By

Dr. Atri Roy Sengupta

 Pay & benefits for international assignees
 Subsidiary workforces in multiple countries
 Employees from many different countries (such as
inpatriates, HCNs, and TCNs)
 Varying country approaches to and levels of pay
and benefits
 Dealing with multiple currencies, exchange rates,
inflation rates, tax systems and rates, and differing
standards and costs of living
 Attraction and retention of employees who are
qualified for foreign assignments (from the
perspective of the parent company, but includes the
perspectives of the PCNs, HCNs, and TCNs)
 Facilitation of transfers between foreign affiliates,
between foreign affiliates and the parent company
(usually headquarters), and between parent-company
and foreign locations.
 Establishment and maintenance of a consistent and
reasonable relationship between the compensation of
employees of all affiliates, both at home and abroad.
 Maintenance of compensation that is reasonable in
relation to the practices of competitors yet minimizes
costs to the extent possible.
 Milkovich and Newman (2008) believe that employee
compensation design hinges on the variations presented
by four key factors:
1. Institutional -- political structures and cultural traditions
along with social contracts and trade union power
2. Economic -- integrated in the existing level of
competitiveness and the degree of market development,
the differences in ownership structures of the
organizations and the characteristics of the tax systems
3. Organisation -- the degree of autonomy enjoyed by the
employees, the level of technology and innovation, and
strategic aims
4. Individual -- demographic characteristics, level of
knowledge and skills, attitudes, motivations and
preferences of the international employees
 Cultural Factors & Compensation Design: compensation design
varies across cultural dimensions.
 Hofstede Model (1983) – culture can be explained in terms of four
dimensions:
1. Power Distance -- The greater the power distance, the more
noticeable the difference between superiors and subordinates (e.g.
Mexico, Arab nations, Malaysia). In contrast, individuals in societies
of short power distance (e.g. Netherlands, Sweden, Australia) will
probably be less tolerant of inequalities between levels and job
categories than in countries where greater power distance is
considered as normal.
 Gomez-Mejia and Welbourne (1991) indicate that countries with a
high power distance require hierarchical compensation systems with
large differences in earnings which reflect differences in status and
position between superiors and subordinates. Countries with a low
power distance require more egalitarian systems which reflect small
differences in earnings and with shared incentives (profit sharing).
 Cultural Factors & Compensation Design: compensation design
varies across cultural dimensions.
 Hofstede Model (1983) – culture can be explained in terms of four
dimensions:
2. Uncertainty Avoidance -- A low level of uncertainty avoidance
supposes a higher tolerance to risk and to the unknown resulting in
lower levels of stress in the individuals of this culture (e.g. Greece,
Portugal, Italy). A high level of uncertainty avoidance is related to
countries where the citizens constantly seek to minimize risks and to
control uncertainty resulting in striving to maintain security
individuals in such societies suffer more tension and stress (e.g.
Sweden, Denmark, Singapore).
 Countries with uncertainty avoidance usually give a lot of weight to
fixed pay and systems are characterized by being centralized and
very oriented towards internal equity. For countries with low
uncertainty avoidance, variable pay is a key element in the
compensation mix, the systems are very decentralized and flexible
and there is a lot more emphasis on the quest for external equity.
 Cultural Factors & Compensation Design: compensation design varies
across cultural dimensions.
 Hofstede Model (1983) – culture can be explained in terms of four
dimensions:
 3. Individualism vs. Collectivism -- Countries with high individualism
positively value and give weight to goals, autonomy and personal
privacy (e.g. USA, United Kingdom, Canada). In contrast, a high level
of collectivism (or low individualism) is found in countries where
central values are established on the basis of group loyalty,
commitment to the rules of the group, participation in group activities,
social cohesion and intense participation (e.g. Japan, South Korea,
Indonesia).
 Compensation based on individual performance and personal
achievements, the use of exclusively extrinsic rewards and the quest for
external equity are the most appropriate practices for countries with an
individualist culture. On the other hand, compensation based on group
performance, the use of intrinsic rewards (as well as extrinsic ones) and
an emphasis on internal equity is best for the collectivist culture.
 Cultural Factors & Compensation Design: compensation design varies
across cultural dimensions.
 Hofstede Model (1983) – culture can be explained in terms of four
dimensions:
 4. Masculinity vs. Femininity -- Masculinity countries (e.g. Germany,
Austria, USA) accept the philosophy of male dominated business
dealings along with highly aspects such as material possessions and
aggression in the search for greater wealth. Feminine societies (e.g.
Norway, Finland, the Netherlands) puts emphasis on behaviors
directed towards care and health, the quality of their lives than to
material possessions. Women are given a wider range of opportunities.
 The more masculine societies are characterized by compensation
policies which favor inequalities according to gender and usually
reward masculine characteristics and stereotypes both financially and
when it comes to promotion. Feminine societies foster more egalitarian
compensation systems which do not make sexual discriminations and
in which access to reward and promotion are not dependent on one’s
meeting a certain stereotype.
 Types of expatriates for purposes of compensation:
1. Temporaries -- employees who are on short-term assignments,
typically less than six months
2. Young, relatively inexperienced expats – employees, with
assignments from six months to five years, who can be
compensated and managed similar to local hires
3. Older, experienced expats – employees, relocated for their
technical or managerial skills, who are compensated with
incentives, add-ons, and adjustments
4. International cadre -- expats from throughout the firm who
move from one foreign assignment to another and need to be
compensated with a global salary and benefits
5. Permanent expats – employees posted to a foreign country but
who stay there for an extended period – beyond the normal
five-year limit for expats and who need to be reclassified as
locals
 There are seven basic approaches followed by global
enterprises to compensate their expats:
1. Negotiation/ad hoc
 Useful at the early stages of “going international” of the
firm when best expats are sent in the assignments.
 The firm does whatever it takes to get the person relocated
and pays whatever costs arise because of the inexperience
of the IHR managers and a tendency to design this
compensation equitable with domestic one.
 There are seven basic approaches followed by global enterprises to
compensate their expats:
2. Balance Sheet
 Followed by most multinationals when their international business
expands to the point where the firm has a larger number of expats.
 The firm, at this stage will seek a more standard approach and will
begin to make policy about what will and what will not be
covered.
 It involves an effort by the multinational to ensure that its
expatriates are “made whole.” Ideally, the compensation package
not only should make the expatriate whole but also should provide
incentive to take the foreign assignment, to remove any worry
about compensation issues while on that assignment, and to
ensure that the individual and his or her family feel good about
having been on the assignment.
  There are seven basic approaches followed by global enterprises to
compensate their expats:
2. Balance Sheet Model

