Transcript Chapter 6

Chapter 8
International
Compensation
IHRM, Dr. N. Yang
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Chapter Objectives
•
•
In the introductory chapter we described IHR managers as
grappling with complex issues:
 Manage more activities from a broader perspective,
 Be more involved in the lives of their far-flung
employees
 Balance the needs of PCNs, HCNs and TCNs
 Control exposure to financial and political risks and
 Be increasingly aware of and responsive to host-country
and regional influences.
In this chapter, all of these issues and concerns are brought
out in a discussion of compensation issues.
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Chapter Objectives
 Examine the complexities that arise when firms move from
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compensation at the domestic level to compensation in an
International context
Detail the key components of international compensation
Outline the two main approaches to international
compensation, and the advantages and disadvantages of
each approach
Introduce a third emerging approach: local plus
Examine the special problem areas of taxation, valid
international living cost data, and the problem of managing
TCN compensation
Examine the recent developments and global compensation
issues.
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Introduction
 Global compensation managers increasingly deal
with two areas of focus.


They must manage highly complex and turbulent local
details, while
Concurrently building and maintaining a unified,
strategic pattern of compensation policies, practices
and values.
 Domestically, such as in the U.S., how would you
determine a compensation package?

What factors to consider?
 Internationally?
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Employee Compensation
Intrinsic
Extrinsic
Participate in
decision making
Financial
Greater job
freedom and
discretion
Performance
-based
More
responsibility
Piecework
More interesting
work
Opportunities
for personal
growth
Diversity of
activities
Commission
Incentive
plans
Performance
bonuses
Merit pay
plans
Implied
Membershipbased
Cost-of-living
increase
Labor market
adjustment
Time-in-rank
increase
Profit sharing
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Non-Financial
Explicit
Membershipbased
Preferred office
finishing
Preferred lunch
hours
Protection
programs
Assigned parking
spaces
Pay for time
not worked
Services and
perquisites
Preferred work
assignments
Business Cards
Own secretary
Impressive titles
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Per Capita Incomes by Metropolitan Area
(U.S. Average: $29,469)
TOP 10
1
San Francisco, Ca
$57,414
6
West Palm Beach,
Boca Raton, Fla
$41,007
2
San Jose, Ca
$55,157
7
Trenton, NJ
$40,954
3
New Heaven, Bridgeport,
Stamfort, Danbury,
Waterbury, Conn.
$46,542
8
Seattle, Bellevue,
Everett, Wash
$40,686
4
Bergen, Passaic, NJ
$42,726
9
Nassau, Suffolk, NY
$40,353
5
Middelsex, Sommerset,
Hunterdon, NJ
$42,392
10
Naples, Fla
$40,121
Source: U.S. Department of Commerce Bureau of Economic Analysis, The Mercury News, August 4, 2002
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Per Capita Incomes by Metropolitan Area
(U.S. Average: $29,469)
BOTTOM 10
1
McAllen, Edinburg, Mission,
Texas
$13,344
6
Auburn, Opelika,
Ala.
$18,484
2
Brownsville, Harlingen, San
Benito, Texas
$14,906
7
El Paso, Texas
$18,535
3
Laredo, Texas
$15,114
8
Merced, CA
$18,536
4
Yuma, Ariz.
$16,002
9
Provo, Orem, Utah
$19,128
5
Las Cruces, N.M.
$17,321
10
Pine Bluff, Ark.
$19,826
Source: U.S. Department of Commerce Bureau of Economic Analysis, The Mercury News, August 4, 2002
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U.S. Metropolitan Area Per Capita Income
Inflation Adjusted by Metropolitan Consumer Price Indexes
Bottom 10
Rank
Metropolitan Areas
2000 in 2009$
2009
Change
19
Denver
46,205
45,982
-0.5%
20
Miami-West Pallm Beach
41,937
41,352
-1.4%
21
Riverside-San Bernardino
30,600
29,930
-2.2%
22
Portland
39,703
38,728
-2.5%
23
Tampa-St. Petersburg
38,048
36,780
-3.3%
24
San Francico
61,831
59,696
-3.5%
25
Dallas-Fort Worth
41,575
39,514
-5.0%
26
Detroit
40,412
37,541
-7.1%
27
Atlanta
39,775
36,482
-8.3%
28
San Jose
68,185
55,404
-18.7%
Unweighted Average
43,801
43,700
-0.2%
Source: Wendell Cox, 2011; http://www.finfacts.ie/img/cost_of_living_cities_2013_Finfacts_full.jpg
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U.S. Metropolitan Area Per Capita Income
