SCM

Chapter # 8

International Pay Systems

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Strategic Compensation Management (HRM-680), Shair Muhammad

 What is International Pay system?

International pay system refers to all forms of

financial returns and tangible benefits that employees
of an international organization receive from their
employer in exchange for providing their services
and efforts.

Strategic Compensation Management (HRM- 1-2

680), Shair Muhammad
 International Pay systems
 Global compensation managers increasingly deal with two
areas of focus.
 They must manage highly complex and turbulent local
details.
 Concurrently building and maintaining a unified, strategic
pattern of compensation policies, practices and values.

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Strategic Compensation Management (HRM-680), Shair Muhammad
 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.
 A good understanding of why and when special
allowances must be supplied and which allowances are
necessary in what countries.

All
All within
within the
the context
context of
of shifting
shifting political,
political, economic
economic
and
and social
social conditions.
conditions. 1-4
Strategic Compensation Management (HRM-680), Shair Muhammad
 Expatriate Expectations
 Financial protection in terms of benefits, social
security and living costs in the foreign location.
 Opportunities for financial advancement through
income and/or savings.
 Issues such as housing, education of children and
recreation to be addressed in the policy.
 Career advancement and repatriation.

Strategic Compensation Management (HRM- 1-5

680), Shair Muhammad
 Key Components of International
Compensation
The
The area
area of
of international
international compensation
compensation isis complex,
complex,
primarily
primarily because
because multinationals
multinationals must
must cater
cater to
to three
three
categories
categories of
of employees:
employees:
 PCNs,
PCNs, TCNs
TCNs and
and HCNs
HCNs
 Key
Key Components:
Components:
Base
Base salary
salary
Foreign
Foreign services
services incentives
incentives
Allowances
Allowances
Benefits
Benefits
Strategic Compensation Management (HRM- 1-6
680), Shair Muhammad
 Culture and Managing International Pay
 Assumption that pay systems must be designed to fit
different national cultures is based on the belief that
most of a country’s inhabitants share a national
character.

 Job of a global manager

 Search for national characteristics whose influence

is assumed to be critical in managing international
pay systems.

Strategic Compensation Management (HRM- 1-7

680), Shair Muhammad
 Strategic Market Mind-Sets
1. Localizer: “Think Global, Act Local”
 Designs pay systems to be consistent with local conditions
 Business strategy is to seek competitive advantage by
providing products and services tailored to local
customers
 Multi-domestic strategy
 Operate independently of corporate headquarters
 Global Geographic Structure

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Strategic Compensation Management (HRM-
680), Shair Muhammad
 Strategic Market Mind-Sets (cont.)
2. Exporter: “Headquarters Knows Best”
 Basic total pay system designed at headquarters and is
“exported” world-wide for implementation at all locations
 Exporting a basic system makes it easier to move managers
and professionals among locations
 One plan from headquarters gives all managers around the
world a common vocabulary and a clear message what the
leadership values
 Global product group structure

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Strategic Compensation Management (HRM-
680), Shair Muhammad
 Strategic Market Mind-Sets (cont.)
3. Globalizer: “Think and
Act Globally and Locally”
 Seek a common system to be used as part of “glue” to
support consistency across all global locations
 Headquarters and operating units are heavily networked
to shared ideas and knowledge
 Performance is measured where it makes sense for the
business
 Pay structures are designed to support business
 Global matrix structure
Strategic Compensation Management (HRM- 1-10
680), Shair Muhammad
 Objectives of Compensation
and Benefits for Expatriates
 Attract and retain employees who are qualified for
foreign assignments
 Provide an incentive to leave the home country for a
foreign assignment
 Maintain a given standard of living
 Take into consideration expatriates’ career and family
needs
 Facilitate reentry into the home country at the end of a
foreign assignment
Strategic Compensation Management (HRM- 1-11
680), Shair Muhammad
Common Allowances in Expatriate Pay
Packages

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Expatriate Compensation Worksheet

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Strategic Compensation Management (HRM-
680), Shair Muhammad
 Example of an Expatriate
Compensation
 An expatriate working in a U.S. branch may receive:
 Base pay: $1,400/mon
 Housing: up to $1,400/mon (Optional)
 Itemized reimbursement: $500/mon
 Discretionary expense (e.g., gifts & gratuity to clients
and partners): $1000/special holidays
 Benefits: Social security/Medicare (Optional)
 Health care: $200/mon paid by employer
 Unemployment coverage
 Workers comp
Strategic Compensation Management (HRM- 1-14
680), Shair Muhammad
 International Compensation
Complexities
 Pay package and approaches
Base pay and benefits
Taxes
Cost of living
 Housing
 Safety
 Transportation
 Education of children
 Length of stay

