Prentice Hall, Inc. © 2006 12-1 A Human Resource Management Approach STRATEGIC COMPENSATION Prepared by David Oakes Chapter 12 International Compensation.

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A Human Resource A Human Resource Management ApproachManagement Approach

STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION

Prepared by David Oakes

Chapter 12Chapter 12

International CompensationInternational Compensation

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Compensation ChallengesCompensation Challenges

Further corporate interests abroad Encourage employee expatriation Minimize workers’ financial risks Enhance overseas experiences Repatriation issues Promoting lowest - cost strategies Promoting differentiation strategies

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International Employees International Employees

Host country nationals (HCNs) Citizens work for U.S. company in own country

Third country nationals (TCNs) Citizens of one country work for a U.S. company in another country

Expatriates U.S. citizens work for a U.S. company in another country

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Compensation FactorsCompensation Factors

Length of overseas assignments Short-term Extended-term

Staff mobility One or more foreign assignments

Equity: pay referent groups Domestic workers Host country workers

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Compensation ComponentsCompensation Components

Core compensation Base pay Incentive compensation

Fringe compensation Standard benefits Enhanced benefits

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Setting Base PaySetting Base Pay

Home country-based Similar to domestic employees

Host country-based Similar to employees in foreign sites

Headquarters-based Not based on home or host country’s pay levels

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Purchasing PowerPurchasing Power

Stability of currency U.S. dollar & foreign money Exchange rate fluctuations

Inflation Increase in prices of goods & services Increase in inflation lowers purchasing power

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Incentive CompensationIncentive Compensation

Foreign service premiums To Encourage Expatriate Assignments

Hardship allowances For tough work & living conditions

Mobility premiums For willingness to relocate to an assignment

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Hardship AllowancesHardship Allowances

Set by U.S. State Dept based on: Foreign living conditions Physical challenges like climate Poor health conditions

Over 150 countries designated

Supplements between 10% - 25% of base pay

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International Fringe CompensationInternational Fringe Compensation

2 Types Standard Enhanced

Considerations Total remuneration Benefit adequacy Tax effectiveness Recognizing local customs & practices

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ENHANCED BENEFITS ENHANCED BENEFITS

Relocation assistance Education reimbursement Home leave & travel reimbursement Rest & relaxation leave and allowance

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Relocation AssistanceRelocation Assistance

Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving & storing household goods

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Balance Sheet ApproachBalance Sheet Approach

To determine compensation packages To provide similar standard of living

Strategic value Protects expatriates’ standard of living Allows companies to control costs

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AppropriatenessAppropriateness

Home country is referent point

Expatriates keep close ties to USA

Assignment is of limited duration Repatriation after assignment Guarantee of no financial hardship

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Major ExpendituresMajor Expenditures

Housing & utilities Goods & services Discretionary income Taxes

Information Sources Returning expatriates Consulting & research companies U.S. State Dept. indexes

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Discretionary Income ExpendituresDiscretionary Income Expenditures

Pension contributions Savings & investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments

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Tax ConsiderationsTax Considerations

Double taxation relief IRC Section 901 IRC Section 911

Tax protection

Tax equalization

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IRC Section 901IRC Section 901

Can credit foreign taxes from U.S. tax

If U.S. tax is greater Expatriates pay difference to IRS

If foreign tax is greater Expatriates can deduct excess to future U.S. taxes For up to 5 years

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IRC Section 911IRC Section 911

Can Exclude up to $70,000 of Income

Exclusions Cash

Income Professional fees Incentives Bonuses Sales commissions

Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living

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Tax ProtectionTax Protection

Employers reimburse expatriates when actual tax is greater

Expatriates pay entire tax when actual tax is less or equal

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Tax EqualizationTax Equalization

Employers deduct hypothetical tax

Employers pay real tax from hypothetical

Reimbursements settled after payment

Equitable treatment any assignment

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Repatriation ConcernsRepatriation Concerns

Losing supplements & allowances

Work experience not valued

Reintegration into domestic workforce

Leaving company