Inflation Adjusted by Metropolitan Consumer Price Indexes
Top 10
Rank
Metropolitan Areas
2000 in 2009$
2009
Change
1
Baltimore
43,729
47,962
9.7%
2
Pittsburgh
39,024
42,216
8.2%
3
Washington
53,753
56,442
5.0%
4
Philadelphia
43,572
45,565
4.6%
5
St. Louis
38,636
40,342
4.4%
6
Milwaukee
40,028
41,696
4.2%
7
Los Angeles
41,382
42,818
3.5%
8
Houston
42,232
43,568
3.2%
9
Cleveland
38,396
39,348
2.5%
10
Chicago
42,761
43,727
2.3%
Source: Wendell Cox, 2011; http://www.finfacts.ie/img/cost_of_living_cities_2013_Finfacts_full.jpg
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International Compensation
Complexities
 Pay package and approaches
Base pay and benefits
Taxes
Cost of living
 Housing
 Safety
 Transportation
 Education of children
 Length of stay
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International Compensation
 Increasingly seen as a mechanism to
develop and reinforce a global corporate
culture
 A primary source of corporate control
 Explicitly linking performance outcomes
with associated costs
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Objectives of International
Compensation
Should be consistent with the overall strategy, structure
and business needs of the MNE.
Must be sufficient to attract and retain staff in the areas
where the MNE has the greatest needs and
opportunities, hence must be competitive and recognize
factors such as incentive for foreign service, tax
equalization and reimbursement for reasonable costs.
Should facilitate the transfer of international employees
in the most cost-effective manner for the firm.
Must give due consideration to equity and ease of
administration.
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Expatriate Expectations
Financial protection in terms of benefits, social
security and living costs in the foreign location
Opportunities for financial advancement through
income and savings
Issues such as housing, education of children,
home leave, and recreation to be addressed in the
policy
Career advancement and repatriation.
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Requirements for Successful International
Compensation and Benefits
 Knowledge of employment and taxation law, customs,
environment and employment practices of many
foreign countries
 Familiarity with currency fluctuations and the effect of
inflation on compensation, and
 A good understanding of why and when special
allowances must be supplied and which allowances
are necessary in what countries
All within the context of shifting political, economic
and social conditions.
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Key Components of International
Compensation
The area of international compensation is
complex, primarily because multinationals must
cater to three categories of employees:
 PCNs, TCNs and HCNs
 Key Components:
 Base salary
 Foreign services inducement
 Hardship premium
 Allowances
 Benefits
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Base Salary
 In a domestic context, base salary denotes the amount of cash
compensation serving as a benchmark for other compensation
elements (such as bonuses and benefits).
 For expatriates, many allowances are directly related to base
salary (e.g. foreign service premium, cost-of-living allowance,
housing allowance)
 It is the basis for in-service benefits and pension contributions –
may be paid in home or local-country currency.
 The base salary is the foundation block for international
compensation whether the employee is a PCN or TCN.
 Major differences can occur in the employee’s package depending
on whether the base salary is linked to the home country of the
PCN or TCN, or whether an international rate is paid.
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Foreign Service Inducement and
Hardship Premium
 PCNs often receive a salary premium as an inducement
to accept a foreign assignment or as compensation for
any hardship caused by the transfer.
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The definition of hardship, eligibility for the premium and amount
and timing of payment must be addressed.
In cases in which hardship is determined, U.S. firms often refer
to the U.S. Department of State’s Hardship Post Differentials
Guidelines to determine an appropriate level of payment.
 Foreign service inducements are usually made in the
form of a percentage of salary, 5-40% of base pay.

