International Compensation

• Presented By:-
AMRENDRA KUMAR
AMARDEEP KUMAR
 Compensation
• Compensation may be defined as the
financial remuneration the employees
receive in exchange for their labour.

• Compensation may be deals with wages,

salaries, pay increase, and other monetary
issue.
 Compensation decision should
achieve Six objectives
• Be legal
• Be adequate
• Be motivating
• Be equitable
• Provide security
• Be cost-benefit effective
 Requirements for Successful
Compensation and Benefits
• Knowledge of employment and taxation law,
customs, environment and employment practices of
many foreign countries

• Familiarity with currency fluctuations and the effect of

inflation on compensation, and

• A good understanding of why and when special

allowances must be supplied and which allowances
are necessary in what countries
 The Firm’s objectives for Int’l
Compensation
• Consistent
• Competitive
• Cost-Effective
facilitation of
transfers
• Equitable
• Administratively
manageable
 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
 Base Salary
• In a domestic context, base salary denotes the amount of
cash compensation serving as a benchmark for other
compensation elements (such as bonuses and benefits).
• For expatriates, many allowances are directly related to base
salary (e.g. foreign service premium, cost-of-living allowance,
housing allowance)
• It is the basis for in-service benefits and pension
contributions – may be paid in home or local-country
currency.
• The base salary is the foundation block for international
compensation whether the employee is a PCN or TCN.
• Major differences can occur in the employee’s package
depending on whether the base salary is linked to the home
country of the PCN or TCN, or whether an international rate
is paid.
 Foreign Service Inducement and
Hardship Premium
• Parent-country nationals often receive a salary premium
as an inducement to accept a foreign assignment or as
compensation for any hardship caused by the transfer.
• Foreign service inducements are usually made in the
form of a percentage of salary, 5-40% of base pay.
– Such payments vary, depending upon the assignment, actual hardship,
tax consequences and length of assignment.
• More commonly paid to PCNs than to TCNs.
 Allowances
• Housing Allowance
– Permits executive to live at same standard as at home
• Cost-of-Living Allowance
– Based on differences in price of food, utilities,
transportation, entertainment, clothing, personal
services, and medical expenses as compared to home
• Allowances for Tax Differentials
– Ensures expatriates will not have less after-tax pay at
home
 Allowances

• Education Allowances
– Insures children receive education equal to that at home

• Moving and Orientation Allowances

– Household effects and language instruction
 Cost-of-living Allowances
(COLA)
• COLA receives the most attention, to compensate for
differences in expenditures between the home country
and the foreign country (e.g., to account for inflation
differentials, currency fluctuations, etc.).
• The COLA may also include payments for housing and
utilities, personal income tax or discretionary items.
• The provision of a housing allowance implies that
employees should be entitled to maintain their home-
country living standards (or, in some cases, receive
accommodation that is equivalent to that provided for
similar foreign employees and peers).
• International comparison of cost of living is difficult and
can be problematic.
 Benefits
• In addition to the already discussed benefits,
multinationals also provide vacations and special
leave.
– Annual home leave usually provides airfares for families to
return to their home countries.
– Rest and rehabilitation leave, based on the conditions of the
host country, may provide the employee’s family with
airfares to a more comfortable location near the host
country.
– Emergency provisions are available in case of a death or
illness in the family.
– Employees in hardship locations often receive additional
leave expense payments or rest and rehabilitation periods.
 Issues Concerning Benefits
• Very difficult to deal with country-to-country, as national
practices vary considerably:
– Transportability of pension plans
– Medical coverage
– Social security benefits

• Firms need to address many issues, including:

– Whether or not to maintain expatriates in home-country benefit
programs, particularly if the firm does not receive a tax
deduction for it.
– Whether firms have the option of enrolling expatriates in host-
country benefit programs and/or making up any difference in
coverage.
– Whether expatriates should receive home-country or host-
country social security benefits.
 Issues Concerning Benefits
(cont.)

• Laws governing private benefit practices differ from

country to country, and firm practices also vary.
• In some countries, expatriates cannot opt out of local
social security programs. In such circumstances, the
firm normally pays for these additional costs.
– European PCNs and TCNs enjoy portable social
security benefits within the European Union.
• Multinationals have generally done a good job of
planning for the retirement needs of their PCNs, but this
is generally less the case for TCNs.
Total compensation Costs for Sending an
Expatriate American Manager to Russia
Approaches to Int’l compensation:
The 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
Approaches to Int’l compensation:
The Going Rate Approach (con’d)
(Advantages & Disadvantages, adapted from Text Table 6-2)

Advantages Disadvantages
• Equality with local • Variation between
nationals assignments for same
•Simplicity employee
• Identification with host •Variation between
country expatriates of same
•Equity amongst different nationality in different
countries
nationalities
• Potential re-entry
problems
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
• 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. Goods & Services
2. Housing
3. Income Taxes
4. Reserve
 Approaches to Int’l compensation:
The Balance Sheet Approach (con’d)

Advantages Disadvantages
• Equity between foreign •Not necessarily equality amongst
assignments for same employee different nationalities – PCNs may
•Equity between expatriates of get paid more than local nationals
same nationality in different (HCNs) or TCNs (expats of
countries different nationalities) for doing the
• Repatriation is facilitated by the same work
fact that expat compensation •Not necessarily simple to
remains anchored to the parent- administer
country compensation system • Unclear whether it promotes
• Simple to communicate identification with home or host
country
 Four Special Problem Areas
1. Taxation
– Tax Equalization
– Tax Protection
– Not-recommended Variations:
» Ad-hoc
» Laissez-faire

2. Pension & Other Benefits Issues

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

4. Managing TCN compensation