IHRM- Module 6

7/28/2019 IHRM- Module 6

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Module 6

Ref: Peter J Dow ling IHRMBook

International Compensation

1 M6-International Compensation


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Syllabus

M6-International Compensation2

Forms of compensation and factors thatinfluence compensation policy

Key components of international

compensation

Approaches to international compensation

Compensation practices across the countries

Social security systems across the countries

Global compensation: emerging issues.


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Introduction


Compensation is not just about paying the employee For MNCs successfully to manage compensation

and benefits requires knowledge of employment and

taxation law, customs, environment and employment

practices of many foreign countries, familiarity withcurrency fluctuations and the effect of inflation on

compensation and an understanding of why and

when special allowances must be supplied and

which allowances are necessary in what countries[awareness about political, economic and social

conditions]

Fixing and managing compensation for an expat is

always complex because they are high cost


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Objectives of International

compensation


Compensation policy should be consistent withthe overall strategy of MNC

Policy must work to attract and retain competent

staff in the locations where MNC has greatestneeds and opportunities

Policy should facilitate the transfer of international

employees in the most costeffective manner forthe firm

Policy must give due consideration to equity and

easy administration [should be fair and easy to


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Forms of Compensation


1. Intrinsic & Extrinsic Compensation Intrinsic : non financial related nature of work,

interest in work and career aspects, related to jobsatisfaction of the employee

Extrinsic: financial nature2. Direct & Indirect Compensation

Direct: an employees fixed and variable annualincome

Indirect: consists of all deferred income, pension,insurance, benefits like company car, expenseallowance

Sum of direct and indirect compensation makes

up organizations total compensation program


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Factors influencing compensation

policy


1. Internal business factors

Margin for wage costs, depends on profit

generated by company

Labour shortage or surplus influences payrates. Labour Shortage-- rise in pay rates,

labour surplus--- fall in wage

Organizational cost strategy

Performance based culture encourage good

or high pay rates for better performance,

means organizations culture influences

compensation structure


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Factors influencing.. Contd.


2. Purchasing power and prosperity

Level of economy

Economy prosperity and cost of living

3. Social factorsWage bargaining power [national and industry

level]

Labour unions

Cultural/ social factors/ characteristics like

Japan- collectivism culture-group appraisal

Germany- high uncertainty avoidance-performance

related pay will not be much encouraged, theyfocus on fixed salary


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Key components of an

international compensation


Base Salary

Foreign service

inducement/hardship premium

Allowances

Benefits

Vacations and special leavesBonuses


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1. Base salary


In domestic context base salary denotes the

amount of cash compensation serving as abenchmark for other compensation elements [like

bonuses, benefits, HRA etc]

For expats it is the primary component of a package

of allowances, many of which are directly related tobase salary [ cost of living allowance COLA, foreign

service premium, housing allowance]

It will be the basis for in service benefits and

pension contributions It may be paid in home or local country currency

Differences may occur in compensation package

depending on whether base salary is linked to the

home country of PCN or TCN, or whether an


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2. Foreign Service Inducement /

Hardship Premium


PCNs often receive salary premium asan inducement to accept foreign

assignment or as compensation for any

hardship caused by transfer More commonly paid to PCNs than

TCNs

Usually 5 to 40% of base pay will bepaid as Foreign Service Inducement

Payment may vary depending upon

assignment, actual hardship, tax


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3. Allowances


MNCs generally pay allowances to motivateemployees to accept international

assignments

A. Cost of living allowance[COLA] Payment made to compensate the

differences in cost of living between home

and foreign country

Difficult to determine, so most of the MNCsprefer to take help of agencies or

consultancies who can provide updates and

information to them

It ma also include a ments for utilities


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3. Allowances contd..


B. Housing Allowance

Objective is to help expat manager to maintain his/herstandard of living in the foreign country

Sometimes accommodations are provided by MNC, it

can be optional or mandatory

Are often paid on either an assessed or an actualbasis

This can be a fixed allowance or some portion of

income out of which actual housing costs are paid

C. Home leave allowancesMany employers cover the expense of one or more

trips back to the home country each year

Expats will get opportunity to meet family, friends and

relatives, and can build up their morale level


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3. Allowances contd..


D. Education Allowances

Allowances for expats children education includes

tuition fees, enrolment fees, books, transportation,

room, board and uniforms etc

E. Relocation Allowances

Covers moving, shipping and storage charges, car

expenses etc

F. Spouse Assistance

This will be given to offset income lost by an expatsspouse as a result of relocating abroad

Alternative to this compensation, MNC can also

provide employment opportunities abroad by

offering job research assistance or in their foreignsubsidiar office


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4. Benefits


Ex: pension plans

It is very difficult to determine It comprise approximately 1/3rd of compensation

package

Issues when considering benefits

1. Whether or not to maintain expatriates in home-country programs, particularly if the firm does not

receive a tax deduction for it.

2. Whether firms have the option of enrolling

expatriates in host-country benefit programsand/or making up any difference in coverage.

