IHRM-Briscoe-Dennis cap.

11- parte II
Determinants of IA Compensation Approach
1. What is the type of employee population being relocated abroad?
Each type of IAs has different needs with regard to IA compensation.
2. What is the purpose or reason for the international assignment?
Demand-driven assignments may require a better compensation package
than learning-driven assignments as the IA will derive developmental benefits
from the latter and should not be provided as many additional incentives to
do so.
3. What is the anticipated duration of the international assignment?
Duration (and especially the number of days out of the home country in a
particular tax year) usually has important tax ramifications for the employee
(and for the employer, if it is taking responsibility for part of the tax
obligation).
4. What happens with the IA at the end of the assignment?
returning to the home country, continuing in the same country with an
extended contract, or moving on to a third country?
5. Where is the IA leaving from and going to?
with regard to C&B (especially taxation) laws, regulations, and practices
6. Who is the peer of the IA?
compare him/herself to in terms of equity with regard to this assignment,
justify the elements of the C&B package.
7. What is the overall cost of the international assignment?
Based on the answers to the above questions

different compensation approaches may provide better solutions!

Approaches to IA Compensation

Negotiation/Ad Hoc
When firms first start sending employees on international assignments and while
their number of IAs is still relatively few, the common approach to determining pay
and benefits is ad hoc, or the C&B package for each individual considered for a
foreign posting is negotiated separately. This approach may appear quite simple
initially, and, given the inexperience of HR managers at this stage, the limited
amount of information available about how to design a C&B system for IAs, and the
many complexities in such a package compared to domestic C&B, it is easy to see
why IHR managers follow this approach. Yet, according to IA compensation experts,
this approach is fraught with complications and, therefore, not recommended.

Balance Sheet
This approach is followed by most MNEs In essence, the balance sheet approach
involves an effort by the MNE to ensure that it is easier for the IA to leave for an
assignment and more likely to return home from a successful assignment (see
Figure 11.1). The old balance sheet terminology emphasized keeping the
employee whole. That is, at a minimum, the IA should be no worse off in terms of
compensation, benefits, and lifestyle for accepting an international assignment in
the US (and to a lesser extent in other countries) when their international business
expands to the point where the firm has a larger number of international assignees
(a dozen or so).
However, the balance sheet (referred to as the buildup system in the UK) is rather
complex to explain to all parties involved. Some IAs have complained that this
approach to determining their compensation (especially determining normalized
spending patterns to calculate the differentials) is much more intrusive into their
personal lives than is true for the traditional domestic compensation package.
The balance sheet approach customizes the C&B approach for each international
assignee by starting with the employees existing compensation (salary, benefits,
and any other forms of monetary or nonmonetary remuneration) at home. To this is
added two other components: a series of equalization components that ensure the
international assignee does not suffer from foreign-country differences in salary or
benefits and a series of incentives to accept (and enjoy) the foreign posting.
One of the key complications in this balance sheet approach is the determination of
the base upon which to add adjustments and incentives. 29 A number of
possibilities exist, including basing the IAs salary on:
home-country salaries (this is the primary base for the homecountry-based
balance sheet approach);
HQ salaries (an international standard based on HQ)
regional salary standard (e.g., old and new European Union countries, US
and Canada, Latin America, south-east Asia)
host-country salaries (this uses destination salaries in the host location)
and better home or host approach.

There are, however, two issues in the balance sheet approach that MNEs need to
decide, namely:
1. what type of adjustment (differential) will they need to pay to make up for
the differences in home- and host-country costs of living;
2. what additional incentives and premiums will be required to motivate the
employee to take on the international assignment?

Determining the Type and Amount of Adjustments

Because of home-host country differences, MNEs must provide a number of
equalization adjustments. These are payments whose purpose is to adjust for
differences (generally in a higher direction), hence the name differentials, in
mandated payments that the IAs have no control over some of which are paid by
the IA and some of which are paid to the IA. These have included adjustments for
differences in (higher) costs of living; fluctuations in exchange rates between the
IAs parent-country currency and that of the foreign assignment location; all locally
mandated payments.
There are at least two common techniques used to determine costs of living. One of
these uses staff of the consulting firm that are located in the particular foreign cities
to estimate the cost of living in those locations based on their surveys of costs in a
standardized (typical expenditures from the home location) market-basket of goods
and services. A second technique involves the surveying of existing and former
expatriates of the clients of the particular consulting firm for their typical spending
in the particular foreign locale.
Determining the Type and Amount of Allowances and Incentives
Once the base salary has been determined, and the needed adjustments calculated,
the firm must decide which incentives it feels are necessary to convince its
employees that it will be to their financial advantage (or, at least, as is being
increasingly maintained, not to their disadvantage), 35 to take the foreign
assignment.
One of the most common incentives has been an additional foreign premium,
used to compensate the international assignee and her/his family for the
dislocation of having to move to an unfamiliar country and to live in what might
be seen as an uncomfortable (i.e., different) environment; provide an incentive to
take the foreign assignment; and keep up with the practices of other MNEs.
Additional forms of incentive include premiums for hardship postings and
dangerous postings, which could include many assignments to developing
countries, locations where the threat of kidnapping or terrorist activity is high, or to
remote locations (such as the outback in Indonesia or on an ocean oil-drilling
platform) or locations with less modern or more restrictive living or environmental
conditions.

