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Managing an Supporting International Assignments – Chapter 6

INTERNATIONAL
COMPENSATION POLICIES
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Managing an Supporting International Assignments – Chapter 6

KEY COMPONENTS OF AN
INTERNATIONAL COMPENSATION
PROGRAM
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Base Salary
• Serves as benchmark for primary components
of package – foreign service premium, cost-
of-living, housing allowance
• Basis for in-service benefits and pension
contributions
• May be paid in home or local currency
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Foreign Service Inducement/Hardship

Premium
• Salary premium as an inducement or as
Compensation for any hardship caused by
transfer
• More commonly paid to TCNs than PCNs
• Made in the form of percentage of salary (5-
40% of base pay)
• Differentials are considered (eg. Host country
work week and hence over time)
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Allowances
• Cost of Living Allowance
– Difference on expenditure between home
and foreign country
– Help of specialized organizations like
‘Organization Resource Counsellors’
– Includes Payment of housing, utilities,
personal income tax etc.
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Allowances
• Housing Allowance
– To enable maintenance of home country
living standards
– Company provided houses, fixed HRA
– Assistance in sale or leasing of residence,
payment of closing costs, rent protection,
equity protection etc.
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Allowances
• Home Leave Allowance (one or more trips to
back home to prevent adjustment problems)
• Education Allowance (language
tuition,children education)
• Relocation Allowance ( moving, shipping,
temporary living, purchase of car etc.
• Spouse assistance (an allowance to make up
for the spouse’s lost income)
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Benefits
• Maintaining expatriates in home country
programs in case of no tax deductions

• Option of enrolling expatriates in host country

benefits and/or making up for any difference

• Home country v/s Host country social security

benefits
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Managing an Supporting International Assignments – Chapter 6

APPROACHES TO INTERNATIONAL
COMPENSATION
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The Going 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
• Additional Payments for low-pay countires
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Balance Sheet Approach

• Most common system used by multinational
firms
• Objective: maintenance of home country
living standard + financial inducement
• Focus on home country pay and benefits
• Adjustments to balance additional expenditure
in host country
• Financial incentives(expatriate/hardship
premium) added to make package attractive
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Balance Sheet Approach

• Major categories of outlays
– Goods and Services : home country outlays for food,
personal care , clothing, household furnishings ,
recreation, transportation, medical care
– Housing : cost associated in host country
– Income taxes: parent country and host country
income taxes
– Reserve: contribution to savings, payments for
benefits, pension contributions, investments,
education expenses, social security taxes etc.
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Taxation
• Problems , Issues and Challenges
– Dual tax cost : Expatriates paying taxes in both
home and host country.
– Need to consider personal and corporate taxes in
addition to income tax
– Modifying compensation packages to provide the
most tax-effective, appropriate rewards within the
overall compensation framework
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Taxation
• Issues while considering benefits
– Whether or not to maintain expatriates in home
country programs, particularly if the company
does not receive tax deduction for it
– Whether companies have the option of enrolling
expatriates in host-country benefit programs
and /or making up any difference in coverage
– Whether host-country legislation regarding
termination affects benefit entitlement
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Taxation
• Issues while considering benefits
– Whether expatriates should receive home country
or host country social security benefits
– Whether benefits should be maintained on home
country or host country basis, who is responsible
for the cost, whether other benefits should be used
to offset any shortfall and whether home country
benefit programs should be exported to local
nationals in foreign countries
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Approaches to International Taxation

• Tax equalization
– Firms withhold an amount equal to home country tax
obligation, and pay all taxes in the host country
– By far the more common taxation policy used by
multinationals
– Tax payments equal to liability of home country tax
payer with same income and family status are
imposed on employee’s salary and bonus
– Additional premiums or allowances are paid tax free
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Approaches to International Taxation

• Tax protection
– Employee pays up to the amount of taxes he or she would
pay on compensation in the home country
– Employee is entitled to any windfall received if total taxes
are less in the host country than in the home country
• Ad-hoc
– Each expatriate handled differently , depending upon
individual package agreed to with the firm
• Laissez Faire
– Employees are ‘on their own’ in conforming to host-country
and home country taxation laws and practices
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International living costs data

• Obtaining upto-date information on international
living costs is a constant issue for MNEs
• The MNEs take the services of consulting firms
• These firms conduct regular surveys calculating a
cost-of-living index that is updated in terms of
currency exchange rates
• This data is a very important issue to expatriate
employees and forms the basis of many
complaints if there are updating lags on
compensation package rise
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International living costs data

• MNEs must also respond to unexpected
events such as currency and stock market
crash. For eg (Asian crisis)
• Such events have a dramatic impact on prices
and the cost of living
• MNEs must also decide what to include in the
‘basket-of-goods’ which the consulting firms
use to decide the living costs
 Tentative Conclusions: Patterns in
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complexity

Universal Pay Level Local

•Firm
•Nation
•Group
•Job
•Person