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A Human Resource A Human Resource Management ApproachManagement Approach
STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION
Prepared by David Oakes
Chapter 12Chapter 12
International CompensationInternational Compensation
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Compensation ChallengesCompensation Challenges
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) Citizens work for U.S. company in own country
Third country nationals (TCNs) 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
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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 Expatriate Assignments
Hardship allowances For tough work & living 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 countries designated
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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AppropriatenessAppropriateness
Home country is referent point
Expatriates keep close ties to USA
Assignment is of limited duration Repatriation after assignment Guarantee of no financial hardship
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Major ExpendituresMajor Expenditures
Housing & utilities Goods & services Discretionary income Taxes
Information Sources Returning expatriates 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 Income
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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Tax ProtectionTax Protection
Employers reimburse expatriates when actual tax is greater
Expatriates pay entire tax when actual tax is less or equal
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Tax EqualizationTax Equalization
Employers deduct hypothetical tax
Employers pay real tax from hypothetical
Reimbursements settled after payment
Equitable treatment any assignment
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Repatriation ConcernsRepatriation Concerns
Losing supplements & allowances
Work experience not valued
Reintegration into domestic workforce
Leaving company