Chap 8 IHRM02 GROUP7 GROUP 7 IHRM 02 International Compensation 1 The complexities caused by moving compensation from a domestic to an international context (Nguyễn Vũ Hoài Linh) a) Definition Compensation is seen as ● a mechanism to develop and reinforce a global corporate culture ● a primary source of corporate control ● linking performance outcomes with associated costs ● the nexus of increasingly strident, sophisticated and public discourses on central issues of corporate governance in an in.
GROUP - IHRM.02 International Compensation The complexities caused by moving compensation from a domestic to an international context (Nguyễn Vũ Hoài Linh) a) Definition Compensation is seen as: ● a mechanism to develop and reinforce a global corporate culture ● a primary source of corporate control ● linking performance outcomes with associated costs ● the nexus of increasingly strident, sophisticated and public discourses on central issues of corporate governance in an international context b) Complexities in global pay includes ● the growing use of outsourced activities and subsequent labor pricing needs ● balancing centralization and decentralization of incentives, benefits and pensions, given the technical capabilities of web-based human resource information systems (HRIS) ● balancing the need for more accurate and detailed performance metrics on international assignees with the realities of a cost-sensitive environment resulting from maturing global competitiveness In the role of international managers, it will take a lot of effort to conduct the international human resource and managers also have to face a lot of challenges and difficulties Specifically: ● Manage more activities from a broader perspective ● Be more involved in the lives of their far-flung (flan) employees ● Balance the needs of PCNs, HCNs (host) & TCNs ● Control exposure to financial and political risk ● Be increasingly aware of and responsive to host country and regional influences Components of an international compensation program (Nguyễn Vũ Hoài Linh) 2.1 Base salary 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) For expatriates, it is the primary component of a package of allowances, many of which are directly related to base salary (e.g foreign service premium, cost-of-living allowance, housing allowance) It is the basis for in-service benefits and pension contributions - may be paid in home or local country currency or a combination (i) of both The base salary is the foundation block for international compensation whether the employee is a Parent-country nationals or Third-country nationals (PCNs or TCNs) 2.2 Foreign service inducement and hardship premium PCNS often receive a salary premium as an inducement to accept a foreign assignment or as a hardship premium to compensate for challenging locations However, the definition of hardship, eligibility for the premium, and amount and timing of payment must be addressed Foreign service inducements, if used, are usually made in the form of a percentage of salary, usually to 40 per cent of base pay, but are also sometimes offered as a lump-sum incentive, depending on the assignment location, tax consequences, and length of assignment 2.3 Allowances Multinationals generally pay allowances in order to encourage employees to take international assignments and to keep employees ‘whole’ relative to home standards Issues concerning allowances can be very challenging to a firm establishing an overall compensation policy, because of the various forms of allowances that exist In this section we will discuss the six most common allowances a) Cost-of-living allowances (COLA) - Typically receives the most attention, involving a payment to compensate for differences in expenditures between the home country and the foreign country.(for example: the costs of transportation, furniture and appliances, medical, automobile maintenance and domestic help) - COLA may also include payments for housing and utilities, personal income tax or discretionary items - Often this allowance is difficult to determine and can be problematic b) Housing allowances - It implies that employees should be entitled to maintain their home-country's living standards (or, in some cases, receive accommodation that is equivalent to that provided for similar foreign employees and peers) - Housing issues are often addressed on a case-by-case basis, but as a firm internationalizes, formal policies become more necessary and efficient - TCNs tend to receive these benefits less frequently than PCNs c) Home leave allowances - It is a provision to cover the employees' expense for one or more trips back to the home country each year - The purpose of paying for such trips is to give expatriates the opportunity to renew family and business ties - - Some firms give expatriates the option of applying home leave to foreign travel rather than returning home Expatriate employees with limited international experience who opt for foreign travel rather than returning home may become more homesick than other expatriates who return home for a ‘reality check’ with fellow employees and friends Without the benefit of returning home it is possible to idealize what they remember of their experience at work and home and fail to come to a measured judgment of what is good and bad in both their host and home environments => So that the company should be aware and consider between two options d) Education allowances - It is an integral part of an international compensation policy - Allowances for education can cover items such as tuition, language class tuition, enrolment fees, books and supplies, transportation, room and board and uniforms - PCNs and TCNs usually receive similar treatment concerning