of Executive Compensation
 Shareholders must approve all equity compensation plans.
 Independent non-executive director setting of compensation is widely practiced.
 Disclosure of salaries is the first step, so that company stakeholders can know and decide whether or not they think remuneration is
fair.
 A say on pay – a non-binding vote of the general meeting to approve director pay packages.
 Progressive taxation is a strategy that affects executive compensation, as well as other highly paid people.
 Maximum wage is the idea to place a cap on the amount that any person may legally make.
 Indexing Operating Performance is a way to make bonus targets business cycle independent.

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