International Compensation
International CompensationInternational compensation refers to all forms of monetary and non-monetary rewards that employees of an international organization receive from their employer in exchange for providing their labor & commitment.
Objectives of international compensation policyTo attract, retain and motivate high quality talenty Policy should be consistent with overall business strategy & needs of the MNC y Should facilitate transfer of international employees in most cost effective
manner for the firmy Provide a consistent and reasonable relationship between the pay levels of
employees at the headquarters and foreign subsidiaries
Elements of Expatriate Compensation Packagesy Base salary y Benefits y Allowances y Incentives y Tax Equalization
Common Elements of Compensation PackagesBase salaryy Amount of money that an expatriate normally receives in y
y y y
his/her home country In a domestic context, base salary denotes the amount of cash compensation serving as a benchmark for other compensation elements (such as bonuses and benefits). Used to establish expatriate pay Paid in home currency, local currency or combination Serves as benchmark against which bonuses & benefits are calculated
Common Elements of Compensation PackagesBenefitsy Substantial portion of expatriate compensation y Transportability of pension plans, medical coverage & social
security coverage are very difficult to deal as national practices varies. y Many thorny issues surround the amount & nature of the benefit package for expatriates . For instancey Whether MNCs should maintain expatriates in home country benefit
programs particularly if firm does not receive tax deduction for it y Whether MNC has option of enrolling expatriates in host country benefit programs y Whether home or host country is responsible for the expatriates social security benefits y Whether benefits should be subject to the requirements of home or host country
Issues Concerning Benefits (cont.)y Laws governing private benefit practices differ from country to
country, and firm practices also vary. y In some countries, expatriates cannot opt out of local social security programs. In such circumstances, the firm normally pays for these additional costs. y European PCNs and TCNs enjoy portable social security benefits within the European Union. y .
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Social Security protects not just the subscriber but also his/her entire family by giving benefit packages in financial security and health care. Social Security schemes are designed to guarantee at least long-term sustenance to families when the earning member retires, dies or suffers a disability. Thus the main strength of the Social Security system is that it acts as a facilitator - it helps people to plan their own future through insurance and assistance. The principal social security laws enacted in India are the following: (i) The Employees State Insurance Act, 1948 (ESI Act) which covers factories and establishments with 10 or more employees and provides for comprehensive medical care to the employees and their families as well as cash benefits during sickness and maternity, and monthly payments in case of death or disablement. (ii) The Employees Provident Funds & Miscellaneous Provisions Act, 1952 (EPF & MP Act) which applies to specific scheduled factories and establishments employing 20 or more employees and ensures terminal benefits to provident fund, superannuation pension, and family pension in case of death during service. Separate laws exist for similar benefits for the workers in the coal mines and tea plantations. (iii) The Workmens Compensation Act, 1923 (WC Act), which requires payment of compensation to the workman or his family in cases of employment related injuries resulting in death or disability. (iv) The Maternity Benefit Act, 1961 (M.B. Act), which provides for 12 weeks wages during maternity as well as paid leave in certain other related contingencies. (v) The Payment of Gratuity Act, 1972 (P.G. Act), which provides 15 days wages for each year of service to employees who have worked for five years or more in establishments having a minimum of 10 workers.
Common Elements of Compensation PackagesAllowancesy Expensive feature of expatriate packages y Cost of living allowance (COLA)
( to ensure same standard of living that he or she enjoyed in the home country, compensates for differences in expenditures between home country & foreign country) y Relocation expenses y Housing allowances y Education allowances y Hardship allowances (lump sum or percentage of base compensation) y Home leave allowances
Foreign Service Inducement and Hardship Premiumy Parent-country nationals often receive a salary premium as an
inducement to accept a foreign assignment or as compensation for any hardship caused by the transfer.y The definition of hardship, eligibility for the premium and amount and timing of payment
must be addressed. y In cases in which hardship is determined, U.S. firms often refer to the U.S. Department of States Hardship Post Differentials Guidelines to determine an appropriate level of payment. y Such payments vary, depending upon the assignment, actual hardship, tax consequences and length of assignment.
y More commonly paid to PCNs than to TCNs.
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Relocation Allowancesy Usually cover moving, shipping and storage charges,
temporary living expenses, subsidies regarding appliance or car purchases (or sales) and down payments or leaserelated charges.y
Allowances regarding perquisites (cars, club memberships, servants and so on) may also need to be considered (usually for more senior positions, but this varies according to location).
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Common Elements of Compensation PackagesIncentivesy Used to motivate expatriates for their productivity and
performance y Trend - Lump-sum payments instead of ongoing premiums
Common Elements of Compensation PackagesTax equalizationy Expatriates may get two tax bills y Usually MNCs pay the extra tax burden y Common method y Compute tax on home country salary & expat salary. Any tax that exceed what would have been imposed in the home country are paid by the MNC
Approaches to the Compensation Packagey Balance sheet approach y Localization/ Going rate Approach y Cafeteria approach y Regional approach
Approaches to the Compensation PackageBalance sheet approach
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This approach links the base salary of PCNs and TCNs to salary structure of the relevant home country. Retains the expatriate in the home-country salary structure and provides allowances to enable the expatriate to maintain a standard of living broadly similar to that enjoyed at home. Based on the premise that employees on overseas assignments should have the same spending power as they would in their home country. The home country is the standard for all payments. The objective is to: y Ensure cost effective mobility of people to global assignments y Ensure that expatriates neither gain nor lose financially y Minimize adjustments required of expatriates
Approaches to the Compensation PackageBalance sheet approach
Advantages Equity between assignments & between expatriates of same nationality Facilitates expatriate re entry Easy to communicate
Disadvantages Can result in great disparities between expatriates of different nationalities & between expatriates & local nationals Can be complex to administer
Going Rate Approach (Market rate approach)y Based on local market rates y Relies on survey comparisons amongy Local nationals (HCNs) y Expatriates of same nationality y Expatriates of all nationalities
y Compensation based on the selected survey comparison y Base pay and benefits may be supplemented by additional
payments for low-pay countries.
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Approaches to the Compensation PackageLocalization / Going rate Approach y Pays the expat a salary comparable to that of local nationals y Based on local market rates y Used with individuals early in their careers & who are being given long term assignment
Advantages Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities
Disadvantages Variation between expatriates of same nationalities in different countries May lead to rivalries for assignments to financially lucrative locations Potential re entry problems
Approaches to the Compensation PackageCafeteria approachy Expat receives a series of options & decides how to spend funds
Regional approachy Compensation system for all expats who are assigned to a particular region
& everyone paid in accord with that system
Tax Strategies for Expatriate Income1.
Tax equalizationy Most common method y Firms withhold an amount equal to home country tax obligation of PCN & pay all taxes in
host country
2.
Tax protectiony Employee pays up to the amount of taxes she would pay on compensation in home country y Employee is entitled to any windfall received if total taxes are less in the foreign country
than in the home countryy If tax is deducted, the difference between the (low) host country tax and the (higher) home
country tax is refunded to the employee.
Tax Strategies for Expatriate Income3. Laissez fairey Employees are on their own in conforming to host & home country taxation
