MBA Semester IV compensation and benefits ----International compensation notes

MASTER OF BUSINESS ADMINISTRATION

SEMESTER IV

COMPENSATION AND BENEFITS

     

Unit 15

International Compensation

 

Table of Contents

 

SL No	Topic		Fig No / Table / Graph	SAQ / Activity	Page No
1	Introduction		-	-	3
	1.1	Objectives	-	-
2	Expatriate Compensation and its Objectives		1	1,	4 - 11
3	Elements     of      Expatriate’s      Compensation Package		2	2, I	12 - 22
4	Problems in Compensation Management		3	3, II	23 - 29
5	Summary		-	-	30
6	Glossary		-	-	31
7	Terminal Questions		-	-	32
8	Answers		-	-	32 - 33
9	Case Study		-	-	34 - 35

 

 

 1. INTRODUCTION

In the earlier unit, you studied the concept of reward strategy in service sector, the method of developing reward policies, factors affecting reward management policies, process of designing a successful reward strategy and implementation of reward strategies. Now you will study the concept of international compensation.

The basic purpose behind international compensation is to attract, retain and motivate personnel required in MNC at present and in future. International compensation helps an organisation to address issues of variation in living cost, laws, taxation policies and other factors in establishing compensation for expatriates, managers and professionals.

In this unit you will learn the concepts of international compensation by concentrating on areas like expatriate (expat) compensation and its objectives, elements of expatriate’s compensation package and problems in compensation management, etc.

1.1 Objectives:

After studying this unit, you should be able to:

❖  Discuss expatriate compensation

❖  Analyse the objectives of expatriate compensation

❖  Identify the elements of expatriate compensation package

❖  Explain the problems in compensation management

 2. EXPATRIATE COMPENSATION AND ITS OBJECTIVES

The demand for expatriate talents has increased as a result of rapid growth of international business over the past two decades.

Expatriates are employees who move from one country to another for employment and are assigned long-term assignments ranging for a period of more than one year.

Case Let

Navigating the Labor Market in China: Enhancing Expatriate Effectiveness

As business continues to grow in China, employers there struggle to find locals who possess the needed knowledge, skills, and abilities to meet the talent demands of the market. Many multinational corporations fill requisitions with candidates from outside of their local region or even from outside China. Since expatriate assignments are extremely costly, employers actively seek cost-effective expatriate compensation options. The local-plus-pay approach in China is popular but remains a work-in-progress In addition to lower-cost compensation and benefit plans, employers are searching for increased return on expatriate investment. In fact, 10 to 20 percent of all U.S. managers sent abroad returned early because of job dissatisfaction or difficulties in adjusting to a foreign country. Of those who stayed for the duration, nearly one-third performed below satisfaction. Most alarming, one-fourth of repatriated employees joined a competitor within one year of returning to their home country. Expatriates in China earn 20 to 50 times what the local Chinese earn, and in some cases the housing allowance of a foreign employee is more than the salary of a local employee of similar rank. In China, foreign expatriates are potential sources of social and compensation comparisons to local employees for many reasons. For instance, although expatriates may differ in nationality, race, or ethnicity, the respective output of locals and expatriates are similar, thus locals view expatriates as colleagues and partners. Locals who perceive that they possess a compensation advantage over similar locals employed in another firm offset the negative effects of their compensation disadvantage in relation to expatriates; there exists an endorsement of both local-expatriate disparity and the disparity between locals.

Although

it would be unrealistic to eliminate the local-expatriate disparity, the magnitude could be reduced by implementing non-pecuniary incentives to locals, such as fast-track programs to senior management and a clear justification of the disparity.

A complete salary and benefit package for an expatriate assignment costs between $0.3 and $1.0 million annually on average. Research has found that companies which have successful expatriate programs follow three general practices:

1.      Achieve knowledge generation and develop global leaders by expanding their skills. Nokia is a prime example of utilizing international assignments to foster innovative ideas. Instead of having an R&D department, senior executives examine their global workforce for engineers and designers that are likely to develop new ideas. Selected workers are given two year assignments to work in a team with an explicit objective of creating new products. Nokia has been able to quickly turn new ideas into successful products.

2.      Target openness and cross cultural abilities over technical skills. Successful companies extend international assignments to employees that not only possess the technical skills but are also open and adaptable to new cultures, customs, and procedural norms. LG Group has a formal process to determine an employee’s fit for an international assignment. Shortly after an employee is hired, he or she is administered a survey that is designed to rate whether he or she is ready for an international assignment and whether he or she possesses cross cultural skills. Identified potential expatriates work with their manager to create an individual development plan, with specific timetables, to facilitate attainment of requisite skills for an expatriate assignment. Approximately 97 percent of expatriates succeed in their international assignments.

3.      Develop a repatriation process. This process may entail career guidance and fostering the utilization of the employees’ international experience in the workplace.