Such payments vary, depending upon the assignment, actual
hardship, tax consequences and length of assignment.
 More commonly paid to PCNs than to TCNs.
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Allowances
 Multinationals generally pay allowances in order to
encourage employees to take international assignments
and to keep employees ‘whole’ relative to home standards.
 Establishing an overall compensation policy can be very
challenging, partly because of the various forms of
allowances, such as:
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COLA – Cost-of-living allowance
Housing allowance
Relocation allowance
Education allowance
Home leave allowance
Spouse assistance
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Cost-of-living Allowances (COLA)
 COLA receives the most attention, to compensate for differences
in expenditures between the home country and the foreign
country (e.g., to account for inflation differentials, currency
fluctuations, etc.).
 COLA may also include payments for housing and utilities,
personal income tax or discretionary items.
 The provision of a housing allowance implies that employees
should be entitled to maintain their home-country living standards
(or, in some cases, receive accommodation that is equivalent to
that provided for similar foreign employees and peers).
 International comparison of cost of living is difficult and can be
problematic.
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Mercer Cost of Living Survey – Worldwide
Rankings 2012
2012
2011
City
Country
1
2
TOKYO
JAPAN
18
15
OSLO
NORWAY
2
1
LUANDA
ANGOLA
19
30
PERTH
AUSTRALIA
3
6
OSAKA
JAPAN
20
12
LIBREVILLE
GABON
4
4
MOSCOW
RUSSIA
21
17
COPENHAGEN
DENMARK
5
5
GENEVA
SWITZERLAND
22
19
SEOUL
SOUTH KOREA
6
7
ZURICH
SWITZERLAND
23
34
CANBERRA
AUSTRALIA
6
8
SINGAPORE
SINGAPORE
24
31
BRISBANE
AUSTRALIA
8
3
N'DJAMENA
CHAD
25
18
LONDON
UNITED KINGDOM
9
9
HONG KONG
CHINA
26
44
KHARTOUM
SUDAN
10
11
NAGOYA
JAPAN
27
46
ADELAIDE
AUSTRALIA
11
14
SYDNEY
AUSTRALIA
28
29
ST. PETERSBURG
RUSSIA
12
10
SÃO PAULO
BRAZIL
29
51
CARACAS
VENEZUELA
13
12
RIO DE JANEIRO
BRAZIL
30
43
SHENZEN
CHINA
14
16
BERN
SWITZERLAND
31
38
TEL AVIV
ISRAEL
15
21
MELBOURNE
AUSTRALIA
31
38
GUANGZHOU
CHINA
16
21
SHANGHAI
CHINA
33
32
NEW YORK CITY
UNITED STATES
17
20
BEIJING
CHINA
34
23
NIAMEY
NIGER
2012
2011 City
Country
Source: Mercer Cost of Living Survey 2012, Mercer international basket,
including rental accommodation costs, base city New York
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Relocation Allowances
 Usually cover moving, shipping and storage charges,
temporary living expenses, subsidies regarding
appliance or car purchases (or sales) and down
payments or lease-related charges.
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
Allowances regarding perquisites (cars, club memberships,
servants and so on) may also need to be considered (usually
for more senior positions, but this varies according to
location).
These allowances are often contingent upon tax-equalization
policies and practices in both the home and the host
countries.
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Education Allowances
 Expatriates’ children are an integral part of
any international compensation policy.

Allowances for education can cover items such
as tuition, language class tuition, enrolment fees,
books and supplies, transportation, room and
board, and uniforms.

PCNs and TCNs usually receive the same
treatment concerning educational expenses.
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Allowances for Spouse Assistance
 To help guard against or offset income lost by
an expatriate’s spouse as a result of
relocating abroad.

Some firms may pay an allowance to make up for
a spouse’s lost income.

