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Prentice Hall, Inc. © 2006
12-1
A Human Resource A Human Resource Management ApproachManagement Approach
STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION
Chapter 12Chapter 12
International CompensationInternational Compensation
Prentice Hall, Inc. © 2006
12-2
Competitive strategies and how Competitive strategies and how international activities fit ininternational activities fit in
Several factors have contributed to the expansion of global markets.- like free trade agreements….
1) Lowest-cost producers relocations to cheaper production areas
2) Differentiation and the search for New Global Markets3) How globalization is affecting HR Departments4) Complexity of international compensation program
• Further corporate interests abroad• Encourage employee expatriation• Minimize workers’ financial risks • Enhance overseas experiences• Repatriation issues• Promoting lowest - cost strategies • Promoting differentiation strategies
Prentice Hall, Inc. © 2006
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International Employees International Employees
Host country nationals (HCNs)Foreign national Citizens work for U.S. company in their
home country
Third country nationals (TCNs)Foreign national Citizens of one country work for a U.S.
company in another country
Expatriates U.S. citizens work for a U.S. company in another country
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Compensation FactorsCompensation Factors
Length of overseas assignments Short-term Extended-term
Staff mobility One or more foreign assignments
Equity: pay referent groups Domestic workers Host country workers / Local employees
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Compensation ComponentsCompensation Components
Core compensation Base pay Incentive compensation
Fringe compensation Standard benefits Enhanced benefits
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Setting Base PaySetting Base Pay
Home country-based Similar to domestic employees
Host country-based Similar to employees in foreign sites
Headquarters-based Not based on home or host country’s pay levels
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Purchasing PowerPurchasing Power
Stability of currency U.S. dollar & foreign money Exchange rate fluctuations
Inflation Increase in prices of goods & services Increase in inflation lowers purchasing power
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Incentive CompensationIncentive Compensation Foreign service premiums
To Encourage employees to accept Expatriate Assignments 10 -30 % of base pay – increase with the length of service – which is not a permanent
increase – paid in installments.
Hardship allowances For tough work & working conditions at foreign locations In small amounts throughout the duration of expatriates assignments. Companies should communicate the role of these payments 3 criteria: extraordinarily difficult living conditions, excessive physical hardship and
notably unhealthy conditions.
Mobility premiums For willingness to relocate to an assignment
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Hardship AllowancesHardship Allowances
Set by U.S. State Dept based on: Foreign living conditions Physical challenges like climate Poor health conditions
Over 150 places as hardship locations
Supplements between 10% - 25% of base pay
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International Fringe CompensationInternational Fringe Compensation
2 Types Standard Enhanced
Considerations Total remuneration Benefit adequacy Tax effectiveness Recognizing local customs & practices
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ENHANCED BENEFITS ENHANCED BENEFITS
Relocation assistance Education reimbursement Home leave & travel reimbursement Rest & relaxation leave and allowance
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Relocation AssistanceRelocation Assistance
Temporary quarters before moving Transportation expenses Reasonable traveling expenses Temporary quarters upon arrival Moving & storing household goods
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Balance Sheet ApproachBalance Sheet Approach
To determine compensation packages To provide similar standard of living Strategic value
Protects expatriates’ standard of living Allows companies to control costs
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Appropriateness:
Home country is an appropriate reference point for economic comparisons.
Expatriates keep close ties to USA (their home country or base country)
Assignment is of limited duration Repatriation after assignment the company promises employees that hey will not lose
financially while on foreign assignment.
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Major Expenditures Housing & utilitiesGoods & servicesDiscretionary incomeTaxes
Information Sources Returning expatriates or foreign government
contacts. Consulting & research companies U.S. State Dept. indexes
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Discretionary Income ExpendituresDiscretionary Income Expenditures
Pension contributions Savings & investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments
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Tax ConsiderationsTax Considerations
Double taxation relief IRC Section 901 IRC Section 911
Tax protection
Tax equalization
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IRC Section 901IRC Section 901
Can credit foreign taxes from U.S. tax If U.S. tax is greater
• Expatriates pay difference to IRS
If foreign tax is greater• Expatriates can deduct excess to future U.S. taxes• For up to 5 years
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IRC Section 911IRC Section 911
Can Exclude up to $70,000 of foreign Income, + a hosing allowance, from tax.
Exclusions Cash
Income Professional fees Incentives Bonuses Sales commissions
Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living
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Employer Considerations: Tax Employer Considerations: Tax ProtectionProtection
Key element of tax protection and tax equalization methods is hypothetical tax:Hypothetical tax: employers calculate the hypothetical tax as
the US income tax based on the same salary level, excluding all foreign allowances.
• Employers reimburse expatriates – when actual tax is greater.
• Expatriates pay entire tax – when actual tax is less or equal to hypothetical tax
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Employer Considerations: Tax Employer Considerations: Tax EqualizationEqualization
Employers deduct hypothetical tax
Employers pay real tax from hypothetical
Reimbursements settled after payment
Equitable treatment any assignment• Employers reimburse expatriates – when actual tax is less.
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Repatriation ConcernsRepatriation Concerns
Losing supplements & allowances
Work experience not valued
Reintegration into domestic workforce Leaving company
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