Honda of America Manufacturing is an excellent example of a company that combines all three general practices. Expatriate assignments start with clear strategic objectives. Employees then complete a survey to determine their strengths and weaknesses. Six months before returning home Honda searches for a position that is best suitable for the expatriate and part of the repatriation process entails lessons learned. The majority of expatriates either meet or exceed expectations, there is less than 5 percent turnover, and consistently the objectives established prior to the assignment are fully met.

In Asia, employee appreciation of employer-provided benefits is limited. An organization should conduct a benefits review to ensure alignment of its rewards programs, people, and business strategies. It is critical for an employer to determine benefits most preferred by employees. This information can be gathered through employee feedback surveys and focus groups. Eighty-six percent of highly engaged employees report that their employer seeks employee opinions and suggestions, and research further indicates that employee perceptions are more favorable when a company effectively communicates the value of its rewards. Employee awareness can also be enhanced by providing total rewards statements to employees or utilizing interactive employee portals. Taking such steps increases a firm’s ability to attract and retain talent.

Coca-Cola China, for example, created a flexible benefits program for its employees that provided basic benefits and allowed upgrades based on wants and needs. During enrollment, onsite support was provided to answer employees’ questions to ensure a smooth process. This program shifted employees’ attitudes and perceptions, from taking their benefits for granted to, “I own them now.

Expatriate compensation for long has been an issue of concern for organisations. After undertaking different efforts to develop effective expatriate compensation plans, many organisations have not benefitted and even have not obtained any return on investment from their plans.

 

 Source: http://digitalcommons.ilr.cornell.edu/cgi/

Figure 15.1: Global Factors Affecting Expatriate Compensation

The above figure 15.1 shows three important factors that affect the expatriate compensation which are as follows:

1.      Factors that affect Individual freedom, open – mindness and academic success.

2.      Environmental factors which may relate to differences in cultural values, customs of the people and the standard of living.

3.      Factors that affect the interpersonal relationships of expatriates that is friends, family and training related to repatriate.

A reasonable expatriate compensation package consists of two main elements:

•      Financial (extrinsic) Compensation

•      Non-financial (intrinsic) compensation

The extrinsic compensation consisting of financial element of the Total Compensation Package is divided into:

•      Direct compensation

•      Indirect compensation

Direct compensation includes fixed and variable pay like salary and bonuses and the indirect compensation consists of deferred incomes in form of pensions and other benefits.

The Non-financial compensation is directly related to the nature of work including opportunities for personal development and career progress.

An expatriate must be compensated for the cost incurred by him as a result of his expatriation to enable him to retain the matching standard of living that he had in his home country.

Moreover, his compensation should motivate him to be successful in his assignment. Expatriate motivation includes self motivation, their career perspective, etc. including opportunities for personal and technical development for making expatriates more competent in the market.

The cost of expatriate compensation has been a major area of concern for firms. Organisation are forced to decrease the cost related to expatriate compensation in view of their high financial constraints.

Such financial pressures aimed at reducing expatriate compensation cost may result in alteration in the perception of overseas compensation in general making recruitment an arduous task for firms. Thus firms need to strike a balance between the need of expatriates and their high cost.

Example: Recent survey shows that the net take home salary received by an expatriate in Japan is the highest in comparison to its other Asian counterparts. On an average a middle manager takes home $98,000 in Japan whereas the same manager if deployed in Hong Kong would have received $ 80,000.

A study found that 77% of expatriate managers are disappointed with their salaries, benefits and international packages in general. Another study found that high rate of failure among expatriate employees is a consequence of many factors including firm’s poor compensation package for them. Therefore in designing an effective expatriate compensation package, organisation must consider the cost of living in host country, the heath care, housing and children education facilities available to them and the foreign tax rates, etc.

Objectives from point of view of organisation

Compensation for Expatriates enables the firms:

(a)  to control the cost relating to expatriate compensation

(b)  to attract potential job applicants interested in international assignments

(c)   to facilitate expatriate movement from one auxiliary unit to other, from home to auxiliary or auxiliary to back home

(d)  to be internally equitable and externally competitive for retaining suitable qualified personnel

(e)  to stimulate employees through rewarding performance resulting in organisational success

(f)    to achieve employee satisfaction regarding the compensation earned

(g)  to provide job satisfaction to its employees placed abroad

(h)  to motivate them to successfully complete their assignments

(i)    optimise its total wage level

(j)    to give due consideration to equity and easy administration

(k)  institute and sustain an unswerving and rational relationship between compensation of all of the employees

(l)    arrange realistic compensation for various locations, in comparison to leading competitors compensation for reasonable foreign services, tax equalisation, reimbursement of reasonable cost

Objectives from the point of view of expatriate employees Compensation for expatriates enables them to:

(a)  feel secured that their compensation policy offers them financial guard in provisions of cost of living, social security and other benefits

(b)  expect that foreign assignments are offering them opportunities for financial advancement through earnings and savings

(c)   ensuring that concerns like children education, housing and recreation are correctly addressed in the compensation policy

(d)  to feel satisfied regarding career advancement and repatriation

 

 

 

 

 

 

          

 3. ELEMENTS OF EXPATRIATE’S COMPENSATION PACKAGE

There are five basic elements in a typical expatriate's compensation package. These include basic pay, benefits, allowances, incentives and tax reliefs.

