Definitions

Compensation

Compensation is the remuneration an employee receives during the

international assignments, and use to counterbalance the inconveniences
caused by the expatriation.

Benefit
Benefit is an additional plus, or allowance to the salary which an employee
receives usually paid in goods or other noncash values e.g. company car,
houses, insurances etc.

Direct financial compensation consisting of payments received in the form of

wages, salaries, bonuses and commissions provided at regular and
consistent intervals

Indirect financial compensation includes all financial rewards that are not
included in direct compensation and can be understood to form part of the
social contract between the employer and employee such as benefits,
leaves, retirement plans, education, and employee services

Non financial compensation refers to topic such as career development and

advancement opportunities, opportunities for recognition as well as working
environment and conditions.
 Objectives of international compensation
Companys objectives Employees objectives
To adopt international compensation Financial securities in terms of
system to the overall strategy and benefits, social security and living
business needs cost in the foreign location
Cover company staff for qualified Financial advantage through
staff in all international subsidiaries income
Facilitate the transfer of employees Housing, children education and
in the most cost-effective way recreation

Help to ease administration

Models
Models to determine the expatriates compensation in the HC

Pc oriented model
HC oriented model/localization
Global model

Pc-oriented model
Ethnocentric model
Oriented to remuneration policies set by practices elaborated by the HQ
Remuneration structure is affected by factors like profit sharing, hierarchies,
seniority, etc.
Comparison to salaries of employees in pc facilitate reintegration into the
remuneration system after assignment
Different salaries between expertise and local workers
Few integration of HC factors can lead to higher costs than necessary

HC-oriented model
Polycentric model
Oriented to remuneration policies of HC with few or no regard to PC policies
 Country-specific factors affect remuneration
Few difference between local employees and expatriates
Less motivation to accept international assignments in low wage countries

Global model
Geocentric model
Policy elaborated by a mix of PC and HC remuneration elements
Valid for all subsidiaries worldwide
Easy comparison of salaries for same position all over the world
Facilitate successive assignments in different countries
Increases mobility
Provides higher transparency
High costs for elaboration of the common policy

Approaches
Approaches to set the amount of additional payments for the expatriate

Balance sheet
Regional system
Negotiation/ ad hoc
Lump sum
Cafeteria

Balance sheet approach

Basic objective is maintenance of home-country living standard plus financial
inducement.

Home country pay and benefits are the foundation of this approach

Adjustment to home package to balance additional expenditure to host country

Financial incentives (expatriate/ hardship premium) added to make the package

attractive

Most common system in usage by multinational firms.

 Balance sheet approach
Advantages Disadvantages
Equity Between assignments Can result in great disparities
between expatriate of the same between expatriates of different
nationality nationalities between expatriates
Facilitate expatriate re-entry and local nationalities
Easy to communicate to Can be complex to administrate
employees
 Balance sheet approach features

Starts with employees existing compensations which depends on the model

used

Equalization adjustment
Adjustment due to differences between taxes, costs of living, inflation,
fluctuation between exchange rates etc
Cost of living adjustment (COLA) which is calculated as a difference between
home country and host country living spending including housing, goods and
service
Additional premiums and allowances
Compensation for inconvenience caused by the assignment to motivate
employee and provide financial advancement
Housing allowances covering settling in and residential costs
Educational allowances for children, language courses and culture trainings
costs, relocation expenses, transport

Approaches to create a compensation package

Regional system

Different policy elaborated for different regions of the world. But for
assignees within particular region it provides equity.

Negotiation/ad hoc

Remuneration set by negotiation between HR and expatriate

Lump sum
 A single payment for the total amount due which covers all major incentives
and adjustments

Cafeteria

Set of cafeteria choices, e.g. company car, insurance, housing, etc.

Cafeteria goods do not increase income taxes
Expatriate can chose out of these selected benefits up to a fixed monetary
limit

Taxation

Taxation is a very complex issue of global compensation.

Approaches:

Tax equalization

Hypothetical taxation as it would be in PC is withheld from employee. And

then company pays all actual taxes.

Tax protection

Hypothetical taxation is compared to actual taxation. If actual taxes are

higher employer protects employee from paying higher taxes by paing the
differences.

Ad-hoc

Individual taxation due to negotiation

Laissez-faire

Taxation is considered as a matter of expatriates own responsibility and

could be very risky

Social security

Every country has specific practices related to social security taxes

 To avoid double social security taxation there are totalization agreements
providing territoriality rule and detached rule

Currency. Home country, local or split combination?

Local currency rapid inflation, limited convertibility

Home country currency to maintain home country financial obligations,
bonuses

Impact of exchange rate fluctuation

Exchange rate differential for the international assignee

Exchange rate differential for the international assignee

Impact of inflation

Inflation differential for the international assignee

Inflation differential for the international assignee

Non-cash benefits

Company cars, mobile phones, living accommodation.

Insurance (medical/dental/critical illness/travel/car)
Non-cash vouchers, such as child care vouchers
Practices in selected countries

France

Transport, canteen food or food vouchers

Philippines

Rice, quality depends on job level

Other Asian countries

Flour, corn, potatoes, etc.

Practices in selected countries

Remuneration basis

Europe & North America:

Job requirements or individuals/group performance

Hong Kong & Singapore

High influence of individual performance

Japan

Influence of age and seniority

High influence of group/enterprise performance

Latin America

Pay old and unproductive employees as young productive ones

because of high costs of terminations

Future view

Greater collaboration between governments and businesses

Clarity and flexibility of remuneration policies
Balance between standardization and localization
Disseminating the know-how and best remuneration practices in
other countries
 Upcoming global competition