Ch-12 (International Compensation)

8/3/2019 Ch-12 (International Compensation)

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Excel BooksCompensation andReward Management B D Singh

Copyright 2007, B D Singh

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International Compensation

CHAPTER

12


12

Chapter


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CHAPTER

12The nature of the assignment of the employee to a large extent determines the

method of compensation. These terms of assignments are:

1. Short-term assignment, which may be for a relatively short period, such as the

case of a feasibility study, etc. This type of assignment does not usually

exceed six months. Families also do not generally accompany.

2. Long term assignment, if the assignment is more than six months or one year.

It will usually result in employee's moving along with his family.

3. Permanent assignment is when an employee signs a permanent employment

contract with a foreign subsidiary, the contract is usually meant for a fixed

period of time of longer duration.


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Problems In Compensation ManagementMNCs face lot of difficulties in evolving compensation package in view of the

following factors:

Economic condition of the host country.

Employment condition of the host country.

Taxation laws of the host country.

Currency fluctuation in the host country.

Inflation situation in the host country.

The result is that expatriates cost three to four times more than the employees of

the host country.


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Objectives Of The Compensation1. Attract and retain employees qualified for service abroad.

2. Facilitate transfers between foreign affiliates and between home country and

foreign affiliates.

3. Establish and maintain a consistent and reasonable relationship betweencompensation of all of the employees of any affiliate, whether posted at home

or abroad and between affiliates.

4. Arrange reasonable compensation, in the various locations, in relation to the

practices of leading competitors.

5. Compensation for reasonable foreign services, tax equalization, reimbursement

of reasonable cost.

6. Be cost-effective.


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Cont.

Elements Of Expatriate's Compensation PackageThere are five basic elements in a typical expatriate's compensation package.

These include:

1. Basic pay

2. Benefits

3. Allowances

4. Incentives and

5. Tax reliefs.


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Cont.

Expatriate Housing Costs in Foreign Cities

Location Estimated Yearly Housing Costs

1. Beijing $158,400

2. Hong Kong $156,000

3. Tokyo $153,600

4. Shanghai $120,0005. Moscow $108,000

6. Seoul $102,000

7. London $ 93,600

8. Ho Chi Minh City $ 86,400

9. Singapore $ 85,20010.New York $ 72,000


7/20Excel BooksCompensation andReward Management B D Singh


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Cont.

Cost Estimates for Goods and Services in Various Cities of the World

Cost of Living: New York - 100, December, 1996

City Ratings

Tokyo 175

Hong Kong 125

Moscow 125Singapore 120

Taipei 115

Seoul 110

Tel Aviv 105

London 104

Beijing 101

New York 100

Athens 95

Sao Paulo 93

Buenos Aires 90




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Lisbon 89Jakarta 88

Bangkok 87

Kuala Lumpur 86

Santiago 78

Istanbul 77

Bogota 75

Warsaw 73

Manila 70

Prague 67

Mexico City 60

Johannesburg 58

Budapest 57

Caracas 56

New Delhi 40

Source: "Cost of Living Across the Globe," The Economist (December 14, 1996)




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Cont.

Social Security Contributions by Employers and Employees

Country Employer contributionrate (%)

Employee contributionrate (%)

Total contribution rate(%)

Argentina 7.81 11.00 18.81

Australia 0.00a 0.00a 0.00a

Belgium 11.21 8.65 19.86

Brazil 20.00 11.00 31.00

Canada 4.30 4.30 8.60

China (Hong KongSAR)

5.00 5.00 10.00

China (Shanghai) 43.50 16.00 59.50

France -b -b -b

Germany 12.80 12.80 25.60

Italy 30.94 9.89 40.83

Japan 8.68 8.68 17.36

Malaysia 1.75 0.50 2.25




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Mexico 29.00 4.00 33.00New Zealand 0.00a 0.00a 0.00a

Singapore 16.00 20.00 36.00

South Africa 0.00a 0.00a 0.00a

Spain 30.60 6.35 36.95

Sweden 22.91 7.00 29.91

Switzerland 5.05 5.05 10.10

Taiwan 5.00 1.00 6.00

Thailand 3.00 3.00 6.00

The Netherlands 0.00a 29.40 29.40

UK 11.90 10.00 21.90

USA 6.20 6.20 12.40

Venezuela 9.00 4.00 13.00

a When the contributions are at zero, they are funded out of the General Tax Revenue and range from zero to very high

values

b Varies

Source: Adapted from Towers Perrin, Worldwide Total Remuneration 2001-2002




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Cont.

Maximum Marginal Tax Rates Around the World

Country 1985 Rate 1988 Rate

Argentina 45.0% 38.3%

Australia 49.0% 49.0%

Belgium 72.0% 70.8%

Canada 34.0% 29.9%

France 65.0% 56.8%

Germany 56.0% 56.0%

Hong Kong 17.5% 16.5%

Japan 70.0% 60.0%

Korea 55.0% 55.0%

Netherlands 72.0% 72.0%

Singapore 40.0% 33.0%

Switzerland 13.8% 11.5%

United Kingdom 60.0% 40.0%

United States 50.0% 33.0%

Source: Internal Dimensions of Human Resource Management by P.J. Dowling and R.S. Schuler




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Cont.