1.      Basic pay: Basic pay can be defined as the money received by an expatriate employee in the home country. At the time of designing out the compensation packages the base pay of expatriates are set in accordance with the base pays that exist in their home countries. However there are some exceptions to this rule as there are basically Four approaches influencing the basic pay which includes Salary Build up (SBU), Salary Purchasing Power Parity (SPPP), Cost of living allowance (COLA) and local Market (LM).

Example: A manager from Germany working in a US based multinational deployed at Spain will get base salary as existing in Germany. Similarly, a US expatriate base pay will be fixed, taking into account the US Salary levels. 

Salaries are typically paid in local currency, home currency or can also be paid as a combination of both. Base pay also acts as a benchmark, helping in calculation of bonuses and other benefits.

2.      Benefits: Benefits provided to employee form one third of their total compensation. However, in case of expatriates, it can even be more than one third. In designing out the benefits for expatriates, the organisation needs to get the answer to the following questions:

❖  Should multinationals uphold expatriates in home country, what benefit programme should be provided to them, specifically if such programmes are nontax deductible.

❖  Do multinationals have an option of enrolling expatriates in host country benefit programme?

❖  Do the legislations of the host country regarding termination of employment affect employees' benefits entitlement?

❖  Is the home or host country responsible for the expatriate social security benefits?

❖  The benefits should be subject to needs of the home or the host country or not.

❖  Should any other benefits be used to offset any deficit in coverage?

❖  Should home country programme be made available for local nationals also or not?

Most multinationals have included expatriate managers in their home-office benefits programme without any additional cost to the expats. If the host country requires expats to contribute to their social security programme, the multinationals typically picks up the tab.

Moreover, multinationals also provide expatriates with special leaves and extra vacation. The expats and their family members are paid airfare for annual home visits, emergency leaves and even on illness and death of a relative.

Some of the common benefits are mentioned below:

(a)  Housing: Housing embraces a wide range of arrangements. Some multinationals provide their expatriates with residence during the deployment and pay their all associated expenses. Other provides a housing allowance per month to the expatriates on a pre-determined basis and lets them free to choose their own residences. In addition some firms also assist their employees in selling or leasing the houses that they leave behind due to expatriation. On sale of house the expatriates are paid the closing cost and other related expenses. Firms like GM encourage its employees to retain the ownership of their houses and giving them on lease. In such cases firms pay the entire rental management charges and reimburse six months’ rent to employees if house remains unoccupied.

(b)  Utilities: Some companies provide air conditioners, bottled gas, bottled water, electricity, telephone and telephone call expenses.

(c)   Car: Car or Chauffeur driven car with parking facilities are provided by some organisations befitting the status or requirements of security of the employee.

(d)  Helping hands: Helping hands such as servants, gardeners and security guards are provided by some organisations either representing affluence or power or status or all of them.

(e)  Club subscriptions: These are also part of benefits of expatriates. The club memberships and club fees along with entertainment power is also given by some. The club may vary from recreational/social clubs to sports club etc.

(f)    Educational benefits are another integral part of the compensation package. These expenses cover costs such as tuition, enrolment fees, books, supplies, transportation, room, board and school uniforms. In some cases, expense to attend post-secondary schools also is provided.

 

3. Allowances: Allowances are expensive features of expatriate compensation package. Some of the allowances are given below:

(a) Cost of Living Allowance (COLA): It involves sums paid to compensate for differences between home country and host countries, especially inflation differences. It is a payment for difference between the home country and the overseas assignments. These allowances are intended to provide the expatriates with some standard of living that they availed in their own country of residence.

Example: Tokyo is the most expensive city in the world according to a survey, whereas New Delhi (at about 40) was among the least expensive cities.

How to Calculate a Cost of Living Allowance:

The amount of COLA should enable an expatriate to be able to purchase the same basket of goods and services in the host location as they could in their home country. The basis for calculating a COLA is the Cost of Living Index (COLI) which indexes the costs of the same basket of goods and services in different geographic locations. COLA is a simple accurate method of measuring fluctuating salary purchasing power and ensuring parity.

