Cross Cultural & Global Management MHR- 106

Compensation in Global Perspective

Introduction
A multinational corporation (MNC) is usually defined as a company with operations in more than one country (Porter, 1990).

The impact of the growth of international economy has become a major force in business in general and in human resource management in particular. These practices are important realities faced by MNCs doing business overseas. MNCs must coordinate policies and procedures that effectively balance the needs and desires of host country nationals (HCNs), parent country nationals (PCNs) and third country nationals (TCNs).

Compensation is one of the most complex areas of international human resource management. Pay systems must conform to local laws and customs for employee compensation while also fitting into global MNC policies. It is also important for MNCs to consider carefully the motivational use of incentives and rewards among the employees drawn from three national or country categories.

A successful compensation strategy involves keeping expatriates motivated while meeting MNC goals and budgets. MNCs HR managers must build an expatriate pay package by: (1) meeting corporate goals at home and abroad, (2) keeping expatriates motivated, and (3) complying with company budgets

These international compensation policies can produce intense internal conflicts within an MNC at any stage of globalization. Compensation includes wages and salaries, incentives such as bonuses, and benefits such as retirement contributions. There are wide variations both between countries and among organizations within countries concerning how to compensate workers. The principal problem is salary levels for the same job and the jobs are different between countries in which an MNC operates
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Compensation System Components

Benefits
Pay

Complexity of International Compensation Policies

management of more activities from a broader perspective greater involvement in the lives of employees and families Balance the needs of PCNs, HCNs and TCNs control exposure to financial and political risks increased awareness of and responsiveness to host country and regional influences

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Global Compensation

seen as a mechanism to develop and reinforce a global corporate culture

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Global Compensation
Increased complexities growing use of outsourced activities and subsequent labour pricing needs

balancing centralization and decentralization of incentives, benefits and pensions balancing the need for more accurate and detailed performance metrics
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Two Primary Areas of Focus

manage highly complex local details

building a unified, strategic pattern of compensation policies, practices, and values

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Total Compensation Management

Requires knowledge of employment and taxation law customs, environment, and employment practices currency fluctuations and the effect of inflation special allowances
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Global Compensation Programs

Facilitate and manage global expansion efforts labour costs internal equity effective governance
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Internal Equity The internal equity method undertakes the job position in the organizational hierarchy. The process aims at balancing the compensation provided to a job profile in comparison to the compensation provided to its senior and junior level in the hierarchy. The fairness is ensured using job ranking, job classification, level of management, level of status and factor comparison.
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External Equity Here the market pricing analysis is done. Organizations formulate their compensation strategies by assessing the competitors or industry standards. Organizations set the compensation packages of their employees aligned with the prevailing compensation packages in the market. This entails for fair treatment to the employees. At times organizations offer higher compensation packages to attract and retain the best talent in their organizations.
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Global Compensation Programs

Key areas pay in relation to the market short and long-term incentive policies consistent processes of job grading and leveling

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Objectives of International Compensation

Organizational consistent with the overall strategy, structure, and business needs attract and retain staff; competitive, incentives for foreign service, tax equalization facilitate the cost-effective transfer of international employees equitable and easy to administer

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Objectives of International Compensation

Individual financial protection in terms of benefits, social security and living costs opportunities for financial advancement through income and/or savings housing, education of children and recreation issues
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International Compensation Program Components

base salary
foreign service inducement/hardship premium allowances benefits
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Base Salary

primary component of a package of allowances, many of which are directly related to base salary, as well as the basis for in-service benefits and pension contributions

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Foreign Service Inducement/ Hardship Premium

Salary premium ( 5-40% of base pay) to accept a foreign assignment compensation for hardship caused by the transfer vary depending on type and length of assignment, hardship, tax consequences, differentials
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Foreign Service Inducement/ Hardship Premium

Must address the definition of hardship eligibility for the premium amount and timing of payment

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Allowances

encourage employees to take international assignments

to keep employees whole relative to home standards

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Cost-Of-Living Allowance (COLA)

payment to compensate for differences in expenditures between the home country and the foreign country (inflation differentials)
may include payments for housing and utilities, personal income tax, or discretionary items

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Housing Allowances
maintain home-country living standards often paid on either an assessed or an actual basis

financial assistance and/or protection in connection with the sale or leasing of an expatriate's former residence
other alternatives include company-provided housing, a fixed housing allowance; or an assessment of a portion of income
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Home Leave Allowances

expense of trips back to the home country each year

purpose is to give expatriates the opportunity to renew family and business ties

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Education Allowances
tuition language class tuition enrolment fees books and supplies transportation room and board uniforms local/boarding school or university
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Relocation Allowances
Contingent upon tax-equalization policies and practices in both the home and the host countries, include: moving, shipping, and storage charges temporary living expenses subsidies regarding appliance or car purchases down payments or lease-related charges.