There are generally three approaches to international compensation. They

are:

i. The budget system

ii. The local growing rate system.

iii. The balance sheet or home made system.




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Cont.

Balance Sheet Approach

RelocationBonus

$1,500Taxes

Equivalent salary andallowances, host country

$10,200

Base country salary$7,000

$1,000

Housing

$700

Goodsand

Services

Reserve

Taxes$2,000

Housing$2,000

Goodsand

Services$2,000

Reserve$1,000

Basecountrycurrency

Allowancespaid by company

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Cont.

Critical Assessment of the Balance Sheet Approach

Some of the disadvantages of the Balance Sheet approach are that - 1. It can result

in great disparity between expatriate of different national and between expatriates of

local nationals, 2. At times, it can be quite complex to administer.

But, its advantages are many more. Some of them are as follows:

1. It ensures equity between assignments.

2. It ensures equity between expatriates of same nationality.

3. It facilities expatriate's re-entry.

4. It is easy to communicate to the employees.

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Cont.

Terms and Conditions for Expatriate Employees

Some of the terms and conditions decided by management for expatriate

employees sent abroad for assignments/projects are:

Period of posting

Alone/family

Pay and allowances

Medical facilities during posting abroad

Housing

Winter clothing/outfit allowance in lumpsum (half in foreign currency to be paid)

Transfer grantequal to one month's salary

Travel to and fro Joining time before leaving.

Leave

Home leave passage

Indian payments

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Cont.

Alternatives to Balance Sheet Approach

The balance sheet approach was refined in the 1960s and 1970s when most

expatriates were technical employees of US oil companies. But the business

environment and the reasons for expatriate assignments have changed since then.

Consequently, many employers are exploring changes.

Expatriate Systems Objectives? Quel Dommage!

Talk to experts in international compensation, and you soon get into

complexities of taxes, exchange rates, housing differences, and the like.

Expatriate compensation systems are forever trying to be like Goldilocks's

porridge: not too high, no too low, but just right.

The expatriate pay must be sufficient to encourage the employee to take the

assignment yet not so attractive that local nationals will feel unfairly treated or

that the expatriate will refuse any future reassignments.

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Cont.

Milkovich and Bloom have argued that strategic flexibility is necessary in

international compensation and that nationality or "national systemsthinking.

This model group forms total compensation into three sets: core, customize

and choice.

Specific practices in the core section may vary according to market and local

conditions but must be consistent with the core policies. The crafted customize set of compensation elements assumes that regional

managers have discretion to choose from a menu of compensation forms.

While alternatives in the choice set offer flexibility for employees to select

among various forms of compensation.

International compensation policies generally follow three alternatives:

1. A fixed value in all countries.

2. A relative value in all countries.

3. A relative market position in all countries.

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Cont.

Example of Employment Package for 'Internationally Compensated Staff'

Currently

disposable

Cash

Annual fixed income

Average income usually

paid in the trade

Netherlands: DFL 100,000

Denmark: DKK 395,000

Britain: 28,000

Variable income

15 per cent of the fixed

income if targets are met

Health assurance allowance

average allowance usually

paid in the host country

Professional expenses

Telephone allowance

full reimbursement of all

costs; tax consequences to be borne by

the employee

Company car

Point of reference are cars in the same

range as make X type Y

Personal expense allowance

the same net allowance

equivalent to DFL 1,500 in all

countries

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Cont.

Commitments

Deferred incomePension

supplement to state pension

upto a maximum of 65

per cent of the last earned

income; the pension age is 65

InsuranceSupplement to sickness benefits upto the

full fixed income during the first year of

illness; supplement upto 85 per cent

in the second year

Disability

After the third year of illness, benefits will

be supplemented upto 65 per cent of the

income in all countries, regardless of state

benefits

Widows/widowers pension the payment

to widows/widowers amounts to 65 percent of the old age pension

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Excel BooksCompensation and Reward Management B D Singh


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CHAPTER

12Comparing the Issues Involved in Using Different Types of Employees

Type of Employee

Issue Home CountryExpatriate

Local Nationals Third CountryNational

Cost Expensive Inexpensive Expensive

Skills High Low Moderate

Loyalty Moderate High Low

Availability Some Many Few

Compensation High/Complex Relatively Low ModerateCost/Complex

Interest in assignment Low High High

Recruited by others No Yes YesTrust Moderate High` Low

Source: M. Harvey "Designing a Global Compensation System: The Logic and a Model," Columbia Journal of World

Business (Winter 1993): 57-72

Documents

Ch-12 (International Compensation)