INTERNATIONAL HUMAN RESOURCE MANAGEMENT
Compensation & Benefits
Expatriate Compensation & Benefits
Organization’s Com- pensation Policy
Competitors
Employment and Taxation Laws
Allowances
Compensation Compensation Benefits Benefits
Economic Conditions
Standard of Living
Political and Social Environment
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Expatriate Costs
• Expatriate costs may pose a multiple- fold expense in relation to employees who are not sent as expatriates to foreign destinations, and are usually significantly higher than the compensation accorded to HCNs and TCNs
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•Example:
•a Chinese manager with 15 years experience costs less than USD 70,000 per annum, while
•a US expatriate manager with corresponding expertise would cost his or her organization USD 300,000 per year
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Goals of an International Organization’s Compensation Policy (1)
1) Policy should be consistent with the overall
strategy, structure and business needs of the international organization
2) Policy must work to attract and retain staff in those areas where the international organization has the greatest needs and opportunities. As a consequence, the policy must be competitive and recognize factors such as incentive for serving in a foreign location, tax equalization and reimbursement for reasonable costs
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Goals of an International Organization’s Compensation Policy (2)
3)Policy should facilitate transfer of
international employees in the most cost-effective manner
4)Policy must give due consideration to
equity and ease of administration
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Employee Expectations and International Organization’s Compensation Policy
Financial protection in terms of benefits, social security and cost of living in the foreign location
Foreign assignment offers opportunities for advancement through income and/or savings
Issues such as housing, education of the children
and recreation are addressed
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Note that the expectations of the employees often do not coincide with the interests of the organization
Key Components of International Compensation Programme for Expatriates
• Base Salary • The base salary is usually the main
component in international compensation, and is the main benchmark used for other elements in an expatriate compensation package, such as bonuses and benefits
• The base salary is either paid in the
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expatriate’s home or parent country currency, or in the currency of the expatriate’s host country
Key Components of International Compensation Programme for Expatriates
• Hardship Premium
• For expatriate’s (usually PCNs, TCNs)
who will encounter “hardships” caused by the transfer to a foreign location, determining the appropriate level of payment can be difficult
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• Factors determining the hardship premium, usually expressed in terms of an expatriate’s base pay, are typically:
Assignment Actual hardship Tax consequences Length of assignment
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Key Components of International Compensation Programme for Expatriates
Allowances: There are many types of allowances in an international compensation package:
Cost of Living Allowance – Payment made to the
expatriate with a view to compensating for differences in expenditure between the home or parent country and the host country. Factors such as inflation differentials and the price level need to be considered. Often, the cost of living allowance is difficult to determine
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Key Components of International Compensation Programme for Expatriates
Housing Allowance – Payment made to the expatriate with a view to ensuring that he or she can maintain their home- country living standard in the host country. Alternatively, an organization may provide housing facilities on a mandatory or optional basis. Also, support services may be provided to the expatriate, for example, by helping sell or rent the expatriate’s house in the home country
Home Leave Allowance – Payment made to the expatriate
with a view to facilitating their visit back to the home country, once or twice a year. Home leave enables the expatriate to renew business, family and social ties, and thus avoid adjustment problems subsequent to repatriation
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Key Components of International Compensation Programme for Expatriates
Education Allowance – Payment made with a view to
supporting the education of the expatriate’s children, i.e. tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment, room and boarding, school uniforms etc. Problems regarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations
Relocation Allowance – Payment made with a view to
enable the relocation of the expatriate to the assignment location. Includes moving, shipping, storage costs, subsidies for purchase of appliances and (possibly) an automobile
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Key Components of International Compensation Programme for Expatriates
Miscellaneous Allowances – Depending on the level of seniority of the expatriate, payments to him or her for club memberships, sport associations, maintenance of household staff etc. may be rendered
In addition, the organization may render financial assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate
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Key Components of International Compensation Programme for Expatriates
Benefits – Support rendered to an expatriate in addition to
the allowances provided. There are several types of benefits, more prominent examples being:
Social Security Benefits (home country or host country?)
Paid Vacations for expatriate and family
Rest and Rehabilitation leave (especially for expatriates
based in “hardship” assignment locations)
Emergency Cases (severe illness, death)
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Calculating International Compensation
There are two basic approaches used to determine an international compensation package:
The Going Rate Approach
The Balance Sheet Approach
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The Going-Rate Approach
Based on local market rates
Relies on survey comparisons – 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
Example: Should a Pakistani bank operating in London use
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local British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreign banks operating in London as the reference point for the base salary offered
Disadvantages of the Going-Rate Approach
DISADVANTAGES DISADVANTAGES
ADVANTAGES ADVANTAGES
Equality with local nationals Equality with local nationals Variation between assignments Variation between assignments for the same employee for the same employee
Simplicity Simplicity
Identification with host country Identification with host country
Rivalry between expatriates Rivalry between expatriates of same nationality in of same nationality in getting assignments getting assignments to some countries to some countries
Equity amongst different Equity amongst different nationalities nationalities
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Potential reentry problems in Potential reentry problems in the home country the home country
Logic of the Balance Sheet Approach
The balance sheet approach to
• international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country, and to provide incentives t offset qualitative differences between assignment locations
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The Balance Sheet Approach
The balance sheet approach is widely used by international organizations to determine the compensation package for expatriates:
Basic objective is the 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 the host country
Financial incentives (expatriate / hardship premium)
added to make the package attractive
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Outlays Considered in the Balance Sheet Approach
The balance sheet approach considers four types of outlays which are incurred by expatriates:
Goods and services – Outlays incurred in the home country for
food, personal care, clothing, household furnishings, recreation, transportation and medical care
Housing – All major costs associated with housing in the host
country
Income Taxes – Parent country and host country income tax
expenditures
Reserve – Contributions to savings, payments for benefits,
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pension contributions, investments, education expenses, social security taxes, etc.
Where costs of host country > costs of home country organization pays the expatriate to make up the difference
Disadvantages of the Balance- Sheet Approach
DISADVANTAGES DISADVANTAGES
ADVANTAGES ADVANTAGES
Equality between assignments Equality between assignments and between expatriates and between expatriates of the same nationality of the same nationality
Can result in considerable Can result in considerable disparities between expatriates disparities between expatriates of different nationalities of different nationalities and between expatriates and between expatriates and local nationals and local nationals
Facilitates expatriate Facilitates expatriate reentry reentry
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Easy to communicate Easy to communicate To employees To employees Can be quite complex Can be quite complex to administer (e.g. changing to administer (e.g. changing economic conditions, economic conditions, taxation) taxation)
