Component of Compensation

8/3/2019 Component of Compensation

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Presented By:

Abhinav

Shubhangi



Content of Components of International

Compensation Programme for Expatriates

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Base Salary Hardship Premium Allowances

Cost of Living Allowance Housing Allowance Home Leave Allowance Education Allowance Relocation Allowance

Miscellaneous Allowances Calculating International

Compensation



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 expatriate¶s home or

parent country currency, or in the currency of the

expatriate¶s host country.

The base salary can be quite a controversial issue, i.e.

when it is linked to the different home countries of the

respective HCNs and TCNs working in an international

organization.

Component Of Compensation

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For expatriate¶s (usually PCNs, TCNs)

who will encounter ³hardships´ caused by

the transfer to a foreign location,

determining the appropriate level of

payment can be difficult.

Factors determining the hardship

premium, usually expressed in terms of an

expatriate¶s base pay, are typically:

Assignment

Actual hardshipTax consequences

Length of assignment

Hardship Premium

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There are many types of allowances in

an international compensation package.

Cost of Living Allowance

Payment made to the expatriate with a viewto 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

Allowances

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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 leaveenables the expatriate to renew

business, family and social ties,

and thus avoid adjustment

problems subsequent torepatriation.

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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, schooluniforms 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.

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Relocation Allowance

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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.



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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R est and R ehabilitation leave (especially for

expatriates based in ³hardship´ assignmentlocations)

Support rendered to an expatriate in addition to theallowances provided.

Paid Vacations for expatriate and family

There are several types of benefits,more prominent

examples being:

Social Security Benefits (home country or host country)

Emergency Cases (severe illness, death

Benefits

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Calculating International

Compensation

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The Going R ate Approach

The Balance Sheet

Approach



T he Going-Rate Approach

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Based on local market ratesRelies on survey comparisons

-Local nationals (HCNs)

-Expatriates of same nationality

-Expatriates of all nationalities

Compensation based on the selected survey comparisonBase pay and benefits may be supplemented by additional

payments for low-pay countries.

Example: Should a Pakistani bank operating in London use

local British salaries, the salaries other Pakistani competitor

banks in London or the average salary offered by all foreignbanks operating in London as the reference point for the

base salary offered



Advantages & Disadvantages

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ADVANTAGES

Equality with local nationals

Simplicity.

Identification with host country.

Equity amongst different

nationalities.

DISADVANTAGES

Variation between assignments for the

same employee.

Rivalry between expatriates of same

nationality in getting assignmentsto some countries.

Potential reentry problems in the home

country.



Logic of the Balance Sheet Approach

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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 inthe home country, and to provide incentives

offset qualitative differences between

assignment locations.



T he 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 thepackage attractive.

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Outlays Considered in the Balance Sheet Approach

The balance sheet approach considers four types of outlays which areincurred 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, pension

contributions, investments, education expenses, social security taxes, etc.

Where costs of host country > costs of home countryorganization pays

the expatriate to make up the difference

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ADVANTAGES

Equality between

assignments and between

expatriates of the same

nationality.

Facilitates expatriate

Re-entry.

Easy to communicate

to employees.

ADVAN T AGES & DISADVAN T AGES OF BALANCE SHEE T APPROACH

DISADVANTAGES

Can result in considerable

disparities between

expatriates of different

nationalities and betweenexpatriates and local

nationals.

Can be quite complex

to administer (e.g. changing

economic conditions,taxation)

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Component of Compensation