educational expenses However the price of studying in international schools is much more expensive than local public schools but international schools are preferred by many expatriates because these schools follow the home-country curriculum, so this may become a problem for multinationals e) Relocation allowances - Including 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 (pơ qui sịt) (cars, club memberships, servants and so on) may also need to be considered (usually for more senior positions, but this varies according to location) - These allowances are often contingent upon (ơ pon) tax-equalization policies and practices in both the home and the host countries - For example, in most Western countries a driver is considered a luxury, only available to very senior managers In developing economies a driver is economical in terms of cost, effectiveness and safety f) Allowances for Spouse assistance - Objective: to help guard against or offset income lost by an expatriate’s spouse as a result of relocating abroad - Some MNEs may pay a one-time allowance to make up for a spouse’s lost income - Some U.S firms are beginning to focus on providing spouses with employment opportunities abroad, either by offering job-search assistance or employment in the firm’s foreign office (subject to a work visa being available) 2.4 Benefits - Expatriate ‘benefits’ includes health care, pension plans/social security, life insurance, child allowances and profit sharing/stock option plans In addition to the following benefits, multinationals also provide vacations and special leave ● Rest and rehabilitation leave, based on the conditions of the host country, may provide the employee’s family with airfares to a more comfortable location near the host country ● Emergency provisions are available in case of a death or illness in the family ● Employees in hardship locations often receive additional leave expense payments or rest and rehabilitation periods International compensation approaches (Phạm Nguyệt Nhi) There are a few methods commonly used to determine global expatriate compensation which include: The going rate approach, the balance sheet approach and local plus In this part, we are going to describe each approach and their advantages and disadvantages ● The going rate approach: The going rate approach could be known as the market rate approach because this type of approach is based on the local market rate It relies on comparison of surveys of the local nationals, expatriates of the same nationality and expatriates of all nationalities’ pay package In this approach, The base pay and benefits may be supplemented by additional payments for low pay countries With this approach, the base salary for the international transfer is linked to the salary structure in the host country The multinational typically collects information from local compensation surveys and must select whether local nationals, expatriates of the same nationality or expatriates of all nationalities will be the reference point in terms of benchmarking The going rate method aims to treat the expatriate employee as a citizen of the host country The advantages of this approach are there is equality with local nationals and it is very attractive to the parent country or third country to a location that pays higher salaries than them Also, this approach is simple and easy for expatriates to understand as well as they are able to identify with the host country Further, there is often equity among expatriates of different nationalities However, there can be variation between assignments for the same employees This is most obvious when comparing an assignment in an advanced economy to one in a developing country or assignments in different advanced economies where differences in managerial salaries and the effect of local taxation can significantly influence an employee's compensation level when using the Going Rate approach Secondly, there may be differences among expatriates of the same country in different locations A strict interpretation of the Going Rate approach might lead to competition for assignments to financially favorable places and less interest in financially unattractive locations Finally, the Going Rate approach may cause issues during repatriation if the employee's income reverts to a level lower than that of the host nation ● The balance sheet approach: The balance sheet approach is the most widely used approach by organizations and its main idea is to maintain the expatriate’s standard of living throughout the assignment at the same level as it was in his/her home country In other words, it is about ensuring the same purchasing power, which helps to maintain the home country’s lifestyle The balance sheet approach implies matching the expatriate’s salary with home-country peers, not with the host-country colleagues This approach links the base salary for expatriates to the salary structure of the relevant home country The key assumption of this approach is that foreign assignees should not suffer a material loss due to their transfer There are four major categories of outlays incurred by expatriates that are incorporated in the Balance Sheet approach: Goods and services – home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care Housing – the major costs associated with housing in the host country Income taxes – parent-country and host-country income taxes Reserve – contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc The employee is expected to contribute a portion of their salary to each of these four categories, equivalent to what they would typically pay for each one at home This serves to protect employees from cost differences between the home and host countries The organization