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Chapter Seven

International Compensation

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Chapter Learning Objectives

After reading this chapter, you should be able to:

• explain the complexities that arise when firms move from


compensation at the domestic level to compensation in an
international context
• detail the key components of an international compensation
program
• outline the two main approaches to international compensation and
the advantages and disadvantages of each approach
• explain the special problem areas of taxation, valid international
living cost data and the problem of managing TCN compensation
• discuss recent developments and global compensation issues
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Terms

• HRIS Allowances:
• repatriation COLA
• base salary housing
• benefits home leave
• education
tax equalization
relocation
• tax protection spouse assistance

global corporate culture


going rate approach
International base pay
balance sheet approach

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Opening Vignette

International Compensation at RBC

• wide range of compensation variables

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Complexity of International
Compensation Policies

• management of more activities from a broader perspective


• greater involvement in the lives of employees and families
• balancethe needs of PCNs, HCNs and TCNs
• control exposure to financial and political risks
• increased awareness of and responsiveness to host country
and regional influences

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Global Compensation

• seen as a mechanism to develop and reinforce a global


corporate culture

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Global Compensation

Increased complexities
• growing use of outsourced activities and subsequent
labour pricing needs

• balancing centralization and decentralization of incentives,


benefits and pensions

• balancing the need for more accurate and detailed


performance metrics
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Two Primary Areas of Focus

• manage highly complex local details

• building a unified, strategic pattern of compensation


policies, practices, and values

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Total Compensation
Management

Requires knowledge of

• employment and taxation law

• customs, environment, and employment practices

• currency fluctuations and the effect of inflation

• special allowances
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Global Compensation
Programs

Facilitate and manage

• global expansion efforts

• labour costs

• internal equity

• effective governance
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Global Compensation
Programs ( IHRM Today 7.2)

Key areas

• pay in relation to the market

• short and long-term incentive policies

• consistent processes of job grading and leveling

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Objectives of International
Compensation

Organizational
• consistent with the overall strategy, structure, and business
needs
• attract and retain staff; competitive, incentives for foreign
service, tax equalization
• facilitate the cost-effective transfer of international
employees
• equitable and easy to administer

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Objectives of International
Compensation

Individual

• financial protection in terms of benefits, social security


and living costs

• opportunities for financial advancement through income


and/or savings

• housing, education of children and recreation issues


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International Compensation
Program Components

• base salary

• foreign service inducement/hardship premium

• allowances

• benefits

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Base Salary

• primary component of a package of allowances, many of


which are directly related to base salary, as well as the
basis for in‑service benefits and pension contributions

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Foreign Service Inducement/
Hardship Premium

Salary premium ( 5-40% of base pay)

• to accept a foreign assignment

• compensation for hardship caused by the transfer

• vary depending on type and length of assignment,


hardship, tax consequences, differentials

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Foreign Service Inducement/
Hardship Premium

Must address

• the definition of hardship

• eligibility for the premium

• amount and timing of payment

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Allowances

• encourage employees to take international assignments

• to keep employees ‘whole’ relative to home standards

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Cost‑Of‑Living Allowance
(COLA)

• payment to compensate for differences in expenditures


between the home country and the foreign country
(inflation differentials)

• may include payments for housing and utilities, personal


income tax, or discretionary items

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Housing Allowances

• maintain home‑country living standards

• often paid on either an assessed or an actual basis

• financial assistance and/or protection in connection with


the sale or leasing of an expatriate's former residence

• other alternatives include company‑provided housing, a


fixed housing allowance; or an assessment of a portion of
income
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Home Leave Allowances

• expense of trips back to the home country each year

• purpose is to give expatriates the opportunity to renew


family and business ties

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Education Allowances

• tuition
• language class tuition
• enrolment fees
• books and supplies
• transportation
• room and board
• uniforms
• local/boarding school or university

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Relocation Allowances

Contingent upon tax‑equalization policies and practices


in both the home and the host countries, include:

• moving, shipping, and storage charges


• temporary living expenses
• subsidies regarding appliance or car purchases
• down payments or lease‑related charges.

