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Employee Expectations and International Organization’s Compensation Policy  Financial protection in terms of benefits, social security and cost of living in the foreign location  Fore

INTERNATIONAL HUMAN RESOURCE MANAGEMENT

Compensation &

Benefits

Expatriate Compensation &

Benefits

Compensation Benefits

Compensation Benefits

Expatriate Costs

• E xpatriate costs may pose a fold expense in relation to employees

multiple-who are not sent as expatriates to

foreign destinations, and are usually

significantly higher than the

compensation accorded to HCNs and

TCNs

• Example:

• a Chinese manager with 15 years

experience costs less than USD 70,000 per annum, while

• a US expatriate manager with

corresponding expertise would cost his

or her organization USD 300,000 per

year

Goals of an International Organization’s

Compensation Policy (1)

1) Policy should be consistent with the overall

strategy, structure and business needs of the

international organization

2) Policy must work to attract and retain staff in those areas where the international organization has the

greatest needs and opportunities As a

consequence, the policy must be competitive and

recognize factors such as incentive for serving in a foreign location, tax equalization and reimbursement for reasonable costs

Goals of an International Organization’s

Compensation Policy (2)

3)Policy should facilitate transfer of

international employees in the most

cost-effective manner

4)Policy must give due consideration to equity and ease of administration

Employee Expectations and International

Organization’s Compensation Policy

 Financial protection in terms of benefits, social

security and cost of living in the foreign location

 Foreign assignment offers opportunities for

advancement through income and/or savings

 Issues such as housing, education of the children

and recreation are addressed

Note that the expectations of the employees often do not

coincide with the interests of the organization

Key Components of International Compensation Programme for Expatriates

• Base Salary

• The base salary is usually the main

component in international compensation,

and is the main benchmark used for other

elements in an expatriate compensation

package, such as bonuses and benefits

• The base salary is either paid in the

expatriate’s home or parent country

currency, or in the currency of the

expatriate’s host country 8

Key Components of International

Compensation Programme for

Expatriates

• Hardship Premium

• For expatriate’s (usually PCNs, TCNs)

who will encounter “hardships” caused

by the transfer to a foreign location,

determining the appropriate level of

payment can be difficult

• Factors determining the hardship premium,

usually expressed in terms of an expatriate’s base pay, are typically:

Assignment

Actual hardship

Tax consequences

Length of assignment

Key Components of International Compensation Programme for Expatriates

Allowances: There are many types of allowances in

an international compensation package:

 Cost of Living Allowance – Payment made to the

expatriate with a view to compensating for

differences in expenditure between the home or

parent country and the host country Factors such

as inflation differentials and the price level need to

be considered Often, the cost of living allowance

is difficult to determine

Key Components of International Compensation Programme for Expatriates

 Housing Allowance – Payment made to the expatriate with

a view to ensuring that he or she can maintain their country living standard in the host country Alternatively,

home-an orghome-anization may provide housing facilities on a

mandatory or optional basis Also, support services may

be provided to the expatriate, for example, by helping sell

or rent the expatriate’s house in the home country

 Home Leave Allowance – Payment made to the expatriate

with a view to facilitating their visit back to the home

country, once or twice a year Home leave enables the

expatriate to renew business, family and social ties, and

thus avoid adjustment problems subsequent to repatriation

Key Components of International Compensation Programme for Expatriates

 Education Allowance – Payment made with a view to

supporting the education of the expatriate’s children, i.e tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment,

room and boarding, school uniforms etc Problems

regarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations

 Relocation Allowance – Payment made with a view to

enable the relocation of the expatriate to the assignment location Includes moving, shipping, storage costs,

subsidies for purchase of appliances and (possibly) an

Key Components of International Compensation Programme for Expatriates

 Miscellaneous Allowances – Depending on the

level of seniority of the expatriate, payments to

him or her for club memberships, sport

associations, maintenance of household staff etc may be rendered

In addition, the organization may render financial assistance to the spouse for her or his loss of

income as a result of the transfer of the expatriate

Key Components of International Compensation Programme for Expatriates

 Benefits – Support rendered to an expatriate in addition to

the allowances provided There are several types of

benefits, more prominent examples being:

 Social Security Benefits (home country or host country?)

 Paid Vacations for expatriate and family

 Rest and Rehabilitation leave (especially for expatriates

based in “hardship” assignment locations)

 Emergency Cases (severe illness, death)

Calculating International Compensation

There are two basic approaches used

to determine an international

compensation package:

The Going Rate Approach

The Balance Sheet Approach

The Going-Rate Approach

 Based on local market rates

 Relies on survey comparisons

– 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

 Example: Should a Pakistani bank operating in London use

local British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreign

banks operating in London as the reference point for the base salary offered

Disadvantages of the Going-Rate Approach

ADVANTAGES Equality with local nationals

Simplicity Identification with host country

Equity amongst different

nationalities

ADVANTAGES Equality with local nationals

Simplicity Identification with host country

Equity amongst different

nationalities

DISADVANTAGES

Variation between assignments

for the same employee

Rivalry between expatriates

of same nationality in getting assignments

to some countries

Potential reentry problems in

the home country

DISADVANTAGES

Variation between assignments

for the same employee

Rivalry between expatriates

of same nationality in getting assignments

to some countries Potential reentry problems in

the home country

Logic of the Balance Sheet Approach

• The balance sheet approach to

international compensation is a system designed to equalize the purchasing power

of employees at comparable position levels living abroad and in the home country, and

to provide incentives t offset qualitative differences between assignment locations

The Balance Sheet Approach

The balance sheet approach is widely used by

international organizations to determine the

compensation package for expatriates:

 Basic objective is the 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 the host country

 Financial incentives (expatriate / hardship premium)

added to make the package attractive

Outlays Considered in the Balance Sheet Approach

The balance sheet approach considers four types of outlays

which are incurred by expatriates:

 Goods and services – Outlays incurred in the home country for

food, personal care, clothing, household furnishings, recreation,

transportation and medical care

 Housing – All major costs associated with housing in the host

country

 Income Taxes – Parent country and host country income tax

expenditures

 Reserve – Contributions to savings, payments for benefits,

pension contributions, investments, education expenses, social

security taxes, etc.

Disadvantages of the Balance-Sheet Approach

ADVANTAGES

Equality between assignments

and between expatriates

of the same nationality

Equality between assignments

and between expatriates

of the same nationality

Can be quite complex

to administer (e.g changing economic conditions,

Can be quite complex

to administer (e.g changing economic conditions,

taxation)