ihrm- module 6
TRANSCRIPT
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Module 6
Ref: Peter J Dow ling IHRMBook
International Compensation
1 M6-International Compensation
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Syllabus
M6-International Compensation2
Forms of compensation and factors thatinfluence compensation policy
Key components of international
compensation
Approaches to international compensation
Compensation practices across the countries
Social security systems across the countries
Global compensation: emerging issues.
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Introduction
M6-International Compensation3
Compensation is not just about paying the employee For MNCs successfully to manage compensation
and benefits requires knowledge of employment and
taxation law, customs, environment and employment
practices of many foreign countries, familiarity withcurrency fluctuations and the effect of inflation on
compensation and an understanding of why and
when special allowances must be supplied and
which allowances are necessary in what countries[awareness about political, economic and social
conditions]
Fixing and managing compensation for an expat is
always complex because they are high cost
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Objectives of International
compensation
M6-International Compensation4
Compensation policy should be consistent withthe overall strategy of MNC
Policy must work to attract and retain competent
staff in the locations where MNC has greatestneeds and opportunities
Policy should facilitate the transfer of international
employees in the most costeffective manner forthe firm
Policy must give due consideration to equity and
easy administration [should be fair and easy to
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Forms of Compensation
M6-International Compensation5
1. Intrinsic & Extrinsic Compensation Intrinsic : non financial related nature of work,
interest in work and career aspects, related to jobsatisfaction of the employee
Extrinsic: financial nature2. Direct & Indirect Compensation
Direct: an employees fixed and variable annualincome
Indirect: consists of all deferred income, pension,insurance, benefits like company car, expenseallowance
Sum of direct and indirect compensation makes
up organizations total compensation program
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Factors influencing compensation
policy
M6-International Compensation6
1. Internal business factors
Margin for wage costs, depends on profit
generated by company
Labour shortage or surplus influences payrates. Labour Shortage-- rise in pay rates,
labour surplus--- fall in wage
Organizational cost strategy
Performance based culture encourage good
or high pay rates for better performance,
means organizations culture influences
compensation structure
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Factors influencing.. Contd.
M6-International Compensation7
2. Purchasing power and prosperity
Level of economy
Economy prosperity and cost of living
3. Social factorsWage bargaining power [national and industry
level]
Labour unions
Cultural/ social factors/ characteristics like
Japan- collectivism culture-group appraisal
Germany- high uncertainty avoidance-performance
related pay will not be much encouraged, theyfocus on fixed salary
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Key components of an
international compensation
M6-International Compensation8
Base Salary
Foreign service
inducement/hardship premium
Allowances
Benefits
Vacations and special leavesBonuses
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1. Base salary
M6-International Compensation9
In domestic context base salary denotes the
amount of cash compensation serving as abenchmark for other compensation elements [like
bonuses, benefits, HRA etc]
For expats it is the primary component of a package
of allowances, many of which are directly related tobase salary [ cost of living allowance COLA, foreign
service premium, housing allowance]
It will be the basis for in service benefits and
pension contributions It may be paid in home or local country currency
Differences may occur in compensation package
depending on whether base salary is linked to the
home country of PCN or TCN, or whether an
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2. Foreign Service Inducement /
Hardship Premium
M6-International Compensation10
PCNs often receive salary premium asan inducement to accept foreign
assignment or as compensation for any
hardship caused by transfer More commonly paid to PCNs than
TCNs
Usually 5 to 40% of base pay will bepaid as Foreign Service Inducement
Payment may vary depending upon
assignment, actual hardship, tax
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3. Allowances
M6-International Compensation11
MNCs generally pay allowances to motivateemployees to accept international
assignments
A. Cost of living allowance[COLA] Payment made to compensate the
differences in cost of living between home
and foreign country
Difficult to determine, so most of the MNCsprefer to take help of agencies or
consultancies who can provide updates and
information to them
It ma also include a ments for utilities
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3. Allowances contd..