Localization
A relatively new approach to IA compensation is referred to as localization. This
approach is being used to address many problems of high cost and perceived
inequity among staff in foreign subsidiaries. Under localization, international
assignees are paid comparably to local nationals and no equalizers are provided
except for some additional allowances. These employees are usually early in their
careers, eager for learning-driven international assignments, they are seeking
employment abroad for a relatively long-term or indefinite period of time, they will
not be repatriated after their assignment is over or desire to stay in the host
location, or they are TCNs or returnees (people who have studied/worked abroad
and return to their home country). Localization tends to be relatively simple to
communicate and administer (if done locally).

Lump Sum
Another approach that some MNEs are trying, particularly in response to concern
over the perception that the balance sheet intrudes too heavily into expatriates
lifestyle decisions, is the lump sum approach. 43 In this approach the firm
determines a lump sum to cover all the major incentives and adjustments, and then
lets the IA determine how to spend it (for example, on housing, transportation,
travel, home visits, education, lifestyle, and so forth). In essence, the lump sum is
more of a payment method than a compensation approach as the amount of the
lump sum is usually calculated in the same way as the balance sheet (housing and
goods and services) but allowances are not paid out for each component. This lump
sum allowance is a single payment, made at the start of the relocation process, to
the transferring IA to cover all of the above, or only the costs associated with the
relocation itself.

Cafeteria
An approach which is increasingly being used for very high salaried executives is to
provide a set of choices of benefitsas in a cafeteria up to a predetermined
monetary limit in value. The advantages accrue to both the firm and to the
individual and are primarily related to the tax coverage of benefits and perquisites
as compared to cash income (paycheck). Since the individual doesnt need as much
cash (as most expenses are paid for by the firm), this approach enables the IA to
gain benefits such as a company car, insurance, company-provided housing, and
the like that may not increase the assignees income for tax purposes.

Regional Systems
For international assignees who make a commitment to job assignments within a
particular region of the world, some firms are developing a regional C&B system to
maintain equity within that region.

Global Systems
A final approach being followed, at least for international assignees above a certain
pay level (i.e., therefore, for professional/technical/managerial employees), is to
implement a common global pay and benefits package for each covered job
classification applied to everyone in that classification, worldwide. This is often done
in recognition of the fact that for many specialized occupations (for example,
software engineers and programmers) and executives there is in fact a global labor
market, with qualified specialists from anywhere and everywhere in the world all
applying for the same jobs. In this approach, MNEs will have two general pay
classifications: local employees below a defined level; and international. The
international level will almost always include a performance-based variable pay
component.

Additional Important IA Compensation Issues

Method of Payment
Once the amount of the international assignees compensation and benefits
package has been determined, the firm must decide whether the expatriate will be
paid in local host-country currency, in home-country currency, or a split-pay
combination.
Impact of Exchange Rate Fluctuations
While the differential home and host calculations in the balance sheet approach are
made at the beginning of the international assignment, there are bound to be
fluctuations in the home and host currencies during the course of the international
assignment. Fluctuating exchange rates (Fx) will alter the figures in the balance
sheet for the IA. As exchange rates fluctuate up and down, they impact the index
and the differential (between the host- and home-country spendables) as the
comparative prices in the host and home locations change. The general rule is that
as the exchange rate goes up, the differential the company pays to the IA goes
down. Similarly, as the exchange rate goes down, the differential goes up. In other
words, the exchange rate and differential are indirectly related.

Impact of Inflation
Inflation/deflation can occur in either the home or host country or in both (if
occurring in both, they could possibly cancel each other out). What happens with
the balance sheet differential when there is inflation? When net inflation goes up
(compared to prices in the home country on which cost comparisons are based),
host-country spendables increase. As a result, the differential goes up. In case of
deflation, host-country spendables are less and the differential goes down.

