carlton ihrm 6

7/31/2019 Carlton ihrm 6

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CHAPTER 6

COMPENSATION


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COMPENSATION

Because of high cost HR managers spend agreat deal of time developing effectivecompensation and benefit programs forinternational employees.

A survey by the conference board reportedthat an expatriate costs;

29% reported 22.9 times salary.

50% reported 33.9 times salary.18% reported 44.9 times salary.


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COMPENSATION

A recent report in Fortune on doing businessin

China, reported that hiring a local Chinese

Manager with 15 years experience would cost

less than US $70000; a US expatriate wouldcost

US $300000.


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COMPENSATIONFor multinational firms, successful

management ofcompensation and benefits requires: knowledge of the taxation laws,

customs, environment, employment practices of many foreign

countries, familiarity with currency fluctuations, the effect of inflation on compensation,

understanding of why and when specialallowances must be supplied and whichallowances are necessary in what countries.

shifting political, economic and socialconditions.


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Aims of compensation policy

The policy should be consistent with theover all strategy, structure, and businessneeds.

Must be able to attract and retain staff.

Should be able to facilitate transfer of

international employees.

Must take care of equity and ease ofadministration.


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Expectations of employees

Financial protection in terms of benefits,social security, cost of living.

Opportunities for financial advancementthrough savings.

Issues such as housing, education, and

recreation would be taken care.

Career advancement opportunities.


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OBJECTIVES OF INTERNATIONALCOMPENSATION

The expectations of both sides could createpossible problems, since some of theobjectives cannot be maximized and couldlead to a complex situation.

This is more so because three categories ofemployees are involved.

Fundamentally there is not much differencein the expectations of both in formulatingdomestic compensation package.


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Key components of international

compensation

Base Salary

Base salary is the foundation block forinternational compensation.

Other benefits depend on the rate of basesalary.

It may be paid home or local currency.

Major differences can occur depending upon

whether the base salary is linked to homecountry, of PCN or TCN or whether an

international rate is paid.


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Key components of international compensation

Foreign Service Inducement / Hardshipallowance

PCNs often receive a salary premium asinducement or as compensation for anyhardship caused.

These are generally made in percentage ofsalary, usually 5 to 50 % of the base pay.Depending on;

the assignment actual hardship tax consequences length of assignments

host countrys work week


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Allowances

Cost of Living Allowance (COLA)It is important to note that these payments are morecommonly paid to PCNs than TCNs.

Cola receives most attention, involves a payment tocompensate for the differences in expendituresbetween the home country and the foreign country(on account of inflation differentials). Often thisallowance is difficult to determine, so companies

may use the services of other organizations, such asOrganization Resource Counselors, Inc. etc.

COLA may also include payment for housing and

utilities, personal income tax, or discretionary items.

K t f i t ti l


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compensationAllowances

Housing Often paid on either an assessed or actual basis.

Other alternatives include company providedhousing, either

mandatory or optional a fixed housing allowance, or

assessment of a portion of income, out of whichactual housing

costs are paid.

K t f i t ti l


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compensationAllowances

Other Housing Issues

Companies usually pay a tax-equalized housing

allowance in order to discourage the purchase of

housing and/or to compensate for higher housing

costs; this allowance is adjusted periodically, basedon

estimates of both local and foreign housing costs.


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Allowances

Other Housing Issues Housing issues are often addressed on a case to

case basis, but as firm internationalizes, formalpolicies become more necessary and efficient.

Financial assistance and /or protection inconnection with the sale or leasing of anexpatriates former residence are offered by many

multinationals. Those in the banking and financialindustry tend to be more generous, offeringassistance in sale or leasing, payment of closingcosts, payment of leasing management fees, rentprotection, and equity protection.


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Allowances

Leave allowance

To cover the expenses of one or more trips back tohome country each year.

The purpose of paying for such trips is to giveexpatriates the opportunity to review family andbusiness ties, there by helping them to avoid

adjustment problems when they are repatriated.


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Allowances

Leave allowance Some firms give expatriates the option of applying

the allowance to foreign travel rather thanreturning home.

