Compensation Chapter 14

Cultural Differences

Regulatory Environment (laws, role of unions, governments)

Human Capital (who is available? Expats? Local Nationals?)

Theme to Expat Compensation: How to make sure the employee is no worse off & make sure people are somewhat happy to go where you need them


--how to further corporate interests abroad & encourage employees to take foreign assignments

--how to minimize financial risks to employees & make their (& their families) experiences as pleasant as possible

--how to promote a smooth transition back to life in US after assignment (repatriation)

--how to promote strategies in foreign markets

--how to manage the various employees

--reasonable adherence to US employment laws for US workers working for US companies abroad (difficulties due to foreign laws & policies)

Host-Country Nationals (HCNs)--foregin national citizenswho work for a US company in their home country

• Example: Japanese citizen working for GE in Tokyo

Third-Country Nationals (TCNs)--foreign national citizen who work at a branch of a US company in a foreign country

• Example: Australian citizen working for Halliburton in Saudi Arabia

Expatriate--US citizens working for US companies in foreign countries

• Example: US citizen working for Citibank in London

Core Compensation

• Base Pay
• Incentive Pay

Benefits

• Standard
• Enhanced

Core Compensation
Base Pay: can be set by 3 different methods

• Home-Country--> expats compensated the amount they would receive if they were performing similar work in their home country;

----Most Suitable when assignments are short

• Host-Country--> expats compensated based on the host country pay scale

-----Most suitable when assignments are long

• Headquarters Based--> compensates all employees according to the pay scales used at the headquarters (wherever that may be)

------Most suitbale when expats move from one foreign country to the next and
infrequently in their home country

Incentive Pay:

Foreign Service Premium: monetary payments above regular base pay that is offered to encourage employees to accept expat assignments;

• Percentage of base pay between 10-30% dispersed over several installments
• Usually applies to positions over 1 year long

Hardship Allowance: to compensate for sacrifices, specifically to recognize & compensate for exceptionally hard living & working conditions

• Percentage of base pay ranging from 5-35% dispersed in small increments throughout duration of serivce
• US State Dept Criterion to Identify hardship locale
• Extraordinarily difficult living conditions (lack of adequate housing, isolation, lack of food)
• Excessive physical hardship (severe climate, high altitude, presence of dangerous conditions affecting physical & mental health)
• Notably Unhealthy Conditions (diseases & epidemics, lack of public sanitation, & inadequate health facilities)

Mobility Premium: basic reward for employees for moving from one assignment to another

• used to encourage employees to accept, leave, or change assignments
• given as a lump sum; tied to moving each time

Benefits:

Standard--typical ones employer must provide
-Expats continue to participate in Social Security Programs
*Retirement Insurance, Benefits for Dependents, Medicare
*FMLA
*PTO includes the same annual vacation benefits as domestic counterparts & any additional foreign holidays


Enhanced--to recognize the sacrifice & make sure employee is no worse off than they would be at home
*Relocation Assistance: Covers moving expenses (temporary quarters, transportation, reasonable travel expenses, moving or storing of household goods)
----Amount reimbursed depends on duration of assignment, distance, and rank/position in company

*Education Reimbursement: Expats may need to place kids in private schools to accommodate for language needs or to receive education comparable to the home country educational system

*Home Leave & Travel Reimbursement: additional vacation specifically to stay connected to family/friends in the home country
---must have served a minimum amount of time before eligible
---while taking this leave, the company will reimburse for travel expenses between foreign locale & US

*Rest & Relaxation Leave & Allowance: additional time off
---Specifically tied to HARDSHIP locations
---Location where employee may go is designated by the Employer

• Used under the Home Country Method of determining base pay
• To provide similar standard of living; keep you “whole”
• Best if assignment is of limited duration
• Best if employee will repatriate after the assignment
• Strategic Value:
  • Protects expats standard of living
  • Allows companies to control costs b/c it relies on standards measuring cost differences between US & foreign countries
• Companies compare the costs of 4 major expenditures (costs based on Cost of Living Index from State Department, Returning Expats, Consulting & Research companies)
  • Housing & utilities
  • Goods & services
  • Discretionary Income (covers variety of financial obligations in the US for which expats remain responsible; companies usually do not provide allowances for these
  • Taxes (expats continue to pay US income taxes & social security taxes; may also have to pay income tax to foreign local gov’t)
• After comparison, employees receive allowances whenever the costs in the foreign country exceed the costs in the US

Starts with a hypothetical tax--> estimate of what you would otherwise be paying if you were to stay at home + estimate of what foreign income tax you may have

• Tax Protection
  • Burden of filing and paying income taxes on expatriate
  • Employers reimburse expats when the actual tax is greater
  • Expats pay entire tax when the actual tax is less or equal
    • Expats pay the lower amount of either the Hypothetical tax or the Actual tax
    • When the Actual Tax is less than the Hypothetical Tax the company will let you pocket the difference; employee may get a financial windfall!

Starts with a hypothetical tax--> estimate of what you would otherwise be paying if you were to stay at home + estimate of what foreign income tax you may have

• Employers take the responsibility for paying income taxes to US & foreign govn’t: they deduct income from expats paycheck in the amount of the Hypothetical tax
  • If the actual tax is higher than the hypothetical tax, the employer will pay the rest
  • If the actual tax is lesser than the hypothetical tax, expat paycheck is still deducted for the amount of the hypothetical tax initially, but will be reimbursed for the amount not used
    • There is no financial windfall for the expatà equitable treatment for everyone