comparative international compensation

8/3/2019 Comparative International Compensation

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Comparative International Compensation

Introduction

Increasingly, today, globalization is a reality for organizations of almostany size. Only the smallest companies seem unaffected by thedisappearance of global boundaries among organizations, markets, and

people. Globalization has increased awareness of and concern for creatinginternationally equitable compensation systems in many companies. Thecomplex nature of international compensation dictates that it receivesspecial attention from organization operating in a multi-national

environment. It is crucial that organizations understand the kind ofemployees employed by international firms, the elements that comprise aninternational compensation system, and the special problems associatedwith returning citizens on overseas assignments to their home corporation.

An expatriate, sometimes referred to as an expat, is a citizen of the countryin which the organization's headquarters is domiciled. For example, anAmerican working for U.S. subsidiary or branch located in Thailand is anexpatriate. An organization may elect to send a domestic employee ormanager to an overseas assignment for any number of reasons: to broaden

an employee's or manager's perspectives relative to internationaloperations, to start or staff new ventures, to train local employees, to utilizespecific expertise possessed by the employee, to protect the organization'sinterests, to help develop the employee or manager, to assist in the transferof technology or skills, or to market products. Evidence suggests thatAmerican firms use expatriates to a much lesser extent than do Japanesefirms.

Objectives of international compensation

Should be consistent with the overall strategy, structure and business needsof the multinational.

Must work to attract and retain staff in the areas where themultinational has the greatest needs and opportunities, hence must

be competitive and recognize factors such as incentive for foreignservice, tax equalization and reimbursement for reasonable costs.


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Should facilitate the transfer of international employees in the mostcost-effective manner for the firm.

Must give due consideration to equal remuniration

Key Components of international compensation

The area of international compensation is complex, primarily because multinationals must cater to three categories ofemployees:

o PCNs, TCNs and HCNso Key Components:

Base salary Foreign services inducement Hardship premium Allowances Benefits

Base Salary

In a domestic context, base salary denotes the amount of cashcompensation serving as a benchmark for other compensationelements (such as bonuses and benefits).

For expatriates, many allowances are directly related to base salary(e.g. foreign service premium, cost-of-living allowance, housingallowance)

It is the basis for in-service benefits and pension contributions maybe paid in home or local-country currency.

The base salary is the foundation block for internationalcompensation whether the employee is a PCN or TCN.


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Major differences can occur in the employees package dependingon whether the base salary is linked to the home country of the PCNor TCN, or whether an international compensation rate is paid.

Foreign Service Inducement and Hardship Premium

Parent-country nationals often receive a salary premium as aninducement to accept a foreign assignment or as compensation forany hardship caused by the transfer.

o The definition of hardship, eligibility for the premium andamount and timing of payment must be addressed.

o In cases in which hardship is determined, U.S. firms often

refer to the U.S. Department of States Hardship PostDifferentials Guidelines to determine an appropriate level ofpayment.

Foreign service inducements are usually made in the form of apercentage of salary, 5-40% of base pay.

o Such payments vary, depending upon the assignment, actualhardship, tax consequences and length of assignment.

More commonly paid to PCNs than to TCNs.

Allowances

Multinationals generally pay allowances in order to encourageemployees to take international assignments and to keep employeeswhole relative to home standards.

Establishing an overall compensation policy can be verychallenging, partly because of the various forms of allowances, suchas:

o Cost-of-living allowanceo Housing allowanceo Relocation allowanceo Education allowanceo Home leave allowanceo Hardship allowance


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Cost-of-living Allowances (COLA)

COLA receives the most attention, to compensate for differences inexpenditures between the home country and the foreign country(e.g., to account for inflation differentials, currency fluctuations,etc.).

The COLA may also include payments for housing and utilities,personal income tax or discretionary items.

The provision of a housing allowance implies that employees shouldbe entitled to maintain their home-country living standards (or, insome cases, receive accommodation that is equivalent to that

provided for similar foreign employees and peers). International comparison of cost of living is difficult and can be

problematic.

Relocation Allowances

Usually cover moving, shipping and storage charges, temporaryliving expenses, subsidies regarding appliance or car purchases (or

sales) and down payments or lease-related charges.o Allowances regarding perquisites (cars, club memberships,

servants and so on) may also need to be considered (usuallyfor more senior positions, but this varies according tolocation).

o These allowances are often contingent upon tax-equalizationpolicies and practices in both the home and the host countries.

Education Allowances

Expatriates children are an integral part of any internationalcompensation policy.

o Allowances for education can cover items such as tuition,


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language class tuition, enrolment fees, books and supplies,transportation, room and board and uniforms.

o PCNs and TCNs usually receive the same treatmentconcerning educational expenses.

