STRATEGIC COMPENSATION A Human Resource Management Approach Chapter

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STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 12 International Compensation 1 Prentice Hall,

STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 12 International Compensation 1 Prentice Hall, Inc. © 2006 Prepared by David Oakes

Compensation Challenges Ø Ø Ø Ø Further corporate interests abroad Encourage employee expatriation Minimize

Compensation Challenges Ø Ø Ø Ø Further corporate interests abroad Encourage employee expatriation Minimize workers’ financial risks Enhance overseas experiences Repatriation issues Promoting lowest - cost strategies Promoting differentiation strategies 2 Prentice Hall, Inc. © 2006

International Employees Ø Host country nationals (HCNs) ² Citizens work for U. S. company

International Employees Ø Host country nationals (HCNs) ² Citizens work for U. S. company in own country Ø Third country nationals (TCNs) ² Citizens of one country work for a U. S. company in another country Ø Expatriates ² U. S. citizens work for a U. S. company in another country 3 Prentice Hall, Inc. © 2006

Compensation Factors Ø Length of overseas assignments ² Short-term Extended-term Ø Staff mobility ²

Compensation Factors Ø Length of overseas assignments ² Short-term Extended-term Ø Staff mobility ² One or more foreign assignments Ø Equity: pay referent groups ² Domestic workers ² Host country workers 4 Prentice Hall, Inc. © 2006

Compensation Components Ø Core compensation ² Base pay ² Incentive compensation Ø Fringe compensation

Compensation Components Ø Core compensation ² Base pay ² Incentive compensation Ø Fringe compensation ² Standard benefits ² Enhanced benefits 5 Prentice Hall, Inc. © 2006

Setting Base Pay Ø Home country-based ² Similar to domestic employees Ø Host country-based

Setting Base Pay Ø Home country-based ² Similar to domestic employees Ø Host country-based ² Similar to employees in foreign sites Ø Headquarters-based ² Not based on home or host country’s pay levels 6 Prentice Hall, Inc. © 2006

Purchasing Power Ø Stability of currency ² U. S. dollar & foreign money ²

Purchasing Power Ø Stability of currency ² U. S. dollar & foreign money ² Exchange rate fluctuations Ø Inflation ² Increase in prices of goods & services ² Increase in inflation lowers purchasing power 7 Prentice Hall, Inc. © 2006

Incentive Compensation Ø Foreign service premiums ² To Encourage Expatriate Assignments Ø Hardship allowances

Incentive Compensation Ø Foreign service premiums ² To Encourage Expatriate Assignments Ø Hardship allowances ² For tough work & living conditions Ø Mobility premiums ² For willingness to relocate to an assignment 8 Prentice Hall, Inc. © 2006

Hardship Allowances Ø Set by U. S. State Dept based on: ² Foreign living

Hardship Allowances Ø Set by U. S. State Dept based on: ² Foreign living conditions ² Physical challenges like climate ² Poor health conditions Ø Over 150 countries designated Ø Supplements between 10% - 25% of base pay 9 Prentice Hall, Inc. © 2006

International Fringe Compensation Ø 2 Types ² Standard ² Enhanced Ø Considerations ² Total

International Fringe Compensation Ø 2 Types ² Standard ² Enhanced Ø Considerations ² Total remuneration ² Benefit adequacy ² Tax effectiveness ² Recognizing local customs & practices 10 Prentice Hall, Inc. © 2006

ENHANCED BENEFITS Ø Ø Relocation assistance Education reimbursement Home leave & travel reimbursement Rest

ENHANCED BENEFITS Ø Ø Relocation assistance Education reimbursement Home leave & travel reimbursement Rest & relaxation leave and allowance 11 Prentice Hall, Inc. © 2006

Relocation Assistance Ø Temporary quarters before moving Ø Transportation expenses Ø Reasonable traveling expenses

Relocation Assistance Ø Temporary quarters before moving Ø Transportation expenses Ø Reasonable traveling expenses Ø Temporary quarters upon arrival Ø Moving & storing household goods 12 Prentice Hall, Inc. © 2006

Balance Sheet Approach Ø To determine compensation packages Ø To provide similar standard of

Balance Sheet Approach Ø To determine compensation packages Ø To provide similar standard of living Ø Strategic value ² Protects expatriates’ standard of living ² Allows companies to control costs 13 Prentice Hall, Inc. © 2006

Appropriateness Ø Home country is referent point Ø Expatriates keep close ties to USA

Appropriateness Ø Home country is referent point Ø Expatriates keep close ties to USA Ø Assignment is of limited duration Ø Repatriation after assignment Ø Guarantee of no financial hardship 14 Prentice Hall, Inc. © 2006

Major Expenditures Ø Ø Housing & utilities Goods & services Discretionary income Taxes Information

Major Expenditures Ø Ø Housing & utilities Goods & services Discretionary income Taxes Information Sources Ø Returning expatriates Ø Consulting & research companies Ø U. S. State Dept. indexes 15 Prentice Hall, Inc. © 2006

Discretionary Income Expenditures Ø Ø Ø Ø Pension contributions Savings & investments Insurance payments

Discretionary Income Expenditures Ø Ø Ø Ø Pension contributions Savings & investments Insurance payments Mortgage equity payments Alimony Child support Student loans Car payments 16 Prentice Hall, Inc. © 2006

Tax Considerations Ø Double taxation relief ² IRC Section 901 ² IRC Section 911

Tax Considerations Ø Double taxation relief ² IRC Section 901 ² IRC Section 911 Ø Tax protection Ø Tax equalization 17 Prentice Hall, Inc. © 2006

IRC Section 901 Ø Can credit foreign taxes from U. S. tax Ø If

IRC Section 901 Ø Can credit foreign taxes from U. S. tax Ø If U. S. tax is greater ² Expatriates pay difference to IRS Ø If foreign tax is greater ² Expatriates can deduct excess to future U. S. taxes ² For up to 5 years 18 Prentice Hall, Inc. © 2006

IRC Section 911 Ø Can Exclude up to $70, 000 of Income Exclusions Ø

IRC Section 911 Ø Can Exclude up to $70, 000 of Income Exclusions Ø Cash Income Bonuses Professional fees Incentives Sales commissions Ø Non - Cash Housing Meals Vehicles Education Home leave Tax reimbursements Moving expenses Cost of living 19 Prentice Hall, Inc. © 2006

Tax Protection Ø Employers reimburse expatriates when actual tax is greater Ø Expatriates pay

Tax Protection Ø Employers reimburse expatriates when actual tax is greater Ø Expatriates pay entire tax when actual tax is less or equal 20 Prentice Hall, Inc. © 2006

Tax Equalization Ø Employers deduct hypothetical tax Ø Employers pay real tax from hypothetical

Tax Equalization Ø Employers deduct hypothetical tax Ø Employers pay real tax from hypothetical Ø Reimbursements settled after payment Ø Equitable treatment any assignment 21 Prentice Hall, Inc. © 2006

Repatriation Concerns Ø Losing supplements & allowances Ø Work experience not valued Ø Reintegration

Repatriation Concerns Ø Losing supplements & allowances Ø Work experience not valued Ø Reintegration into domestic workforce Ø Leaving company 22 Prentice Hall, Inc. © 2006