Transcript IHRM PowerPoint Slides for Week 06

INTERNATIONAL HUMAN
RESOURCE MANAGEMENT
Week 6
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
1
Expatriate Compensation & Benefits
Organization’s Compensation Policy
Employment and
Taxation Laws
Compensation
Benefits
Allowances
Political and Social
Environment
18 July 2015
Competitors
IHRM (MBA III)
Economic
Conditions
Standard of Living
Course Instructor: Dr. Aurangzeb Z. Khan
2
Expatriate Costs
• Expatriate costs may pose a multiple-fold expense in
relation to employees who are not sent as expatriates to
foreign destinations, and are usually significantly higher
than the compensation accorded to HCNs and TCNs
Example:
– a Chinese manager with 15 years experience costs
less than USD 70,000 per annum, while
– a US expatriate manager with corresponding
expertise would cost his or her organization USD
300,000 per year
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
3
Goals of an International Organization’s
Compensation Policy (1)
1) Policy should be consistent with the overall strategy,
structure and business needs of the international
organization
2) Policy must work to attract and retain staff in those areas
where the international organization has the greatest
needs and opportunities. As a consequence, the policy
must be competitive and recognize factors such as
incentive for serving in a foreign location, tax
equalization and reimbursement for reasonable costs
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
4
Goals of an International Organization’s
Compensation Policy (2)
3) Policy should facilitate transfer of international
employees in the most cost-effective manner
4) Policy must give due consideration to equity and ease of
administration
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
5
Employee Expectations and International
Organization’s Compensation Policy
 Financial protection in terms of benefits, social security
and cost of living in the foreign location
 Foreign assignment offers opportunities for
advancement through income and/or savings
 Issues such as housing, education of the children and
recreation are addressed
Note that the expectations of the employees often do not
coincide with the interests of the organization
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
6
Key Components of International
Compensation Programme for Expatriates
Base Salary
 The base salary is usually the main component in
international compensation, and is the main benchmark
used for other elements in an expatriate compensation
package, such as bonuses and benefits
 The base salary is either paid in the expatriate’s home or
parent country currency, or in the currency of the
expatriate’s host country
 The base salary can be quite a controversial issue, i.e.
when it is linked to the different home countries of the
respective HCNs and TCNs working in an international
organization
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
7
Key Components of International
Compensation Programme for Expatriates
Hardship Premium
 For expatriate’s (usually PCNs, TCNs) who will
encounter “hardships” caused by the transfer to a foreign
location, determining the appropriate level of payment
can be difficult
 Factors determining the hardship premium, usually
expressed in terms of an expatriate’s base pay, are
typically:
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18 July 2015
Assignment
Actual hardship
Tax consequences
Length of assignment
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
8
Key Components of International
Compensation Programme for Expatriates
Allowances: There are many types of allowances in
an international compensation package:
 Cost of Living Allowance – Payment made to the
expatriate with a view to compensating for differences in
expenditure between the home or parent country and the
host country. Factors such as inflation differentials and
the price level need to be considered. Often, the cost of
living allowance is difficult to determine
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
9
Key Components of International
Compensation Programme for Expatriates
 Housing Allowance – Payment made to the expatriate with
a view to ensuring that he or she can maintain their homecountry living standard in the host country. Alternatively, an
organization may provide housing facilities on a mandatory
or optional basis. Also, support services may be provided to
the expatriate, for example, by helping sell or rent the
expatriate’s house in the home country
 Home Leave Allowance – Payment made to the expatriate
with a view to facilitating their visit back to the home country,
once or twice a year. Home leave enables the expatriate to
renew business, family and social ties, and thus avoid
adjustment problems subsequent to repatriation
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
10
Key Components of International
Compensation Programme for Expatriates
 Education Allowance – Payment made with a view to
supporting the education of the expatriate’s children, i.e.