Incentive components
• Housing allowance
• Displacement allowance:
Base Unfamiliar country;
compensation Uncomfortable environment Foreign
• Salary • Relocation expenses compensation
• Benefits • Education; language • Base pay
• Other forms training Allowance • Benefits

Equalization adjustments
• Cost-of-living adjustments
• Tax equalization allowance
• Employee benefits
adjustments
• Other forms
2. Balance Sheet Components
Incentive components
● Overseas/foreign service premiums
● Compensation for life adjustments (displacement allowances: unfamiliar
country, uncomfortable/harsh/dangerous environment)
● Relocation/travel expenses; house-hunting expenses; shipment and storage of
household goods; furnishings for foreign housing; home sale protection or
rental assistance; automobile shipping or sale protection
● Temporary living expenses
● Housing allowance: comparable to original home; comparable to foreign
peers; utilities allowance
● Education allowance for self, children, spouse; language and cultural training
allowance
● Spousal support: education, income replacement, employment services and
career planning
● Perquisites, e.g., club memberships, home leave, R&R leave, company car and
driver
● Tax preparation assistance
● Financial advice
● Expatriation counseling
● Home-country career support and counseling
● Repatriation assistance and planning
2. Balance Sheet Components

Equalization adjustments
● Cost-of-living adjustment (COLA)
● Reimbursement for payments into host-country welfare plans
● Income taxes – withheld for home taxes, pay local taxes; equalization and
protection
● Protection for fluctuation in exchange rates; inflation
● Employee benefits adjustments (pension, retirement savings plans, health
care)
 There are seven basic approaches followed by global enterprises to
compensate their expats:
2. Balance Sheet Base Salary Determination
 Home-country salaries (this is the most common base for
the balance sheet approach).
 International (usually based on headquarters) standard.
 Regional standard (e.g., the EU, US and Canada, Latin
America, South East Asia).
 Host-country (or destination) salaries; or the salaries of
other expatriates while on assignment – peers and/or
colleagues – in the host location.
 Better of home or host approach.
 There are seven basic approaches followed by global enterprises to
compensate their expats:
2. Balance Sheet Incentives Determination
 Most common incentives are “overseas premium” used to
 compensate the expatriate for all the adjustments that s/he
will need to make
 compensate the expatriate and her/his family for the
“dislocation” of having to move to an unfamiliar country
and to live in what might be seen as an uncomfortable (i.e.,
different) environment
 provide an incentive to take the foreign assignment
 keep up with the practices of other MNEs
 These premiums used to average about 15 to 25 percent of
the expatriate’s base pay
 There are seven basic approaches followed by global enterprises to
compensate their expats:
2. Balance Sheet Incentives Determination
 Additional forms of incentive include premiums for
“hardship” postings and dangerous postings, which could
include many assignments to developing countries,
locations where the threat of kidnapping or terrorist
activity is high, or to remote locations (such as the outback
in Indonesia or on an ocean oil drilling platform) or
locations with primitive conditions. The three broad areas
typically considered in evaluating the extent of hardship
include physical threat, level of discomfort, and
inconvenience.
 2. Balance Sheet Incentives Determination -- US State Department
indexes for cost-of-living and housing allowances for selected cities
Location COL index Maximum annual Hardship Danger
(DC = 100) housing allowance ($) (%) (%)
Canberra, Australia 105
Brussels, Belgium 121 30,700
Rio de Janeiro, Brazil 127
Beijing, China 122 20
Cairo, Egypt 87 15
Paris, France 136 55,700
Munich, Germany 126 25,000
Hong Kong 176 5
New Delhi, India 95 15
Jakarta, Indonesia 100 20
Tel Aviv, Israel 146 10 20
Tokyo, Japan 183 80,000
Nairobi, Kenya 121 25
 2. Balance Sheet Incentives Determination -- US State Department
indexes for cost-of-living and housing allowances for selected cities
Location COL index Maximum annual Hardship Danger
(DC = 100) housing allowance ($) (%) (%)
Seoul, Korea 121 46,300
Kuwait City, Kuwait 117 15 15
Mexico City, Mexico 120 37,500 15
Moscow, Russia 130 15
Riyadh, Saudi Arabia 116 25
Singapore 129 35,900
Johannesburg, S. Africa 85
Madrid, Spain 105 29,700
Stockholm, Sweden 144
Geneva, Switzerland 164 64,000
Istanbul, Turkey 132 10
London, UK 144 64,800
Caracas, Venezuela 120 52,000 15
2. Balance Sheet Incentives & Adjustments Determination -- Compensation for expat
relocation from New Jersey to Paris, first year (US$) selected cities

