The document discusses the key components of international compensation programs for expatriates, focusing on various elements such as base salary, foreign service premiums, and allowances like cost-of-living and housing. It outlines differences in compensation packages for parent-country nationals (PCNs), third-country nationals (TCNs), and host-country nationals (HCNs), along with challenges related to managing benefits, such as healthcare and pensions. The conclusion emphasizes that multinationals pay allowances to encourage international assignments and maintain employees' standards relative to their home country.

1. An Assignment on
‘KEY COMPONENTS OF AN
INTERNATIONAL COMPENSATION PROGRAM’
Assignment No: 1
Course code: MGT-406
Course Title: International Human Resource Management.
Submitted To:
Mr. Mohammad Ikbal Hossain
Lecturer
Department Business Administration
Daffodil International University
Submitted BY:
161-11-270
MD. Naim
Department of Business of Administration
Daffodil International University
Submitted date 25-03-19

2. The area of international compensation is complex primarily because multinationals
must cater to three categories of employees: PCNs, TCNs and HCNs. In this section,
we discuss key components of international compensation as follows.
Base salary
The term base salary acquires a somewhat different meaning when employees go abroad. In a
domestic context, base salary denotes the amount of cash compensation serving as a benchmark
for other compensation elements (such as bonuses and benefits). For expatriates, it is the primary
component of a package of allowances, many of which are directly related to base salary (e.g.
Foreign Service premium, cost-of-living allowance, housing allowance) as well as the basis for
in-service benefits and pension contributions. It may be paid in home or local country cur-rency
or a combination of both. The base salary is the foundation block for international compensation
whether the employee is a PCN or TCN. Major differences can occur in the employee’s package
depending on whether the base salary is linked to the home country of the PCN or TCN, or
whether an international rate is paid
Foreign Service inducement and hardship premium
Parent-country nationals often receive a salary premium as an inducement to accept a
foreign assignment, as well as a hardship premium to compensate for challenging locations.
Under such circumstances, the definition of hardship, eligibility for the premium, and
amount and timing of payment must be addressed. For example, where a host country’s
work week may be longer than that of the home country, a differential payment may be
made in lieu of overtime, which is not normally paid to PCNs or TCNs. In cases in which
hardship is determined, US firms often refer to the US Department of State’s Hardship Post
Differentials Guidelines to determine an appropriate level of payment. As a number of
researchers in this field have noted over many dec-ades18 making international comparisons
of the cost of living is problematic. It is important to note, though, that these payments are
more commonly paid to PCNs than TCNs. Foreign service inducements, if used, are usually
made in the form of a percentage of salary, usually 5 to 40 per cent of base pay, but are also
sometimes offered as a lump-sum incentive (i.e. as a one-off payment made at some point
during an assignment). Such payments vary, depending upon the assignment location, tax
consequences, and length of assignment.
Allowances
Issues concerning allowances can be very challenging to a firm establishing an overall
compensation policy, partly because of the various forms of allowances that exist. In this
section we will discuss the six most common allowances.
Cost-of-living allowance:
The cost-of-living allowance (COLA), which typically receives the most attention, involves
a payment to compensate for differences in expenditures between the home country and the

3. foreign country. COLA payments are intended to compensate for cost differentials between
an expatriate’s home and host country, for example, the costs of transportation, furniture
and appliances, medical, alcohol and tobacco, automobile maintenance and domestic help.
Family size is the predominant method for determining COLA payments, with increments
provided for each child. Often this allowance is difficult to determine, so companies may
use the services of organizations such as Mercer (a US-based firm) or ECA International
(based in Britain).20 These firms specialize in providing COLA information on a global
basis, regularly updated, to their clients. The COLA may also include payments for housing
and utilities, and discretionary items.21 Various COLA indices exist, which, for example,
allow an American to live like an American in Paris or which presume that the American
will adapt to the assignment location by adjusting to the local life style and international
living costs.
Housing allowance:
Implies that employees should be entitled to maintain their home-country living standards
(or, in some cases, receive accommodation that is equivalent to that provided for similar
foreign employees and peers). The amount of housing allowance is determined
predominantly by family size, and to some extent job level. Other alternatives include
company-provided housing (either mandatory or optional); a fixed housing allowance
across a particular job level, with the expatriate ‘topping up’ according to personal
preferences; or assessment of a portion of income, out of which actual housing costs are
paid. Housing issues are often addressed on a case-by-case basis, but as a firm international-
sizes, formal policies become more necessary and efficient. Financial assistance and/or
protection in connection with the leasing of an expatriate’s former residence is offered by
many MNEs, but less so for selling a house as many MNEs encourage their employees to
retain a presence in their home country real estate market. Those in the banking and finance
industry tend to be the most generous, offering assistance in sale and leasing, payment of
closing costs, payment of leasing management fees, rent protection and equity protection.
Generally, TCNs tend to receive these benefits less frequently than PCNs.
Home leave allowances:
Many MNEs also have a provision for home leave allowances where employers cover
the expense of one or more trips back to the home country each year. The primary
purpose of paying for such trips is to give expatriates the opportunity to renew family
and business ties, thereby helping them to minimize adjustment problems when they
are repatriated. Although firms traditionally have restricted the use of leave allowances
to travel home, some firms give expatriates the option of applying home leave to
foreign travel rather than returning home. Firms allowing use of home leave
allowances for foreign travel need to be aware that expatriate employees with limited
international experience who opt for foreign travel rather than returning home may
become more homesick than other expatriates who return home for a ‘reality check’
with fellow employees and friends. Without the benefit of returning home to mix with
employees and friends it is possible to idealize what they remember of their experience
at work and home and fail to come to a measured judgment of what is good and bad in
both their host and home environments. Overall, it would seem prudent for MNEs to
take the view that home leave allowances should normally be used for the purpose they