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Spouse Assistance

• offset income lost by an expatriate's spouse as a result of


relocating abroad

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Tax‑Equalized Housing
Allowance

• to discourage the purchase of housing and/or to


compensate for higher housing costs

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Benefits

• national practices vary considerably

• transportability of pension plans, medical coverage, and


social security benefits are very difficult to normalize

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Issues When Considering
Benefits

Whether
• to maintain expatriates in home-country programs,
particularly if the firm does not receive a tax deduction
for it
• firms have the option of enrolling expatriates in host-
country benefit programs and/or making up any
difference in coverage
• expatriates should receive home-country or host-country
social security benefits

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Approaches to International
Compensation

Two main options

Going Rate Approach (Market Rate Approach)


• linked to host country salary structure

Balance Sheet Approach (Build-up Approach)


• linked the home-country the salary structure

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Going Rate Approach (Table 7-1)

Based on local market rates

Relies on survey comparisons among:


• local nationals (HCNs)
• expatriates of same nationality
• expatriates of all nationalities

Compensation based on the selected survey comparison

Base pay and benefits may be supplemented by additional payments


for low-pay countries

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Advantages and Disadvantages of the
Going Rate Approach (IHRM Notebook 7.1)

Advantages Disadvantages

• equality with local • variation between


nationals assignments for same
employee
• simplicity
• variation between
• identification with host expatriates of same
country nationality in different
• equity amongst different
countries
nationalities • potential re-entry problems
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The Balance Sheet Approach
(Table 7-2)

• Basic objective is maintenance of home-country living


standard plus financial inducement

• Home-country pay and benefits are the foundations of this


approach

• Adjustments to home package to balance additional


expenditure in host country

• Financial incentives (expatriate/hardship premium) added


to make the package attractive

• Most common system in usage by multinational firms


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Key Categories of Expatriate Outlays
( IHRM Notebook 7.2)

1. Goods and services-home-country outlays for items


such as food, personal care, clothing, household
furnishings, recreation, transportation and medical care
2. Housing-the major costs associated with housing in the
host country
3. Income taxes-parent-country and host-country income
taxes
4. Reserve-contributions to savings, payments for benefits,
pension contributions, investments, education expenses,
social security taxes, etc.

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Expatriate Compensation Worksheet
(Table 7-3)

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Advantages and Disadvantages of the
Balance Sheet Approach (IHRM Notebook
7.3)

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Tax Equalization

• MNEs withhold an amount equal to the home‑country tax


obligation of the PCN, and pay all taxes in the host
country.

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Tax Protection

• employee pays up to the amount of taxes he or she would


pay on compensation in the home country

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Maximum Marginal Federal Tax
Rates (Table 7.4)

Country Maximum marginal rate (%)

Argentina 35.00
Australia 47.00
Belgium 50.00
Brazil 27.50
Canada 29.00
China (Hong Kong) 20.00

China 45.00
France 48.09
Germany 42.00
India 33.66
Italy 43.00
Japan 37.00
Malaysia 28.00
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Expatriate Benefits
(IHRM Notebook 7.4)

1. Keep expatriates in home-country programs, particularly if the


company does not receive a tax deductions for it?
2. Enroll expatriates in host-country benefit programs and/or making
up coverage differences?
3. Does host-country legislation regarding termination affects benefit
entitlement?
4. Do expatriates receive home-country or host-country social
security benefits?
5. Should benefits be maintained on a home-country or host-country
basis? Who is responsible for the cost? Should other benefits
offset any shortfall in coverage? Should home-country benefit
programs be exported to local nationals in foreign countries?

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Social Security Contributions By
Employers and Employees (Table 7.5)

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Range of Working Times Required to
Buy One Big Mac (Table 7.6)

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Differentiating Between
PCNs and TCNs

• TCNs have a great deal of international experience; often


move from country to country in the employ of one MNE
• MNEs use a home-country balance sheet approach for
TCNs
• can be less expensive than paying all expatriates on a PCN
scale; could lead to perceived inequities
• the reduction in expenses outweighs the difficulty of
justifying any pay differentials

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Differentiating Between
PCNs and TCNs

• TCN employees are valuable; firms may need to rethink


their approach; establishing a system of international base
pay for key managers

• multinational firms need to match their compensation


policies with their staffing policies and general IHRM
philosophy

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Complexity, Challenges and Choices
in Global Pay (Figure 7.1)

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Discussion Questions

1. What should be the main objectives for a multinational


firm with regard to its compensation policies?

2. Describe the main differences in the Going Rate and


Balance Sheet Approaches to international compensation.

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Discussion Questions

3. What are the key differences in salary compensation for


PCNs and TCNs? Do these differences matter?

4. What are the main points that MNEs must consider when
deciding how to provide benefits?

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Case: Going to India

1. If Geoff’s whole family is coming with him to India,


should Geoff maintain or sever his residency in Canada?
Discuss the advantages and disadvantages of both
options – put yourself in Geoff’s shoes. In your decision
consider also taxation implications.

2. If you were Geoff, would you prefer a going rate


approach or a balance sheet approach to negotiate your
base salary? What kind of approach to determine the
base salary will Andrew opt for? Why?
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Case: Going to India

3. Create an expatriate compensation worksheet that


outlines a package proposal with details of all
components, currencies, etc. In your package you need to
consider Geoff’s personal circumstances and the fact
that the whole family will come after having sold their
house in Canada.

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