will provide additional benefits or allowances based on specific circumstances The advantages of this approach are: ● Employees receive equivalent compensation to their colleagues back at home ● Repatriation or a subsequent relocation is straight-forward because employees understand that they will be adequately compensated and will not struggle financially when they return to their home country ● The balance sheet approach takes a holistic approach to expatriate packages, taking all the necessary factors into account to ensure employees don’t experience major gains or losses when they relocate ● Whether an employee is moving to a higher or lower wage country this method can still be applied ● Easy to communicate The disadvantages of this approach are: ● This method is time-consuming and complex to administer due to ever-changing economic conditions ● It intrudes on an employee’s personal financial situation ● If known, pay disparities between expatriates and host country employees may cause tension in the workplace The balance sheet approach is perhaps most appropriate for mid and senior-level employees where the return on investment is higher In comparison between approaches, the going rate approach seems to be more cost-effective than the balance sheet approach However, the balance sheet approach continues to be the most widely used method This shows that attraction/motivation of potential candidates for assignments is clearly more important than cost saving ● The local plus approach: A third emerging approach to international compensation is called the local plus approach Local Plus has begun to emerge, particularly in the Asia Pacific region Surprisingly, local-plus policies are becoming more popular as an alternative Under a local-plus approach, transferees receive a salary based on the host-country salary structure, plus additional allowances that can include housing assistance and educational assistance for children Transferees generally not remain on their home-country benefits plans In general, the "plus" elements vary considerably by company and location Local Plus compensation does not typically include tax equalization, COLA, mobility premiums, hardship allowances, familiarization visits, home leave, cross-cultural training and other pre-departure programs, or spouse assistance Pension benefits are optional depending on the nature of the assignment and whether the transfer is temporary or permanent Local-plus packages are sometimes seen as the "magic elixir" of expatriate compensation because they can strike a balance between local packages and expensive expatriate packages Developing low-cost alternative salary packages is one way to achieve this This approach will solve this problem by offering ‘plus’ benefits based on what is appropriate given the employee’s experience and skills rather than where they come from or where they are going to Local plus compensation tends to decrease the ties that bind expatriates to their firm However, differences in host-country conditions make these policies a challenge As Local Plus expatriates are less reliant on firms to fund their expatriate lifestyle, and because they are living a largely ‘local’ lifestyle to begin with, their willingness to consider other job offers that may afford them even an incremental increase in their current salary is higher Second, providing a “plus” benefit package rather than significantly increasing the base salary alleviates some of these problems but doesn’t fully eliminate the fact that some countries are more attractive than others for overall cost, pay, or tax reasons and that the base salary might fluctuate more than with a home-based approach Third, companies have a duty of care and need to provide a minimum coverage in terms of health, pension, and other benefits In some cases, the benefits provided to local employees are not meeting international standards or are not available to foreigners Security issues can also drive the need for specific benefits and force employees to live in specific types of secure housing These limitations mean that a local plus package can become very expensive (if the plus cannot be limited to a few allowances or benefits) or be insufficient for some moves, especially to dangerous hardship locations The special problem areas of taxation, valid international living cost data and the problem of managing TCN compensation (Trần Thu Huyền) Taxation - Taxation is one aspect of international compensation that interests practitioners and foreigners most because taxes often evoke emotional responses - Tax filing can be very time consuming for both MNCs and expats - Multinational companies typically choose one of the following approaches to international tax treatment: Tax Equalization: Companies withhold an amount equal to the foreign national's tax liability and pay all taxes in the host country Tax protection: Workers pay up to the amount of tax they would pay on home country compensation In such a situation, the worker is entitled to any money received if the total tax abroad is less than in the home country => Tax equality is by far the more common tax policy used by multinationals - Ad hoc – each expatriate handled differently - Laissez-faire – each is ‘on their own’ - As multinational companies operate in more and more countries, they are subject to very different income tax rates - Many Multinational enterprises retain the services of international accounting firms to provide advice and prepare host-country and home-country tax returns for their expatriates - Multinationals are also out sourcing the provisions of further aspects of the total expatriate compensation packages including a variety of destination services of providing