ch-12 (international compensation)
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International Compensation
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International Compensation
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International Compensation
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12The nature of the assignment of the employee to a large extent determines the
method of compensation. These terms of assignments are:
1. Short-term assignment, which may be for a relatively short period, such as the
case of a feasibility study, etc. This type of assignment does not usually
exceed six months. Families also do not generally accompany.
2. Long term assignment, if the assignment is more than six months or one year.
It will usually result in employee's moving along with his family.
3. Permanent assignment is when an employee signs a permanent employment
contract with a foreign subsidiary, the contract is usually meant for a fixed
period of time of longer duration.
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Problems In Compensation ManagementMNCs face lot of difficulties in evolving compensation package in view of the
following factors:
Economic condition of the host country.
Employment condition of the host country.
Taxation laws of the host country.
Currency fluctuation in the host country.
Inflation situation in the host country.
The result is that expatriates cost three to four times more than the employees of
the host country.
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Objectives Of The Compensation1. Attract and retain employees qualified for service abroad.
2. Facilitate transfers between foreign affiliates and between home country and
foreign affiliates.
3. Establish and maintain a consistent and reasonable relationship betweencompensation of all of the employees of any affiliate, whether posted at home
or abroad and between affiliates.
4. Arrange reasonable compensation, in the various locations, in relation to the
practices of leading competitors.
5. Compensation for reasonable foreign services, tax equalization, reimbursement
of reasonable cost.
6. Be cost-effective.
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Elements Of Expatriate's Compensation PackageThere are five basic elements in a typical expatriate's compensation package.
These include:
1. Basic pay
2. Benefits
3. Allowances
4. Incentives and
5. Tax reliefs.
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Expatriate Housing Costs in Foreign Cities
Location Estimated Yearly Housing Costs
1. Beijing $158,400
2. Hong Kong $156,000
3. Tokyo $153,600
4. Shanghai $120,0005. Moscow $108,000
6. Seoul $102,000
7. London $ 93,600
8. Ho Chi Minh City $ 86,400
9. Singapore $ 85,20010.New York $ 72,000
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Cost Estimates for Goods and Services in Various Cities of the World
Cost of Living: New York - 100, December, 1996
City Ratings
Tokyo 175
Hong Kong 125
Moscow 125Singapore 120
Taipei 115
Seoul 110
Tel Aviv 105
London 104
Beijing 101
New York 100
Athens 95
Sao Paulo 93
Buenos Aires 90
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Lisbon 89Jakarta 88
Bangkok 87
Kuala Lumpur 86
Santiago 78
Istanbul 77
Bogota 75
Warsaw 73
Manila 70
Prague 67
Mexico City 60
Johannesburg 58
Budapest 57
Caracas 56
New Delhi 40
Source: "Cost of Living Across the Globe," The Economist (December 14, 1996)
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Social Security Contributions by Employers and Employees
Country Employer contributionrate (%)
Employee contributionrate (%)
Total contribution rate(%)
Argentina 7.81 11.00 18.81
Australia 0.00a 0.00a 0.00a
Belgium 11.21 8.65 19.86
Brazil 20.00 11.00 31.00
Canada 4.30 4.30 8.60
China (Hong KongSAR)
5.00 5.00 10.00
China (Shanghai) 43.50 16.00 59.50
France -b -b -b
Germany 12.80 12.80 25.60
Italy 30.94 9.89 40.83
Japan 8.68 8.68 17.36
Malaysia 1.75 0.50 2.25
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Mexico 29.00 4.00 33.00New Zealand 0.00a 0.00a 0.00a
Singapore 16.00 20.00 36.00
South Africa 0.00a 0.00a 0.00a
Spain 30.60 6.35 36.95
Sweden 22.91 7.00 29.91
Switzerland 5.05 5.05 10.10
Taiwan 5.00 1.00 6.00
Thailand 3.00 3.00 6.00
The Netherlands 0.00a 29.40 29.40
UK 11.90 10.00 21.90
USA 6.20 6.20 12.40
Venezuela 9.00 4.00 13.00
a When the contributions are at zero, they are funded out of the General Tax Revenue and range from zero to very high
values
b Varies
Source: Adapted from Towers Perrin, Worldwide Total Remuneration 2001-2002
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Maximum Marginal Tax Rates Around the World
Country 1985 Rate 1988 Rate
Argentina 45.0% 38.3%
Australia 49.0% 49.0%
Belgium 72.0% 70.8%
Canada 34.0% 29.9%
France 65.0% 56.8%
Germany 56.0% 56.0%
Hong Kong 17.5% 16.5%
Japan 70.0% 60.0%
Korea 55.0% 55.0%
Netherlands 72.0% 72.0%
Singapore 40.0% 33.0%
Switzerland 13.8% 11.5%
United Kingdom 60.0% 40.0%
United States 50.0% 33.0%
Source: Internal Dimensions of Human Resource Management by P.J. Dowling and R.S. Schuler
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There are generally three approaches to international compensation. They
are:
i. The budget system
ii. The local growing rate system.
iii. The balance sheet or home made system.
