Comparative International CompensationIntroduction Increasingly, today, globalization is a reality for organizations of almost any size. Only the smallest companies seem unaffected by the disappearance of global boundaries among organizations, markets, and people. Globalization has increased awareness of and concern for creating internationally equitable compensation systems in many companies. The complex nature of international compensation dictates that it receives special attention from organization operating in a multi-national environment. It is crucial that organizations understand the kind of employees employed by international firms, the elements that comprise an international compensation system, and the special problems associated with returning citizens on overseas assignments to their home corporation. An expatriate, sometimes referred to as an expat, is a citizen of the country in which the organization's headquarters is domiciled. For example, an American working for U.S. subsidiary or branch located in Thailand is an expatriate. An organization may elect to send a domestic employee or manager to an overseas assignment for any number of reasons: to broaden an employee's or manager's perspectives relative to international operations, to start or staff new ventures, to train local employees, to utilize specific expertise possessed by the employee, to protect the organization's interests, to help develop the employee or manager, to assist in the transfer of technology or skills, or to market products. Evidence suggests that American firms use expatriates to a much lesser extent than do Japanese firms. Objectives of international compensation Should be consistent with the overall strategy, structure and business needs of the multinational. • Must work to attract and retain staff in the areas where the multinational has the greatest needs and opportunities, hence must be competitive and recognize factors such as incentive for foreign service, tax equalization and reimbursement for reasonable costs. . cost-of-living allowance. foreign service premium. For expatriates. housing allowance) It is the basis for in-service benefits and pension contributions – may be paid in home or local-country currency. The base salary is the foundation block for international compensation whether the employee is a PCN or TCN. base salary denotes the amount of cash compensation serving as a benchmark for other compensation elements (such as bonuses and benefits). primarily because multinationals must cater to three categories of employees: o o PCNs.• • Should facilitate the transfer of international employees in the most cost-effective manner for the firm. many allowances are directly related to base salary (e.g. TCNs and HCNs Key Components: Base salary Foreign services inducement Hardship premium Allowances Benefits Base Salary • • • • In a domestic context. Must give due consideration to equal remuniration Key Components of international compensation The area of international compensation is complex. • Major differences can occur in the employee’s package depending on whether the base salary is linked to the home country of the PCN or TCN. More commonly paid to PCNs than to TCNs. eligibility for the premium and amount and timing of payment must be addressed. o Such payments vary. o The definition of hardship. Foreign Service Inducement and Hardship Premium • • • 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. actual hardship. partly because of the various forms of allowances. o In cases in which hardship is determined. tax consequences and length of assignment. U. Foreign service inducements are usually made in the form of a percentage of salary. Establishing an overall compensation policy can be very challenging.S.S. Department of State’s Hardship Post Differentials Guidelines to determine an appropriate level of payment. such as: o Cost-of-living allowance o Housing allowance o Relocation allowance o Education allowance o Home leave allowance o Hardship allowance . Allowances • • Multinationals generally pay allowances in order to encourage employees to take international assignments and to keep employees ‘whole’ relative to home standards. depending upon the assignment. firms often refer to the U. or whether an international compensation rate is paid. 5-40% of base pay. shipping and storage charges. The COLA may also include payments for housing and utilities. Relocation Allowances • Usually cover moving. International comparison of cost of living is difficult and can be problematic. . The provision of a housing allowance implies that employees should be entitled to maintain their home-country living standards (or..g. o These allowances are often contingent upon tax-equalization policies and practices in both the home and the host countries. o Allowances regarding perquisites (cars. currency fluctuations. but this varies according to location). etc. Education Allowances • Expatriates’ children are an integral part of any international compensation policy. club memberships. o Allowances for education can cover items such as tuition.). receive accommodation that is equivalent to that provided for similar foreign employees and peers). subsidies regarding appliance or car purchases (or sales) and down payments or lease-related charges. to account for inflation differentials. temporary living expenses. personal income tax or discretionary items. to compensate for differences in expenditures between the home country and the foreign country (e. in some cases. servants and so on) may also need to be considered (usually for more senior positions.Cost-of-living Allowances (COLA) • • • • COLA receives the most attention. Allowances for Spouse Assistance • To help guard against or offset income lost by an expatriate’s spouse as a result of relocating abroad.S. room and board and uniforms. Home leave