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International Human International Human Resources Management Resources Management

International Compensation Management

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Attract individuals who are competent and interested in international assignments

Facilitate movement of expatriates from one subsidiary to another, from the home country to subsidiaries and from subsidiaries back to home country

Provide a consistent and reasonable relationship between the pay levels of employees at the headquarters, domestic affiliates and foreign subsidiaries

Be cost-effective by minimizing unnecessary expenses

Be consistent with the overall strategy, structure and business needs

Objectives of Objectives of CompensationCompensation

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Compensation philosophy is the set of values and beliefs that an organization has with regards to monetary and non-monetary benefits payable to employees

What are the goals of the organizations compensation system?

What percentage of compensation should be linked to individual/ unit performance and what should be the base salary?

What is the role of performance appraisal in disbursing compensation, bonus, merit hike etc.?

How to target the positioning of compensation of employees relative to market?

Compensation Philosophy Compensation Philosophy

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Contingency theory

Resource based Theory

The agency Theory

Equity Theory

Theories of Compensation Theories of Compensation

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Strategic business and operating inputs obtained from the subsidiaries business plan and objectives and the operating targets and resources requirements

Industry and labor market practices and trends to assess demand-supply relationships

Employee inputs and preferences to ascertain the degree to which compensation is fixed- structure based vs. negotiable -based on competency/skill

Compensation StrategyCompensation Strategy

Aligning Compensation Strategy by Michaiel H. Schuster

EMPLOYEE Inputs and Preferences

BusinessAnd

OperatingInputs

IndustryAnd Labor

Market Practices &

Trends

Compensation Philosophy and Objectives Based upon Business, Operating & Human Resource RequirementsD

ESIGN

ASSESSMENT

Compensation Mangement

Fringe Benefits

OrganisationsPerformance

OrVariable Pay

Non- Monetary& Other Monetary Rewards

& Recognitions

Base Pay Delivery

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Elements of compensation Base Salary Incentives/ Variable pay Allowances Long Term Benefits Taxes

Components of Components of

CompensationCompensation

Base Salary

Its common in any compensation strategy- domestic or foreign.

The base salary is the foundation block of international compensation whether the employee is a PCN or TCN.

Incentives/Variable Pay

A growing number of MNCs have dropped the ongoing premium for overseas assignments and replaces it with a one time, lump- sum premium

Even in domestic Bs MNCs are preferring one- time premiums to periodic salaries.

Incentives/Variable Pay contd.

Yahoo. Com has dropped CEO’s salary to some % but they are entitled to benefit from a discretionary bonus in the form of a fully vested stock option of up to 1 million shares / annum.

Google Inc. has also done a similar thing.

Incentives/Variable Pay contd.

Referral Bonus: It is a popular way of bringing in new

talent by employees introducing friends, relatives and acquaintances to the company.

Eligibility to receive a hiring bonus varies across job levels, but is relatively un affected by companies size or industry sector.

Incentives/Variable Pay contd.

Use of Retention Bonuses/ Rises for employeesIs common in industries like IT/BPO

and in the services industry. Surveys indicate that about one third of technology and life sciences companies use a formal or discretionary retention bonus plan to retain key employee.

The practice is more common in large industry but does not vary by industry sector.

Allowances

They are an inevitable feature of international compensation.

One common allowance relate to the cost of living- an adjustment for differences in the cost of living between the home country and foreign assignment.

Popular Allowances are

Spouse assistanceHousing allowanceHome leave allowanceRelocation allowance( to cover

expenses as moving, shipping and storage charges, temporary living expenses, subsidies regarding appliance or car purchase and lease related charges etc.)

Educational allowance( to the children & trailing spouse)

Allowances contd.Foreign Service/Hardship Premium

This is perceived as an inducement in the form of a salary premium to accept an overseas assignment.

Generally salary premiums vary from 5-40 % of the base salary.

Actual salary depends upon the assignment, actual hardship, tax consequences and length of assignment.

Use of Long Term benefits

Employee Stock Option Plan (ESOP)

This is plan established by a company wherein a certain no. of shares are reserved for purchase and issuance to key employees. Such shares usually vest over a certain period to serve as an incentive for employees to build long-term value for the company.

Use of Long Term benefits contd.

Restricted Stock Unit ( RSU)

This is a plan established by a company, wherein units of stocks are provided with restrictions on when they can be exercised.

It is usually issued as partial compensation for employees.

The restriction generally lifts in 3-5 years when the stock vests.

IT companies are increasingly using RSUs as incentives since they afford a lot more flexibility.

Use of Long Term benefits contd

Employee Stock Purchase Plan ( ESPP)

This is a plan wherein a company sells This is a plan wherein a company sells shares to its employees usually, at a shares to its employees usually, at a discount.discount.

The company deducts the purchase price The company deducts the purchase price of these shares every month from of these shares every month from employees salary.employees salary.

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MNCs generally select one of the following approaches to tackle international taxation.TAX EQUALISATIONTAX PROTECTION

TaxesTaxes

TAX EQUALISATION

Organisations withhold an amount equal to the home country tax obligation of the PCN and pay all taxes in the host country.

TAX PROTECTION

The employee pays up to the amount of taxes he or she would pay on remuneration in the home country.

In such a situation, the employee is entitled to any windfall received if the total taxes are less in the foreign country than in the home country.

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Goal Orientation – profit making vs. service oriented

Parent company philosophy Industry type Capacity to pay Local labor market characteristics Local Culture Government and statutory provisions

Variables influencing Variables influencing CompensationCompensation

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Going Rate Approach

Balance Sheet Approach

Other Approaches

International Compensation International Compensation Packages Packages

Going Rate Approach

Executives are paid according to the host country salary structures.

When salary structures in host country are lower, additional salary payments are made to the expatriates.

Balance Sheet Approach

Majority of MNCs follow the balance sheet approach to determine expatriate compensation.

This method provides a compensation package that attempts to equate or balance the expatriate’s purchasing power in the host country as compared to the home country.

Income Tax

Housing

Goods& Services

Reserve

Premium& IncentivesIncome Tax

Housing

Goods& ServicesReserve

Home & Host Country Income

Taxes

Housing

Goods& Services

Reserve

Income Tax

Housing

Goods& Services

Reserve

Home country Salary

Home Country EquivalentPurchasing

Power

Host country costs

paid by orgn.& from salary

Home CountryCosts

International Citizen’s Approach

In this approach an international basket of goods is used for all expatriates, regardless of country of origin,

It includes food, clothing, housing and so forth.

Expatriates are not provided salary adjustments that would allow them to purchase exactly the same items in the host country as in the home country.

Rather they receive adjustments that would allow them to purchase a comparable local product of same nature and use.

Global Salary Systems International Citizen’s Approach is

alternatively called globalsalary systems.This is appropriate when an MNC has a

team of dedicated international managers- Europeans, Americans or Asians who are ready to move to any part of Globe.

It seeks to provide worldwide equity in rewards and allow managers to move between countries with minimal effects on life style.

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Compensation

Administration

Salary Increases / reviews

Establish Salary Bands

Developing Rates of

pay for Jobs

Linkages to

performance

Appraisal

Starting Salary for

New Employee

s

Compensation Administration Compensation Administration

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Issues in International Issues in International compensationcompensation Impact of the human resources

demand-supply equation at the parent country / host country

Increasing usage of international compensation and benefits consultants

Use of compensation benchmarking Surveys at local and global levels

Outsourcing Compensation management/ payroll processing