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Balance Sheet Approach
RelocationBonus
$1,500Taxes
Equivalent salary andallowances, host country
$10,200
Base country salary$7,000
$1,000
Housing
$700
Goodsand
Services
Reserve
Taxes$2,000
Housing$2,000
Goodsand
Services$2,000
Reserve$1,000
Basecountrycurrency
Allowancespaid by company
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Critical Assessment of the Balance Sheet Approach
Some of the disadvantages of the Balance Sheet approach are that - 1. It can result
in great disparity between expatriate of different national and between expatriates of
local nationals, 2. At times, it can be quite complex to administer.
But, its advantages are many more. Some of them are as follows:
1. It ensures equity between assignments.
2. It ensures equity between expatriates of same nationality.
3. It facilities expatriate's re-entry.
4. It is easy to communicate to the employees.
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Terms and Conditions for Expatriate Employees
Some of the terms and conditions decided by management for expatriate
employees sent abroad for assignments/projects are:
Period of posting
Alone/family
Pay and allowances
Medical facilities during posting abroad
Housing
Winter clothing/outfit allowance in lumpsum (half in foreign currency to be paid)
Transfer grantequal to one month's salary
Travel to and fro Joining time before leaving.
Leave
Home leave passage
Indian payments
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Alternatives to Balance Sheet Approach
The balance sheet approach was refined in the 1960s and 1970s when most
expatriates were technical employees of US oil companies. But the business
environment and the reasons for expatriate assignments have changed since then.
Consequently, many employers are exploring changes.
Expatriate Systems Objectives? Quel Dommage!
Talk to experts in international compensation, and you soon get into
complexities of taxes, exchange rates, housing differences, and the like.
Expatriate compensation systems are forever trying to be like Goldilocks's
porridge: not too high, no too low, but just right.
The expatriate pay must be sufficient to encourage the employee to take the
assignment yet not so attractive that local nationals will feel unfairly treated or
that the expatriate will refuse any future reassignments.
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Milkovich and Bloom have argued that strategic flexibility is necessary in
international compensation and that nationality or "national systemsthinking.
This model group forms total compensation into three sets: core, customize
and choice.
Specific practices in the core section may vary according to market and local
conditions but must be consistent with the core policies. The crafted customize set of compensation elements assumes that regional
managers have discretion to choose from a menu of compensation forms.
While alternatives in the choice set offer flexibility for employees to select
among various forms of compensation.
International compensation policies generally follow three alternatives:
1. A fixed value in all countries.
2. A relative value in all countries.
3. A relative market position in all countries.
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Example of Employment Package for 'Internationally Compensated Staff'
Currently
disposable
Cash
Annual fixed income
Average income usually
paid in the trade
Netherlands: DFL 100,000
Denmark: DKK 395,000
Britain: 28,000
Variable income
15 per cent of the fixed
income if targets are met
Health assurance allowance
average allowance usually
paid in the host country
Professional expenses
Telephone allowance
full reimbursement of all
costs; tax consequences to be borne by
the employee
Company car
Point of reference are cars in the same
range as make X type Y
Personal expense allowance
the same net allowance
equivalent to DFL 1,500 in all
countries
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Commitments
Deferred incomePension
supplement to state pension
upto a maximum of 65
per cent of the last earned
income; the pension age is 65
InsuranceSupplement to sickness benefits upto the
full fixed income during the first year of
illness; supplement upto 85 per cent
in the second year
Disability
After the third year of illness, benefits will
be supplemented upto 65 per cent of the
income in all countries, regardless of state
benefits
Widows/widowers pension the payment
to widows/widowers amounts to 65 percent of the old age pension
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12Comparing the Issues Involved in Using Different Types of Employees
Type of Employee
Issue Home CountryExpatriate
Local Nationals Third CountryNational
Cost Expensive Inexpensive Expensive
Skills High Low Moderate
Loyalty Moderate High Low
Availability Some Many Few
Compensation High/Complex Relatively Low ModerateCost/Complex
Interest in assignment Low High High
Recruited by others No Yes YesTrust Moderate High` Low
Source: M. Harvey "Designing a Global Compensation System: The Logic and a Model," Columbia Journal of World
Business (Winter 1993): 57-72
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