Chapter 6Chapter objectivesChapter objectives (cont.)IntroductionIntroduction (cont.)Objectives of international compensationObjectives of international compensation (cont.)Slide 8Slide 9Key components of an international compensation programKey components of an international compensation program (cont.)Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Approaches to international compensationApproaches to international compensation (cont.)Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Some tentative conclusions: patterns in complexitySome tentative conclusions: patterns in complexity (cont.)Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Chapter summaryChapter summary (cont.)Slide 55Chapter 6CompensationIBUS 618 Dr. YangChapter objectivesIn 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.)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.)IBUS 618 Dr. YangChapter 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.IBUS 618 Dr. YangIntroduction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.)IBUS 618 Dr. YangIntroduction (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.IBUS 618 Dr. YangObjectives 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.)IBUS 618 Dr. YangObjectives 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.)IBUS 618 Dr. YangObjectives 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.)IBUS 618 Dr. YangObjectives 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.IBUS 618 Dr. YangKey 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.)IBUS 618 Dr. YangKey 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, many of which are directly related to base salary (e.g. foreign service premium, cost-of-living allowance, housing allowance) and also the basis for in-service benefits and pension contributions. It may be paid in home or local-country currency.The base salary is the foundation block for 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