payment in a package Valid international living cost data - The international cost of living is a regular issue for countries Regarding the international cost of living, some consulting firms offer regular surveys to calculate a cost of living index that can be updated according to currency exchange rates - Multinational enterprises using a balance sheet approach must continuously update compensation packages with new cost of living data, which is an ongoing administrative requirement => This is a very important issue for expatriates and is the basis of many complaints if the update is substantially behind any increase in the cost of living - There is much debate about what should be in the 'basket' that consulting firms use as the basis for calculating the cost of living around the world - It is also possible to take a broader view and focus on the cost of doing business rather than the cost of living for expatriates, because the MNC is concerned with the overall cost of doing business in one country specific as well as the more microscopic issue of expat living costs The problem of managing TCN compensation Third-country nationals (TCNs) are employees who are not from the home country or the host country TCNs have traditionally been technical or professional employees hired for short-term employment and are often considered international freelance employees In the case of TCNs, multinational companies have one of three options regarding compensation: ● Pay the TCNs as if they were local nationals ● Treat them as any other citizen would be treated ● Establish an arrangement based primarily on the third country's existing pay ranges The option a company chooses depends primarily on how these employees were hired into the organization or how they obtained the international assignment The most common practices include the following: If the company is hiring locally in the host country, a Third-country nationals who applies for a job (including a professional or managerial position) may be assumed to be applying under the terms being offered In this case, unless the TCN was specifically targeted and individually recruited for the position, he or she would most likely be offered the same compensation package provided to other local nationals If a Third-country nationals who is already employed by the company is transferred from another country, the compensation arrangement usually depends on the individual's particular career pattern TCNs who occupy positions that involve regular transfers or reassignments are most likely to be compensated on the same basis as any one of their counterparts who are also subject to frequent transfers 5 Examine recent developments and global compensation issues (Hoàng Khánh Linh) Global compensation is rapidly changing towards non-material trends The changing workforce attitude requires HR management groups to revisit the existing compensation and work environment provided by the company In the future, enterprises will increase the incentive content of non-material returns in total rewards, including career development, immediate feedback on performance and job intelligence and automation; enterprises will re-emphasize employees' physical and mental health and security management through personalized material returns Employee performance, work experience and its total rewards needs are closely linked as u can see there are some trends in the area of HR compensation: ● Diversification of Work and Multi-Polarization of Compensation Levels: the traditional employment structure will be supplemented by a more flexible and adaptable model, and the salary, work schedules and contract types will be more diversified The diversification of future work will lead to multi-polarization of compensation levels ● Mixed Compensation Structure with Real-Time Payroll: Mixed working mode makes individual income diversified, and mixed and diversified employment mode makes compensation structure more complicated The future compensation cycle is no longer limited to the monthly, but to increase the real-time pay, quarterly pay, pay per piece, and other ways of payment ● From External Incentives to Self-Motivation: Internal motivation comes from freedom and not oppression, surprise rewards, random rewards setting clear objectives maximizing happiness of success continuous challenge setting necessary risks and failures ● From Regular Feedback to Instant Rewards: Feedback is no longer limited to long cycles of verbal recognition and high cost material rewards, but may be short cycles of low-cost and efficient use of virtual medals, digital thumb up behavior ● From Total Rewards to Full Experience: Drawing an employee journey and experience map can help companies notice key points in employee experience and ensure that employee values have an effect on employee experience After rolling out recent developments and global compensation issues, we have a few recommendations for businesses The first is to apply five laws of feedback: Without feedback, people tend to give up The intensity of the feedback determines the intensity of people's subsequent behavior People decide what to next (positive, negative, status quo) based on the type of feedback Constant environmental feedback can build behavior habits by influencing motivation The more delayed the feedback, the lower the utility Secondly, digital recognition and incentives, The laws of incentives: Value is defined by the receiver more than the giver Self-worth is recognized by others Incentives and recognition enable employees to explore their potential Throughout the presentation, we hope that global HR managers and HR services professionals better understand key trends in compensation to help companies