Differences in cost of living only impact the portion of the salary that is spendable in the host country. Items in the home country such as retirement funding, medical insurance and other home based costs are not impacted by the cost of living in the host country. The COLA is paid as a salary supplement (i.e. as an additional allowance) net of tax in the host country. If the COLA is a taxable allowance in the host country it should be grossed up in order that the full amount of calculated COLA is paid net of tax given that the basis of the calculation is Net Spendable Salary. The COLA is often accompanied by other allowances and benefits such as flights home, relocation / settling in allowance, and furnishing allowance.

To determine the Net Spendable Salary establish what amount / portion of the current salary (in home currency) is spent in maintaining the employee’s current standard of living / lifestyle. What will the expatriate need to spend their salary on in the host country? For example will accommodation be provided or will the employee pay rent, will healthcare be provided etc. Deduct all items that are either provided in kind or are spendable in the home country. Deduct the hypothetical amount of tax, social contributions and any other statutory deductions applicable in the home country from the Spendable Salary. What is left is the Net Spendable Salary.

Cost of Living Allowance (COLA): The formula for calculating the cost of living allowance using the above inputs is as follows:

(Net Spendable Salary X Cost of Living Index X Hardship Index X Exchange Rate) less (Net Spendable Salary X Exchange Rate) = COLA Examples of COLA Calculations are as follows:

Example 1: A British employee moving from London to Mumbai where the employer will provide housing and education More Expensive in Mumbai:

Alcohol & Tobacco	- 37.53%
Clothing	- 9.58%
Communication	- 44.92%
Furniture & Appliances	- 19.31%
Groceries	- 24.03%
Healthcare	- 31.24%
Miscellaneous	- 72.43%
Personal Care	- 24.94%
Recreation & Culture	- 35.73%
Restaurants Meals Out and Hotels	- 33.11%
Transport is	- 27.99%

The overall difference in cost of living moving from London Mumbai is - 30.53%.

In this case the cost of living index is negative and would not be applied.

Example 2: A British employee with a net spendable salary of £18,000 moving from London to Mumbai where the employer will provide housing and education. (£18,000.00 X 1 X 1.3 X 67.2852) less (£18,000.00 X67.2852) = COLA of 363,340.32 Indian Rupee

Based on all the above factors a person would require a Cost of Living Allowance of 363,340.32 (INR ), in addition to their current salary of

£18,000.00 British Pound (GBP ) to compensate for relocating from London to Mumbai. This Cost of Living Allowance compensates for the overall cost of living difference of [-30.53%] and the relative difference in hardship of 30%.

(b)  Relocation Allowance: Expatriates are provided with allowances to meet the cost of shipping, moving and storage charges associated with the personal belongings like clothes, furniture and other items that expatriates and their family members may or may not take along with them in their new assignments. They are also provided with allowances for meeting expenses related to use of car and club membership facilities in the host country.

(c)   Hardship Allowance: Hardship allowances are given to expatriates to work in risky or hazardous area with poor quality of life. Some of the difficulties in the host country could be as follows:

❖  Excessive hot/cold climate

❖  Health hazard

❖  Poor communication

❖  Isolation

❖  Language difficulties

❖  Scarcities of food

❖  Political risks

❖  Force-majeure (floor, typhoons, earthquakes, tsunamis, etc.)

❖  Regular possibility of theft, kidnapping

Example: Expatriates posted in Africa, middle-east, are given hardship premium. That could be in shape of a lump sum pay or a percentage of base pay.

(d)  Separation Allowance: When family is not allowed to accompany, this allowance is given by some organisations.

(e)  Clothing Allowance, especially in extremely cold areas.

(f)    Added Responsibility Allowance or Status Allowance.

(g)  Home Leave Allowance: Trips back to home country each year to renew family and business ties.

(h)  Spouse Assistance Allowance: To make up for spouse's loss of income.

 

Source:http://www.imercer.com/uploads/US/pdfs/negotiating%20an%20expatriate %20compensation%20package%207.21.2010.pdf

Figure 15.2: Most Valuable Component of International Package

Figure 15.2 reflects the type of allowances available to expatriate in their compensation package forming its most important or critical part.

4.      Incentives: In recent years some MNCs have also been designing special incentive programmes for keeping expatriates motivated. In the process a growing number of firms have dropped the premium schemes for overseas assignments and replaced it with long-term incentives.