Social Security
An additional factor involves the varying country-specific practices related to social
security taxes and government-provided or-mandated social services, ranging from
health care to retirement programs. These can add considerably to the foreign
taxation burden. Countries that have established social security systems have
negotiated bilateral social security treaties with each other in order to eliminate
double taxation referred to as totalization agreements.

Taxes on Expatriate Income

A major determinant of an IAs lifestyle abroad can be the amount of money the
expatriate must pay in personal income taxes. Employees who move from one
country to another are confronted with widely disparate tax systems, philosophies,
and rates and may be required to pay taxes in both home and host countries,
depending on the tax policies of the two countries.
Laissez-Faire
This approach is uncommon, but smaller employers and those employers just
beginning to conduct international business may follow this approach with their
taxation policies. In essence, under this approach the IA is expected to take care of
his or her own taxation, even if it means tax obligations in both home and host
countries.
Tax Equalization
This is the most common approach, since it supports the home-country system of
the balance sheet approach. Because tax rates and obligations vary so much from
country to country, tax equalization provides equitable treatment for all
international assignees regardless of IA location. Under this strategy, the firm
withholds a hypothetical tax from the IAs income (the tax obligation in the home
country that they would otherwise have to pay, anyway) and then pays all actual
taxes in the home and host counties. In essence, the taxes that the international
assignee must pay are equalized between home and host countries.
Tax Protection
Under the tax protection strategy, the international assignee pays both the home
and host taxes, but the hypothetical tax is compared to the actual taxes. If the
actual taxes are greater than the hypothetical tax, the employer pays the difference
to the IA. If the tax rate is less in the foreign assignment, then the employee
receives the difference as a windfall. In essence, the employer protects the IA
against higher taxes.
Ad Hoc
Under this strategy, each international assignee is handled differently depending on
the individual package she or he received or negotiated with her or his employer.
The ad hoc method usually goes hand-in-hand with the negotiation approach. In
addition, the typical allowances paid to international assignees are often viewed as
taxable income in certain countries

Special US Issues in IA Compensation

Taxation of US International Assignees

US citizens are taxed on their incomes, regardless of where the income is earned or
where the IAs live. 51 Fortunately, special rules can limit the US tax liability of US
international assignees during their employment abroad.

Compensation by Foreign Multinationals in the US

Just as US firms have recognized the need to pay their international assignees at
least as well as their local colleagues (in countries where the locals make more than
their US counterparts), such is also true for foreign firms that operate in the US.
Foreign owners of US companies and of US subsidiariesare realizing that they
must match US executive compensation practices to stay competitive and to retain
their top US executives. 53 In most countries, executive compensation is not a
subject that receives much attention, either outside firms or within them. This is
clearly not the case in the US.

Compensation and Taxation of Foreign Nationals Working in the US

A last issue of concern is compensation and taxation for foreign nationals on
assignment to the US. Foreign employees assigned to HQs are usually referred to as
inpatriates. This issue, of course, has a counterpart in foreign nationals who move
from a subsidiary in any country to the country of the parent HQs, no matter the
country of ownership of the enterprise. These inpatriates are brought to
headquarters for a relatively short period of timeusually two years or lessfor the
purposes of learning about the firm.

International Compensation and Benefits Management

It should be obvious by now that global C&B management is more complex than its
domestic counterpart. This is at least partially due to the following problem areas
not confronted in domestic HRM. First, the collection of data about pay rates, benefit
packages, government practices, and taxation systems in different countries, and in
different languages and cultures, from unfamiliar sources, makes it very difficult to
design comparable pay packages for international assignees or for consistency
among various overseas operations. Second, pay systems (particularly for
international assignees) must contend with government currency controls (for
instance, limiting amounts that can be taken out of the country) and constantly
changing exchange and inflation rates, making it necessary to constantly adjust the
incomes of international assignees in local currencies. A third issue that adds to the
complexity are the varying rates of inflation encountered in foreign locations, that
may also require frequent re-establishment of international assignees pay rates to
counteract the effects of sometimes high inflation rates.

Salary Data
It is often very difficult for MNEs to get country-specific compensation data that
have much reliability. Very few governments (at least in developing countries)
collect or publish adequate data. And there exists in only a few locations local trade
associations that collect and publish such information (as is available in most
developed countries). Therefore, MNEs must rely on the information provided by
accounting firms with international practices, consulting firms that specialize in
developing such data (as may be available from local governments and
international organizations), specialized consulting firms, or even develop their own
data through local MNE compensation clubs that share such information.