alternatives: o Allow foreign travel rather than returning home o Expatriates may become more homesick than others who return home for a ‘reality check’ with fellow employees and friends. formal policies become more necessary and efficient. PCNs and TCNs usually receive the same treatment concerning educational expenses. either mandatory or optional o A fixed housing allowance o Or assessment of a portion of income. out of which actual housing costs are paid. firms are beginning to focus on providing spouses with employment opportunities abroad. Benefits . either by offering jobsearch assistance or employment in the firm’s foreign office (subject to a work visa being available). Alternative Allowances • • • Housing alternatives may include: o Company-provided housing. o U. enrolment fees.o language class tuition. o Some firms may pay an allowance to make up for a spouse’s lost income. books and supplies. transportation. As a firm internationalizes. multinationals also provide vacations and special leave. o Emergency provisions are available in case of a death or illness in the family. o Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage. o Employees in hardship locations often receive additional leave expense payments or rest and rehabilitation periods. o Annual home leave usually provides airfares for families to return to their home countries. o Whether expatriates should receive home-country or hostcountry social security benefi Issues Concerning Benefits (cont. as national practices vary considerably: o Transportability of pension plans o Medical coverage o Social security benefits • Firms need to address many issues. o Rest and rehabilitation leave.) • Laws governing private benefit practices differ from country to country. based on the conditions of the host country. Issues Concerning Benefits • Very difficult to deal with country-to-country. may provide the employee’s family with airfares to a more comfortable location near the host country.• In addition to the already discussed benefits. . including: o Whether or not to maintain expatriates in home-country benefit programs. and firm practices also vary. particularly if the firm does not receive a tax deduction for it. In such circumstances. expatriates cannot opt out of local social security programs. Going Rate Approach • • • Based on local market rates Relies on survey comparisons among o Local nationals (HCNs) o Expatriates of same nationality o 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. Approaches to international compensation There are two main options in the area of international compensation. Advantages and Disadvantages of the Going Rate Approach • Advantages o Equity withy local nationals o Simplicity o Identification with host country o Equity among different nationalities • Disadvantages o Variation between assignments for same employee .• • In some countries. the firm normally pays for these additional costs. o European PCNs and TCNs enjoy portable social security benefits within the European Union. Multinationals have generally done a good job of planning for the retirement needs of their PCNs. . personal care. o Home-country pay and benefits are the foundations of this approach o Adjustments to home package to balance additional expenditure in host country o Financial incentives (e. recreation.o o Variation between expatriates of same nationality in different countries Potential re-entry problems The Balance Sheet Approach • The basic objective is to ‘keep the expatriate whole’ through maintenance of home-country living standard plus a financial inducement to make the package attractive. Income taxes o Parent-country and host-country income taxes. transportation. investments. A Typical Balance Sheet . education expenses. Reserve o Contributions to savings. expatriate/hardship premium) added to make the package attractive o Most common system in usage by multinationals Major Categories Incorporated in the Balance Sheet Approach (cont. and medical care. pension contributions.g. Housing o Major costs associated with housing in the host country. social security taxes. clothing. payments for benefits. household furnishings.) • • • • Goods and services o Home-country outlays for items such as food. etc. Additional Costs Paid by Company Reserve Reserve Reserve Reserve Goods and Services Goods and Services Goods and Services Goods and Services Housing Housing Housing Housing Income Taxes Income Taxes Premiums and Incentives Host-Country Costs Paid by Company and from Salary Home-Country Equivalent Purchasing Power Host-Country Costs Home-Country Salary Income Taxes . gifts & gratuity to clients and partners): $1000/special holidays o Benefits: Social security/Medicare (Optional) o Health care: $200/mon paid by employer o Unemployment coverage o Workers comp A U.S.000/mon o Housing: Free for initial 6 months or up to a lump sum subsidy of $1.000 for a contract of 3 years or above (optional) o Benefits: Pension coverage for a 5 year contract or paid at the option of the expatriate o Health care: Completely paid by employer or optional incentive to the expatriate o Home leave 1-2 times/Yr o Paid vacations and observed Chinese holidays o Initial research launch grant: $10.Home. branch may receive: o Base pay: $1.000 .400/mon (Optional) o Itemized reimbursement: $500/mon o Discretionary expense (e.500-10. expatriate working for a Chinese university: o Base pay variation: $1.400/mon o Housing: up to $1..S.500-$10. • A recent survey of living costs ranked the 10 most expensive cities as: o o o o Tokyo Moscow Osaka Hong Kong .and Host-Country Income Taxes Expatriate compensation Worksheet Example of an Expatriate compensation • An expatriate working in a U.g. .o o o o o o Beijing Geneva London Seoul Zurich New York Conclusion: Thus the above Description tells us the comparative Study of international Compensation.