build global competitive totals and incentive systems in an increasingly complex market environment Case study (Ngô Duy Hiếu) Compensation Problems with a Global Workforce (Global, Thailand, Philippines, Japan, Bolivia) Expanding the international workforce to include non-parent-country employees has brought increased capabilities and decreased costs-along with a new set of compensation problems For example, the director of international HR for a large multinational IT company faced just such a dilemma: It seems as though our international compensation program has gotten out of hand I have parent-country expatriates, third-country nationals, and inpatriates yelling at me about their allowances [In addition] headquarters is yelling at me because the costs are too high Quite frankly, I can't seem to get any answers from our consultant about how to handle compensation for such a global workforce, and no one else in the industry seems to know how to approach the problem, either This IT multinational has 40 highly paid US expatriates working as field engineers and marketing managers in 14 countries But it also has foreign national employees from the Philippines, Japan, and Bolivia working alongside the US employees in eight locations worldwide And, finally, it has foreign nationals from Thailand and the Philippines working with US nationals at the organization's headquarters In all cases, it is the firm's policy to send such employees out on foreign assignments for less than five years and then return them to their home countries An example of the types of complaints that were being received from the expats involves the following problem concerning inpatriate employees working at headquarters The firm has a field engineer from the Philippines who is earning the equivalent of US$35,000 in Manila It has another field engineer from Thailand who's earning the equivalent of US$40,000 in Bangkok And they've both been relocated to headquarters and are working side by side with American field engineers who earn $80,000 for the same job Not only they work side by side, but they live near each other, shop at the same stores, and eat at the same restaurants The problem that IHR has is that it's spending a lot of money on cost-of-living adjustment data for expats from two different home countries, both going to headquarters, and yet their current standard of living is the same, and the same as that of their local peers They're angry because their allowances don't reflect how they live in the headquarters' country Their allowances also don't reflect how they lived in their home countries, either So what we have are two employees, one earning $35,000 and the other earning $40,000 (plus cost-of-living adjustments), working and living side by side with headquarters' counterparts who are earning $80,000 The solution that most companies have tried is to simply raise the foreign nationals' salaries to the $80,000 level, thereby creating a host-country pay system for a home-country employee Unfortunately, there's nothing more pathetic than the tears of your foreign nationals when it's time to return home, and you have to tell them you're cutting their salary to the pre-headquarters' assignment level What you are looking for is a pay system that will compensate your foreign nationals either by pay or provided benefits [including, e.g., housing and local transportation], in a consistent, fair and equitable manner, and will allow you to repatriate them with minimal trauma Discussion Questions Question 1: What would you if you were the IHR manager? - It is true that global companies have a lot of complexity and diversity in it, and with different countries comes different currencies This can create problems while giving compensation to the global employees Employees each have their own perception of internal equity as it affects them among their peers, managers and subordinates If an employee believes they are underpaid, they will typically react by reducing their effort or performance - Ihr managers also need to think about the reward system as a whole - Balancing between the domestic and global is quite a difficult task for the IHRM Also maintaining a bonus plan and promoting the employees on the basis of merit is difficult - Managing compensation without a proper budget is useless Also the manager needs to think of the budget according to the region and its people Question 2: What kind of global compensation policy would deal effectively with this sort of problem? - Providing traditional compensation to the employees can affect the budget, instead the company can make a policy of earning rewards by their merits - Performance basis pay can also solve the global compensation problem - By simply following the global compensation laws, an international company can cope up with the problem - Organizations can also adopt the line of sight policy where the Ihr managers compares the reward received by the employees and their given performance to the organization GROUP CONTRIBUTION Name Student ID Contribution Nguyễn Vũ Hoài Linh 19071411 100% Phạm Nguyệt Nhi 19071455 100% Trần Thu Huyền 19071384 100% Hoàng Khánh Linh 19071402 100% Ngô Duy Hiếu 18071087 100% ... Linh 19071411 100% Phạm Nguyệt Nhi 19071455 100% Trần Thu Huyền 19071 384 100% Hồng Khánh Linh 19071402 100% Ngơ Duy Hiếu 180 71 087 100% ... headquarters' counterparts who are earning $80 ,000 The solution that most companies have tried is to simply raise the foreign nationals' salaries to the $80 ,000 level, thereby creating a host-country... relocated to headquarters and are working side by side with American field engineers who earn $80 ,000 for the same job Not only they work side by side, but they live near each other, shop at