Strategic Compensation Management (HRM- 1-15

680), Shair Muhammad
 International Compensation
 Increasingly seen as a mechanism to develop and
reinforce a global corporate culture
 A primary source of corporate control
 Explicitly linking performance outcomes
with associated costs

Strategic Compensation Management (HRM- 1-16

680), Shair Muhammad
 Objectives of International
Compensation
Should be consistent with the overall strategy, structure and
business needs of the MNE.
Must be sufficient to attract and retain staff in the areas where the
MNE has the greatest needs and opportunities, hence must be
competitive and recognize factors such as incentive for foreign
service, tax equalization and reimbursement for reasonable costs.
Should facilitate the transfer of international employees in the
most cost-effective manner for the firm.
Must give due consideration to equity and ease of administration.

Strategic Compensation Management (HRM- 17

680), Shair Muhammad
 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. 1-18
 Allowances
 Multinationals generally pay allowances in order to encourage
employees to take international assignments and to keep employees
‘whole’ relative to home standards.
 Establishing an overall compensation policy can be very
challenging, partly because of the various forms of allowances,
such as:
 COLA – Cost-of-living allowance
 Housing allowance
 Relocation allowance
 Education allowance
 Home leave allowance
 Spouse assistance Strategic Compensation Management (HRM-
1-19
680), Shair Muhammad
 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.).
 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. Strategic Compensation Management (HRM- 1-20
680), Shair Muhammad
 Relocation Allowances
 Usually cover moving, shipping and storage charges,
temporary living expenses, subsidies regarding appliance
or car purchases (or sales) and down payments or lease-
related charges.
 Allowances regarding perquisites (cars, club memberships,
servants and so on) may also need to be considered (usually for
more senior positions, but this varies according to location).
 These allowances are often contingent upon tax-equalization
policies and practices in both the home and the host countries.

Strategic Compensation Management (HRM- 1-21

680), Shair Muhammad
 Education Allowances
 Expatriates’ children are an integral part of any
international compensation policy.
 Allowances for education can cover items such as tuition,
language class tuition, enrolment fees, books and supplies,
transportation, room and board, and uniforms.
 PCNs and TCNs usually receive the same treatment
concerning educational expenses.

Strategic Compensation Management (HRM- 1-22

680), Shair Muhammad
 Allowances for Spouse Assistance
 To help guard against or offset income lost by an
expatriate’s spouse as a result of relocating abroad.
 Some firms may pay an allowance to make up for a spouse’s
lost income.
 U.S. firms are beginning to focus on providing spouses with
employment opportunities abroad, either by offering job-search
assistance or employment in the firm’s foreign office (subject
to a work visa being available).

Strategic Compensation Management (HRM- 1-23

680), Shair Muhammad
 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.
Strategic Compensation Management (HRM- 1-24
680), Shair Muhammad
 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.
Strategic Compensation Management (HRM- 1-25
680), Shair Muhammad
 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.
Strategic Compensation Management (HRM- 1-26
680), Shair Muhammad
 Approaches to International
Compensation
 Twomain options in the area of international
compensation:
Going Rate Approach (also referred to as the
Market Rate Approach)
Balance Sheet Approach (also known as the Build-
up Approach).

Strategic Compensation Management (HRM- 1-27

680), Shair Muhammad
 Going Rate Approach

 Based
 Based on
on local
local market
market rates
rates
 Relies
 Relies on
on survey
survey comparisons
comparisons among
among
 Local nationals (HCNs)
Local nationals (HCNs)
 Expatriates of same nationality
Expatriates of same nationality
 Expatriates of all nationalities
Expatriates of all nationalities
 Compensation
 Compensation based
based on
on the
the selected
selected survey
survey comparison
comparison
 Base
 Base pay
pay and
and benefits
benefits may
may be
be supplemented
supplemented by
by
additional
additional payments
payments for
for low-pay
low-pay countries.
countries.