tuition, language class, school enrollment fees, books and
supplies, transportation to educational establishment, room
and boarding, school uniforms etc. Problems regarding the
level of education required and adequacy of schools in the
host country, and transportation to other localities may pose
significant problems for organizations
 Relocation Allowance – Payment made with a view to
enable the relocation of the expatriate to the assignment
location. Includes moving, shipping, storage costs, subsidies
for purchase of appliances and (possibly) an automobile
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
11
Key Components of International
Compensation Programme for Expatriates
 Miscellaneous Allowances – Depending on the level of
seniority of the expatriate, payments to him or her for club
memberships, sport associations, maintenance of
household staff etc. may be rendered
In addition, the organization may render financial assistance
to the spouse for her or his loss of income as a result of the
transfer of the expatriate
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
12
Key Components of International
Compensation Programme for Expatriates
 Benefits – Support rendered to an expatriate in addition to the
allowances provided. There are several types of benefits,
more prominent examples being:
 Social Security Benefits (home country or host country?)
 Paid Vacations for expatriate and family
 Rest and Rehabilitation leave (especially for expatriates
based in “hardship” assignment locations)
 Emergency Cases (severe illness, death)
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
13
Calculating International Compensation
There are two basic approaches used to
determine an international compensation
package:
The Going Rate Approach
The Balance Sheet Approach
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
14
The Going-Rate Approach
 Based on local market rates
 Relies on survey comparisons
– Local nationals (HCNs)
– Expatriates of same nationality
– Expatriates of all nationalities
 Compensation based on the selected survey comparison
 Base pay and benefits may be supplemented by additional
payments for low-pay countries
 Example: Should a Pakistani bank operating in London use
local British salaries, the salaries other Pakistani competitor
banks in London or the average salary offered by all foreign
banks operating in London as the reference point for the base
salary offered
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
15
Disadvantages of the Going-Rate Approach
DISADVANTAGES
ADVANTAGES
Variation between assignments
for the same employee
Equality with local nationals
Simplicity
Identification with host country
Equity amongst different
nationalities
18 July 2015
IHRM (MBA III)
Rivalry between expatriates
of same nationality in
getting assignments
to some countries
Potential reentry problems in
the home country
Course Instructor: Dr. Aurangzeb Z. Khan
16
Logic of the Balance Sheet Approach
The balance sheet approach to
international compensation is a system
designed to equalize the purchasing
power of employees at comparable
position levels living abroad and in the
home country, and to provide incentives t
offset qualitative differences between
assignment locations
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
17
The Balance Sheet Approach
The balance sheet approach is widely used by
international organizations to determine the compensation
package for expatriates:
 Basic objective is the maintenance of home-country living
standard, plus financial inducement
 Home-country pay and benefits are the foundations of this
approach
 Adjustments to home package to balance additional
expenditure in the host country
 Financial incentives (expatriate / hardship premium) added
to make the package attractive
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
18
Outlays Considered in the Balance Sheet Approach
The balance sheet approach considers four types of outlays which are
incurred by expatriates:
 Goods and services – Outlays incurred in the home country for food, personal
care, clothing, household furnishings, recreation, transportation and medical
care
 Housing – All major costs associated with housing in the host country
 Income Taxes – Parent country and host country income tax expenditures
 Reserve – Contributions to savings, payments for benefits, pension
contributions, investments, education expenses, social security taxes, etc.
Where costs of host country > costs of home country  organization
pays the expatriate to make up the difference
18 July 2015
IHRM (MBA III)
Course Instructor: Dr. Aurangzeb Z. Khan
19
Disadvantages of the Balance-Sheet
Approach
DISADVANTAGES
ADVANTAGES
Equality between assignments
and between expatriates
of the same nationality
Facilitates expatriate
reentry
Easy to communicate
To employees
18 July 2015
IHRM (MBA III)
Can result in considerable
disparities between expatriates
of different nationalities
and between expatriates
and local nationals
Can be quite complex
to administer (e.g. changing
economic conditions,
taxation)
Course Instructor: Dr. Aurangzeb Z. Khan
20