International Human Resource Management

Managing people in a multinational context

Chapter Objectives
In this chapter we: Examine the complexities that arise when firms move from compensation at the domestic level to compensation in an international context. Detail the key components of an international compensation program. Outline the two main approaches to international compensation and the advantages and disadvantages of each approach. Examine the special problem areas of taxation, valid international living cost data and the problem of managing TCN compensation. Examine recent developments and global compensation issues.
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Terms
HRIS repatriation base salary benefits Tax equalization Tax protection allowances: COLA housing home leave education relocation spouse assistance global corporate culture International base pay

going rate approach balance sheet approach

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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 programs and/or making up any difference in coverage. 3. Whether expatriates should receive homecountry or host-country social security benefits.
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Table 7-1

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 7-2

Advantages and disadvantages of the Going Rate Approach

Disadvantages

Advantages

Equality with local nationals Variation between assignments for same employee Simplicity Variation between expatriates of same Identification with host nationality in different countries country Potential re-entry problems Equity amongst different nationalities

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Table 7-3

The Balance Sheet Approach

Basic objective is 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 host country Financial incentives (expatriate/hardship premium) added to make the package attractive Most common system in usage by multinational firms

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Four Balance Sheet Approach categories

1. Goods and services home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care. 2. Housing the major costs associated with housing in the host country. 3. Income 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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Table 7-4

Expatriate compensation worksheet

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Table 7-5

Advantages and disadvantages of the Balance Sheet Approach

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Table 7-6

Maximum marginal federal tax rates

Country Maximum marginal rate (%) Country Maximum marginal rate (%)

Argentina Australia Belgium Brazil Canada China (Hong Kong) China France Germany India Italy Japan Malaysia
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35.00 47.00 50.00 27.50 29.00 20.00 45.00 48.09 42.00 33.66 43.00 37.00 28.00

Mexico Netherlands Poland Singapore South Africa South Korea Spain Sweden Switzerland Taiwan United Kingdom United States Venezuela

33.00 52.00 40.00 22.00 40.00 35.00 29.16 26.00 11.50 40.00 40.00 35.00 34.00
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Some issues when considering benefits

1. Keep expatriates in home-country programs, particularly if the company does not receive a tax deductions for it? 2. Enroll expatriates in host-country benefit programs and/or making up coverage differences? 3. Does host-country legislation regarding termination affects benefit entitlement? 4. Do expatriates receive home-country or host-country social security benefits? 5. Should benefits be maintained on a home-country or hostcountry basis? Who is responsible for the cost? Should other benefits offset any shortfall in coverage? Should homecountry benefit programs be exported to local nationals in foreign countries?
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Table 7-7

Social security contributions by employers and employees

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Table 7-8

Range of working times required to buy one Big Mac

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Figure 7-1

Complexity, challenges and choices in global pay

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Discussion Questions
1. What should be the main objectives for a multinational firm with regard to its compensation policies? 2. Describe the main differences in the Going Rate and Balance Sheet Approaches to international compensation. 3. What are the key differences in salary compensation for PCNs and TCNs? Do these differences matter? 4. What are the main points that MNEs must consider when deciding how to provide benefits? 5. Why is it important for MNEs to understand the compensation practices of other countries? 6. 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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