M6-International Compensation12
B. Housing Allowance
Objective is to help expat manager to maintain his/herstandard of living in the foreign country
Sometimes accommodations are provided by MNC, it
can be optional or mandatory
Are often paid on either an assessed or an actualbasis
This can be a fixed allowance or some portion of
income out of which actual housing costs are paid
C. Home leave allowancesMany employers cover the expense of one or more
trips back to the home country each year
Expats will get opportunity to meet family, friends and
relatives, and can build up their morale level
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3. Allowances contd..
M6-International Compensation13
D. Education Allowances
Allowances for expats children education includes
tuition fees, enrolment fees, books, transportation,
room, board and uniforms etc
E. Relocation Allowances
Covers moving, shipping and storage charges, car
expenses etc
F. Spouse Assistance
This will be given to offset income lost by an expatsspouse as a result of relocating abroad
Alternative to this compensation, MNC can also
provide employment opportunities abroad by
offering job research assistance or in their foreignsubsidiar office
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4. Benefits
M6-International Compensation14
Ex: pension plans
It is very difficult to determine It comprise approximately 1/3rd of compensation
package
Issues when considering benefits
1. Whether or not to maintain expatriates in home-country programs, particularly if the firm does not
receive a tax deduction for it.
2. Whether firms have the option of enrolling
expatriates in host-country benefit programsand/or making up any difference in coverage.
3. Whether expatriates should receive home-country
or host-country social security benefits.
Most US PCN remain under their home country
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M6-International Compensation15
5. Apart from all these, MNCs also give
vacations and special leaves to
expatriates
6. Bonuses
There are three approaches to providebonuses;
A percentage is added to base pay
ranging from 10% to 30% of base pay
Lump sum payment at the beginning or
end of foreign assignment
or combination of first two
Approaches to International
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Approaches to International
compensation
M6-International Compensation16
There are two main options in the area ofinternational compensation
Going Rate Approach [also known as Market
rate App roach]The Balance Sheet Approach [also known as
Bu i ld up Approach]
Going Rate Approach[Market Rate
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Going Rate Approach[Market Rate
Approach]
M6-International Compensation17
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
MNC obtains information from localcompensation surveys
Base pay and benefits may be supplemented by
additional payments for low-pay countries
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Contd..
M6-International Compensation18
For ex:
Japanese bank operating in New York would need
to decide whether its reference point would be
Local US salaries or
Other Japanese competitors in New York or
All foreign banks operating in New York
If location is in a low pay country, MNC usuallyadds additional benefits and payments with base
pay.
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Merits & Demerits of Going Rate
Approach
M6-International Compensation19
Advantages
Equality with local
nationals Simplicity
Identification with host
country
Equity amongst
different nationalities
Disadvantages
Variation between
assignments for sameemployee
Variation between
expatriates of same
nationality in differentcountries
Potential re-entry
problems
a ance ee or u p
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a ance ee or u pApproach
M6-International Compensation20
Objective is to keep the expatriate whole[maintaining home country living standard
plus financial inducement to make package
attractive]
Home country pay and benefits arefoundations of this pay
Adjustments to home package to balance
additional expenditure in host country
Financial incentives are added
Most common system in usage by MNC firms
Expats will not suffer from material loss
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Four Balance Sheet Approach categories
M6-International Compensation21
1. Goods and serv ices home-country
outlays for items such as food, personalcare, clothing, household furnishings,
recreation, transportation and medical care.
2. Hous ing the major costs associated withhousing in the host country.
3. Incom e taxes parent-country and host-
country income taxes.
4. Reserve contributions to savings,payments for benefits, pension contributions,
investments, education expenses, social
security taxes, etc.
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Merits & Demerits of balance Sheet
Approach
M6-International Compensation22
xpa r a e ompensa on or s ee
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xpa r a e ompensa on or s eesample
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International taxation
M6-International Compensation24
There are two approaches for international
taxation
1. Tax protection
In this approach, the company reimburses theexpatriate for the difference, if the actual home
tax plus the host country tax is greater than the
hypothetical tax calculation. If the two are less than the hypothetical tax
calculation, the expatriate gets to keep the
difference.
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International Taxation contd..
M6-International Compensation25
2. Tax equalization
In this approach the company pays both the home
and host country taxes for the expatriate.