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Spouse Assistance

offset income lost by an expatriate's spouse as a result of relocating abroad

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Tax-Equalized Housing Allowance

to discourage the purchase of housing and/or to compensate for higher housing costs

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Benefits

national practices vary considerably

transportability of pension plans, medical coverage, and social security benefits are very difficult to normalize

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Issues When Considering Benefits

Whether to maintain expatriates in home-country programs, particularly if the firm does not receive a tax deduction for it firms have the option of enrolling expatriates in hostcountry benefit programs and/or making up any difference in coverage expatriates should receive home-country or host-country social security benefits
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Approaches to International Compensation

Two main options Going Rate Approach (Market Rate Approach) linked to host country salary structure Balance Sheet Approach (Build-up Approach) linked the home-country the salary structure

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Going Rate Approach

Based on local market rates Relies on survey comparisons among: local nationals (HCNs) expatriates of same nationality expatriates of all nationalities Compensation based on the selected survey comparison

Base pay and benefits may be supplemented by additional payments for low-pay countries
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Advantages and Disadvantages of the Going Rate Approach Advantages equality with local nationals simplicity identification with host country equity amongst different nationalities Disadvantages variation between assignments for same employee variation between expatriates of same nationality in different countries potential re-entry problems
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The Balance Sheet Approach

Basic objective is maintenance of home-country living standard plus financial inducement Home-country pay and benefits are the foundations of this approach Adjustments to home package to balance additional expenditure in host country Financial incentives (expatriate/hardship premium) added to make the package attractive Most common system in usage by multinational firms
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Key Categories of Expatriate Outlays

1. Goods and services-home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care 2. Housing-the major costs associated with housing in the host country 3. Income taxes-parent-country and host-country income taxes 4. Reserve-contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc.
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Expatriate Compensation Worksheet

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Advantages and Disadvantages of the Balance Sheet Approach

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Tax Equalization

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

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Tax Protection

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

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Maximum Marginal Federal Tax Rates

Country
Maximum marginal rate (%)

Argentina Australia Belgium Brazil Canada China (Hong Kong) China France Germany India Italy Japan Malaysia

35.00 47.00 50.00 27.50 29.00 20.00 45.00 48.09 42.00 33.66 43.00 37.00 28.00
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Expatriate Benefits
1. 2. 3. 4. 5. Keep expatriates in home-country programs, particularly if the company does not receive a tax deductions for it? Enroll expatriates in host-country benefit programs and/or making up coverage differences? Does host-country legislation regarding termination affects benefit entitlement? Do expatriates receive home-country or host-country social security benefits? Should benefits be maintained on a home-country or host-country basis? Who is responsible for the cost? Should other benefits offset any shortfall in coverage? Should home-country benefit programs be exported to local nationals in foreign countries?
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Social Security Contributions By Employers and Employees

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Differentiating Between PCNs and TCNs

TCNs have a great deal of international experience; often move from country to country in the employ of one MNE MNEs use a home-country balance sheet approach for TCNs can be less expensive than paying all expatriates on a PCN scale; could lead to perceived inequities the reduction in expenses outweighs the difficulty of justifying any pay differentials
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Differentiating Between PCNs and TCNs

TCN employees are valuable; firms may need to rethink their approach; establishing a system of international base pay for key managers
multinational firms need to match their compensation policies with their staffing policies and general IHRM philosophy

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Complexity, Challenges and Choices in Global Pay

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Case: Going to India

1. If Geoffs whole family is coming with him to India, should Geoff maintain or sever his residency in Canada? Discuss the advantages and disadvantages of both options put yourself in Geoffs shoes. In your decision consider also taxation implications. 2. If you were Geoff, would you prefer a going rate approach or a balance sheet approach to negotiate your base salary? What kind of approach to determine the base salary will Andrew opt for? Why?
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Case: Going to India

3.

Create an expatriate compensation worksheet that outlines a package proposal with details of all components, currencies, etc. In your package you need to consider Geoffs personal circumstances and the fact that the whole family will come after having sold their house in Canada.

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THANK YOU

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