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CHAPTER

12
Chapter

International Compensation

12
International Compensation
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CHAPTER

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1.

International Compensation

The nature of the assignment of the employee to a large extent determines the method of compensation. These terms of assignments are: Short-term assignment, which may be for a relatively short period, such as the case of a feasibility study, etc. This type of assignment does not usually

exceed six months. Families also do not generally accompany.


2. Long term assignment, if the assignment is more than six months or one year. It will usually result in employee's moving along with his family. 3. Permanent assignment is when an employee signs a permanent employment contract with a foreign subsidiary, the contract is usually meant for a fixed period of time of longer duration.

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following factors:

International Compensation

Problems In Compensation Management


MNCs face lot of difficulties in evolving compensation package in view of the

Economic condition of the host country.

Employment condition of the host country.


Taxation laws of the host country. Currency fluctuation in the host country.

Inflation situation in the host country.

The result is that expatriates cost three to four times more than the employees of the host country.
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1. 2. 3.

International Compensation

Objectives Of The Compensation


Attract and retain employees qualified for service abroad. Facilitate transfers between foreign affiliates and between home country and foreign affiliates. Establish and maintain a consistent and reasonable relationship between compensation of all of the employees of any affiliate, whether posted at home or abroad and between affiliates. Arrange reasonable compensation, in the various locations, in relation to the practices of leading competitors. Compensation for reasonable foreign services, tax equalization, reimbursement of reasonable cost.

4. 5.

6.
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Be cost-effective.
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These include: 1. Basic pay

International Compensation

Elements Of Expatriate's Compensation Package


There are five basic elements in a typical expatriate's compensation package.

2.
3. 4. 5.

Benefits
Allowances Incentives and Tax reliefs.

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Location 1. Beijing 2. Hong Kong 3. Tokyo 4. Shanghai 5. Moscow 6. Seoul 7. London 8. Ho Chi Minh City 9. Singapore 10.New York

International Compensation

Expatriate Housing Costs in Foreign Cities Estimated Yearly Housing Costs $158,400 $156,000 $153,600 $120,000 $108,000 $102,000 $ 93,600 $ 86,400 $ 85,200 $ 72,000

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City
Tokyo Hong Kong Moscow Singapore Taipei Seoul Tel Aviv London Beijing New York Athens Sao Paulo Buenos Aires 12-7

International Compensation

Cost Estimates for Goods and Services in Various Cities of the World Cost of Living: New York - 100, December, 1996

Ratings
175 125 125 120 115 110 105 104 101 100 95 93 90 B D Singh
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Lisbon Jakarta Bangkok Kuala Lumpur Santiago Istanbul Bogota

International Compensation

89 88 87 86 78 77 75

Warsaw
Manila Prague Mexico City Johannesburg Budapest Caracas New Delhi

73
70 67 60 58 57 56 40
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Source: "Cost of Living Across the Globe," The Economist (December 14, 1996)

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Country Argentina Australia Belgium Brazil Canada China (Hong Kong SAR) China (Shanghai) France Germany Italy Japan Malaysia

International Compensation

Social Security Contributions by Employers and Employees Employer contribution rate (%) 7.81 0.00a 11.21 20.00 4.30 5.00 43.50 -b 12.80 30.94 8.68 1.75 Employee contribution rate (%) 11.00 0.00a 8.65 11.00 4.30 5.00 16.00 -b 12.80 9.89 8.68 0.50
Cont.

Total contribution rate (%) 18.81 0.00a 19.86 31.00 8.60 10.00 59.50 -b 25.60 40.83 17.36 2.25
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Mexico New Zealand Singapore South Africa Spain Sweden Switzerland

International Compensation

29.00 0.00a 16.00 0.00a 30.60 22.91 5.05

4.00 0.00a 20.00 0.00a 6.35 7.00 5.05

33.00 0.00a 36.00 0.00a 36.95 29.91 10.10

Taiwan
Thailand The Netherlands UK USA Venezuela

5.00
3.00 0.00a 11.90 6.20 9.00

1.00
3.00 29.40 10.00 6.20 4.00

6.00
6.00 29.40 21.90 12.40 13.00

a When the contributions are at zero, they are funded out of the General Tax Revenue and range from zero to very high values b Varies Source: Adapted from Towers Perrin, Worldwide Total Remuneration 2001-2002
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Country
Argentina Australia Belgium Canada

International Compensation

Maximum Marginal Tax Rates Around the World

1985 Rate
45.0% 49.0% 72.0% 34.0%

1988 Rate
38.3% 49.0% 70.8% 29.9%

France
Germany Hong Kong Japan Korea Netherlands Singapore Switzerland United Kingdom United States

65.0%
56.0% 17.5% 70.0% 55.0% 72.0% 40.0% 13.8% 60.0% 50.0%

56.8%
56.0% 16.5% 60.0% 55.0% 72.0% 33.0% 11.5% 40.0% 33.0%
Cont.
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Source: Internal Dimensions of Human Resource Management by P.J. Dowling and R.S. Schuler

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are: i. ii. The budget system

International Compensation

There are generally three approaches to international compensation. They

The local growing rate system.

iii. The balance sheet or home made system.