The company calculates the hypothetical tax andmakes the deductions from the person's paycheck
on that basis.
If the actual tax is less, the company reimburses
the expatriate for the over-deduction.
If the actual tax is more than has been deducted,
then the expatriate reimburses the company for
the difference.
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International living costs data
M6-International Compensation26
MNCs using the balance sheet approach must
constantly update compensation packages with newdata on living costs, which is an ongoing
administrative requirement
There is also much debate about what should be in
the basket of goods which consulting firms use asthe basis for calculating living costs around the world
For example the Swiss Bank UBS uses the Big Mac
Index to measure the living costs around the world
According to the Index, it takes more than 3 hours forthe average worker in Nairobi to earn enough for a Big
Mac. In Los Angeles, Tokyo, the global burger can be
bought for a mere 10 minutes effort.
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M6-International Compensation27
Range of working times required to buy one Big Mac
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Compensation practices across the
countries
M6-International Compensation28
INDIA
Basic wage corresponds with Fair Wages
Committee [1948] and 15th labour conference [1957]
recommendations
Criteria for determining basic wage are: skills,
experience needed for job, difficulty of work [both
mental and physical], training needed,
responsibilities involved and hazardous nature of job
DA is linked with AICPA [All India Consumer Price
Index
Government has set up Wage Boards, Pay
Commissions for fixing & revising wages,
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US
M6-International Compensation29
Basic compensation package comprises of a base
salary, a variable performance linked bonus, long term
cash incentives, compulsory benefit contributions andvoluntary benefit contributions
During the fiscal year salary adjustments are warranted,
these are known as interim increases & generally
classified into 3 ways1. Administrative oversight: an adjustment to an
individuals pay, frequently occurring shortly after the
effective date of annual merit increase
2. Alignment: is used to adjust pay of individuals whosesalary is low in comparison to pay of similarly
performing employees within the peer group
3. Retention: is used to reward employees who are
critical to the success of an organizations mission or a
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Russia
M6-International Compensation30
Having a good fixed salary is important in
compensation package The optimal compensation package combines
bonus and non monetary benefits
In most cases bonus varies 20% to 40% of total
salary
The most common type of bonus is the payment
of thirteen month ofsalary, if certain objectives
have been achieved by the companyApart from above, Russians have been used to
receive non-monetary benefits such as good
lunches, medical insurance, life insurance and so
on
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Japan
M6-International Compensation31
Japan has seniority based wage system, which
has 2 featuresThe amount of pay goes up according to the length
of service and age
Wages are not set separately for individual jobs
Bonuses are paid in summer and winter
Allowances are paid when worker leaves the
company
Basic salary is determined according to job relatedqualifications and competence, ranks within a job
category
Pay hikes on base salary are given every year in
April
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Saudi Arabia
M6-International Compensation32
In addition to base monthly salaries, companies
provide benefits and allowances to their Saudiand expatriate employees
Includes housing, food, auto allowances, vacation
tickets to home country, school fees etc
Some benefits are mandated by Saudi Labour
Law and others are granted by discretion of
company
Apart from this, bonuses will be provided
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China
M6-International Compensation33
A nationally unified wage system was structured in
1956 for both blue and white collar employees Under this system, there were 8 grades for workers,
15 grades for technical person and 25 grades formanagers and administrative personnel
Reform of compensation system began at enterpriselevel
Enterprise Law was issued in 1988 and relatedregulations during 1990s provided separation of an
enterprise from its controlling authority so thatenterprise had autonomy and incentives
A state regulated wage systems have now replacedby diversified wage packages with more focus onenterprise profitability and individual performance
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Soc ial Securi ty Schemes
M6-International Compensation34
According to International LabourOrganization [ILO], social security
is security furnished by the society
through appropriate organization
against certain risks to which its
members are exposed. The risksare sickness, maternity, old age
anddeath
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Contd..
M6-International Compensation35
Scope of social security programs differs from country to
country and they have 4 common features in common:
1. They are statutorily established by the government
2. They provide some form of payment to individuals to
compensate part of the lost income due to contingencies
such as unemployment, maternity, injury at work etc.
