Inthr_(8b) Compensation (1)

International Compensation Week 8

Copyright 2006, Sharon L. O'Sullivan

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International Compensation Week 8 •

EARLIER

What enables people to perform? ( & What Challenges do Expatriates face when interpretating performance expectations?) What Challenges do Firms face in accurately appraising international performance? What additional cultural/ logistical challenges arise in managing international performance?

TODAY • Objectives for Int’l Compensation – The Firm’s perspective – The Int’l Employees’ perspective

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Key Components of an Int’l Compensation program Two Approaches to Int’l comp ( + pros/cons):

– The Going Rate Approach – The Balance Sheet Approach

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Four special Problem Areas (taxation, COLA,TCN pay)

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Summary

Copyright 2006, Sharon L. O'Sullivan

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The Firm’s objectives for Int’l Compensation • Consistent • Competitive • Cost-Effective facilitation of transfers • Equitable • Administratively manageable Copyright 2006, Sharon L. O'Sullivan

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Int’l Employees’ Objectives for Int’l Compensation • • • •

Financial protection Financial advancement Logistics Career advancement perks

Copyright 2006, Sharon L. O'Sullivan

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Key Components of an Int’l Compensation Program • Base Salary • Foreign Service Inducement / Hardship Premium • Allowances • • • • • •

COLA (Cost of living) Housing Home Leave Allowance Education Allowance Relocation Allowance Spousal Assistance

• Benefits Copyright 2006, Sharon L. O'Sullivan

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Approaches to Int’l compensation: The Going Rate Approach (a/k/a the “Market Rate approach”; adapted from Text Table 6-1) • •

Based on local market rates Relies on survey comparisons among: – Local nationals (HCNs) – Expatriates of same nationality – Expatriates of all nationalities

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Compensation based on the selected survey comparison Base pay and benefits may be supplemented by additional payments for low-pay countries

Copyright 2006, Sharon L. O'Sullivan

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Approaches to Int’l compensation: The Going Rate Approach (con’d) (Advantages & Disadvantages, adapted from Text Table 6-2)

Advantages

Disadvantages

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

• Variation between assignments for same employee •Variation between expatriates of same nationality in different countries • Potential re-entry Copyright 2006, Sharon L. O'Sullivan problems

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Approaches to Int’l compensation: The Balance Sheet Approach • • •

Popularity: Most common system in usage by MNCs Basis: Home-country pay + benefits are the foundations of this approach Objective: Maintenance of home-country living standard + financial inducement • •

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Home package is adjusted to balance additional expenditure needed in host country Financial incentives (hardship/”expatriate” premium) are added to make the package more attractive

Main Categories of Outlays: 1. 2. 3. 4.

Goods & Services Housing Income Taxes Reserve Copyright 2006, Sharon L. O'Sullivan

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Approaches to Int’l compensation: The Balance Sheet Approach (con’d) Advantages

Disadvantages

• Equity between foreign assignments for same employee •Equity between expatriates of same nationality in different countries • Repatriation is facilitated by the fact that expat compensation remains anchored to the parentcountry compensation system • Simple to communicate

•Not necessarily equality amongst different nationalities – PCNs may get paid more than local nationals (HCNs) or TCNs (expats of different nationalities) for doing the same work •Not necessarily simple to administer • Unclear whether it promotes identification with home or host country

Copyright 2006, Sharon L. O'Sullivan

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Four Special Problem Areas 1. Taxation – Tax Equalization – Tax Protection – Not-recommended Variations: » Ad-hoc » Laissez-faire

2. Pension & Other Benefits Issues

Copyright 2006, Sharon L. O'Sullivan

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Four Special Problem Areas (con’d) 3. Valid int’l living cost data (COLA) (vs. Cost of doing business)

4. Managing TCN compensation

Copyright 2006, Sharon L. O'Sullivan

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Points to Reflect On… 1. What should be the objectives of international compensation? How might pay norms/assumptions (about hierarchical pay structures vs egalitarianism, for example) influence objectives? 2. What would be the most important component of an int’l compensation system for YOU? 3. Which of the 2 approaches to int’l compensation makes more sense to you? Why? 4. If you were an expat, how would you like your employer to address the 4 special problem areas? And if you were the Copyright 2006, Sharon L. O'Sullivan 12 employer?