International Human Resources

Management
International Compensation Management

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 Objectives of Compensation
 Attract individuals who are competent and interested in
international assignments
 Facilitate movement of expatriates from one subsidiary
to another, from the home country to subsidiaries and
from subsidiaries back to home country
 Provide a consistent and reasonable relationship
between the pay levels of employees at the headquarters,
domestic affiliates and foreign subsidiaries
 Be cost-effective by minimizing unnecessary expenses
 Be consistent with the overall strategy, structure and
business needs

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Compensation Philosophy
Compensation philosophy is the set of values and beliefs
that an organization has with regards to monetary and
non-monetary benefits payable to employees
 What are the goals of the organizations compensation
system?
 What percentage of compensation should be linked to
individual/ unit performance and what should be the base
salary?
 What is the role of performance appraisal in disbursing
compensation, bonus, merit hike etc.?
 How to target the positioning of compensation of
employees relative to market?

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Theories of Compensation

 Contingency theory
 Resource based Theory
 The agency Theory
 Equity Theory

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Compensation Strategy
 Strategic business and operating inputs obtained
from the subsidiaries business plan and objectives
and the operating targets and resources
requirements
 Industry and labor market practices and trends to
assess demand-supply relationships
 Employee inputs and preferences to ascertain the
degree to which compensation is fixed- structure
based vs. negotiable -based on competency/skill

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 Aligning Compensation Strategy by Michaiel H. Schuster

A
S
Industry
S EMPLOYEE Business And
E
S Inputs and And Labor
S Preferences Operating Market
M
E
Inputs Practices &
N Trends
T

Compensation Philosophy and Objectives

D Based upon Business, Operating & Human Resource Requirements
E
Organisations
S Performance
I Or
G Base Pay Variable Pay Compensation
Non- Monetary& Fringe Benefits
N Delivery Mangement
Other Monetary Rewards
& Recognitions
Components of Compensation
Elements of compensation
 Base Salary
 Incentives/ Variable pay
 Allowances

 Long Term Benefits

 Taxes

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Base Salary
Itscommon in any compensation strategy-
domestic or foreign.
The base salary is the foundation block of
international compensation whether the
employee is a PCN or TCN.
Incentives/Variable Pay
A growing number of MNCs have
dropped the ongoing premium for
overseas assignments and replaces it with
a one time, lump- sum premium
Even in domestic Bs MNCs are preferring
one- time premiums to periodic salaries.
Incentives/Variable Pay contd.
 Yahoo. Com has dropped CEO’s salary
to some % but they are entitled to benefit
from a discretionary bonus in the form of
a fully vested stock option of up to 1
million shares / annum.
Google Inc. has also done a similar thing.
Incentives/Variable Pay contd.
 Referral Bonus:
It is a popular way of bringing in new talent by
employees introducing friends, relatives and
acquaintances to the company.
Eligibility to receive a hiring bonus varies
across job levels, but is relatively un affected
by companies size or industry sector.
Incentives/Variable Pay contd.
Use of Retention Bonuses/ Rises for
employees
Is common in industries like IT/BPO and in the
services industry. Surveys indicate that about
one third of technology and life sciences
companies use a formal or discretionary
retention bonus plan to retain key employee.
The practice is more common in large industry
but does not vary by industry sector.
Allowances
 They are an inevitable feature of
international compensation.
One common allowance relate to the cost
of living- an adjustment for differences in
the cost of living between the home
country and foreign assignment.
 Popular Allowances are
 Spouse assistance
 Housing allowance
 Home leave allowance
 Relocation allowance( to cover expenses as
moving, shipping and storage charges,
temporary living expenses, subsidies regarding
appliance or car purchase and lease related
charges etc.)
 Educational allowance( to the children &
trailing spouse)
Allowances contd.
Foreign Service/Hardship Premium
This is perceived as an inducement in the
form of a salary premium to accept an
overseas assignment.
Generally salary premiums vary from 5-40
% of the base salary.
Actual salary depends upon the assignment,
actual hardship, tax consequences and
length of assignment.
Use of Long Term benefits
Employee Stock Option Plan (ESOP)

This is plan established by a company

wherein a certain no. of shares are
reserved for purchase and issuance to key
employees. Such shares usually vest over
a certain period to serve as an incentive
for employees to build long-term value
for the company.
Use of Long Term benefits contd.
Restricted Stock Unit ( RSU)

This is a plan established by a company, wherein

units of stocks are provided with restrictions on
when they can be exercised.
It is usually issued as partial compensation for
employees.
The restriction generally lifts in 3-5 years when the
stock vests.
IT companies are increasingly using RSUs as
incentives since they afford a lot more flexibility.
 Use of Long Term benefits contd
 Employee Stock Purchase Plan ( ESPP)

This is a plan wherein a company sells shares to its

employees usually, at a discount.
The company deducts the purchase price of these
shares every month from employees salary.
Taxes
MNCs generally select one of the
following approaches to tackle
international taxation.
TAX EQUALISATION
TAX PROTECTION

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TAX EQUALISATION
Organisations withhold an amount equal
to the home country tax obligation of the
PCN and pay all taxes in the host country.
TAX PROTECTION
 The employee pays up to the amount of
taxes he or she would pay on
remuneration in the home country.
In such a situation, the employee is
entitled to any windfall received if the
total taxes are less in the foreign country
than in the home country.
Variables influencing Compensation
 Goal Orientation – profit making vs. service
oriented
 Parent company philosophy
 Industry type
 Capacity to pay
 Local labor market characteristics
 Local Culture
 Government and statutory provisions

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International Compensation Packages

 Going Rate Approach

 Balance Sheet Approach

 Other Approaches

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Going Rate Approach
Executives are paid according to the host
country salary structures.
 When salary structures in host country
are lower, additional salary payments are
made to the expatriates.
Balance Sheet Approach
 Majority of MNCs follow the balance
sheet approach to determine expatriate
compensation.
 This method provides a compensation
package that attempts to equate or balance
the expatriate’s purchasing power in the
host country as compared to the home
country.
 Home & Host
Country Income Income Tax
Income Tax Premium
Taxes
Housing & Incentives
Housing Income Tax
Housing
Goods&
Goods& Services Housing
Services
Goods&
Goods&
Services
Services
Reserve Reserve Reserve
Reserve
Home Country
Host country
Equivalent
costs
Home Country Purchasing
Home country paid by orgn.
Costs Power
Salary & from salary
International Citizen’s Approach
 In this approach an international basket of goods
is used for all expatriates, regardless of country
of origin,
 It includes food, clothing, housing and so forth.
 Expatriates are not provided salary adjustments
that would allow them to purchase exactly the
same items in the host country as in the home
country.
 Rather they receive adjustments that would
allow them to purchase a comparable local
product of same nature and use.
Global Salary Systems
 International Citizen’s Approach is
alternatively called globalsalary systems.
 This is appropriate when an MNC has a team of
dedicated international managers- Europeans,
Americans or Asians who are ready to move to
any part of Globe.
 It seeks to provide worldwide equity in rewards
and allow managers to move between countries
with minimal effects on life style.
Compensation Administration

Salary
Establish Increases /
Salary Bands reviews

Compensation
Administration

Developing Starting
Rates of pay Salary for
for Jobs New
Employees
Linkages to
performance
Appraisal
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Issues in International compensation
 Impact of the human resources demand-
supply equation at the parent country /
host country
 Increasing usage of international
compensation and benefits consultants
 Use of compensation benchmarking
Surveys at local and global levels
 Outsourcing Compensation management/
payroll processing
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