Allowances for Spouse Assistance

To help guard against or offset income lost by an expatriates spouseas a result of relocating abroad.

o Some firms may pay an allowance to make up for a spouseslost income.

o U.S. firms are beginning to focus on providing spouses with

employment opportunities abroad, either by offering job-search assistance or employment in the firms foreign office(subject to a work visa being available).

Alternative Allowances

Housing alternatives may include:o Company-provided housing, either mandatory or optional

o A fixed housing allowanceo Or assessment of a portion of income, out of which actual

housing costs are paid. Home leave alternatives:

o Allow foreign travel rather than returning homeo Expatriates may become more homesick than others who

return home for a reality check with fellow employees andfriends.

As a firm internationalizes, formal policies become more necessaryand efficient.

Benefits


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In addition to the already discussed benefits, multinationals alsoprovide vacations and special leave.

o Annual home leave usually provides airfares for families toreturn to their home countries.

o Rest and rehabilitation leave, based on the conditions of thehost country, may provide the employees family with airfaresto a more comfortable location near the host country.

o Emergency provisions are available in case of a death orillness in the family.

o Employees in hardship locations often receive additionalleave expense payments or rest and rehabilitation periods.

Issues Concerning Benefits

Very difficult to deal with country-to-country, as national practicesvary considerably:

o Transportability of pension planso Medical coverageo Social security benefits

Firms need to address many issues, including:o Whether or not to maintain expatriates in home-country

benefit programs, particularly if the firm does not receive atax deduction for it.

o Whether firms have the option of enrolling expatriates inhost-country benefit programs and/or making up anydifference in coverage.

o Whether expatriates should receive home-country or host-country social security benefi

Issues Concerning Benefits (cont.)

Laws governing private benefit practices differ from country tocountry, and firm practices also vary.


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In some countries, expatriates cannot opt out of local social securityprograms. In such circumstances, the firm normally pays for theseadditional costs.

o European PCNs and TCNs enjoy portable social securitybenefits within the European Union.

Multinationals have generally done a good job of planning for theretirement needs of their PCNs.

Approaches to international compensation

There are two main options in the area of international compensation.

Going Rate Approach

Based on local market rates Relies on survey comparisons among

o Local nationals (HCNs)o Expatriates of same nationalityo Expatriates of all nationalities compensation based on the

selected survey comparison

Base pay and benefits may be supplemented by additional paymentsfor low-pay countries.

Advantages and Disadvantages of the Going Rate Approach

Advantageso Equity withy local nationalso Simplicity

o Identification with host countryo Equity among different nationalities

Disadvantageso Variation between assignments for same employee


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o Variation between expatriates of same nationality in differentcountries

o Potential re-entry problems

The Balance Sheet Approach

The basic objective is to keep the expatriate whole throughmaintenance of home-country living standard plus a financialinducement to make the package attractive.

o Home-country pay and benefits are the foundations of thisapproach

o Adjustments to home package to balance additionalexpenditure in host country

o Financial incentives (e.g., expatriate/hardship premium) addedto make the package attractive

o Most common system in usage by multinationals

Major Categories Incorporated in the Balance Sheet Approach(cont.)

Goods and serviceso Home-country outlays for items such as food, personal care,

clothing, household furnishings, recreation, transportation,and medical care.

Housingo Major costs associated with housing in the host country.

Income taxeso Parent-country and host-country income taxes.

Reserveo Contributions to savings, payments for benefits, pension

contributions, investments, education expenses, social securitytaxes, etc.

A Typical Balance Sheet


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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


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Home- and Host-Country Income Taxes

Expatriate compensation Worksheet

Example of an Expatriate compensation

An expatriate working in a U.S. branch may receive:o Base pay: $1,400/mono Housing: up to $1,400/mon (Optional)o Itemized reimbursement: $500/mono Discretionary expense (e.g., gifts & gratuity to clients and

partners): $1000/special holidayso Benefits: Social security/Medicare (Optional)o Health care: $200/mon paid by employero Unemployment coverageo Workers comp

A U.S. expatriate working for a Chinese university:o Base pay variation: $1,500-$10,000/mono

Housing: Free for initial 6 months or up to a lump sumsubsidy of $1,500-10,000 for a contract of 3 years or above(optional)

o Benefits: Pension coverage for a 5 year contract or paid at theoption of the expatriate

o Health care: Completely paid by employer or optionalincentive to the expatriate

o Home leave 1-2 times/Yro Paid vacations and observed Chinese holidayso Initial research launch grant: $10,000 .

A recent survey of living costs ranked the 10 most expensive cities as:

o Tokyoo Moscowo Osakao Hong Kong


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o Beijingo Genevao Londono Seoulo Zuricho New York

Conclusion: Thus the above Description tells us the comparativeStudy of international Compensation.

comparative international compensation

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