Firms allowing use of home leave allowance needto be aware that expatriates with limitedinternational experience who opt for foreign travel

rather than returning home may become homesick than the other expatriates who return homefor a reality check with fellow employees andfriends.


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Allowances

Education allowance

For expatriates children are also an integral partof any international compensation policy.

The level of education provided for, the adequacyof local schools, and transportation of dependentswho are being educated in other locations maypresent problems for the multinationals.

PCNs and TCNs usually receive the same

treatment concerning educational expenses. Attendance at a university may also be provided

for when deemed necessary.


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Allowances

Relocation allowance

Usually cover moving, shipping and storagecharges, temporary living expenses, subsidiesregarding appliances or car purchase (or sales),and down payments or lease related charges.

Allowances regarding perquisites (cars, clubmemberships, servants, etc) may also be neededto be considered (usually for more seniorpositions, but this varies according to location).

These allowances are often contingent upon tax equalization policies and practices in both homeand the host countries.


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Allowances

Spouse assistance

To help guard against or offset income lost by anexpatriates spouse as a result of relocatingabroad.

Although some firms may pay up an allowance tomake up for spouses loss income.

US firms are beginning to focus on providingspouses with employment opportunities abroad,either by offering job search assistance oremployment in the firms foreign unit (subject towork visa being available).


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Benefits

There is inherent complexity in internationalbenefits.

Companies need to address many issues while

considering benefits. Some of

these are:

Whether to maintain expatriates in home countryprograms, particularly if the firm does not receiveany tax benefits for it.

Whether firms have the option of enrollingexpatriates in home country benefits and / ormaking up any differences in coverage.

Whether expatriates should receive home-country

or host country benefits.


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Benefits

Most US PCNs typically remain under their homecountrys benefits plan. In some countries,expatriates cannot opt out of local securityprograms; in such circumstances, the firm

normally pays for these additional costs.

European PCNs and TCNs enjoy portable socialsecurity benefits within European Union.


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Benefits

Pension plans

difficult to deal with country to country becausenational

practices vary considerably. Transportability ofpension

plans, medical coverage, and social security benefitsare

very difficult to normalize.


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APPROACHES TO INTERNATIONAL

COMPENSATION

There are two main options in the area ofinternational compensation;

Going rate approach (market rate approach)

Balance rate approach (build up approach)



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COMPENSATION Going rate approach Based on local market rates

Relies on survey comparisons Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities

Compensation based on selected surveycomparison

Base pay and benefits may be

supplemented by additional payments forlow pay countries

EG Japanese bank in NY would need to decide

whether its reference point would be local USsalaries, other Japanese competitors or all


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APPROACHES TO INTERNATIONALCOMPENSATION-Going rate approach

Advantages

Equality with localnationals

Simplicity Identification with

host country

Equity amongst

different nationals

Disadvantages

Variation betweenassignments for

some employees Variation between

expatriates of somenationality indifferent countries

Potential re-entryproblems


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COMPENSATION-Going rate approach

COUNTRY CEO COMPENSATION INUS $

US 901,181

Hong Kong 672,877Singapore 572,414France 523,511Britain 489,710Australia 476,700

Switzerland 465,180Canada 440,886Germany 423,898Malaysia 342,151

Survey by Towers Perrin of total compensation around the world


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COMPENSATION

The balance sheet approach

The basic objective is to keep the expatriate

whole.

The foreign assignees should not suffermaterial loss due to their transfer


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COMPENSATION -The balance sheetapproach

Principles

Maintenance of home country livingstandard, plus financial inducement.

Home country pay and benefits are thefoundations of this approach.

Adjustment to home package to balanceadditional expenditure in host country.

Financial incentives (expatriate hardshippremium) added to make the packageattractive.

Most common system in usage bymultinational firms.



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APPROACHES TO INTERNATIONALCOMPENSATION -The balance sheet

approach There are 4 major categories of outlays incurred by

expatriates that are incorporated in the balance sheetapproach.

Goods and services---home country outlays for itemssuch as food, personal care, clothing, house holdfurnishings, recreation, transportation and medicalcare.

