Chapter 6: Compensation pdf

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.) [...]...Key components of an international compensation program (cont.) • 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,... Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) Table 6-4: Expatriate compensation worksheet Use with International Human Resource Management ISBN 1-84480013-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... further aspects of the total expatriate compensation packages including a variety of destination services in lieu of providing payment in a package Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • Taxation (cont.) – When multinationals plan compensation packages, they need to... practices can be modified in each country to provide the most tax-effective, appropriate rewards for PCNs, HCNs and TCNs within the framework of the overall compensation policy of the firm – The difficulties in international compensation ‘are not compensation so much as benefits’ • Pension plans are very difficult to compare or equalize across nations, as cultural practices vary endlessly • Transportability... Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Key components of an international compensation program (cont.) • Benefits – The complexity inherent in international benefits often brings more difficulties than when dealing with compensation – Pension plans are very difficult to deal with country-to-country, as national practices vary considerably • Transportability... periods Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation There are two main options in the area of international compensation – the Going Rate Approach (also referred to as the Market Rate Approach) and the Balance Sheet Approach (sometimes known as the Build-up Approach) • The... 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 host country The multinational usually obtains information from local compensation surveys and must decide whether local nationals (HCNs), expatriates of the... Welch Approaches to international compensation (cont.) • The Going Rate Approach (cont.) – Advantages and disadvantages of the Going Rate Approach Table 6-2: Advantages and disadvantages of the Going Rate Approach Use with International Human Resource Management ISBN 1-84480013-X Published by Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • The Balance... Thomson Learning © Peter Dowling and Denice Welch Approaches to international compensation (cont.) • The Balance Sheet Approach (cont.) – The approach links the base salary for PCNs and TCNs to the salary structure of the relevant home country • For example, a US executive taking up an international position would have his or her compensation package built upon the US base-salary level rather than that... international compensation whether the employee is a PCN or TCN Major differences can occur in the employee’s package depending on whether the base salary is linked to the home country of the PCN or TCN, or whether an international rate is paid 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 . 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. 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. 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