report

1. Company
LOGO
INTERNATIONAL
COMPENSATION POLICIES
Managing an Supporting International Assignments – Chapter 6

2. Company
LOGO
Employer’s Objectives
• Consistent with over all strategy
• Must attract and retain staff
• Facilitate transfer of international employees
• 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
Employees’ Objectives

3. Company
LOGO
KEY COMPONENTS OF AN
INTERNATIONAL COMPENSATION
PROGRAM
Managing an Supporting International Assignments – Chapter 6

4. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
APPROACHES TO INTERNATIONAL
COMPENSATION
Managing an Supporting International Assignments – Chapter 6

11. Company
LOGO
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. Company
LOGO
The Going Rate Approach
• 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
DISADVANTAGES ADVANTAGES

13. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
Advantages and Disadvantages
• Advantages
– 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

17. Company
LOGO
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

18. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
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. Company
LOGO
Tentative Conclusions: Patterns in
complexity
Universal Pay Level Local
•Firm
•Nation
•Group
•Job
•Person