International compensation

International compensation
Globalization has increased the awareness of and concern for creating internationally equitable compensation system in many companies The complex nature of IC dictates that nit receives special attention from organizations operating in a multinational environment

International compensation
It is crucial that organizations understand the kind of employees employed by international firms, the elements that comprise an IC system and the special problems associated with returning citizens on overseas or employment to their home corporation for multinational firms

international compensation
Successful management of c&b requires knowledge of the employment and taxation laws, customs, environment and employment practices of many foreign countries Also needed are familiarity with currency fluctuations and the effect of inflation on compensation and understanding of why and when special allowances must b e supplied and which allowances are necessary in what countries

International compensation
Most employers remain wedded to the traditional home based method of expatriate pay but it is found that one size fits all approach to expatriate remn is not necessarily the most effective There should be a wide gap between wages paid for comparable position in different countries due to difference in economic system, political, legal and cultural environment

Objectives of IC
To utilize specific expertise possessed by the employer To reduce risk of perceived inequities and simplifying the job by maintaining equitable wage rate cross culturally To enable the organization to attract and retain potential candidates thereby matching local and regional standard

objectives
To stimulate performance and behaviour of an individual leading to organizations success To understand the difference of compensation practice across organizations and to overcome the complexity in global design rewards To enable the organization to optimize its total wage level To broaden on employees or manager perspectives relative to the international operations

objectives
To facilitate the transfer and relation on international employees To offer financial protection in terms of benefits, social security and living costs in the foreign location for employees To raise the expectation of an employee in terms of career advancement and repatriation

Responsibilities of an IC Manager
Partner closely with international HR, business managers and executives to resolve grievances related to HR, compensation and systems Work with HR generalists, HRIS, benefits and compensation to maintain consistent international approach and support Evaluate design HR process and programs to support business results

Responsibilities of an IC manager
Research, develop and administer appropriate IC plan Develop monitor international data base by individual country Develop people process to support entry into new global markets Participate in and analyze results of compensation surveys for international management positions

Responsibilities of IC manager
Work with staffing to maintain expatriate admn and develop expatriate package with our culture and philosophy Maintain summaries of all international compensation plans by location

Tools for managing IC

Design an IC management grading system that corresponds identically to your domestic grading system International salary ranges by country that allow you to smoothly expatriate a manager overseas, or from country to country and back home again without disruption Reliable external compensation market data on competitive pay level for each major functions

Tools
A standardized performance measurement system that weighs the contribution made by management in a consistent fashion regardless of where the executive is stationed Salary increase guidelines that properly motivate and reward performance and are in line within your worldwide compensation strategic plan A base delivery method that complies with local country laws and still remain integrated with your overall base pay systems

Requirement of an effective IC manager

Strong analytical skills and ability to work with matrices, numbers and trends Proven ability to management a growing organization Ability to work in a fast paced, rapidly changing environment Significant prior recruiting and management experience

Requirements..
Very bright and assertive with the ability to pick up new technologies and assess situation questions in existing international regions and entry into new countries Great people skills at all levels of the company Strong emphasis on team play rather than politics Creative problem solver

Components of IC
Base salary and base pay Indirect monetary compensation (benefit) Fringe compensation including standard benefit Relocation assistance Educational reimbursement for expatriate children Home leave benefit and travel reimbursement Rest and relaxation leave and allowance

components
Equalization benefit : Cost of living allowance Education allowance for children Foreign service premium Emergency leave Club membership Spouse employment Cross cultural training

components
Incentives Stock options Mobility premiums Perquisites Performance related reward

Base salary
It is the amount of money that an expatriate normally receives in the home country it is finally determined after establishing consistent compensation measures between countries that builds credibility both at home and abroad Some multinational companies conduct their own local annual compensation survey which covers all forms of compensation including, cash, short and long term incentives, retirement plans, medical benefit and perquisites

methods
There are various methods for setting base pay US companies use one of the three methods to calculate expatriates base pay : Home country based method Host country based method Headquarters based method

Home country method

This is often most appropriate for expatriatesthe market or going rate of pay for a comparable job in the home country is normally used for setting this rate this method is suitable to an expatriate the assignments are short in duration and local nationals performing comparable jobs receive substantially higher pay

Host country method

This method is based on the host country s pay scale and is suitable when assignments are of long duration the expatriate s base pay will be competitive with other employees base pay in the hose country rather than the counterparts at home

Headquarters based method

This method compensates all employees according to the ay scales used at the headquarter this is suitable for expatriate who move from one foreign assignment to another and rarely work in their home countries