3. Whether expatriates should receive home-country

or host-country social security benefits.

Most US PCN remain under their home country


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5. Apart from all these, MNCs also give

vacations and special leaves to

expatriates

6. Bonuses

There are three approaches to providebonuses;

A percentage is added to base pay

ranging from 10% to 30% of base pay

Lump sum payment at the beginning or

end of foreign assignment

or combination of first two

Approaches to International


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Approaches to International

compensation


There are two main options in the area ofinternational compensation

Going Rate Approach [also known as Market

rate App roach]The Balance Sheet Approach [also known as

Bu i ld up Approach]

Going Rate Approach[Market Rate


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Going Rate Approach[Market 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

MNC obtains information from localcompensation surveys

Base pay and benefits may be supplemented by

additional payments for low-pay countries


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Contd..


For ex:

Japanese bank operating in New York would need

to decide whether its reference point would be

Local US salaries or

Other Japanese competitors in New York or

All foreign banks operating in New York

If location is in a low pay country, MNC usuallyadds additional benefits and payments with base

pay.


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Merits & Demerits of Going Rate

Approach


Advantages

Equality with local

nationals Simplicity

Identification with host

country

Equity amongst

different nationalities

Disadvantages

Variation between

assignments for sameemployee

Variation between

expatriates of same

nationality in differentcountries

Potential re-entry

problems

a ance ee or u p


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a ance ee or u pApproach


Objective is to keep the expatriate whole[maintaining home country living standard

plus financial inducement to make package

attractive]

Home country pay and benefits arefoundations of this pay

Adjustments to home package to balance

additional expenditure in host country

Financial incentives are added

Most common system in usage by MNC firms

Expats will not suffer from material loss


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Four Balance Sheet Approach categories


1. Goods and serv ices home-country

outlays for items such as food, personalcare, clothing, household furnishings,

recreation, transportation and medical care.

2. Hous ing the major costs associated withhousing in the host country.

3. Incom e 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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Merits & Demerits of balance Sheet

Approach


xpa r a e ompensa on or s ee


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xpa r a e ompensa on or s eesample



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International taxation


There are two approaches for international

taxation

1. Tax protection

In this approach, the company reimburses theexpatriate for the difference, if the actual home

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.


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International Taxation contd..


2. Tax equalization

In this approach the company pays both the home

and host country taxes for the expatriate.

The company calculates the hypothetical tax andmakes 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.


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International living costs data


MNCs using the balance sheet approach must

constantly update compensation packages with newdata on living costs, which is an ongoing

administrative requirement

There is also much debate about what should be in

the basket of goods which consulting firms use asthe basis for calculating living costs around the world

For example the Swiss Bank UBS uses the Big Mac

Index to measure the living costs around the world

According to the Index, it takes more than 3 hours forthe average worker in Nairobi to earn enough for a Big

Mac. In Los Angeles, Tokyo, the global burger can be

bought for a mere 10 minutes effort.


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Range of working times required to buy one Big Mac


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Compensation practices across the

countries


INDIA

Basic wage corresponds with Fair Wages

Committee [1948] and 15th labour conference [1957]

recommendations

Criteria for determining basic wage are: skills,

experience needed for job, difficulty of work [both

mental and physical], training needed,

responsibilities involved and hazardous nature of job

DA is linked with AICPA [All India Consumer Price

Index

Government has set up Wage Boards, Pay

Commissions for fixing & revising wages,


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US


Basic compensation package comprises of a base

salary, a variable performance linked bonus, long term

cash incentives, compulsory benefit contributions andvoluntary benefit contributions

During the fiscal year salary adjustments are warranted,

these are known as interim increases & generally

classified into 3 ways1. Administrative oversight: an adjustment to an

individuals pay, frequently occurring shortly after the

effective date of annual merit increase

2. Alignment: is used to adjust pay of individuals whosesalary is low in comparison to pay of similarly

performing employees within the peer group

3. Retention: is used to reward employees who are

critical to the success of an organizations mission or a


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Russia


Having a good fixed salary is important in

compensation package The optimal compensation package combines

bonus and non monetary benefits

In most cases bonus varies 20% to 40% of total

salary

The most common type of bonus is the payment

of thirteen month ofsalary, if certain objectives

have been achieved by the companyApart from above, Russians have been used to

receive non-monetary benefits such as good

lunches, medical insurance, life insurance and so

on


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Japan


Japan has seniority based wage system, which

has 2 featuresThe amount of pay goes up according to the length

of service and age

Wages are not set separately for individual jobs

Bonuses are paid in summer and winter

Allowances are paid when worker leaves the

company

Basic salary is determined according to job relatedqualifications and competence, ranks within a job

category

Pay hikes on base salary are given every year in

April


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Saudi Arabia


In addition to base monthly salaries, companies

provide benefits and allowances to their Saudiand expatriate employees

Includes housing, food, auto allowances, vacation

tickets to home country, school fees etc

Some benefits are mandated by Saudi Labour

Law and others are granted by discretion of

company

Apart from this, bonuses will be provided


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China


A nationally unified wage system was structured in

1956 for both blue and white collar employees Under this system, there were 8 grades for workers,

