*International Human Resources Management International Compensation Management

*Attract individuals who are competent and interested in international assignmentsFacilitate movement of expatriates from one subsidiary to another, from the home country to subsidiaries and from subsidiaries back to home countryProvide a consistent and reasonable relationship between the pay levels of employees at the headquarters, domestic affiliates and foreign subsidiariesBe cost-effective by minimizing unnecessary expensesBe consistent with the overall strategy, structure and business needs

Objectives of Compensation

*Compensation philosophy is the set of values and beliefs that an organization has with regards to monetary and non-monetary benefits payable to employees What are the goals of the organizations compensation system?What percentage of compensation should be linked to individual/ unit performance and what should be the base salary?What is the role of performance appraisal in disbursing compensation, bonus, merit hike etc.?How to target the positioning of compensation of employees relative to market?

Compensation Philosophy

*Contingency theoryResource based TheoryThe agency TheoryEquity Theory

Theories of Compensation

*Strategic business and operating inputs obtained from the subsidiaries business plan and objectives and the operating targets and resources requirementsIndustry and labor market practices and trends to assess demand-supply relationshipsEmployee inputs and preferences to ascertain the degree to which compensation is fixed- structure based vs. negotiable -based on competency/skillCompensation Strategy

Aligning Compensation Strategy by Michaiel H. SchusterEMPLOYEE Inputs and PreferencesBusinessAndOperatingInputsIndustryAnd LaborMarket Practices & TrendsCompensation Philosophy and Objectives Based upon Business, Operating & Human Resource RequirementsDESIGNASS ESSMENTCompensation MangementFringe BenefitsOrganisationsPerformanceOrVariable PayNon- Monetary& Other Monetary Rewards& Recognitions

Base Pay Delivery

*Elements of compensationBase SalaryIncentives/ Variable payAllowancesLong Term Benefits Taxes

Components of Compensation

Base SalaryIts common in any compensation strategy- domestic or foreign.The base salary is the foundation block of international compensation whether the employee is a PCN or TCN.

Incentives/Variable PayA growing number of MNCs have dropped the ongoing premium for overseas assignments and replaces it with a one time, lump- sum premium Even in domestic Bs MNCs are preferring one- time premiums to periodic salaries.

Incentives/Variable Pay contd. Yahoo. Com has dropped CEOs salary to some % but they are entitled to benefit from a discretionary bonus in the form of a fully vested stock option of up to 1 million shares / annum.Google Inc. has also done a similar thing.

Incentives/Variable Pay contd. Referral Bonus: It is a popular way of bringing in new talent by employees introducing friends, relatives and acquaintances to the company.Eligibility to receive a hiring bonus varies across job levels, but is relatively un affected by companies size or industry sector.

Incentives/Variable Pay contd. Use of Retention Bonuses/ Rises for employeesIs common in industries like IT/BPO and in the services industry. Surveys indicate that about one third of technology and life sciences companies use a formal or discretionary retention bonus plan to retain key employee.The practice is more common in large industry but does not vary by industry sector.

Allowances They are an inevitable feature of international compensation.One common allowance relate to the cost of living- an adjustment for differences in the cost of living between the home country and foreign assignment.

Popular Allowances areSpouse assistanceHousing allowanceHome leave allowanceRelocation allowance( to cover expenses as moving, shipping and storage charges, temporary living expenses, subsidies regarding appliance or car purchase and lease related charges etc.)Educational allowance( to the children & trailing spouse)

Allowances contd.Foreign Service/Hardship PremiumThis is perceived as an inducement in the form of a salary premium to accept an overseas assignment.Generally salary premiums vary from 5-40 % of the base salary.Actual salary depends upon the assignment, actual hardship, tax consequences and length of assignment.

Use of Long Term benefitsEmployee Stock Option Plan (ESOP)

This is plan established by a company wherein a certain no. of shares are reserved for purchase and issuance to key employees. Such shares usually vest over a certain period to serve as an incentive for employees to build long-term value for the company.

Use of Long Term benefits contd. Restricted Stock Unit ( RSU)

This is a plan established by a company, wherein units of stocks are provided with restrictions on when they can be exercised. It is usually issued as partial compensation for employees.The restriction generally lifts in 3-5 years when the stock vests.IT companies are increasingly using RSUs as incentives since they afford a lot more flexibility.

Use of Long Term benefits contd Employee Stock Purchase Plan ( ESPP)

This is a plan wherein a company sells shares to its employees usually, at a discount. The company deducts the purchase price of these shares every month from employees salary.

*MNCs generally select one of the following approaches to tackle international taxation.TAX EQUALISATION TAX PROTECTIONTaxes

TAX EQUALISATIONOrganisations withhold an amount equal to the home country tax obligation of the PCN and pay all taxes in the host country.

TAX PROTECTION The employee pays up to the amount of taxes he or she would pay on remuneration in the home country.In such a situation, the employee is entitled to any windfall received if the total taxes are less in the foreign country than in the home country.

*Goal Orientation profit making vs. service orientedParent company philosophyIndustry typeCapacity to payLocal labor market characteristics Local CultureGovernment and statutory provisions

Variables influencing Compensation

*Going Rate ApproachBalance Sheet ApproachOther Approaches

International Compensation Packages

Going Rate ApproachExecutives are paid according to the host country salary structures. When salary structures in host country are lower, additional salary payments are made to the expatriates.

Balance Sheet Approach Majority of MNCs follow the balance sheet approach to determine expatriate compensation. This method provides a compensation package that attempts to equate or balance the expatriates purchasing power in the host country as compared to the home country.

Income Tax

Housing

Goods& Services

Reserve

Premium& IncentivesIncome Tax

Housing

Goods& ServicesReserve

Home & Host Country IncomeTaxes

Housing

Goods& Services

Reserve

Income Tax

Housing

Goods& Services

Reserve

Home country SalaryHome Country EquivalentPurchasingPowerHost country costs paid by orgn.& from salaryHome CountryCosts

International Citizens ApproachIn this approach an international basket of goods is used for all expatriates, regardless of country of origin,It includes food, clothing, housing and so forth. Expatriates are not provided salary adjustments that would allow them to purchase exactly the same items in the host country as in the home country.Rather they receive adjustments that would allow them to purchase a comparable local product of same nature and use.

Global Salary Systems International Citizens Approach is alternatively called globalsalary systems.This is appropriate when an MNC has a team of dedicated international managers- Europeans, Americans or Asians who are ready to move to any part of Globe.It seeks to provide worldwide equity in rewards and allow managers to move between countries with minimal effects on life style.

*Compensation AdministrationSalary Increases / reviewsEstablish Salary BandsDeveloping Rates of pay for JobsLinkages to performance Appraisal Starting Salary for New EmployeesCompensation Administration

*Issues in International compensationImpact of the human resources demand-supply equation at the parent country / host countryIncreasing usage of international compensation and benefits consultantsUse of compensation benchmarking Surveys at local and global levelsOutsourcing Compensation management/ payroll processing

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