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A Human Resource A Human Resource Management ApproachManagement Approach

STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION

Chapter 12Chapter 12

International CompensationInternational Compensation

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Competitive strategies and how Competitive strategies and how international activities fit ininternational activities fit in

Several factors have contributed to the expansion of global markets.- like free trade agreements….

1) Lowest-cost producers relocations to cheaper production areas

2) Differentiation and the search for New Global Markets3) How globalization is affecting HR Departments4) Complexity of international compensation program

• Further corporate interests abroad• Encourage employee expatriation• Minimize workers’ financial risks • Enhance overseas experiences• Repatriation issues• Promoting lowest - cost strategies • Promoting differentiation strategies

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International Employees International Employees

Host country nationals (HCNs)Foreign national Citizens work for U.S. company in their

home country

Third country nationals (TCNs)Foreign national Citizens of one country work for a U.S.

company in another country

Expatriates U.S. citizens work for a U.S. company in another country

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Compensation FactorsCompensation Factors

Length of overseas assignments Short-term Extended-term

Staff mobility One or more foreign assignments

Equity: pay referent groups Domestic workers Host country workers / Local employees

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Compensation ComponentsCompensation Components

Core compensation Base pay Incentive compensation

Fringe compensation Standard benefits Enhanced benefits

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Setting Base PaySetting Base Pay

Home country-based Similar to domestic employees

Host country-based Similar to employees in foreign sites

Headquarters-based Not based on home or host country’s pay levels

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Purchasing PowerPurchasing Power

Stability of currency U.S. dollar & foreign money Exchange rate fluctuations

Inflation Increase in prices of goods & services Increase in inflation lowers purchasing power

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Incentive CompensationIncentive Compensation Foreign service premiums

To Encourage employees to accept Expatriate Assignments 10 -30 % of base pay – increase with the length of service – which is not a permanent

increase – paid in installments.

Hardship allowances For tough work & working conditions at foreign locations In small amounts throughout the duration of expatriates assignments. Companies should communicate the role of these payments 3 criteria: extraordinarily difficult living conditions, excessive physical hardship and

notably unhealthy conditions.

Mobility premiums For willingness to relocate to an assignment

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Hardship AllowancesHardship Allowances

Set by U.S. State Dept based on: Foreign living conditions Physical challenges like climate Poor health conditions

Over 150 places as hardship locations

Supplements between 10% - 25% of base pay

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International Fringe CompensationInternational Fringe Compensation

2 Types Standard Enhanced

Considerations Total remuneration Benefit adequacy Tax effectiveness Recognizing local customs & practices

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ENHANCED BENEFITS ENHANCED BENEFITS

Relocation assistance Education reimbursement Home leave & travel reimbursement Rest & relaxation leave and allowance

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Relocation AssistanceRelocation Assistance

Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving & storing household goods

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Balance Sheet ApproachBalance Sheet Approach

To determine compensation packages To provide similar standard of living Strategic value

Protects expatriates’ standard of living Allows companies to control costs

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Appropriateness:

Home country is an appropriate reference point for economic comparisons.

Expatriates keep close ties to USA (their home country or base country)

Assignment is of limited duration Repatriation after assignment the company promises employees that hey will not lose

financially while on foreign assignment.

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Major Expenditures Housing & utilitiesGoods & servicesDiscretionary incomeTaxes

Information Sources Returning expatriates or foreign government

contacts. Consulting & research companies U.S. State Dept. indexes

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Discretionary Income ExpendituresDiscretionary Income Expenditures

Pension contributions Savings & investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments

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Tax ConsiderationsTax Considerations

Double taxation relief IRC Section 901 IRC Section 911

Tax protection

Tax equalization

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IRC Section 901IRC Section 901

Can credit foreign taxes from U.S. tax If U.S. tax is greater

• Expatriates pay difference to IRS

If foreign tax is greater• Expatriates can deduct excess to future U.S. taxes• For up to 5 years

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IRC Section 911IRC Section 911

Can Exclude up to $70,000 of foreign Income, + a hosing allowance, from tax.

Exclusions Cash

Income Professional fees Incentives Bonuses Sales commissions

Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living

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Employer Considerations: Tax Employer Considerations: Tax ProtectionProtection

Key element of tax protection and tax equalization methods is hypothetical tax:Hypothetical tax: employers calculate the hypothetical tax as

the US income tax based on the same salary level, excluding all foreign allowances.

• Employers reimburse expatriates – when actual tax is greater.

• Expatriates pay entire tax – when actual tax is less or equal to hypothetical tax

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Employer Considerations: Tax Employer Considerations: Tax EqualizationEqualization

Employers deduct hypothetical tax

Employers pay real tax from hypothetical

Reimbursements settled after payment

Equitable treatment any assignment• Employers reimburse expatriates – when actual tax is less.

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Repatriation ConcernsRepatriation Concerns

Losing supplements & allowances

Work experience not valued

Reintegration into domestic workforce Leaving company

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