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International Compensation

Balance Sheet Approach Equivalent salary and allowances, host country $10,200
Relocation Bonus

Base country salary


$7,000

$1,500 Taxes

Base country currency

Taxes $2,000

$1,000 Housing $700

Allowances paid by company

Housing $2,000
Goods and Services $2,000 Reserve $1,000

Goods and Services Reserve


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International Compensation

Critical Assessment of the Balance Sheet Approach Some of the disadvantages of the Balance Sheet approach are that - 1. It can result in great disparity between expatriate of different national and between expatriates of local nationals, 2. At times, it can be quite complex to administer. But, its advantages are many more. Some of them are as follows: 1. 2. 3. 4. It ensures equity between assignments. It ensures equity between expatriates of same nationality. It facilities expatriate's re-entry. It is easy to communicate to the employees.
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International Compensation

Terms and Conditions for Expatriate Employees Some of the terms and conditions decided by management for expatriate employees sent abroad for assignments/projects are: Period of posting


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Alone/family Pay and allowances Medical facilities during posting abroad Housing Winter clothing/outfit allowance in lumpsum (half in foreign currency to be paid) Transfer grantequal to one month's salary Travel to and fro Joining time before leaving. Leave Home leave passage Cont. Indian payments Copyright 2007, B D Singh
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International Compensation

Alternatives to Balance Sheet Approach The balance sheet approach was refined in the 1960s and 1970s when most expatriates were technical employees of US oil companies. But the business

environment and the reasons for expatriate assignments have changed since then. Consequently, many employers are exploring changes.
Expatriate Systems Objectives? Quel Dommage! Talk to experts in international compensation, and you soon get into complexities of taxes, exchange rates, housing differences, and the like. Expatriate compensation systems are forever trying to be like Goldilocks's porridge: not too high, no too low, but just right. The expatriate pay must be sufficient to encourage the employee to take the assignment yet not so attractive that local nationals will feel unfairly treated or Cont. that the expatriate will refuse any future reassignments.
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International Compensation

Milkovich and Bloom have argued that strategic flexibility is necessary in international compensation and that nationality or "national systems thinking. This model group forms total compensation into three sets: core, customize and choice. Specific practices in the core section may vary according to market and local conditions but must be consistent with the core policies. The crafted customize set of compensation elements assumes that regional managers have discretion to choose from a menu of compensation forms. While alternatives in the choice set offer flexibility for employees to select among various forms of compensation. A fixed value in all countries. A relative value in all countries. A relative market position in all countries.
Compensation and Reward Management B D Singh
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International compensation policies generally follow three alternatives: 1. 2. 3.


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Cash

International Compensation

Example of Employment Package for 'Internationally Compensated Staff'


Professional expenses

Annual fixed income


Average income usually paid in the trade Netherlands: DFL 100,000 Denmark: DKK 395,000 Britain: 28,000 Currently disposable Variable income 15 per cent of the fixed income if targets are met Health assurance allowance average allowance usually paid in the host country

Telephone allowance
full reimbursement of all costs; tax consequences to be borne by the employee Company car Point of reference are cars in the same range as make X type Y Personal expense allowance the same net allowance equivalent to DFL 1,500 in all countries

Cont.

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Pension

International Compensation

Deferred income

Insurance Supplement to sickness benefits upto the full fixed income during the first year of illness; supplement upto 85 per cent in the second year Disability After the third year of illness, benefits will be supplemented upto 65 per cent of the income in all countries, regardless of state benefits Widows/widowers pension the payment to widows/widowers amounts to 65 per cent of the old age pension

supplement to state pension upto a maximum of 65 per cent of the last earned income; the pension age is 65

Commitments

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Issue Cost

International Compensation

Comparing the Issues Involved in Using Different Types of Employees Type of Employee Home Country Expatriate Expensive Local Nationals Inexpensive Third Country National Expensive

Skills
Loyalty Availability Compensation Interest in assignment Recruited by others Trust
Business (Winter 1993): 57-72

High
Moderate Some High/Complex Low No Moderate

Low
High Many Relatively Low High Yes High`

Moderate
Low Few Moderate Cost/Complex High Yes Low

Source: M. Harvey "Designing a Global Compensation System: The Logic and a Model," Columbia Journal of World

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