5.      Social Security Agreements: Social security agreements, often called totalisation agreements, have two main purposes. First, they eliminate dual social security taxation, which occurs when a worker from one country is employed in another country and is required to pay social security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for the worker who has divided his or her career between their country and another country. Without some way to coordinate social security coverage and taxes, someone who works outside his native country may find himself covered under the systems of both countries simultaneously. Paying dual social security contributions is particularly costly for companies that offer tax equalization arrangements for their expatriate employees. In this type of arrangement, a company that sends an employee to work in another country guarantees the assignment will not result in a reduction of the employee's aftertax income. The employer usually accomplishes this by paying both the employer and employee share of the host country social security taxes for transferred employees. Since the tax laws of many countries provide that an employer's payment of an employee's share of a social security contribution is taxable compensation to the employee, the employee's social security and income tax liability is thereby increased. So, the employer also must pay additional social security and income tax, which in turn further increases the employee's taxable income and tax liability. Thus, the employee's foreign social security coverage results in a substantially greater tax burden for the employer than the social security tax alone. Depending on the second country's tax rates, this pyramid effect has been known to increase an employer's foreign social security costs in some countries to as much as 65% to 70% of the employee's salary. For Example: Australia has components such as leased accommodation, LAFHA etc, Denmark has an insurance to be covered over and above social security as all these elements are part of the compensation package or Cost to the Company.

6.      Tax Relief: Taxation causes most concern to MNCs. Therefore, they adopt one of the following approaches to give relief to the expatriates.

(a)  Tax-equalisation – In this approach the firm withholds an amount equal to home country tax-obligation of expatriates and pays all taxes in the host country.

(b)  Tax protection – In this approach employee pays the taxes which he would have paid on the compensation package in the home country. In that event, the employer is gainer, if the taxes in foreign country are less than home country.

(c)   Ad hoc approach – Each expatriate is handled differently on taxation issue and tax relief is given depending on negotiation.

(d)  Lassiez-faire – The expatriate is left on his own to pay the taxes because the compensation package consists of tax element also.

Tax equalisation is the most commonly practiced tax relief policy of MNCs.

Most countries of the world have an income tax. This tax varies in amount and structure from country to country. Countries levy this tax on expatriates working there. Therefore, the company and the proposed expatriate need to obtain information about the income taxes in the host country. This should be done by contacting a qualified tax consultant. If this meant merely finding out about the tax structure in the host country and comparing it to what the expatriate would pay in the U.S., this would be a relatively simple problem. However, the U.S. tax code makes this much more difficult by also taxing the income of the expatriate. Using one of two sections of the IRS code, section 901 or section 911, ameliorates the effects of this "double taxation". Section 901 minimizes double taxation by establishing the following:

(a)  If U.S. tax is greater than the host country tax, then the expatriate pays the difference to the U.S.

(b)  If the host country tax is greater than the U.S. tax, then the expatriate has a tax credit which can be carried back two years and forward five years. Alternatively, in lieu of the credit, the expatriate can deduct foreign taxes paid on income that is subject to U.S. tax as an itemized deduction on their Form 1040, Schedule A.

In contrast, section 911 allows the expatriate to exclude up to $87,600 (in 2008) of foreign earned income from U.S. taxation(updated for cost of living each year), plus a housing allowance. Which of these two alternatives is better depends upon the particular circumstances of the expatriate and the assignment. Generally, the difference between the U.S. tax rate and that of the host country is a determinative factor. If the U.S. tax is greater than the host country's tax, section 911 will usually lead to a lower total tax liability. Section 901 is preferable when the U.S. tax is lower than the host country tax. In either case, the expatriate faces paying more taxes than if not on an overseas assignment. Companies make up for this difference in one of two ways. Both of these approaches start with creating a hypothetical U.S. tax liability of what the employee would have paid in taxes if not on a foreign assignment. The first approach is tax protection. In this approach the company reimburses the expatriate for the difference if the actual U.S. tax plus the host country tax is greater than the hypothetical tax calculation. If the two are less than the hypothetical tax calculation, the expatriate gets to keep the difference.

The second and more often used approach is tax equalization. In this approach the company pays both the U.S. and host country taxes for the expatriate. The company calculates the hypothetical tax and makes the deductions from the person’s paycheck on that basis. If the actual tax is less, the company reimburses the expatriate for the over-deduction. If the actual tax is more than has been deducted, then the expatriate reimburses the company for the difference. Tax equalization has two advantages. One is obviously that expatriates do not benefit from differences between actual and hypothetical taxes. The second is that location does not influence how much an expatriate can pocket, making transfers between locations easier.

International HRM Managers throughout the world have stated that designing benefits is the most critical part specifically if you take into consideration the pension plans.

Pension Plans are the most difficult benefit plans to compare and equalise among nations due to existence of variation in cultural practices in these countries. Normalisation of pension plans, social security benefits and medical coverage is very difficult. Therefore at time of including these benefits in the compensation package firms need to address a number of factors listed below:

•      Whether to include expatriates in home-country programmes, especially in programmes where company does not receive a tax deduction for it.

•      Whether companies have an option of enrolling expatriates in host-country benefit programmes.

•      Whether the legislation of host-country relating termination affects benefit entitlement or not.

•      Whether expatriates should receive host-country or home-country social security benefits or not.

•      Whether benefits should be maintained on a home-country or host-country basis or not.