Indirect monetary compensation

Fringe compensation including standard benefits benefits represent an important expatriate s compensation package to bring in a sense of security among expatriates and their families but also makes their living more acceptable and enjoyable at the foreign site some fringe benefits include health benefits, company car, driver, domestic staff and child care, assistance to spouse in finding suitable and acceptable employment, medical, vacation, holidays and emergency leave

indirect
Relocation allowance this component covers expatriates expense to relocate to foreign posts- it typically involves moving, shipping and storage charges that are associated with personal furniture, clothing and other items that the expatriates and his or her family are taking to the new assignment

indirect
Some of the relocation assistance payment Temporary quarters prior to departure because the expatriate s house has been sold or rented Transportation to the foreign post for employees and their families Reasonable expenses incurred by the family during travel

indirect
Temporary quarters while waiting for delivery of the household goods or while looking for suitable housing Moving household goods to the foreign post Storing household goods in US

indirect
Education reimbursement for expatriate s children it is also an integral part of compensation package these cover costs such as tuition, transportation, enrolment fees, books supplies, school uniform, etc. expatriate s typically place their children in private schools designed for english speaking students

indirect
Home leave benefits and travel reimbursement this benefit enables an expatriate to make contact with his family either by calling or taking paid time off in the country to avail this facility, an expatriate should serve in the foreign country for one year or six months if time duration of an expatriate is longer, then he deserves a long leave and vice versa

Indirect..
Equalization benefits these benefits are intended to keep expatriates in the same financial conditions they were in, before accepting an overseas assignment and to reduce any negative aspects of living in a foreign country

indirect
Cost of living allowance (COLA) this is the payment for difference between the home country and overseas assignment the difference is in terms of cost of food, other consumable items, services and housing in the home country and cost of those items in host country

indirect
Housing allowance employers provide expatriate employees with housing and utility allowance to cover the difference between housing and utilities cost in the home and host country some firms provide expatriate with residence during assignment and pay all associated expenses others give predetermined housing allotment each month and let expatriate choose their own residence

indirect
Foreign service premium these are the monetary payments above and beyond regular base pay and typically range between 10% to 30% of base pay FSPs are generally categorized as an incentive bonus for performing the assignment in the host country these premiums generally apply to assignments that extend beyond one year some organizations are now granting expatriates lump sum bonuses in lieu of FSP which are made at the time of expatriation and repatriation

indirect
Hardship allowance this allowance compensates expatriates for their hardships while working in hazardous areas or an area with a poor quality of life employers disperse hardship allowance in small amounts throughout the duration employees deputed to eastern europe, china and some middle eastern countries get this ranges between 10% to 25% of base pay

indirect
Emergency leave paid leave for personal and family emergencies is a component of most expatriates compensation package such emergencies include critically ill family members or their deaths in the foreign postsome companies also provide unpaid emergency leave of absence thereby bearing travel expenses between the destinated countries

indirect
Club membership country club memberships are provided to executives who use such facilities in the performance of their jobs Allowance of spouse assistance some companies may pay an allowance to make up for a spouse s lost income

Indirect..
Cross cultural training it helps in managing expatriate s expectation and creating learning Incentives in recent years, some MNCs have also been designing special incentive programmes for retaining expatriates

Approaches to IC
There are two main options in the area of IC The going rate approach ( also referred to as the market rate approach) The balance sheet approach ( also known as the build up approach)

The going rate approach

The key characteristic of this approach are, the base salary for international transfer is linked to the salary structure on the host country the multinational usually obtains information from local compensation surveys and must decide whether local national expatriates of the same nationality or expatriates of all nationalities will be the reference point in terms of bench marking

Advantages of going rate

This approach is simple and easy for expatriates to understand Expatriates are able to identify with host country, and there is often equality among expatriates of different nationalities There is equality with local nations which is very effective in attracting to a location that pays higher salaries than those received in the home country

disadvantages
There can be variation between assignments for the same employees most probably when we compare an assignment in an advanced economy with one in a developing country and also between assignments in various advanced economies where difference in managerial salaries and the effect of local taxation can significantly influence an employees compensation level using the going rate approach

Disadvantages,,,
There can also be variation between expatriates of the same nationality in different locations A strict implementation can lead to rivalry for assignment to locations that are financially attractive and little interest in locations considered to be financially unattractive

Disadvantages..
The approach can also pose problem upon repatriation when the employees salary reverts to a home country level that is below that of the host country This approach not only creates problem for firms in developing countries but also for firms from many countries where local managerial salaries are well below that of US, which is the world market leader in managerial salaries

The balance sheet approach

This is most widely approach for IC the basic objective is to keep the expatriate whole,i.e., maintaining relativity to PCN colleagues and compensating for the costs of an international assignment through maintenance of home country living standard, plus a financial inducement to make the package attractive this approach links the base salary for PCNs and TCNs to the salary structure of the relevant home country

Balance sheet approach

According to Reynolds, the balance sheet approach to IC is a system designed to equalize the purchasing power of employees of comparable position levels living abroad and in the home country and to provide incentives to offset qualitative difference between assignment locations

outlays
Goods / services home country outlays for items such as food, personal care, clothing, household furnishing, 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 contributes to savings, payments for benefits, pension, social security taxes and so on

Advantages of balance sheet approach

This approach provides equity between foreign assignments and between expatriates of the same nationality Repatriation of expatriates is facilitated by the emphasis on equity with the parent country since expatriate compensation remains anchored to the compensation system in the parent country This approach is easy to communicate to employees

disadvantages
This approach results in considerable disparities both between expatriates of different nationalities and between PCN s and HCN s There are chances of problem when international staffs are paid different amounts for performing the same job in the host location according to their different home base salary This approach can become quite complex to administer in the area of taxation, living costs and differentiating between PCNs and TCNs