15 grades for technical person and 25 grades formanagers and administrative personnel

Reform of compensation system began at enterpriselevel

Enterprise Law was issued in 1988 and relatedregulations during 1990s provided separation of an

enterprise from its controlling authority so thatenterprise had autonomy and incentives

A state regulated wage systems have now replacedby diversified wage packages with more focus onenterprise profitability and individual performance


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Soc ial Securi ty Schemes


According to International LabourOrganization [ILO], social security

is security furnished by the society

through appropriate organization

against certain risks to which its

members are exposed. The risksare sickness, maternity, old age

anddeath


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Contd..


Scope of social security programs differs from country to

country and they have 4 common features in common:

1. They are statutorily established by the government

2. They provide some form of payment to individuals to

compensate part of the lost income due to contingencies

such as unemployment, maternity, injury at work etc.

3. Tripartite financing [(government)treasury, financial

institution and bank] has been accepted by many countries

as a mechanism for financing the social security insurance

system

4. Benefits of services are provided in 2 ways; Social insurance to contributors during old age, sickness,

disablement etc

Social assistance, non-contributory benefits towards the

maintenance of children, women, aged, disabled etc

oc a ecur y c emes n eren


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oc a ecur y c emes n eren countr ies


Germany

Wage earners come under compulsory insurancethrough Wage Earners Sickness Insurance Act,

1883, the Accident Insurance Act 1884, and Invalidity

and Old age Protection 1889.

The statutory sickness insurance scheme provides

benefit in the form of early detection of diseases,

sickness benefits, hospital treatment, etc

Under the Occupational Safety Act 1974, employersare required to appoint industrial medical officers and

occupational safety specialists


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schemes


The Workmens Compensation Act of 1987 made

earnings related compensation, payable to those whowere injured at workplace.

The Old Age Pensions Act of 1908 made provision of

means-tested pension, to people aged over 70

The 1934 Unemployment Act introduced to providebenefits for those unemployed but not covered by

national insurance

Social Security and Housing Benefits Act of 1982,

provides contributory benefits like retirement pensions,unemployment benefits, widows benefit, sickness

benefit and non contributory benefits like guardians

allowance, child benefit etc

Social security expenditure is 10% of gross national


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US: Social security schemes


Social security system was introduced in 1935 as a

program of insurance protection for the workers and his

family against complete loss of income through old age

or death

In 1950 it was extended to cover farm and household

employees and other persons

The following social security programs provide financial

security to workers and their families;

The Old Age and Survivors Insurance (OASI) program

The Disability Insurance (DI) programThe Hospital Insurance (HI) program

The Supplementary Medical Insurance (SMI)

There are union negotiated welfare plans which are

financed by the employers


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Japan: Social Security Schemes


Being the first country to establish a social

insurance system, Japan adopted HealthInsurance Scheme for employees of large

companies in 1992, followed by national, health

insurance in 1938, seamans insurance in 1939

and employees pension program in 1941

The contributory employees pension program

covers regular employees. The national pension

program has a contributory as well as a noncontributory segment. Contributory segment has a

compulsory and voluntary part. A number of

pension programs also exist for special groups

such as civil servants, seaman, and private school


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Contd..


Japan has 2 main health insurance programs: one

is Compulsory Employees Health Insurance Plan

for workers employed in manufacturing, mining and

retail establishments with 5 or more employees .

The second one is National Health Insurance Plan,

which covers residents not insured as a result of

their employment. It is designed to cover the oldest,

poorest and most sick segments of Japanese

society

Since 1947, Japan has had unemployment

insurance, the law was amended in 1975 to make

the coverage compulsory for all industrial and

commercial firms with more than 5 employees.


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India: social security schemes


The social security legislation in India regarding theindustrial field consists of following enactments

Workmens Compensation Act 1923

Minimum Wages Act 1948

Payment of Wages Act 1936

Industrial Disputes Act 1947

Employees Provident Fund and Miscellaneous

Provisions Act 1952

Payment of Bonus Act 1965

Maternity Benefit Act 1961

The Payment of Gratuity Act, 1972


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Issues


Skill based pay: as technology progress newer skills are

required. Skill based pay can help organizations pay itspeople based on skills that are currently in need. It formsa part of base pay, some use it as a contingent pay.

Broad banding: it can be defined as delayering of paystructure. It involves consolidation of the existing paygrades into a small number of wide bands. Thisconsolidation results in broad minimum to maximumspread attached to it. Such pay structures are bettersuited to the needs of todays flexible, flatter andperformanceoriented organizations

Variable pay: it is a financially measurable reward paid to

an individual based on his or her overall performance. Team rewards: team rewards provide an opportunity for

each team member to receive a bonus based on theoutput of the team as a whole. Team incentives are mostappropriate when jobs are highly interrelated.


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M6-International Compensation

Documents

IHRM- Module 6