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Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt) Professor 1

Contemporary strategic compensation challenges

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Page 1: Contemporary strategic compensation challenges

Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)

Professor

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Page 2: Contemporary strategic compensation challenges

Compensation & Benefits

Page 3: Contemporary strategic compensation challenges

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Compensation& Benefits

Compensation& Benefits

Employment andTaxation Laws

Organization’s Com-pensation Policy

Competitors

Standard of LivingPolitical and Social

Environment

Allowances Economic Conditions

Page 4: Contemporary strategic compensation challenges

Expatriate costs may pose a multiple-fold expense in relation to employees who are not sent as expatriates to foreign destinations

Costs significantly higher than the compensation accorded to Host Country Nationals (HCNs) and Third Country Nationals (TCNs)

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Page 5: Contemporary strategic compensation challenges

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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

Page 6: Contemporary strategic compensation challenges

1) Policy should be consistent with overall strategy, structure and business needs of international organization

2) Policy must work to attract and retain staff in those areas where international organization has greatest needs and opportunities.

3) 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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Page 7: Contemporary strategic compensation challenges

3) Policy should facilitate transfer of international employees in most cost-effective manner

4) Policy must give due consideration to equity and ease of administration

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Page 8: Contemporary strategic compensation challenges

Financial protection in terms of benefits, social security and cost of living in foreign location

Foreign assignment offers opportunities for advancement through income and/or savings

Issues such as housing, education of 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

Page 9: Contemporary strategic compensation challenges

Base Salary

Base salary - main component in international compensation

It is used as main benchmark for other elements in expatriate compensation package, such as, bonuses and benefits

Base salary is either paid in expatriate’s home or parent country currency, or in currency of expatriate’s host country

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Page 10: Contemporary strategic compensation challenges

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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Page 11: Contemporary strategic compensation challenges

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• Factors determining hardship premium, usually expressed in terms of an expatriate’s base pay:

AssignmentActual hardshipTax consequencesLength of assignment

Page 12: Contemporary strategic compensation challenges

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 home or parent country and host country

Factors such as inflation differentials and price level need to be considered

Often, cost of living allowance is difficult to determine

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Page 13: Contemporary strategic compensation challenges

Housing Allowance – Payment made to expatriate with a view to ensuring that he or she can maintain their home-country living standard in host country.

Organization may provide - Housing facilities on a mandatory or optional basis- Support services to expatriate for selling or renting

expatriate’s house in home country

Home Leave Allowance – Payment made to expatriate with a view to facilitating their visit back to home country, once or twice a year.

Home leave allowance enables expatriate to renew business, family and social ties, avoiding adjustment problems subsequent to repatriation

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Page 14: Contemporary strategic compensation challenges

Education Allowance – Payment made with a view to supporting education of 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 level of education required and adequacy of schools in host country & transportation costs may pose significant problems for organizations

Relocation Allowance – Payment made with a view to enable relocation of expatriate to assignment location includes moving, shipping, storage costs, subsidies for purchase of appliances and automobile 14

Page 15: Contemporary strategic compensation challenges

Miscellaneous Allowances – Depending on level of seniority of expatriate, payments to him for club memberships, sport associations, maintenance of household staff, etc. may be provided

Organization may provide financial assistance to spouse for loss of income as a result of transfer of expatriate

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Page 16: Contemporary strategic compensation challenges

Benefits – Support rendered to expatriate in addition to allowances:

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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Page 17: Contemporary strategic compensation challenges

Two basic approaches used to determine an international compensation package:

Going Rate Approach

Balance Sheet Approach

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Page 18: Contemporary strategic compensation challenges

Based on local market rates

Relies on survey comparisons◦ Local nationals (HCNs)◦ Expatriates of same nationality◦ Expatriates of all nationalities

Compensation based on selected survey comparison

Base pay and benefits may be supplemented by additional payments for low-pay countries

Example: Should a Indian bank operating in London use local British salaries, salaries of other Indian competitor banks in London or average salary offered by all foreign banks operating in London as reference point for base salary offered

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Page 19: Contemporary strategic compensation challenges

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ADVANTAGES

- Equality with local nationals

- Simplicity

- Identification with host country

- Equity amongst different nationalities

ADVANTAGES

- Equality with local nationals

- Simplicity

- Identification with host country

- Equity amongst different nationalities

DISADVANTAGES

- Variation between assignmentsof same employee

- Rivalry between expatriatesof same nationality ingetting assignmentsto some countries

- Potential reentry problems in home country

DISADVANTAGES

- Variation between assignmentsof same employee

- Rivalry between expatriatesof same nationality ingetting assignmentsto some countries

- Potential reentry problems in home country

Page 20: Contemporary strategic compensation challenges

Balance sheet approach to international compensation is a system designed to equalize purchasing power of employees at comparable position levels living abroad and in home country, and to provide incentives to offset qualitative differences between assignment locations

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Page 21: Contemporary strategic compensation challenges

Balance sheet approach is widely used by international organizations to determine compensation package for expatriates:

Basic objective is maintenance of home-country living standard, plus financial inducement

Home-country pay and benefits are foundations of this approach

Adjustments to home package to balance additional expenditure in host country

Financial incentives (expatriate / hardship premium) added to make package attractive

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Page 22: Contemporary strategic compensation challenges

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Balance sheet approach considers four types of outlays which are incurred by expatriates:

Goods and services – Outlays incurred in home country for food, personal care, clothing, household furnishings, recreation, transportation and medical care

Housing – All major costs associated with housing in host country

Income Taxes – Parent country and host country income tax expenditures

Reserve – Contributions to savings, payments for benefits, 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

Page 23: Contemporary strategic compensation challenges

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ADVANTAGES

- Equality between assignmentsand between expatriatesOf same nationality

- Facilitates expatriate reentry

- Easy to communicate to employees

ADVANTAGES

- Equality between assignmentsand between expatriatesOf same nationality

- Facilitates expatriate reentry

- Easy to communicate to employees

DISADVANTAGES

- Can result in considerabledisparities between expatriatesof different nationalitiesand between expatriates and local nationals

- Can be quite complex to administer (e.g. changingeconomic conditions,taxation)

DISADVANTAGES

- Can result in considerabledisparities between expatriatesof different nationalitiesand between expatriates and local nationals

- Can be quite complex to administer (e.g. changingeconomic conditions,taxation)