3. Tripartite financing [(government)treasury, financial
institution and bank] has been accepted by many countries
as a mechanism for financing the social security insurance
system
4. Benefits of services are provided in 2 ways; Social insurance to contributors during old age, sickness,
disablement etc
Social assistance, non-contributory benefits towards the
maintenance of children, women, aged, disabled etc
oc a ecur y c emes n eren
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oc a ecur y c emes n eren countr ies
M6-International Compensation36
Germany
Wage earners come under compulsory insurancethrough Wage Earners Sickness Insurance Act,
1883, the Accident Insurance Act 1884, and Invalidity
and Old age Protection 1889.
The statutory sickness insurance scheme provides
benefit in the form of early detection of diseases,
sickness benefits, hospital treatment, etc
Under the Occupational Safety Act 1974, employersare required to appoint industrial medical officers and
occupational safety specialists
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schemes
M6-International Compensation37
The Workmens Compensation Act of 1987 made
earnings related compensation, payable to those whowere injured at workplace.
The Old Age Pensions Act of 1908 made provision of
means-tested pension, to people aged over 70
The 1934 Unemployment Act introduced to providebenefits for those unemployed but not covered by
national insurance
Social Security and Housing Benefits Act of 1982,
provides contributory benefits like retirement pensions,unemployment benefits, widows benefit, sickness
benefit and non contributory benefits like guardians
allowance, child benefit etc
Social security expenditure is 10% of gross national
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US: Social security schemes
M6-International Compensation38
Social security system was introduced in 1935 as a
program of insurance protection for the workers and his
family against complete loss of income through old age
or death
In 1950 it was extended to cover farm and household
employees and other persons
The following social security programs provide financial
security to workers and their families;
The Old Age and Survivors Insurance (OASI) program
The Disability Insurance (DI) programThe Hospital Insurance (HI) program
The Supplementary Medical Insurance (SMI)
There are union negotiated welfare plans which are
financed by the employers
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Japan: Social Security Schemes
M6-International Compensation39
Being the first country to establish a social
insurance system, Japan adopted HealthInsurance Scheme for employees of large
companies in 1992, followed by national, health
insurance in 1938, seamans insurance in 1939
and employees pension program in 1941
The contributory employees pension program
covers regular employees. The national pension
program has a contributory as well as a noncontributory segment. Contributory segment has a
compulsory and voluntary part. A number of
pension programs also exist for special groups
such as civil servants, seaman, and private school
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Contd..
M6-International Compensation40
Japan has 2 main health insurance programs: one
is Compulsory Employees Health Insurance Plan
for workers employed in manufacturing, mining and
retail establishments with 5 or more employees .
The second one is National Health Insurance Plan,
which covers residents not insured as a result of
their employment. It is designed to cover the oldest,
poorest and most sick segments of Japanese
society
Since 1947, Japan has had unemployment
insurance, the law was amended in 1975 to make
the coverage compulsory for all industrial and
commercial firms with more than 5 employees.
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India: social security schemes
M6-International Compensation41
The social security legislation in India regarding theindustrial field consists of following enactments
Workmens Compensation Act 1923
Minimum Wages Act 1948
Payment of Wages Act 1936
Industrial Disputes Act 1947
Employees Provident Fund and Miscellaneous
Provisions Act 1952
Payment of Bonus Act 1965
Maternity Benefit Act 1961
The Payment of Gratuity Act, 1972
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Issues
M6-International Compensation42
Skill based pay: as technology progress newer skills are
required. Skill based pay can help organizations pay itspeople based on skills that are currently in need. It formsa part of base pay, some use it as a contingent pay.
Broad banding: it can be defined as delayering of paystructure. It involves consolidation of the existing paygrades into a small number of wide bands. Thisconsolidation results in broad minimum to maximumspread attached to it. Such pay structures are bettersuited to the needs of todays flexible, flatter andperformanceoriented organizations
Variable pay: it is a financially measurable reward paid to
an individual based on his or her overall performance. Team rewards: team rewards provide an opportunity for
each team member to receive a bonus based on theoutput of the team as a whole. Team incentives are mostappropriate when jobs are highly interrelated.
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M6-International Compensation