4. are provided to give employees and their families the opportunity to renew family and
business ties, thereby increasing the probability of reduced adjustment problems when
they are repatriated.
Education allowances:
The provision of education allowances for the children of expatriates is frequently an
integral part of an international compensation policy. Allowances for education can
cover items such as tuition (including language classes), application and enrolment
fees, books and supplies, meals, transportation, excursions and extra-curricular
activities, parent association fees, school uniforms and, if applicable, room and board.
Although school uniforms are not common in the USA, it is common practice (and in
many countries compulsory) for school children to wear uniforms, particularly in
international schools. PCNs and TCNs usually receive similar treatment concerning
educational expenses, but the level of education provided for and the adequacy of local
public schools versus international schools may present problems for multinationals.
International schools (e.g. United World College of South East Asia, British
International School Shanghai) are far more expensive than local public schools but
are pre-ferried by many expatriates because these schools follow the home-country
curriculum and cater to a globally diverse student body more capable of supporting
‘third culture kids’. The cost of local and international schools for dependent children
from kindergarten through to high school are typically covered by the employer ORC
reports that 95 per cent of MNEs contribute to the educational expenses of expatriate
children.22 However, there may be restrictions depending on the age of children (pre-
school, day care and university are typically not covered), availability of school places,
and their fees. In a number of countries attendance at schools in the host location may
be seen as unsuitable and the MNE may cover (or contribute towards) the costs of
children attending a private boarding school elsewhere (e.g. the costs of room and
board as well as other transportation costs to cover parental visits and school holiday
travel). The costs of attendance at a university may also be provided for by
multinationals, when deemed necessary, but this is rare.
Relocationallowances:
Items typically covered by include 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 perqui-sites (cars, drivers,
club memberships, servants and so on) may also need to be considered (usually for
more senior positions, but this varies according to location). These allowances are
often contingent upon tax-equalization policies and practices in both the home and the
host countries. For example, in most Western countries a driver is considered a luxury,
only available to very senior managers. In developing economies a driver is
economical in terms of cost, effectiveness and safety. Apart from the expectation that
managers use drivers, parking is frequently chaotic in developing countries (especially
in large cities) and the driver also performs the function of a parking attendant. In
some developing countries it is quite common for the police to
Arrest drivers involved in traffic accidents and leave them in detention while responsibility
and damages are assessed. Such a risk is unacceptable to many MNEs which do not allow

5. their expatriate employees to drive at all in specific developing countries and provide local
drivers for both the expatriate and spouse.
Spouse assistance:
Increasingly, many MNEs are also offering to help guard against or offset income lost by an
expatriate’s spouse as a result of relocating abroad. Payments, on average, are capped at
US$7000 per family but vary according to region. Although some MNEs may pay a one-
time allowance to make up for a spouse’s lost income (averaging US$11 000 per family
according to ORC), US multinationals are beginning to focus on providing spouses with
employment opportunities abroad, either by offering job-search assistance, career
counseling, cultural orientation, resume/CV preparation, work permit assistance and
language tuition, or in more unusual cases employment in the MNE’s foreign business
(subject of course to a work visa being approved by the host country government for this
purpose).
To summarize, MNEs generally pay allowances in order to encourage employees to take
international assignments and to keep employees ‘whole’ (i.e. relatively comparable) to
home standards. We will present more about this concept later in the chapter.
Benefits
The complexity inherent in international benefits often brings more difficulties than when
dealing with compensation. Expatriate ‘benefits’ includes health care, pension plans/social
security, life insurance, child allowances and profit sharing/stock option plans.
Pension plans are very difficult to deal with country-to-country as national practices vary
considerably. Transportability of pension plans/social security and medical coverage
benefits are very difficult to normalize. Therefore, MNEs need to address many issues when
considering benefits, including:
1. Whether or not to maintain expatriates in home-country programs, particularly if
the multinational does not receive a tax deduction for it.
2. Whether MNEs have the option of enrolling expatriates in host-country benefit
programs and/or making up any difference in coverage.
3. Whether expatriates should receive home-country or are eligible to receive host-
country social security benefit.