U.S. firms are beginning to focus on providing
spouses with employment opportunities abroad,
either by offering job-search assistance or
employment in the firm’s foreign office (subject to
a work visa being available).
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Alternative Allowances
 Housing alternatives may include:
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

Company-provided housing, either mandatory or optional
A fixed housing allowance
Or assessment of a portion of income, out of which actual
housing costs are paid.
 Home leave alternatives:

Allow foreign travel rather than returning home

Expatriates may become more homesick than others who
return home for a ‘reality check’ with fellow employees and
friends.
 As a firm internationalizes, formal policies become
more necessary and efficient.
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Benefits
 In addition to the already discussed benefits,
multinationals also provide vacations and special
leave.
 Annual home leave usually provides airfares for families to
return to their home countries.
 Rest and rehabilitation leave, based on the conditions of the
host country, may provide the employee’s family with airfares
to a more comfortable location near the host country.
 Emergency provisions are available in case of a death or
illness in the family.
 Employees in hardship locations often receive additional
leave expense payments or rest and rehabilitation periods.
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Issues Concerning Benefits
 Very difficult to deal with country-to-country, as national
practices vary considerably:

Transportability of pension plans

Medical coverage

Social security benefits
 Firms need to address many issues, including:

Whether or not to maintain expatriates in home-country benefit
programs, particularly if the firm does not receive a tax deduction for it.

Whether firms have the option of enrolling expatriates in host-country
benefit programs and/or making up any difference in coverage.

Whether expatriates should receive home-country or host-country
social security benefits.
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Issues Concerning Benefits (cont.)
 Laws governing private benefit practices differ from
country to country, and firm practices also vary.
 In some countries, expatriates cannot opt out of
local social security programs. In such
circumstances, the firm normally pays for these
additional costs.

European PCNs and TCNs enjoy portable social security
benefits within the European Union.
 Multinationals have generally done a good job of
planning for the retirement needs of their PCNs, but
this is generally less the case for TCNs.
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Approaches to International
Compensation
 Two main options in the area of international
compensation:
Going Rate Approach (also referred to as the
Market Rate Approach)
Balance Sheet Approach (also known as the
Build-up Approach).
 A third emerging approach
Local Plus typically in the Asia Pacific region
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Table
8.1
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
 Base pay and benefits may be supplemented by
additional payments for low-pay countries.
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Table
8.2
Advantages and Disadvantages of the
Going Rate Approach
 Advantages
 Equity with local
nationals
 Simplicity
 Identification with
host country
 Equity among
different nationalities
 Disadvantages
 Variation between
assignments for
same employee
 Variation between
expatriates of same
nationality in different
countries
 Potential re-entry
problems
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Table
8.3
The Balance Sheet Approach
 The basic objective is to ‘keep the expatriate whole’
through maintenance of home-country living standard
plus a financial inducement to make the package
attractive.

Home-country pay and benefits are the foundations of
this approach
 Adjustments to home package to balance additional
expenditure in host country
 Financial incentives (e.g., expatriate/hardship premium)
added to make the package attractive
 Most common system in usage by multinational firms
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Major Categories Incorporated in the
Balance Sheet Approach
 Goods and services
 Home-country outlays for items such as food, personal care,
clothing, household furnishings, 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
 Contributions to savings, payments for benefits, pension
contributions, investments, education expenses, social security
taxes, etc.
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A Typical Balance Sheet
Income
Taxes
Additional Costs
Paid by Company
Home- and
Host-Country
Income Taxes
Income
Taxes
Housing
Housing
Housing
Goods and
Services
Goods and
Services
Goods and
Services
Reserve
Reserve
Reserve
Host-Country
Costs
Host-Country
Costs Paid by
Company and
from Salary
Home-Country
Salary
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Premiums and
Incentives
Income Taxes
Housing
Goods and
Services
Reserve
Home-Country
Equivalent
Purchasing Power
33
International Costs of Living
 Multinationals using the Balance
 Top 10 costliest cities for
Sheet Approach must constantly
update compensation packages
with new data on living costs,
which is an on-going
administrative requirement.
 Must also be able to respond to
unexpected events, such as the
currency and stock market
crash, which suddenly unfolded
in a number of Asian countries
in late 1997.
 The level of local knowledge
requires specialist advice.
expatriates 2014/ 2013:
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Luanda, Angola
2. Moscow, Russia
3. Tokyo, Japan
4. N’Djamena, Chad
5. Singapore, Singapore
6. Hong Kong, China
7. Geneva, Switzerland
8. Zurich, Switzerland
9. Bern, Switzerland
10. Sydney, Australia
1.
http://www.finfacts.ie/costofliving.htm
34
Local Plus Approach
 The expatriate employee is paid according to the
prevailing salary levels, structure, and
administrative guidelines of the host location …
 “Expatriate-type” benefits in recognition of
foreign status
 Does not typically include:
COLA, mobility premiums, hardship allowances,
familiarization visits, home leave, cross-cultural
training, other pre-departure or spouse assistance
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Table
8.4
Expatriation compensation
worksheet
2013
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Table
8.5
Advantages and disadvantages of the
Balance Sheet Approach
 Advantages:
 Disadvantages:
 Equity
 Between assignments
 Between expatriates of
the same nationality