Housing---major cost associated with housing in hostcountry

Income-taxes---parent country and host countryincome taxes

Reserve---contributions to savings, payment forbenefits, pension contributions, investments,education expenses, social security taxes, and so on



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APPROACHES TO INTERNATIONALCOMPENSATION -The balance sheet

approach

Expatriate Compensation Worksheet

Employee Brain Smith

Position Marketing Manager Country New Euphoria

Reason for change New Assignment

Effective date of change February 1998


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COMPENSATION -The balance sheet approach

Items Amounts

A$ P.A.

Paid in

A$ P.A.

Paid in

localcurrency

Base salary 123,000

COLA 33,750

Overseas service premium(20%) 27,000

Hardship allowance(20%) 27,000

Housing deduction - 9,450

Tax deduction -51,079

TOTAL 162,221

67,500

27,000

27,000

- 9,450-51,079

60,971

1,01,250

50,625

151,875

COLA Index = 150


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COMPENSATION -The balance sheet approach

Advantages and disadvantages of the balance

sheet approach.dvantages Disadvantages

Equity

-between assignments

-between expatriates of samenationality

Facilitates expatriate re-entry

Easy to communicate toemployees

Can result in disparities

-between expatriates of differentnationalities

-can be quite complex toadminister



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COMPENSATION -Taxation

Taxation probably causes the most concern to HR

practitioners and expatriates (both PCNs and TCNs)since it generally evokes emotional responses.

To illustrate a potential problems, for US

expatriate anassignment abroad can mean being double-taxed

both

in the country of assignment and in the US. This tax

cost, combined with all other expatriate costs,makes

some US multinationals think twice before makinguse

of expatriates.


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COMPENSATION -Taxation Multinationals generally select one of the following approaches to

handle international taxation: Tax equalizationfirms withhold an amount equal to the home

country tax obligation of the PCN, and pay all the taxes in thehost country. It is far more common taxation practice used bymultinationals. Thus for a PCN, tax payments equal to the liability

of a home country tax payer with the same income and familystatus are imposed on the employees salary and bonus. Thefirm typically pays any additional premiums or allowances, taxfree to the employee. As the multinationals operate in more andmore countries, they are subject to widely discrepant income taxrates. It is important to note that just focusing on the income tax

can be misleading because the shares of both social securitycontributions and consumption taxes are rising in the OECDcountries.

(org. for eco. dev. & coop.)


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Tax protectionthe employee pays up to theamount of taxes he or she would pay on

compensation in the home country. In such a

situation the employee is entitled to anywindfall

received if the total taxes are less in foreign

country than in the home country.


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Stuart adds two other approaches;

Ad-hoc, each expatriate is handled differently,depending on the individual package agreed withthe firm.

Laissez faire employees are on their own inconfirming to host country and home countrytaxation laws and practices.

When multinationals plan compensation packages,they need to consider to what extent specificpractices can be modified in each country toprovide for the most tax-effective, appropriaterewards for PCNs, HCNs, and TCNs within the

overall compensation policy of the firm.


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COMPENSATION -International living costs data.

Obtaining up-to-date information on international

living costs is a constant issue for themultinationals.

Many multinationals retain the services of

consultingfirms that may offer a broad range of services. A

number

of consulting firms offer regular surveys that

calculatethe COLA index and are updated in terms of

currency

exchange rates.


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A recent survey of living costs in selected cities ranked 10most expensive cities as;

Tokyo Reykjavik (Iceland)

Geneva Oslo Libreville (Gabon) Copenhagen Berlin Helsinki Stockholm and Munich.


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Multinationals using the balance sheetapproach

must constantly update compensationpackages

with new data on living costs, an on going

administrative requirement. This is an issue to

which expatriate employees pay greatattention,

and forms basis of many complaints ifupdating

substantially lags behind any rise in living

costs.


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Multinationals must also be able to respondto

unexpected events, such as currency andstock

market crash that suddenly unfolded in anumber

of Asian countries in late 1977. somecountries,

such as Indonesia, faced a devaluation of theircurrency by over 50% as against US $ in amatter

of weeks, which had a dramatic impact onprices

and cost of living.


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The economist has developed its own bench mark ofliving costs based on the cost of a Mc Donalds Big Macaround the world.