Strategic Compensation Management (HRM- 1-28

680), Shair Muhammad
 Advantages and Disadvantages
of the Going Rate Approach

 Advantages
 Advantages  Disadvantages
 Disadvantages
 Equity with local  Variation between
Equity with local Variation between
nationals
nationals assignments
assignmentsforforsame
same
 Simplicity employee
employee
Simplicity
 Identification with host  Variation between
Identification with host Variation between
country
country expatriates
expatriatesof
ofsame
same
 Equity among different nationality
nationalityin
indifferent
different
Equity among different countries
nationalities
nationalities countries
 Potential re-entry
Potential re-entry
problems
problems

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Strategic Compensation Management (HRM-
680), Shair Muhammad
 The Balance Sheet Approach

 The basic objective is to ‘keep the expatriate whole’

through maintenance of home-country living standard
plus a financial inducement to make the package
attractive.

 Home-country pay and benefits are the foundations of this
approach
 Adjustments to home package to balance additional

expenditure in host country
 Financial incentives (e.g., expatriate/hardship premium) added

to make the package attractive
 Most common system in usage by multinational firms

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Strategic Compensation Management (HRM-
680), Shair Muhammad
 Major Categories Incorporated in
the Balance Sheet Approach
 Goods and services
 Home-country outlays for items such as food, personal
care, clothing, household furnishings, recreation,
transportation, and medical care.
 Housing
 Major costs associated with housing in the host country.
 Income taxes
 Parent-country and host-country income taxes.
 Reserve
 Contributions to savings, payments for benefits, pension
contributions, investments, education expenses, social 1-31
Strategic Compensation Management (HRM-
security taxes, etc. 680), Shair Muhammad
 A Typical Balance Sheet
Additional Costs
Paid by Company
Home- and
Host-Country Premiums and
Income
Income Taxes Incentives
Income Taxes
Taxes Income Taxes
Housing
Housing
Housing Housing
Goods and Goods and Goods and Goods and
Services Services Services Services
Reserve Reserve Reserve Reserve
Host-Country Home-Country
Home-Country Host-Country Costs Paid by Equivalent
Salary Costs Company and Purchasing Power
from Salary
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Strategic Compensation Management (HRM-
680), Shair Muhammad
 International Costs of Living
 Multinationals
Multinationalsusing
usingthetheBalance
Balance  Top 10 costliest cities for
Top 10 costliest cities for
Sheet
SheetApproach
Approachmustmustconstantly
constantly expatriates
expatriates2014/
2014/2013:
2013:
update
updatecompensation
compensationpackages
packages 1.1. Luanda,
Luanda,Angola
Angola
with
withnew
newdata
dataon
onliving
livingcosts,
costs, Moscow,
2.2. Moscow,Russia
Russia
which
whichisisan
anon-going
on-going Tokyo,
3.3. Tokyo,Japan
Japan
administrative
administrativerequirement.
requirement. N’Djamena,
4.4. N’Djamena,Chad
Chad
 Must
Mustalso
alsobe
beable
abletotorespond
respondtoto Singapore,
5.5. Singapore,Singapore
Singapore
unexpected
unexpectedevents,
events,such
suchasasthe
the Hong
6.6. HongKong,
Kong,China
China
currency
currencyand
andstock
stockmarket
marketcrash,
crash, Geneva,
which
7.7. Geneva,Switzerland
Switzerland
whichsuddenly
suddenlyunfolded
unfoldedininaa Zurich,
number
8.8. Zurich,Switzerland
Switzerland
numberof ofAsian
Asiancountries
countriesininlate
late Bern,
1997.
9.9. Bern,Switzerland
Switzerland
1997. Sydney,
The
10.
10. Sydney,Australia
Australia

Thelevel
levelofoflocal
localknowledge
knowledge
requires
requiresspecialist
specialistadvice.
advice. http://www.finfacts.ie/costofliving.htm

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Strategic Compensation Management (HRM-
680), Shair Muhammad
Expatriation compensation worksheet

1-34
 Advantages and disadvantages of
the Balance Sheet Approach
 Advantages:
 Advantages:  Disadvantages:
 Disadvantages:
Equity
Equity  Can
Can result
result in
in great
great
Between
Betweenassignments
assignments disparities
disparities
Between
Betweenexpatriates
expatriatesof
of Between

Betweenexpatriates
expatriatesof
of
the
thesame
samenationality
nationality different
differentnationalities
nationalities
Facilitate Between
Betweenexpatriates
expatriatesand
Facilitate re-entry

re-entry and
Easy local
localnationals
nationals
Easy toto  Can
communicate
communicate to
to Can be
becomplex
complex to
to
employees administer
administer
employees
 May
May entail
entail difficulty
difficulty to
to
attract
attract human
humancapital
capital 1-35