International Compensation

Objectives of this Chapter 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.

Managing Variations

How people get paid around the world depends on differences (and similarities) in the following general factors

Economic

Institutional

Organizational

Employee

Guide to International Compensation

Variation in International Pay Practices

Social contracts

Cultures

Trade unions

Ownership and financial markets

Managers autonomy

The Social Contract Labour relations go beyond employee-employer

relations

Includes

The State

All the owners of other companies (acting as individual or, through business associations, at a collective level)

All the employee (acting at individual or, through their unions, at collective level)

The relations and expectations of these three parties constitute the social contract

The Social Contract (contd..)

Different people in different countries have different expectations and beliefs about the roles of government, unions, employees, employers & business organizations, with respect to compensation.

The Social Contract (contd..) Degree Of Centralization Within Compensation Framework Of Different Countries

UK & Canada- Use highly decentralized compensation systems with minimum government interventions

Japan, Germany, Spain- Establish compensation systems of average centralization since they are controlled by the sector to which the company belongs

Sweden, Denmark & Belgium- Highly centralized framework with heavy govt. intervention, which form national wage system


Differing Presence of Trade Union in Different Countries

High union membership in European Countries such as Sweden & Denmark

Low membership in countries like UK, South Korea, Japan, USA (to some extent)


Social Legislation

Within EU, UK is the country with fewest legal requirement. There is no minimum salary, no. of hours & formal methods of participation. Other e.g. USA & Japan

France & Germany- most heavily regulated social welfare system.

Culture

Shared mental programming rooted in values, beliefs, and assumptions shared in common by a group of people

Influences how information is processed

Culture and Managing International Pay

Assumption that pay systems must be designed to fit different national cultures is based on the belief that most of a countrys inhabitants share a national character

Culture and Managing International Pay (contd..)

Countries with High Power distance require hierarchical compensation system with large differences in earnings which reflect differences in status & position between superior and subordinate

Countries with High Uncertainty Avoidance usually give a lot of weight to fix pay & systems are characterized by being centralized & very oriented towards internal equity.


Individualist Culture- Compensation based on individual performance & personal achievements, use of exclusively extrinsic rewards and the quest for external equity

Collectivist Culture- Compensation based on group performance, the use of intrinsic rewards (as well as extrinsic ones), and emphasis on internal equity


Masculine Culture- Compensation policies which favour inequalities according to gender & usually reward masculine characteristics & stereotypes both financially & when it comes to promotion

Feminine Culture- Foster more egalitarian compensation systems which do not make sexual discriminations & in which access to reward & promotion are not dependent on ones meeting certain stereotype.

Culture Matters, but So Does Cultural Diversity (cont.)

Interplay among various conditions within each nation or region, taken as a whole, form distinct contexts for determining compensation

Economic

Institutional

Organizational

Individual

Factors Affecting International Pay

Ownership and capital markets

Managers autonomy

Comparing Costs

Factors affecting wage comparisons Standard of living costs Purchasing power

Purchasing Power Parity- The adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other. E.g. A pair of shoes costs Rs 2500 in India. Then it should cost $50 in America when the exchange rate is 50 between the dollar and the rupee.

Working time required

Exhibit 16.8: Strategic Similarities and Differences: An Illustrated Comparison

Strategic Market Mind-Set

Localizer: Think Global, Act Local

Designs pay systems to be consistent with local conditions

Business strategy is to seek competitive advantage by providing products and services tailored to local customers

Operate independently of corporate headquarters

Strategic Market Mind-Set (cont.)

Exporter: Headquarters Knows Best

Basic total pay system designed at headquarters and is exported world-wide for implementation at all locations

Exporting a basic system makes it easier to move managers and professionals among locations

One plan from headquarters gives all managers around the world a common vocabulary and a clear message what the leadership values

Strategic Market Mind-Set (cont.) Globalizer: Think and Act Globally and Locally

Seek a common system to be used as part of glue to support consistency across all global locations

Headquarters and operating units are heavily networked to shared ideas and knowledge

Performance is measured where it makes sense for the business

Pay structures are designed to support business

Common Allowances in Expatriate Pay Packages

Salary Taxes

Housing Allowances

and

Premiums

Elements of Expatriate Compensation

Common Allowances in Expatriate Pay Packages

Financial Allowances

Social Adjustment Assistance

Family Support

Terms

26 IHRM Chapter 7

HRIS

repatriation

base salary

benefits

Tax equalization

Tax protection

global corporate culture

International base pay

going rate approach

balance sheet approach

allowances: COLA housing home leave education relocation spouse assistance

Issues when considering benefits

27 IHRM 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.

28 IHRM Chapter 7

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

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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

30 IHRM Chapter 7

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

Four Balance Sheet Approach categories

31 IHRM 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.

32 IHRM Chapter 7

Expatriate compensation worksheet

33 IHRM Chapter 7

Advantages and disadvantages of the Balance Sheet Approach

34 IHRM Chapter 7

Maximum marginal federal tax rates

Country

Argentina Australia Belgium Brazil Canada China (Hong Kong) China France Germany India Italy Japan Malaysia

Maximum marginal rate (%)

35.00 47.00 50.00 27.50 29.00 20.00 45.00 48.09 42.00 33.66 43.00 37.00 28.00

Maximum marginal rate (%)

33.00 52.00 40.00 22.00 40.00 35.00 29.16 26.00 11.50 40.00 40.00 35.00 34.00

Country

Mexico Netherlands Poland Singapore South Africa South Korea Spain Sweden Switzerland Taiwan United Kingdom United States Venezuela

Some issues when considering benefits

35 IHRM 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?

Documents

International Compensation