Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Chapter 6 Compensation Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Chapter objectives In the introductory chapter we described IHR managers as grappling with complex issues. International managers must (1) manage more activities from a broader perspective, (2) be more involved in the lives of their far-flung employees, (3) balance the needs of PCNs, HCNs and TCNs, (4) control exposure to financial and political risks and (5) be increasingly aware of and responsive to host-country and regional influences. All of these issues and concerns are brought out in a discussion of compensation issues. In this chapter we: (cont.) Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Chapter objectives (cont.) • 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 the recent developments and global compensation issues. Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Introduction • Global compensation managers (that is, everyone involved at any level in pay-related decisions) increasingly deal with two areas of focus. They must manage highly complex and turbulent local details while concurrently building and maintaining a unified, strategic pattern of compensation policies, practices and values. (cont.) Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Introduction (cont.) • For multinationals successfully to manage compensation and benefits requires knowledge of employment and taxation law, customs, environment and employment practices of many foreign countries, familiarity with currency fluctuations and the effect of inflation on compensation and an understanding of why and when special allowances must be supplied and which allowances are necessary in what countries – all within the context of shifting political, economic and social conditions. Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Objectives of international compensation • When developing international compensation policies, a firm seeks to satisfy several objectives. First, the policy should be consistent with the overall strategy, structure and business needs of the multinational. • Second, the policy must work to attract and retain staff in the areas where the multinational has the greatest needs and opportunities. Hence the policy must be competitive and recognize factors such as incentive for foreign service, tax equalization and reimbursement for reasonable costs. (cont.) Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Objectives of international compensation (cont.) • Third, the policy should facilitate the transfer of international employees in the most cost-effective manner for the firm. Fourth, the policy must give due consideration to equity and ease of administration. • The international employee will also have a number of objectives that need to be achieved from the firm’s compensation policy. First, the employee will expect the policy to offer financial protection in terms of benefits, social security and living costs in the foreign location. (cont.) Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Objectives of international compensation (cont.) • Second, the employee will expect a foreign assignment to offer opportunities for financial advancement through income and/or savings. • Third, the employee will expect issues such as housing, education of children and recreation to be addressed in the policy. (The employee will also have expectations in terms of career advancement and repatriation, as discussed in Chapters 3, 5 and 7.) (cont.) Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Objectives of international compensation (cont.) • If we contrast the objectives of the multinational and the employee, we see, of course, the potential for many complexities and possible problems, as some of these objectives cannot be maximized on both sides. • Firms must rethink the traditional view that local conditions dominate international compensation strategy. Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Key components of an international compensation program The area of international compensation is complex primarily because multinationals must cater to three categories of employees: PCNs, TCNs and HCNs. Key components of international compensation are as follows: (cont.) [...]... nations refer to as ‘social security’ programs Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) Table 6- 7 : Social security contributions by employers and employees Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and... Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • The Balance Sheet Approach (cont.) – There are advantages and disadvantages of the Balance Sheet Approach Table 6- 5 : Advantages and disadvantages of the Balance Sheet Approach Use with International Human Resource Management. .. in host-country benefit programs and/or making up any difference in coverage • Whether host-country legislation regarding termination affects benefit entitlement • Whether expatriates should receive home-country or host-country social security benefits Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international. .. with the host-country assignment exceed equivalent costs in the parent country, these costs are met by both the firm and the expatriate to ensure that parent-country equivalent purchasing power is achieved Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) Table 6- 4 : Expatriate... expatriates in home-country programs, particularly if the firm does not receive a tax deduction for it • Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage • Whether expatriates should receive home-country or host-country social security benefits Use with International Human Resource Management ISBN 1-8 4480013-X Published by... known as the Build-up Approach) • The Going Rate Approach Table 6- 1 : Going Rate Approach Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • The Going Rate Approach (cont.) – With this approach, the base salary for international transfer is linked to the salary structure in the... location is in a low-pay county, the multinational usually supplements base pay with additional benefits and payments Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • The Going Rate Approach (cont.) – Advantages and disadvantages of the Going Rate Approach Table 6- 2 : Advantages... Approach Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • The Balance Sheet Approach Table 6- 3 : The Balance Sheet Approach – The basic objective is to ‘keep the expatriate whole’ (that is, maintaining relativity to PCN colleagues and compensating for the costs of an international. .. home-country living standards (or, in some cases, receive accommodation that is equivalent to that provided for similar foreign employees and peers) Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Key components of an international compensation program (cont.) • Allowances (cont.) • Other alternatives include company-provided... of expatriates Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • Taxation (cont.) – Multinationals generally select one of the following approaches to handling international taxation: • Tax equalization – firms withhold an amount equal to the home-country tax obligation . International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Chapter 6 Compensation Use with International Human Resource Management. issues. In this chapter we: (cont.) Use with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Chapter objectives. with International Human Resource Management ISBN 1-8 4480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Objectives of international compensation • When developing international