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Managing an Supporting International Assignments Chapter 6

INTERNATIONAL COMPENSATION POLICIES

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Managing an Supporting International Assignments Chapter 6

KEY COMPONENTS OF AN INTERNATIONAL COMPENSATION PROGRAM

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Base Salary
Serves as benchmark for primary components of package foreign service premium, costof-living, housing allowance Basis for in-service benefits and pension contributions May be paid in home or local currency

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Foreign Service Inducement/Hardship Premium

Salary premium as an inducement or as Compensation for any hardship caused by transfer More commonly paid to TCNs than PCNs Made in the form of percentage of salary (540% of base pay) Differentials are considered (eg. Host country work week and hence over time)

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Allowances
Cost of Living Allowance Difference on expenditure between home and foreign country Help of specialized organizations like Organization Resource Counsellors Includes Payment of housing, utilities, personal income tax etc.

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Allowances
Housing Allowance To enable maintenance of home country living standards Company provided houses, fixed HRA Assistance in sale or leasing of residence, payment of closing costs, rent protection, equity protection etc.

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Allowances
Home Leave Allowance (one or more trips to back home to prevent adjustment problems) Education Allowance (language tuition,children education) Relocation Allowance ( moving, shipping, temporary living, purchase of car etc. Spouse assistance (an allowance to make up for the spouses lost income)

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Benefits
Maintaining expatriates in home country programs in case of no tax deductions

Option of enrolling expatriates in host country benefits and/or making up for any difference Home country v/s Host country social security benefits

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Managing an Supporting International Assignments Chapter 6

APPROACHES TO INTERNATIONAL COMPENSATION

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The Going Rate Approach

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 Additional Payments for low-pay countires

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Balance Sheet Approach

Most common system used by multinational firms Objective: maintenance of home country living standard + financial inducement Focus on home country pay and benefits Adjustments to balance additional expenditure in host country Financial incentives(expatriate/hardship premium) added to make package attractive

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Balance Sheet Approach

Major categories of outlays
Goods and Services : home country outlays for food, personal care , clothing, household furnishings , recreation, transportation, medical care Housing : cost associated in host country Income taxes: parent country and host country income taxes Reserve: contribution to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes etc.

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Taxation
Problems , Issues and Challenges Dual tax cost : Expatriates paying taxes in both home and host country. Need to consider personal and corporate taxes in addition to income tax Modifying compensation packages to provide the most tax-effective, appropriate rewards within the overall compensation framework

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Taxation Issues while considering benefits

Whether or not to maintain expatriates in home country programs, particularly if the company does not receive tax deduction for it Whether companies have the option of enrolling expatriates in host-country benefit programs and /or making up any difference in coverage Whether host-country legislation regarding termination affects benefit entitlement

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Taxation Issues while considering benefits

Whether expatriates should receive home country or host country social security benefits Whether benefits should be maintained on home country or host country basis, who is responsible for the cost, whether other benefits should be used to offset any shortfall and whether home country benefit programs should be exported to local nationals in foreign countries

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Approaches to International Taxation

Tax equalization
Firms withhold an amount equal to home country tax obligation, and pay all taxes in the host country By far the more common taxation policy used by multinationals Tax payments equal to liability of home country tax payer with same income and family status are imposed on employees salary and bonus Additional premiums or allowances are paid tax free

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Approaches to International Taxation

Tax protection
Employee pays up to the amount of taxes he or she would pay on compensation in the home country Employee is entitled to any windfall received if total taxes are less in the host country than in the home country

Ad-hoc
Each expatriate handled differently , depending upon individual package agreed to with the firm

Laissez Faire
Employees are on their own in conforming to host-country and home country taxation laws and practices

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International living costs data

Obtaining upto-date information on international living costs is a constant issue for MNEs The MNEs take the services of consulting firms These firms conduct regular surveys calculating a cost-of-living index that is updated in terms of currency exchange rates This data is a very important issue to expatriate employees and forms the basis of many complaints if there are updating lags on compensation package rise

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International living costs data

MNEs must also respond to unexpected events such as currency and stock market crash. For eg (Asian crisis) Such events have a dramatic impact on prices and the cost of living MNEs must also decide what to include in the basket-of-goods which the consulting firms use to decide the living costs

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Tentative Conclusions: Patterns in complexity

Universal

Pay Level

Local

Firm Nation Group Job Person