Example: An expatriate working in US branch may get:

•      Base pay of $2,400 per month

•      Housing allowance up to $ 1,400 per month

•      Itemised reimbursement worth $ 500 per month

•      Discretionary reimbursement like gift, gratuity etc for $1000 per special holidays

•      Social security and Medicare

•      Health Care paid by employer worth $ 200

•      Workers compensation etc.

 

 

 4. PROBLEMS IN COMPENSATION MANAGEMENT

From the concepts studied in the earlier units, by now you must know that compensation in its broadest sense acts as a heart for every organisation’s performance potential.

It provides a junction where individual and organisation’s priorities and goals meet to encourage commitment of both parties. Whether it is domestic or international market, Compensation provides a driving force, retaining them and encouraging them in enduring persistence and enhanced performance.

Therefore, you can say that while forming a global compensation and benefit strategy, the

HR must deal with various factors which are usually not observed in domestic environment.

Development of suitable compensation policies for expatriates aimed at meeting organisational strategies thereby accommodating different types of workforce terms and conditions posses a big challenge for HR managers. These challenges include:

1.      Dealing with diverse standards, cost of living, multiple exchange rates, currency rates, inflation and deflation rates, tax rates and tax systems in different host countries.

2.      Responsibility of maintaining a suitable balance between global consistency and local significance while designing expatriate compensation.

3.      Taking into considerations the issues addressing organisational business challenges like mergers and acquisitions, expansions, joint ventures, investitures and Greenfield operations.

4.      Consideration of the local compensation practices, laws and regulations while designing compensation policies.

5.      Accommodation of different employee expectations and values which have stemmed from differences in their preferences regarding cultures, communication and languages.

Therefore in order to strike an effective balance among all the above listed influencing factors, the HR managers must take into consideration the following while designing out an effective compensation strategies for expatriates for enabling a firm in their proper attraction, retention and motivation.

1.      Culture: Cultural differences should be taken into consideration at time of formulating compensation and benefit programs for expatriates. This is attributable to a simple reason that a compensation program highly valued in one country may be worthless in another. Cultural differences in context of beliefs, values and attitudes should be reflected in company’s compensation and benefit policy for its expatriates. A company can adopt the following techniques in such circumstances:

❖  They can engage local contacts in the host country to better understand the existing and traditional practices relating payment of compensation and benefits

❖  They can outwit biases existing at company headquarters or can circumvent imitation of the policies and procedures adopted at their countries headquarter.

❖  They can also circumvent imitation of the policies and procedures adopted at their headquarter country relating compensation and benefit design.

2.      Economic factors: Economic factors in context with designing compensation policies includes the differences that exists from country to country in terms of influence of politics and power, wealth distribution and unforeseen circumstances like immediate changes n inflation levels, forex rates and wage rates, etc. In order to encompass these economic conditions in compensation policy a firm can:

❖  Carryout a risk analysis of various economic factors ad their consequences

❖  Identify how personnel from official government and unofficial authority sources of a region or community exerts a large impact on acceptable compensation packages and norms

❖  Construct allowances for currency fluctuations or for local inflation and deflation

❖  Craft contingency plans to minimise the risk related with change in economic factors

❖  Help local area in providing education and training facilities, child care and other local services etc

3.      Inflation and exchange rates: Inflation is a situation when prices tend to rise sharply in economy bringing down the purchasing power of individuals. Employees get particularly concerned when their income does not rise equivalently to rise in inflation and when their standard of living declines as a consequence.

Similarly a change in exchange rate also influences the value of their earnings. Expatriates often face these problems. In order to adjust for these changes in inflation and rate of exchange the company must fix up and change their salary structures and allowances accordingly. The most common practices that a firm can use in adjusting these fluctuations are:

❖  Re-calculation of cost of living allowances when the change accounts for 5 percent or more.

❖  Use of split payroll for expatriate compensation where one portion of earnings are send to expatriates home country in US dollars through banks and the other portion is given to employee in the host country itself.

❖  To provide income in such a way that the expatriate is able to gain advantage of tax benefits available on the portion of income received in the host country.

4.      Taxation: The rules and regulations concerning taxation variate extremely from country to country. Every country has its own taxation system affecting its compensation policy and structures. Like some countries do not have income tax and other may charge income tax in excess of 50 percent etc.

