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 allowances: COLA
repatriation housing
base salary home leave
education
benefits relocation
Tax equalization spouse assistance
Tax protection
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 home-
country 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 Advantages and disadvantages of the Going Rate Approach
7-2

Advantages Disadvantages

• Equality with local nationals • Variation between assignments for

• Simplicity same employee
• Identification with host • Variation between expatriates of same
country nationality in different countries
• Equity amongst different • Potential re-entry problems
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 Advantages and disadvantages of the Balance Sheet Approach
7-5

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Table
7-6
Maximum marginal federal tax rates
Country Maximum marginal Country Maximum marginal
rate (%) rate (%)

Argentina 35.00 Mexico 33.00

Australia 47.00 Netherlands 52.00
Belgium 50.00 Poland 40.00
Brazil 27.50 Singapore 22.00
Canada 29.00 South Africa 40.00
China (Hong Kong) 20.00 South Korea 35.00
China 45.00 Spain 29.16
France 48.09 Sweden 26.00
Germany 42.00 Switzerland 11.50
India 33.66 Taiwan 40.00
Italy 43.00 United Kingdom 40.00
Japan 37.00 United States 35.00
Malaysia 28.00 Venezuela 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 host-
country basis? Who is responsible for the cost? Should other
benefits offset any shortfall in coverage? Should home-
country benefit programs be exported to local nationals in
foreign countries?
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Table Social security contributions by employers and employees
7-7

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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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