 Facilitate re-entry

 Easy to communicate
to employees
Can result in great
disparities


IHRM, Dr. N. Yang
Between expatriates of
different nationalities
Between expatriates
and local nationals
Can be complex to
administer
May entail difficulty to
attract human capital
37
Table
8.6a
Compensation approaches & strategies
for long-term international assignments
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Table
8.6b
Compensation approaches & strategies
for long-term international assignments
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Table
8.6c
Compensation approaches & strategies
for long-term international assignments
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Table
8.6d
Compensation approaches & strategies
for long-term international assignments
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MNE Approaches to International
Taxation
 Tax Equalization

Firms withhold an amount equal to the home-country
tax obligation of the PCN, and pay all taxes in the host
country.
 Tax Protection

The employee pays up to the amount of taxes he or
she would pay on compensation in the home country.
In such a situation, the employee is entitled to any
windfall received if total taxes are less in the foreign
country than in the home country.
 Ad hoc – each expatriate is handled differently
 Laissez-faire – each is on their own
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Table
8.6d
Maximum marginal federal tax rates
Max. marginal
% rate
Country
Max. marginal
% rate
Australia
45.00
Mexico
28.00
Belgium
50.00
Netherlands
52.00
Canada
29.00
New Zealand
39.00
Chile
40.00
Poland
40.00
Denmark
26.48
Spain
27.13
France
40.00
Sweden
25.00
Germany
45.00
Switzerland
11.50
Italy
43.00
Turkey
35.00
Japan
40.00
United Kingdom
40.00
Korea
35.00
United States
35.00
Country
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Table
8.7
Working time required to buy one Big Mac
City
1 Big Mac in min
City
1 Big Mac in min
Chicago, Tokyo, Toronto
12
Kuala Lumpur, Vilnius
41
London, Los Angeles, Miami
13
Bucharest, Riga
42
Hong Kong, New York, Sydney
14
Beijing
44
Dublin, Frankfurt, Luxembourg, Montreal, Zurich
15
Bangkok, Kiev
45
Copenhagen, Geneva, Vienna
17
Istanbul
48
Dubai, Nicosia
18
Delhi
49
Amsterdam, Auckland, Berlin, Brussels
19
Río de Janeiro
51
Lyon, Munich, Paris, Stockholm, Taipei
20
Sofia
56
Barcelona, Moscow, Oslo
21
Buenos Aires
57
Lisbon
23
Bogotá, Lima
58
Tel Aviv
24
Budapest
59
Manama
25
Mumbai
61
Johannesburg
26
Bratislava
62
Helsinki, Madrid, Milan, Rome, Seoul
27
Santiago de Chile
69
Athens, Shanghai, Tallinn
30
Cairo
82
Warsaw, Doha
31
Manila
88
Ljubljana
34
Caracas
126
Singapore
34
Mexico City
129
Prague
38
Jakarta
136
Nairobi
158 44
São Paulo
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40 Dr. N. Yang
Issues to consider for expatriate
benefits
 Keep expatriates in home-country programs,
particularly if the firm receives no tax deduction
for it?
 Option to enroll expatriates in host-country
benefit programs &/or make up any difference
in coverage?
 Do expatriates receive home-country or are
eligible to receive host-country social security
benefits?
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Table
8.8
Social Security Contributions by
Employers & Employees
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46
A Wider View on Business Costs
 Relate costs of doing business in different economies to
statistic measures of:







Wages of employees, more than expatriates
Costs for expatriate staff
Air travel and subsistence
Corporation taxes
Perceived corruption levels
Office and industrial rents
Road transport.
 Generally the developed countries tend to rank as more
expensive than developing countries because their wage
costs are higher, but nothing is absolute.
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World Pay Report: Emerging Economies Come First in
New International Pay Stakes, 2006
Rank
Country
Average Real Salary:
Senior Managers (€)
Rank
Country
Average Real Salary:
Senior Managers (€)
1
Turkey
79,021
15
Netherlands
58,915
2
India
77,665
16
Czech Rep.
57,416
3
Russia
77,355
17
Australia
55,505
4
Switzerland
76,913
18
Canada
54,032
5
Brazil
76,449
19
Italy
53,003
6
Poland
76,269
20
France
51,396
7
Spain
75,904
21
Belgium
51,196
8
Germany
75,701
22
Denmark
48,228
9
Japan
69,634
23
U.K.
46,809
10
Austria
66,243
24
Slovakia
45,389
11
Portugal
66,191
25
Norway
42,939
12
Ireland
62,608
26
China
42,288
13
USA
61,960
27
Hungary
41,406
14
Greece
60,785
28
Finland
41,018
-
59,651
29
Sweden
37,652
Average
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Tentative Conclusions
 Complexity, challenges, & choices
 Emerging trends and developments
 Unexpected events
 Professional networking and consulting
services
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Some Tentative Conclusions:
Patterns in Complexity
 International compensation administration is more
complex than its domestic counterpart, but not
radically different in pattern or form.
 Recent developments in the study of global pay
issues may be seen to operate at three distinct
levels:



The basic level of cultural values and assumptions;
The level of pay strategy, practices and systems
design;
The level of pay administration and form.
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Some Tentative Conclusions:
Patterns in Complexity (cont.)
 At the level of cultural values, a debate is
ongoing between
Advocates of pay systems that value competitive
individualism and result in ‘hierarchical’ pay
systems with large pay differentials for executives,
market-sensitive professions and other ‘critical’
employee groups, and
Advocates of pay systems that value cooperative
collectivism and result in more ‘egalitarian’ pay
systems with smaller pay differentials and more
shared group or firm-wide reward practices.
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Figure
8-1
Complexity, challenges and choices in global pay
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Chapter Summary
 In this chapter, we have examined the
complexities arising when firms move from
compensation at the domestic level to
compensation in an international context.
 It is evident from our review that compensation
policy becomes a much less precise process
than is the case in the domestic HR context.
 To demonstrate the complexity, challenges,
and choices, we have:
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Summary
 Detailed the key components of an international compensation




program
Outlined the two main approaches to international compensation
(the Going Rate and the Balance Sheet), introduced a third new
approach – Local Plus, and contrasted the advantages and
disadvantages of each approach
Outlined special problem areas such as taxation, obtaining valid
international living costs data, and the problems of managing TCN
compensation.
Presented a model of global pay that highlights the complexity and
yet familiarity of pay practices in the global context.
The combination of pay decisions based on strategic global
standardization and sensitivity to the changing local and
regional conditions that characterizes the state of international pay
practices.
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Implications for IHRM
Providing a strategic yet sensitive balance
can only be achieved by creating and
maintaining professional networks comprised
of home office and local affiliate HR
practitioners, outsourcing selected activities
through specialist consultants, and a close
cooperation with local and regional
governments and other key local institutions.
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Vocabulary
 compensation
 complexities, challenges, &








greater choices
HRIS = HR information system
Key components
base salary
foreign service inducements
hardship premium
COLA = cost-of-living
allowance
housing allowance
home leave allowances









education allowances
relocation allowances
spouse assistance
balance sheet, going rate or
market rate, & local plus
approaches
taxation
tax equalization
tax protection, ad hoc &
laissez-faire approaches
international base pay
pay strategies
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Discussion Questions
1.
2.
3.
4.
5.
6.
What should be the main objectives for a multinational firm with
regard to its compensation policies?
Describe the main differences in the Going Rate and Balance Sheet
Approaches to international compensation.
What are the key differences in salary compensation for PCNs and
TCNs? Do these differences matter?
What are the main points that MNEs must consider when deciding how
to provide benefits?
Why is it important for MNEs to understand the compensation
practices of other countries?
Explain how balancing the interests of global and local, occupational
and functional perspectives might play out in a compensation decision
scenario.
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