International Compensation

International Compensation
“International compensation refers to all forms
of monetary and non-monetary rewards that
employees of an international organization
receive from their employer in exchange for
providing their labor & commitment.”
Objectives of international compensation policy

“To attract, retain and motivate high quality talent

 Policy should be consistent with overall business strategy & needs of

the MNC
 Should facilitate transfer of international employees in most cost

effective manner for the firm

 Provide a consistent and reasonable relationship between the pay

levels of employees at the headquarters and foreign subsidiaries

Elements of Expatriate Compensation
Packages

Base salary
Benefits
Allowances
Incentives
Tax Equalization
 Common Elements of Compensation
Packages
Base salary
 Amount of money that an expatriate normally receives
in his/her home country
 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).
 Used to establish expatriate pay
 Paid in home currency, local currency or combination
 Serves as benchmark against which bonuses & benefits
are calculated
 Common Elements of Compensation
Packages
Benefits
 Substantial portion of expatriate compensation
 Transportability of pension plans, medical coverage &
social security coverage are very difficult to deal as
national practices varies.
 Many thorny issues surround the amount & nature of
the benefit package for expatriates . For instance
 Whether MNC’s should maintain expatriates in home country
benefit programs particularly if firm does not receive tax
deduction for it
 Whether MNC has option of enrolling expatriates in host
country benefit programs
 Whether home or host country is responsible for the expatriates
social security benefits
 Whether benefits should be subject to the requirements of home
 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.
.

1–7
 Social Security protects not just the subscriber but also his/her entire family by giving benefit packages in
financial security and health care. Social Security schemes are designed to guarantee at least long-term
sustenance to families when the earning member retires, dies or suffers a disability. Thus the main strength of
the Social Security system is that it acts as a facilitator - it helps people to plan their own future through
insurance and assistance.
 The principal social security laws enacted in India are the following:
 (i)               The Employees’ State Insurance Act, 1948 (ESI Act) which covers factories and establishments
with 10 or more employees and provides for comprehensive medical care to the employees and their families
as well as cash benefits during sickness and maternity, and monthly payments in case of death or disablement.
 (ii)            The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (EPF & MP Act)
which applies to specific scheduled factories and establishments employing 20 or more employees and ensures
terminal benefits to provident fund, superannuation pension, and family pension in case of death during
service.  Separate laws exist for similar benefits for the workers in the coal mines and tea plantations.
 (iii)          The Workmen’s Compensation Act, 1923 (WC Act), which requires payment of compensation to
the workman or his family in cases of employment related injuries resulting in death or disability.
 (iv)          The Maternity Benefit Act, 1961 (M.B. Act), which provides for 12 weeks wages during maternity
as well as paid leave in certain other related contingencies.
 (v)             The Payment of Gratuity Act, 1972 (P.G. Act), which provides 15 days wages for each year of
service to employees who have worked for five years or more in establishments having a minimum of 10
workers.
 Common Elements of Compensation Packages
Allowances
 Expensive feature of expatriate packages
Cost of living allowance (COLA)
( to ensure same standard of living that he or she
enjoyed in the home country, compensates for
differences in expenditures between home country &
foreign country)
Relocation expenses
Housing allowances
Education allowances
Hardship allowances (lump sum or percentage of
base compensation)
Home leave allowances
 Foreign Service Inducement and Hardship
Premium
 Parent-country nationals often receive a salary premium as an
inducement to accept a foreign assignment or as compensation
for any hardship caused by the transfer.
 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.
 Such payments vary, depending upon the assignment, actual hardship, tax
consequences and length of assignment.
 More commonly paid to PCNs than to TCNs.

1–10
 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.
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).

1–11
 Common Elements of Compensation
Packages
Incentives
 Used to motivate expatriates for their productivity and
performance
 Trend - Lump-sum payments instead of ongoing
premiums
 Common Elements of Compensation
Packages
Tax equalization
 Expatriates may get two tax bills
 Usually MNC’s pay the extra tax burden
 Common method
 Compute tax on home country salary & expat salary. Any tax
that exceed what would have been imposed in the home country
are paid by the MNC
Approaches to the Compensation Package
 Balance sheet approach

 Localization/ Going rate Approach

 Cafeteria approach

 Regional approach
Approaches to the Compensation Package
Balance sheet approach
• This approach links the base salary of PCN’s and TCN’s to salary
structure of the relevant home country.
 Retains the expatriate in the home-country salary structure and
provides allowances to enable the expatriate to maintain a standard
of living broadly similar to that enjoyed at home.
 Based on the premise that employees on overseas assignments
should have the same spending power as they would in their home
country.
 The home country is the standard for all payments.
 The objective is to:
Ensure cost effective mobility of people to global assignments
Ensure that expatriates neither gain nor lose financially
Minimize adjustments required of expatriates
Approaches to the Compensation Package
Balance sheet approach

Advantages
• Equity between assignments &
between expatriates of same
nationality
• Facilitates expatriate re entry
• Easy to communicate
Disadvantages
• Can result in great disparities
between expatriates of different
nationalities & between expatriates &
local nationals
• Can be complex to administer
 Going Rate Approach (Market rate approach)
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1–17
Approaches to the Compensation Package
Localization / Going rate Approach
 Pays the expat a salary comparable to that of local nationals
 Based on local market rates
 Used with individuals early in their careers & who are being given
long term assignment

Advantages Disadvantages
• Equality with local nationals • Variation between expatriates of
• Simplicity same nationalities in different
• Identification with host country countries
• Equity amongst different • May lead to rivalries for assignments
nationalities to financially lucrative locations
• Potential re entry problems
Approaches to the Compensation Package

Cafeteria approach
 Expat receives a series of options & decides how to spend funds

Regional approach
 Compensation system for all expats who are assigned to a particular
region & everyone paid in accord with that system
Tax Strategies for Expatriate Income
1. Tax equalization
 Most common method
 Firms withhold an amount equal to home country tax obligation of PCN & pay all
taxes in host country
2. Tax protection
 Employee pays up to the amount of taxes she would pay on compensation in
home country
 Employee is entitled to any windfall received if total taxes are less in the foreign
country than in the home country
 If tax is deducted, the difference between the (low) host country tax and the
(higher) home country tax is refunded to the employee.
Tax Strategies for Expatriate Income
3. Laissez faire
 Employees are on their own in conforming to host & home country taxation