There are also considerable disparities in purchasingpower around the world. The exhibit shows a range ofdata to illustrate this point with the purchasing power ofworking time shown for a range of factors. While the USworkers do not have the highest hourly earnings, the

purchasing power of the working time is high in terms ofless working time required to pay for items such as petrol,income tax liability, consumer durables and food items.


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A recent study by Economist Intelligence unitcalculated an index that measures the relativecost of doing business in 27 economies bycompiling statistics relating to wages, costs forexpatriate staff, air travel and subsistence,

corporate taxes, perceived corruption levels, officeand industrial rents, and road transport. The top10 most expensive countries in terms of businesscosts in 1997 were;

1. Germany 2. US

3. Belgium 4. Britain 5. France 6. The Netherlands 7. Sweden 8. Australia 9. Italy 10. Singapore


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APPROACHES TO INTERNATIONAL COMPENSATION

the purchasing power of working time.

ustralia

Canada

Germany

USA

Korea

Bread/KG

mins

6.5

6.5

5

3.5

18

Coffee/KG

h. Mins

2 11

47.5

20

36.5

4 15.5

MensShoes/pair

H mins

4 10

3 45

2 38

4 56.5

10 8

Petrol/ litre

H mins

2.5

1.5

2

1

7.5

Rent 4 rms

H mins

26 47.5

28 32

15 25.5

54 56.5

69 46

Color TV

H mins

22 34

14 16

35

16 29

101 20

I-T P.A.

H mins

265 30.5

481 3

135 42

129 24

95 11.5

Net earn/ H.1995

$ US

12.53

16.73

27.06

18.2

6.17


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Germany is the most expensive countryoverall because of its very high basic wages,while the second most expensive rank for theUS is in large part because of high executive

salaries. In general, developed countriesrank as more expensive than developingcountries because their wage costs arehigher.



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COMPENSATION - Differentiating Between PCNs

and TCNs One of the outcomes of balance approach is

to produce differentiation betweenexpatriate employees of differentnationalities because of the use of

nationality to determine the relevant homecountry base salary. In effect, this is adifferentiation between PCNs and TCNs.Many TCNs have great deal of international

experience because they often from countryto country in the employee of onemultinational.



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and TCNs Reynolds has observed, that there is no

doubt that paying TCNs according to theirhome country base salary can be lessexpensive than paying all expatriates on aPCN scale (particularly if the multinational ishead quartered in a country such as US orGermany, which has both high managerialsalaries and a strong currency), butjustifying these differences can be very

difficult. the reduction in expensesoutweighs the difficulty of justifying any paydifferentials.



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and TCNs However, as firms expand internationally, it

is likely that TCN employees will becomemore valuable and firms may need to rethinktheir approach to compensating TCNs.

As a starting point, multinationals need tomatch their compensation policies with thestaffing policies and general HR philosophy.



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and TCNs If a firm has an ethnocentric staffing policy,

its compensation policy should be one ofkeeping the expatriate whole (ie maintainingrelativity to PCN colleagues plus

compensating for the costs of internationalservice).



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and TCNs If however staffing policy follows a

geocentric approach (ie, staffing a positionwith the best person regardless ofnationality) there may be no clear home

for the TCN, and the firm will need toconsider establishing a system ofinternational base pay for key managers paidin a major reserved currency, such as US $ or

Deutsche Mark. This allows the firm to dealwith considerable variation in base salariesfor managers.



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Researchers have argued that Thenationality or national systems thinkinghas had an excessive influence on managingcompensation and reward systemsinternationally, and propose a strategicflexibility model, shown below.

This model groups forms of totalcompensation into 3 sets: core, crafted and

choice.

Specific practices in the core section mayvary according to the market and local

conditions but must be consistent with thecore olicies.


COMPENSATION - Differentiating Between

PCNs and TCNs

Strategic Flexibility of International Compensation


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Strategic Flexibility of International Compensation

Assignments Stock PurchasesCHOICE

Tax Deferral Base / bonus Mix

CUSTOMIZE

Base/BonusMix

Stock Options

Benefit Choices

FlexibleSchedules

CORECompetitive Cash

Basic BenefitsPerformance Based

EmployabilityWork Based

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