Payroll Maintenance
An additional problem with global C&B programs involves the maintenance of
payroll files on international personnel (international HRISfor details see Chapter
13) and the development of global systems for handling payroll and benefits. 58
Domestic HRIS is usually not designed to handle all the additional pieces of
information that are common to multiple locations and multiple currencies.

Data Privacy
Keeping these files up-to-date and using the information in them for employee
decision-making, such as pay increases or adjustments or career and job-
assignment decisions, gets even more difficult as many countries maintain laws
against the transfer of private employee information out-of-country or region.

Cost Concerns
Another concern for the development of global C&B systems involves efforts by
MNEs to include IHR issues in the strategic management of the enterprise.

Benchmarking
Many firms are now trying to determine what successful MNEs are doing in terms of
design and implementation of their international compensation systems. 60 Often
this attempt to benchmark the best practices seems like an exercise in codification
of ignorance, since there is so little research to identify what works best when. 61
Surveys of practices of MNEs may be doing nothing more than identifying what is
currently being done.

CHAPTER 15 BRISCOE DENNIS

The IHRM Department, Professionalism, and Future Trends
This chapter is divided into three major sections:
1) the role and nature of the IHR department;
2) the role and nature of IHRM as a profession; and
3) the future of IHRM
As will be seen, there are linkages among these topics, and all are connected by the
increasing competency and professionalization of IHRM.

The IHRM Department

This section discusses the department within which these activities take place and the
role that is evolving for that department. It also discusses some of the support activities
that IHR departments are generally called on to provide.
Organizational Advancement of IHRM
Increasingly, top-level attention must also be paid to the human aspects of cross border
business, to the merger of global workforces and cultures in acquisitions, joint ventures,
and alliances, and to the development of the individual employees who represent
multiple corporate and national cultures, speak multiple languages, and have widely
varying perspectives on customer, product, and business issues. It is IHR which is
expected to provide and coordinate these capabilities and advise the rest of the
enterprise on how to ensure performance in this cross-border complexity.

In the end, the global and cultural aspects of international business boil down to finding
ways to develop a corporate glue that will hold the organization effectively together.
This type of organizational glue can be developed through the use of effective cross
national task forces and work teams, or the use of shared service centers and centers
of excellence located throughout the global enterprise, and can thus be used to pull
together employees from disparate country and corporate cultures.

Involvement of the IHRM Department

In the future they will need to encourage the following agenda for their IHRM
departments:
Ensure IHR contribution as an integral partner in formulating the global strategy
for the firm.
Develop the necessary competence among the senior IHR staff so that they can
contribute as partners in the strategic management of the global firm.
Take the lead in developing processes and concepts for top management as they
develop the global strategy. (Indeed, we would suggest they should be part of the
top management team developing such a strategy, not merely providing input!)
These contributions might include developing capacities for information scanning
about HR issues throughout the world (particularly for the countries of existing or
contemplated operations), for decision-making (particularly related to global HR
concerns), and for the learning processes that the firm needs to adapt to new
global requirements.
Develop a framework to help top management fully understand the (increasingly
complex) organizational structure and people implications of globalization. That
is, help top management, individually and as a team, develop the required global
mindset to conduct successful global business.
Facilitate the implementation of the global strategy by identifying the key skills
that will be required by management and employees, assessing current global
competencies in IHRM and in the rest of the management team, and developing
strategies for locating outside talent that may be required (either through
consulting, outsourcing, or hiring).
Distribute and share the responsibilities for IHRM. Increasingly, IHR will become
a shared responsibility. Line management, IHR managers, and work teams will
all share in the objective of ensuring the effective hiring, development,
deployment, and retention of the global firms human resources. This will
inevitably lead to the decentralization of IHRM decision- and policymaking, at
least in many areas (alongside the pressure for consistent and cost-effective
IHRM practice). There will be less use of headquarters IHRM departments, with
IHRM responsibilities delegated out to the business units of the firm, or, at least
shared and developed with them. Many of the basic administrative activities
(particularly for IA program administration, including relocation, cultural and
 language training, health and safety orientation and management, and benefits
administration) will be outsourced to venders with special expertise in these
particular areas of IHRM, or will be delivered through shared service centers
and/or centers of excellence, which will be located at the best and most cost-
effective locales throughout the global business.

