Case Presentation

Jul 05, 2014

Compensation Problems
with a Global Workforce
Group 9:
Rijul Bhardwaj
Rashmi Chauhan
Sureshkumar A.
2
IT Multinational Company faces specific challenges due to its global
operations
Global workforce mobility General Problems
> PCNs, TCNs and HCNs complaining about
allowances
> HQ complaining that costs of global mobility
are high
Specific Problem
> Employee from Manila
In Philippines: $25,000
In US: $25,000 + Cost of Living Adj
> Employee from Bangkok
In Thailand: $30,000
In US: $30,000 + Cost of Living Adj
> Employee in US: $60,000
> Allowances neither reflect home country nor
host country
> Discontent over salary post repatriation
Subsidaries
Intl Workforce
United States
Philippines
Bolivia
Japan
Thailand
Headquarters
Global
Workspaces
United States
Source: Case Author
3
Tackling them requires asking specific questions to decide
compensation and allowances
> Not all assignees, types and locations are alike
> Different compensation systems are necessary
> In some cases, combination of compensation systems is also useful
4
Keeping nature of international workforce in mind, Balance Sheet
approach is chosen for compensation design
Choosing the approach
> IT MNC is already well established with global operations and considerable employee mobility
> Localization needs are limited due to contract assignments being the norm
> Global movement involves not only management but also field engineers
Compensation Systems
Negotiations/Ad Hoc
> Negotiations decide allowances
> First international assignments
> Few IAs
Lump sum
> Payment method
> Impacts taxation


Balance Sheet
> Cost of Living Adjustment
> Established expatriation program

Cafeteria
> Choice of benefits
> Only for fundamental benefits

Localization
> No equalizers
> Applicable to young expats
> For business or personal reasons
Regional and Global Plans
> Systems specific to regions or
decided centrally
> For IAs above certain pay level



Balance Sheet approach best caters to all the above requirements
5
Balance Sheet approach requires estimation of base salary
Base salary has to be identified based on several factors
> Home-country salaries
> HQ salaries
> Regional salary standard
> Host country salaries
> Better of home or host
Factors that decide base salary
> Long assignments and transfer
between locations
> HQ-based balanced sheet
> Based on PC base, if
MNE from a high-wage
country
> Short foreign postings and
returning
> Home country base
> For regional focus of a global
firm
> Regional base
Effect of Location
> Well defined operations in
developed countries
> Need to maintain equity among
workers
> Host-country base
Effect of job profile
Manila
$25,000
Bangkok
$30,000
6
Adjustment of salary requires component-wise breakup
Components of Base Salary
[SE
RIE
S
NA
ME]
[SE
RIE
S
NA
ME]
[SE
RIE
S
NA
ME]
[SE
RIE
S
NA
ME]
> Deposit accounts and personal reserves
> Dedicated for contingent spending
> Day to day goods and services, such as food and clothing
> Depends on home-country CPI, inflation and local purchasing power
> Average expense for housing in the home country
> Depends on real estate, rent and mortgage markets
> Income taxes are calculated slabwise or at a flat rate
> Reduces overall disposable income
7
For the two employees, salary breakup in home-country is
estimated
[VAL
UE]
[VAL
UE]
[VAL
UE]
[VAL
UE]
$25,000
Manila
Bangkok
[VAL
UE]
[VAL
UE]
[VAL
UE]
[VAL
UE]
$30,000
> Income taxes rate falls under 25% slab according to
FY 2013 rules
> Expenditure on spendables is close to ~40%
> Income taxes is at 33% flat rate with no deductions
> About 33% spending on goods and services
Taxes
Housing
Goods and Services
Savings
Source: Numbeo Database, Case Author
8
Balance sheet is built-up stepwise to estimate final salary and
allowances
Manila
Bangkok
~113%
[VALUE] $5,000 $5,000 $5,000
[VALUE]
$20,931
$14,652
[VALUE]
$19,320
$11,592
[VALUE]
$11,300
$6,250
$5,624
$25,000 $56,551 $37,494 $43,118
Premium
Taxes
Housing
Goods and Services
Savings
$6,250
$11,592
$14,652
[VALUE] $5,100 $5,100 $5,100
[VALUE]
$19,537
$13,676
[VALUE]
$18,082
$10,849
[VALUE]
$10,683
$9,900
$5,929
$30,000 $53,402 $39,525 $45,454
$9,900
$10,849
$13,676
~96%
Home Country
Home-Host
Adjustment
Sharing of Costs
Premiums and
Allowances
Source: Numbeo Database
~258%
~394%
9
Issues related with repatriation
What compensation to
provide on return to
home country
What should be the
role and
responsibilities of the
repatriate
What methods can
help in knowledge
transfer of the
experience on the
international
assignment
What type of training
should be provided to
help adapt back to the
previous culture
How does the
repatriate compares
himself with the peers
& what all assistance
needs to be provided
to his/her family.
10
Additional Important IA Compensation Issues
Social Security
Method of Payment
Local host-country currency
Home country currency
Split pay combination
Taxes on Expatriate
Income
Hypothetical Tax is covered by the MNE
Tax Strategies
Exchange Rate
Fluctuations &
Inflation
Affects the differential of home and host country spendable
Need for explanation to IA regarding corresponding pay change
Pay adjustment done on fluctuations reaching a certain bar
Territoriality Rule
Detached Worker Rule
Totalization Agreements
To avoid double taxation related to social security
11
Additional Important IA Compensation Issues
Laissez- faire
Ad Hoc Tax Protection
Tax Equalization
IA pays home & host
taxes
Hypothetical tax is
compared with actual
taxes
Windfall gain is
possible
MNE pays actual tax
minus hypothetical tax
Reduces non-
compliance
IA takes care of his or
her taxation
IA may not be in
compliance with tax
payments
Done with the
negotiation approach
Case- to case basis
Tax Strategies
12
US Issues in IA taxation
Taxation of US International
Assignees
Compensation for Foreign
Multinationals in US
Compensation & Taxation
for foreign nationals in US
Limited tax liability for
US IA during
employment abroad.
The exclusions are pro-
rated based on the
number of days in a
year for which IA stays
abroad
Foreign tax credit can
be availed to reduce US
tax liabilities
Foreign firms need to
adapt to US executive
compensation practices
to stay competitive
Current reliance is more
on base salary
compared to bonus &
incentives
Need to adapt to this US
framework.
Classification of foreign
nationals is an area of
concern
Immigrant /Non-
immigrant visa
Tax equalization treaty
present or not
Resident-aliens vs non-
resident aliens
13
Complexity of International C&B Management
Standard payroll system
does not account
language, dependents etc.
type of expenses
Salary Data
Benchmarking Cost Concerns
Payroll Maintenance Data Privacy
Difficult to get valid country
specific C&B data
C&B
Issues
Countries have laws
against transfer of private
employee information
Downsizing involving IA
C&B Systems for cross-
border JVs , M&As,
preventing discrimination
Comparing yourself with
the prevailing trend in the
industry