Compensation management in international context

1. Compensation Management in
International Context
1Ligo Koshy, Faculty, MACFAST,Tiruvalla

2. Key Components of International
Compensation
Key Components:
• Base salary
• Foreign services inducement and Hardship premium
• Allowances
» Cost of Living Allowance(COLA)
» Housing Allowance
» Home Leave Allowance
» Education Allowance
» Relocation Allowance
» Spouse Assistance
• Benefits
22Ligo Koshy, Faculty, MACFAST,Tiruvalla

3. Base Salary
• Expatriates salaries are typically set according to the base
salary of the home country
• The salaries are usually paid in Home currency, local currency
, or a combination of the two
• The base salary serves as the benchmark against which
benefits are calculated
33Ligo Koshy, Faculty, MACFAST,Tiruvalla

4. Foreign Service Inducement and
Hardship Premium
• Perceived as an inducement in the form of salary premium to accept a foreign /
overseas assignment or as compensation for any hardship caused by the
transfer.
• Foreign service inducements are usually made in the form of a percentage of
salary, 5-40% of base pay.
• In addition , if the work-week in the host country is longer than in the home
country, the assignee will be paid for extra hours worked
• Certain countries are highly hostile to foreigners staying and working.
Expatriates in such environment are paid 2-3 times more than their domestic
salaries
44Ligo Koshy, Faculty, MACFAST,Tiruvalla

5. Allowances
• Multinationals generally pay allowances in order to encourage
employees to take international assignments and to keep
employees lifestyle relative to home standards.
• Various forms of allowances, such as:
– Cost-of-living allowance (COLA)
– Housing allowance
– Relocation allowance
– Education allowance
– Home leave allowance
55Ligo Koshy, Faculty, MACFAST,Tiruvalla

6. Cost-of-living Allowances (COLA)
• It is the allowance which aims to compensate the differences
in cost of living between the home and foreign country.
• The COLA may also include payments for housing and utilities,
personal income tax.
66Ligo Koshy, Faculty, MACFAST,Tiruvalla

7. Housing Allowance
• Employees should be entitled to maintain their home-country
living standards
• The amount of housing allowance is determined
predominantly by family size, and to some extent job
title/level.
7Ligo Koshy, Faculty, MACFAST,Tiruvalla

8. Relocation Allowances
• Usually cover moving, shipping and storage charges,
temporary living expenses, subsidies regarding appliance
or car purchases (or sales) and down payments or lease-
related charges.
– Allowances regarding perquisites (cars, club memberships,
servants and so on) may also need to be considered (usually for
more senior positions, but this varies according to location).
88Ligo Koshy, Faculty, MACFAST,Tiruvalla

9. Education Allowances
• For the children of expatriates.
– Allowances for education can cover items such as
tuition, language class tuition, enrolment fees,
books and supplies, transportation etc.
99Ligo Koshy, Faculty, MACFAST,Tiruvalla

10. Spouse Assistance
• To help guard against or offset income lost by an
expatriate’s spouse as a result of relocating abroad.
– Some firms may pay an allowance to make up for a spouse’s lost
income.
– U.S. firms are beginning to focus on providing spouses with
employment opportunities abroad, either by offering job-search
assistance or employment in the firm’s foreign office (subject to a
work visa being available).
1010Ligo Koshy, Faculty, MACFAST,Tiruvalla

11. Alternative Allowances
• Home leave alternatives:
–Allow foreign travel rather than returning
home
1111Ligo Koshy, Faculty, MACFAST,Tiruvalla

12. Benefits
• Expatriates Benefits includes
• Healthcare
• Pension plans/ social security
• Life insurance
• Profit sharing/ stock options plans
• Issues need to be addressed by the MNC while designing the
benefits are as follows
• Whether or not to maintain expatriate in home country programs
• Whether to enrol expatriates in host country benefit program
1212Ligo Koshy, Faculty, MACFAST,Tiruvalla

13. Approaches to International
Compensation
13Ligo Koshy, Faculty, MACFAST,Tiruvalla

14. Approaches to International
Compensation
• Various Approaches includes
• The Budget System
• Local going rate system
• Balance sheet or Home net system
14Ligo Koshy, Faculty, MACFAST,Tiruvalla

15. Budget System
• This system takes in to account all costs incurred by the
employee at both the home and host country.
• MNC’s will compensate for all the expenses of the expatriate
in the home and in the host country.
• MNC’s will have a control on the spending pattern of the
expatriate.
15Ligo Koshy, Faculty, MACFAST,Tiruvalla

16. Local Going Rate Approach
• Based on local market rates/ host country
• Relies on survey comparisons among
• Local nationals (HCNs)
• Expatriates of same nationality
• Expatriates of all nationalities
• The main Advantages of this Approach is that
• Pay equality with nationals is facilitated
• Promotes equity amongst different nationalities doing the
same work
• Simple and easy for expatriates to understand provides
grater identification with the host nation
1616Ligo Koshy, Faculty, MACFAST,Tiruvalla

17. Balance Sheet or Home Net System
• The objective behind this system is to provide the
same net sum of salary in both, home and host
countries so as to maintain home-country living
standard.
• Net sum of salary means the freely disposable
income
17Ligo Koshy, Faculty, MACFAST,Tiruvalla

18. The Balance Sheet Approach
18
• The basic objective is to maintain home-country living
standard plus a financial inducement to make the package
attractive.
• The idea is that spending power must be identical in both
countries
• Home-country pay and benefits are the foundations of this
approach
• Adjustments to home package to balance additional
expenditure in host country
• Financial incentives (e.g.hardship premium) added to make the
package attractive
• Most common system in usage by multinationals
Ligo Koshy, Faculty, MACFAST,Tiruvalla

19. Major Categories Incorporated in the
Balance Sheet Approach
19
• Goods and services
• For items such as food, personal care, clothing, household
furnishings, recreation, transportation, and medical care.
• Housing
• Major costs associated with housing in the host country.
• Income taxes
• Parent-country and host-country income taxes.
• Reserve
• Contributions to savings, payments for benefits, pension
contributions, investments, social security taxes, etc.
19Ligo Koshy, Faculty, MACFAST,Tiruvalla

20. A Typical Balance Sheet
20
Additional Costs
Paid by Company
Reserve Reserve Reserve Reserve
Goods and
Services
Goods and
Services
Goods and
Services
Goods and
Services
Housing
Housing
Housing Housing
Income
Taxes
Income
Taxes
Premiums and
Incentives
Host-Country
Costs Paid by
Company and
from Salary
Home-Country
Equivalent
Purchasing
Power
Host-Country
Costs
Home-Country
Salary
Income
Taxes
Home- and
Host-Country
Income Taxes
20Ligo Koshy, Faculty, MACFAST,Tiruvalla

21. International Taxation- Approaches
• MNC’s generally select one of the two approaches to manage
International Taxation
• Tax protection
• Expat will pay the tax in both the countries
• The company reimburses the expatriate for the
difference, if the actual home tax plus the host country
tax is greater than the hypothetical tax calculation
• Tax equalization
• The company pays both the home and host country
taxes for the expatriate
• The company calculate the hypothetical tax and makes
the deductions from the persons paycheck on that
basis
21Ligo Koshy, Faculty, MACFAST,Tiruvalla