Similarly some benefits are taxable in one country but are non-taxable in others or viceversa. Therefore at the time of designing out the compensation and benefit structures for expatriates a company should consider the tax on such compensation and benefit that are to be paid either by the employee or the employer in providing such benefits. To do so a company can:

❖  Understand the taxation for monetary and non-monetary compensation, benefits and perks keeping in mind which of these are to be taxed, at what rate and at what levels

❖  Employ experts in local compensation and benefits practices and laws

❖  Differentiate that a benefit may be undesirable solely because of the fact that how it is taxed

5.      Competitive Labour Market: The compensation and benefits that are necessary in magnetising and sustaining talent are determined by aggressive demand for talent. However the compensation for these talents differ from country to country and region to region depending on the area wise scope of talent, the industries in which these talents can be found, the type of talent sought and the mixture of remuneration compensation. Therefore a firm must practice the following to attract and retain best talent:

❖  When there is a shortage in supply of industry specific expertise or when the rate of compensation is very high, the firm can employee individuals with similar skills and can than train and coach them on jobs.

❖  They must lead, equal or lag the pay rates in relative market place which is based on skills required, the demand for needed talent and the best way of compensating these talents.

❖  They can use most suitable mix of pay and benefits which are appealing to present and future employees

6. Laws and Regulations: Remuneration to expatriates are also influenced by many laws and regulations like minimum wages, payment of overtime, compulsory bonuses, work hours, acquired rights, compulsory time-offs and employment at will etc which variate from nation to nation and region to region. Therefore in order to cope up with these challenges in designing an efficient compensation strategy for expatriates a firm must:

❖  analyse the benefits provided by government in terms of both mandatory and nonmandatory benefits and also the ones which are chosen by employees

❖  Identify the differences and similarities in each market relating to existing compensation laws and regulations

❖  employ expertise services in local compensation and benefit laws and regulations

7.            Standardisation vs. localisation: Firms at time of designing its compensation and benefit policies must strategically choose between standardisation and localisation or make use of a blend of both of these in their compensation policies and designs. Standardisation is followed to make compensation policies standardised in view of firm’s overall compensation and benefit philosophy and definite practices relating compensation are localised to fit the context of local, regional and country conditions. Therefore you can say that a firm can adopt a long-term program not only to sustain organisational overall compensation philosophy but must also mull with local restrictions, tax regimes and cultures etc.

8.            Collective bargain, employee representation and regulatory mandates: The role played by trade unions and work councils to a large extend protects employees from the actions that impact their pay and employment conditions. Therefore a firm must:

❖  Value the inferences for minimum wages, retirement packages and pensions etc

❖  Fulfil the requirements of third-party representations

❖  Differentiate between the collective agreements which are industry wise and government mandates and regulations.

In addition to the above motioned factors the compensation and benefit strategies are also influenced by the organisational approach to staffing as seen in given table 15.1.

Table 15.1: Organisational Approach to Staffing & its Impact on Compensation and

Benefit Strategies

Approaches	Impact on Compensation and Benefit Strategy
Ethnocentric: There is a tight control of international operations, very little autonomy and key positions are held by headquarter personnel.	•       It may lead to transfer of total compensation policies of headquarters with insufficient consideration of local regulatory differences in culture. •       Dictates to local country management may result in superficial conformity.
Regio-centric: Here operations are managed regionally. The coordination and communication is high within but between the regions	•       There is greater uniformity of remuneration within regions. •       Remunerations may be perceived similar than they really are due to proximity of countries. •       The regional headquarters may face a blind spot regarding country differences resulting in ethnocentrism regional level.
Polycentric: Here subsidiaries are treated as own entity. the management is carried out by local personnel among which few are promoted to headquarters	•       Legal compensation norms and local culture are given more importance. •       Steady remuneration policies are provided and incorporated within each subsidiary. •       Incentives tend to maximise achievement of local rather than global objectives.
Geocentric: Firms here are looked as single international firm. The talent is procured from any location and strategic plans are global in nature	• •	Local compensation policies are more consistent with global policies. Greater stress on global consistency can result in imposition of inappropriate policies at the local country level.
	•	The development of equitable and consistent policies for remuneration among global managers can be challenging as top level managers constantly move from one country to another.

 

To conclude you can say that expatriate compensation designing encompassing different challenges aim at providing a driving force for effectively attracting, retaining and motivating human talents in and outside your country.

Managing strategically the global compensation, consideration of variable pay for expatriates, analysing the influence of local culture and laws, use of a total reward system and addressing the double challenge of localisation and global integration are important and fundamental practices in managing compensation and benefits at global scale.

 

Activity II

 

Suppose you own a MNC and you want to place your employees abroad to expand your  business further. Choose any three countries where you want expand your business. Critically analyse these three countries from the point of view of challenges that you will face in

         designing compensation policy and choose the best country among the three.

 

 

 

 

 

 

 5. SUMMARY

Let us recapitulate the important concepts discussed in this unit:

•      International compensation can be defined as the monetary and non-monetary rewards offered to an expatriate employee.

•      Expatriates are employees who move from one country to another for employment.

•      Expatriate compensation includes financial and non-financial compensation and benefits provided to employees who move from one country to another for employment

•      The cost of expatriate compensation has been a major area of concern for firms.

