International Human Resource ManagementManaging people in a multinational context

v IHRM Chapter 7 2

In this chapter we:• Examine the complexities that arise when firms move from

compensation at the domestic level to compensation in an international context.

• Detail the key components of an international compensation program.

• Outline the two main approaches to international compensation and the advantages and disadvantages of each approach.

• Examine the special problem areas of taxation, valid international living cost data and the problem of managing TCN compensation.

• Examine recent developments and global compensation issues.

Chapter Objectives

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Terms

3IHRM Chapter 7

HRISrepatriationbase salarybenefitsTax equalizationTax protection

global corporate cultureInternational base pay

going rate approachbalance sheet approach

allowances: COLAhousinghome leaveeducationrelocationspouse assistance

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Issues when considering benefits

4IHRM Chapter 7

1. Whether or not to maintain expatriates in home-country programs, particularly if the firm does not receive a tax deduction for it.

2. Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage.

3. Whether expatriates should receive home-country or host-country social security benefits.

v 5IHRM Chapter 7

Table7-1

Going Rate Approach

• Based on local market rates

• Relies on survey comparisons among: - Local nationals (HCNs) - Expatriates of same nationality - 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

v 6IHRM Chapter 7

Table7-2

Advantages and disadvantages of the Going Rate Approach

Advantages

• Equality with local nationals• Simplicity• Identification with host country• Equity amongst different nationalities

Disadvantages

• Variation between assignments for same employee• Variation between expatriates of same nationality in different countries• Potential re-entry problems

v 7IHRM Chapter 7

Table7-3

The Balance Sheet Approach

• Basic objective is 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 host country

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

• Most common system in usage by multinational firms

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Four Balance Sheet Approach categories

8IHRM Chapter 7

1. Goods and services – home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care.

2. Housing – the major costs associated with housing in the host country.

3. Income taxes – parent-country and host-country income taxes.

4. Reserve – contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc.

v 9IHRM Chapter 7

Table7-4 Expatriate compensation worksheet

v 10IHRM Chapter 7

Table7-5

Advantages and disadvantages of the Balance Sheet Approach

v 11IHRM Chapter 7

Table7-6

Maximum marginal federal tax rates

Country

ArgentinaAustraliaBelgiumBrazilCanadaChina (Hong Kong)ChinaFranceGermanyIndiaItalyJapanMalaysia

Maximum marginalrate (%)

35.0047.0050.0027.5029.0020.0045.0048.0942.0033.6643.0037.0028.00

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Some issues when considering benefits

12IHRM Chapter 7

1. Keep expatriates in home-country programs, particularly if the company does not receive a tax deductions for it?

2. Enroll expatriates in host-country benefit programs and/or making up coverage differences?

3. Does host-country legislation regarding termination affects benefit entitlement?

4. Do expatriates receive home-country or host-country social security benefits?

5. Should benefits be maintained on a home-country or host-country basis? Who is responsible for the cost? Should other benefits offset any shortfall in coverage? Should home-country benefit programs be exported to local nationals in foreign countries?

v 13IHRM Chapter 7

Table7-7

Social security contributions by employers and employees

v 14IHRM Chapter 7

Table7-8

Range of working times required to buy one Big Mac

v 15IHRM Chapter 7

Complexity, challenges and choices in global payFigure7-1

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Discussion Questions

16IHRM Chapter 7

1. What should be the main objectives for a multinational firm with regard to its compensation policies?

2. Describe the main differences in the Going Rate and Balance Sheet Approaches to international compensation.

3. What are the key differences in salary compensation for PCNs and TCNs? Do these differences matter?

4. What are the main points that MNEs must consider when deciding how to provide benefits?

5. Why is it important for MNEs to understand the compensation practices of other countries?

6. Explain how balancing the interests of global and local, occupational and functional perspectives might play out in a compensation decision scenario.