Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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Compensation & Benefits
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Compensation& Benefits
Compensation& Benefits
Employment andTaxation Laws
Organization’s Com-pensation Policy
Competitors
Standard of LivingPolitical and Social
Environment
Allowances Economic Conditions
Expatriate costs may pose a multiple-fold expense in relation to employees who are not sent as expatriates to foreign destinations
Costs significantly higher than the compensation accorded to Host Country Nationals (HCNs) and Third Country Nationals (TCNs)
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•Example:
•A Chinese manager with 15 years experience costs less than USD 70,000 per annum, while
•A US expatriate manager with corresponding expertise would cost his or her organization USD 300,000 per year
1) Policy should be consistent with overall strategy, structure and business needs of international organization
2) Policy must work to attract and retain staff in those areas where international organization has greatest needs and opportunities.
3) Policy must be competitive and recognize factors such as incentive for serving in a foreign location, tax equalization and reimbursement for reasonable costs
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3) Policy should facilitate transfer of international employees in most cost-effective manner
4) Policy must give due consideration to equity and ease of administration
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Financial protection in terms of benefits, social security and cost of living in foreign location
Foreign assignment offers opportunities for advancement through income and/or savings
Issues such as housing, education of children and recreation are addressed
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Note that the expectations of the employees often do not coincide with the interests of the organization
Base Salary
Base salary - main component in international compensation
It is used as main benchmark for other elements in expatriate compensation package, such as, bonuses and benefits
Base salary is either paid in expatriate’s home or parent country currency, or in currency of expatriate’s host country
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Hardship Premium
For expatriate’s (usually PCNs, TCNs) who will encounter “hardships” caused by the transfer to a foreign location, determining the appropriate level of payment can be difficult
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• Factors determining hardship premium, usually expressed in terms of an expatriate’s base pay:
AssignmentActual hardshipTax consequencesLength of assignment
Allowances: There are many types of allowances in
an international compensation package: Cost of Living Allowance – Payment made to
the expatriate with a view to compensating for differences in expenditure between home or parent country and host country
Factors such as inflation differentials and price level need to be considered
Often, cost of living allowance is difficult to determine
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Housing Allowance – Payment made to expatriate with a view to ensuring that he or she can maintain their home-country living standard in host country.
Organization may provide - Housing facilities on a mandatory or optional basis- Support services to expatriate for selling or renting
expatriate’s house in home country
Home Leave Allowance – Payment made to expatriate with a view to facilitating their visit back to home country, once or twice a year.
Home leave allowance enables expatriate to renew business, family and social ties, avoiding adjustment problems subsequent to repatriation
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Education Allowance – Payment made with a view to supporting education of expatriate’s children, i.e. tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment, room and boarding, school uniforms etc.
Problems regarding level of education required and adequacy of schools in host country & transportation costs may pose significant problems for organizations
Relocation Allowance – Payment made with a view to enable relocation of expatriate to assignment location includes moving, shipping, storage costs, subsidies for purchase of appliances and automobile 14
Miscellaneous Allowances – Depending on level of seniority of expatriate, payments to him for club memberships, sport associations, maintenance of household staff, etc. may be provided
Organization may provide financial assistance to spouse for loss of income as a result of transfer of expatriate
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Benefits – Support rendered to expatriate in addition to allowances:
Social Security Benefits (home country or host country)
Paid Vacations for expatriate and family Rest and Rehabilitation leave (especially for
expatriates based in “hardship” assignment locations)
Emergency Cases (severe illness, death)
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Two basic approaches used to determine an international compensation package:
Going Rate Approach
Balance Sheet Approach
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Based on local market rates
Relies on survey comparisons◦ Local nationals (HCNs)◦ Expatriates of same nationality◦ Expatriates of all nationalities
Compensation based on selected survey comparison
Base pay and benefits may be supplemented by additional payments for low-pay countries
Example: Should a Indian bank operating in London use local British salaries, salaries of other Indian competitor banks in London or average salary offered by all foreign banks operating in London as reference point for base salary offered
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ADVANTAGES
- Equality with local nationals
- Simplicity
- Identification with host country
- Equity amongst different nationalities
ADVANTAGES
- Equality with local nationals
- Simplicity
- Identification with host country
- Equity amongst different nationalities
DISADVANTAGES
- Variation between assignmentsof same employee
- Rivalry between expatriatesof same nationality ingetting assignmentsto some countries
- Potential reentry problems in home country
DISADVANTAGES
- Variation between assignmentsof same employee
- Rivalry between expatriatesof same nationality ingetting assignmentsto some countries
- Potential reentry problems in home country
Balance sheet approach to international compensation is a system designed to equalize purchasing power of employees at comparable position levels living abroad and in home country, and to provide incentives to offset qualitative differences between assignment locations
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Balance sheet approach is widely used by international organizations to determine compensation package for expatriates:
Basic objective is maintenance of home-country living standard, plus financial inducement
Home-country pay and benefits are foundations of this approach
Adjustments to home package to balance additional expenditure in host country
Financial incentives (expatriate / hardship premium) added to make package attractive
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Balance sheet approach considers four types of outlays which are incurred by expatriates:
Goods and services – Outlays incurred in home country for food, personal care, clothing, household furnishings, recreation, transportation and medical care
Housing – All major costs associated with housing in host country
Income Taxes – Parent country and host country income tax expenditures
Reserve – Contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc.
Where costs of host country > costs of home country organization pays the expatriate to make up the difference
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ADVANTAGES
- Equality between assignmentsand between expatriatesOf same nationality
- Facilitates expatriate reentry
- Easy to communicate to employees
ADVANTAGES
- Equality between assignmentsand between expatriatesOf same nationality
- Facilitates expatriate reentry
- Easy to communicate to employees
DISADVANTAGES
- Can result in considerabledisparities between expatriatesof different nationalitiesand between expatriates and local nationals
- Can be quite complex to administer (e.g. changingeconomic conditions,taxation)
DISADVANTAGES
- Can result in considerabledisparities between expatriatesof different nationalitiesand between expatriates and local nationals
- Can be quite complex to administer (e.g. changingeconomic conditions,taxation)