•      Basic pay, benefits, allowances, incentives and tax relief are the five basic essential components of an expatriate compensation package which should be carefully designed and implemented.

•      Differences in culture, economic factors, inflation and exchange rate fluctuations, taxation system, competitive labour market, regulations and laws in host country and regulatory mandates are some of the complexities addressed by HR managers in designing compensation policies.

 

 6. GLOSSARY

•      Direct compensation: It is an employee's fixed and variable annual income.

•      Exchange rate: It is the rate at which currency of one country can be exchanged for another.

•      Expatriate: These are the employees who move from one country to another for employment.

•      Extrinsic compensation: It is monetary compensation.

•      Indirect compensation: It is all kinds of deferred income, such as pension and insurance and of benefits like a company car, expense allowance.

•      Inflation: It is the rate at which general price levels of goods and services rise bringing down the purchasing power of individuals.

•      International Compensation: It is the monetary and non-monetary rewards valued for employee’s relative contribution to MNC performance.

•      Intrinsic compensation: It is the non-financial compensation which is related to the nature of the work, interesting work and career prospects.

             

 7. TERMINAL QUESTIONS

1.      What do you understand by expatriate compensation?

2.      What are the objectives of expatriate compensation? Explain using examples.

3.      What are the elements of expatriate compensation package?

4.      Write a note on different types of benefits provided to expatriates in their compensation package.

5.      What are the complexities encountered by an HR Manager in designing international compensation policies.

8 . ANSWERS

Self Assessment Questions

1.      Expatriates

2.      True

3.      Both (a) and (b)

4.      Cost

5.      False

6.      Both (a) and (b)

7.      A. Individual

b.      B. Cultural differences, Living condition

c.       Interpersonal Relationship 

8.      Base pay

9.      True

10.  Allowances

11.  COLA

12.  True

13.  Tax-equalisation

14.  True

15.  Domestic Environment

16.  Both (a) and (b)

17.  True

18.  Inflation

19.  Split payroll

20.  1:b; 2:d; 3:a; 4:c

Terminal Questions

1.      Expatriate compensation includes financial and non-financial compensation and benefits provided to employees who move from one country to another for employment. For more details, refer to section 2.

2.      Controlling cost of expatriates compensation, attraction, retention and motivation of talented workforce, optimisation of wage levels, helping employee movement, providing employees with a sense of job security, financial protection and sense of career advancement and repatriation etc are some of the few objectives of expatriate compensation. For more details, refer to section 2.

3.      Basic pay, benefits, allowances, incentives and tax relief are the five basic essential components of an expatriate compensation package which should be carefully designed and implemented. For more details, refer to section 3.

4.      Housing facilities, utilities like air conditioners, bottled gas, electricity, telephone and telephone call expenses, club facilities and education benefits are some of the benefits included in expatriate compensation. For more details, refer to section 3.

5.      Differences in culture, economic factors, inflation and exchange rate fluctuations, taxation system, competitive labour market, regulations and laws in host country and regulatory mandates are some of the complexities addressed by HR managers in designing compensation policies. For more details, refer to section 4.

 

 9. CASE STUDY

Compensation in Net Labs International

Net Labs International is an IT company of Indian origin. The company decided to go global, as it found a lot of market potential in the western countries. Hence, the company had to develop an international compensation policy so as to have a proper, well defined policy that reflects the vision and mission of the organisation as well as being competitive with respect to employee performance and financial gains.

The HR department was made responsible for developing compensation practices that enables the organisation to be competitive in market, to attract the talent organisation, and finally to retain the best performers.

Solution: The company handled following measures to overcome the above mentioned problem.

1.      They provided flexibility to respond to departmental needs and improve employee morale.

2.      Ensured consistency and fairness in compensation administration and attracted qualified and talented applicants.

3.      Maintained salaries those are externally competitive and internally equitable.

4.      Providing equal pay for equal work under comparable working conditions without regard for race, colour, marital status, age, sex and disability.

5.      Adjusting pay ranges when warranted by changing economic and competitive factors, as determined by salary surveys.

6.      Reflecting a direct relationship of pay to individual job performance.

Benefits: It was a very easy approach to compensation benefits

1.      The company could administer the individual performance evaluation easily.

2.      The company could achieve the target 6 months earlier and became one of the best competitors in the market.

 

Questions:

1.         What are benefits of this compensation plan?

2.         How Net Labs International solved the problem? 

References:

•      Bhatia, S. K. (2005). International Human Resource Management: A Global Perspective. New Delhi: Deep and Deep Publishers.

•      Dowling, P. J., Welch, D. E. & Schuler, R. S. (2001). International Human Resource Management. Toronto: South Western Thomson Learning.

•      Mousumi S. Bhattacharya and Nilanjan Sen Gupta. (2009): Compensation Management.

New Delhi: Excel Books.