Staffing the Department

The IHR department itself, in order to pursue this new role, will find it has a need for
fewer specialists and more generalists; that it will need to be even more business-
focused ,that individual IHR managers will need to have more experience working in
global teams themselves and more training in how to make teams work effectively
together across borders; and that IHR managers will need to develop coaching skills
(with line managers, helping them to solve their people problems) and become
information specialists (creating, maintaining, and using/interpreting IHR data for the
rest of the firm).
Linking the Department with the Business and its Strategy
IHR departments will need to be more closely linked into the actual management of the
business, through development of IHR philosophies (values, culture, vision), policies
(guidelines for action), and programs, practices, and processes (involving line managers
at every step) that fit the vision and strategy of the firm.
Demonstrating the Contributions of the IHRM Department
learn how to demonstrate that the right things are being done correctly.
 One aspect of this will be research to determine what the best IHR practices are
around the world and to use them to both judge the quality of a firms IHR
activities as well as to develop better IHR practices.
Indicators of Being World Class
short list of possible criteria and metrics to use to determine whether the IHRM practices
in any particular firm are indeed among the best in the world.

Professionalization of IHRM
This section examines the ongoing professionalization of IHR, the competencies of IHR
managers, and the global leadership that can and should be provided by todays IHR
manager
Importance of the Function
Research supports that a focus on progressive IHR programs is related to gaining
global competitive advantage .IHRM programs and departments must receive high-
priority attention and resources. It will be critical for global managers to have experience
in the IHR department, and it will be just as important for IHR managers to have
experience in line management, and in global assignments, as well.
Development of IHR Managers
MNEs will need IHR executives who can do more than handle the selection, training,
relocation, and compensation of expatriates. MNEs will need and expect their IHR
executives to assist in the strategic management of their global businesses, to develop
IHR policies for operations located around the globe, and hire and develop highly
productive workforces in multiple countries. The development of this type of strategic
IHR manager is becoming a central focus of the IHR profession.
The strengthening of IHR departments and the development of more competency in
IHR could be accomplished in a number of ways:

Education
There are only a handful of Masters degree programs in IHR. However, many
universities now offer at least a survey course in IHR, often as part of a Masters
degree program in HR or as an elective course within a program on international
business or in a general MBA curriculum.
Also, providers of IHR services offer short seminars and a few host annual
conferences on IHR. Attendance at these seminars and conferences is one of the
available ways to stay current on issues being addressed by MNEs and on MNE
best practices in IHR.
The American Society for Human Resource Management (as well as a few
universities around the US) now offers a training program for preparation to take
the Certificate in Global HR.
One of the most important areas for learning for IHR managers should be the
experience of living and working (hopefully, practicing HR) in another country and
culture
Self-education.Reading the growing number of books and magazines on the
subject of IHR as well as networking with other practitioners, including joining
one of the growing number of local IHR discussion groups that are being created
in many population centers.
 Routledge website for the series on Global HRM.

Competencies of IHR (General)

cross-cultural interpersonal skills
local responsiveness
cross-national adaptation
coaching and development of global literacy
manage global risks: accidental expatriates, global compliance, global tax
procedures and measures for demonstrating the ROI, triple bottom-line, and
balanced scorecard metrics for IHRM initiatives
global strategic leadership for the whole organization
Competencies IHR (Specific)
Effective recruiting and staffing to attract and retain the best talent for a global
workforce
improve worldwide communications
foster a global mindset in all employees
International Human Resource Information System: codify the body of
knowledge in IHR and to design a testing procedure for certifying professional
skill
develop global leadership Cross cultural assigments
HR function as a strategic business partner
design and implement global HR systems (training, compensation, performance,
health and safety)

Challenges Faced by IHRM

lack of HR talent around the world
increased number of employee relations issues
Globalization and freer trade are leading many countries to change their legal
frameworks impacts IHR practices
Change in the wants of employees around the world
The New MNE HR Organization
A major disconnect is occurring between what executives know and understand and
what the global business environment needs.
To meet this, MNEs are pursuing several different models of IHR organization, with their
IHR functions facing a number of challenges

Opportunities for Strengthening IHR

Critics:
IHR is not doing an adequate job of playing that role
HR is not being a true business partner,
IHR dont have competencies necessary to meet all the needs of the new three-
tiered model and to meet the global organizational needs of human capital,
innovation, and flexibility.
The IHRM Job of the Future
Capabilities needed for IHRM in the future:
In order to achieve the needed capabilities, IHRM should:
Hire for international experience
Disperse people with international experience throughout the firm
Learn how to recruit and assign on a global basis.
Increase the firms international information diet
Train everyone in cross-cultural communication, etiquette,
protocol, negotiation styles, and ethics.
Ensure international developmental assignments.
Pursue GPHR certification
Understand and appreciate the importance of developing themselves to better
carry out their global mandates.