Basic compensation
Salary 100,000
Bonuses 20,000
Stock options 0
Miscellaneous salary adjustments 0
Employer pension contribution 20,000
Total compensation 140,000
2. Balance Sheet Incentives & Adjustments Determination -- Compensation for expat
relocation from New Jersey to Paris, first year (US$) selected cities

Allowances
Cost-of-living allowance 35,000
Net housing allowance 35,000
Automobile 4,500
Moving expense reimbursement 10,000
Home leave 15,000
Children (two)/Spouse education allowance 25,000
Cultural/Language training allowance 5,000
Expatriate premium 12,000
Hardship premium 0
Danger premium 0
Home management/maintenance 0
Club membership/fees 5,000
Tax services provided 0
Other allowances 0
Mobility premium 0
Relocation allowance, first year only 5,000
Other earned income 0
Loan bonus interest 0
Nontaxable assignment costs 0
Other adjustments to salary/allowance detail 0
Total allowances 151,500
2. Balance Sheet Incentives & Adjustments Determination -- Compensation for expat
relocation from New Jersey to Paris, first year (US$) selected cities

Tax costs
Actual tax liabilities
US federal 3,713
US FICA 8,034
New Jersey 552
France income 101,150
France social insurance 0
Total actual tax 113,449
Less hypothetical tax
US federal (23,834)
US FICA (5,580)
New Jersey (3,374)
Total hypothetical tax (31,788)
Employer’s social insurance, US 8,034
Employer’s social insurance, France 0
Other corporate taxes 0
Tax cost to company 89,695
Total costs 361,195
 There are seven basic approaches followed by global enterprises to
compensate their expats:
3. Localization
 This approach is being used to address problems of high
cost and perceived inequity among staff in foreign
subsidiaries.
 Here the expatriates (usually individuals who are early in
their career and who are being posted overseas for
relatively long-term assignments or are TCNs or are
returnees) are paid comparably to local nationals.
 There are seven basic approaches followed by global enterprises to
compensate their expats:
4. Lump sum
 In this approach the firm determines (sometimes in negotiation
with the expat candidate) a total salary for the expat, to cover all
the major incentives and adjustments, and then lets the expat
determine how to spend it, for example, on housing,
transportation, travel, home visits, education, lifestyle, and so
forth.
 This lump sum allowance is a single payment, made at the start of
the relocation process, to the transferring expat to cover all of the
above, or only the costs associated with the relocation, itself. Or,
sometimes, the lump sum payment is split between payment at the
outset of the assignment and the remainder paid upon successful
completion of the assignment (as an incentive to perform
successfully and to stay with the firm until the end of the
assignment).
 There are seven basic approaches followed by global enterprises to
compensate their expats:
5. Cafeteria
 An approach which is increasingly being used for very
highly salaried expat executives is to provide a set of
“cafeteria” choices of benefits, up to a predetermined
monetary limit in value.
 The advantages are primarily related to the tax coverage of
benefits and perquisites as compared to cash income (pay
check).
 Since the individual doesn’t need as much cash (since
most expenses are paid for by the firm), this approach
enables the expat to gain benefits such as a company car,
insurance, company-provided housing, and the like that
do not increase the expat’s income for tax purposes.
 There are seven basic approaches followed by global enterprises to
compensate their expats:
6. Regional systems
 For expats who make a commitment to job assignments
within a particular region of the world, some firms are
developing a regional compensation and benefits system
to maintain equity within that region.
 If such individuals are later moved to another region, their
pay will be transferred to one of the other regional
systems, depending on what is used there, such as the
balance sheet approach.
 There are seven basic approaches followed by global enterprises
to compensate their expats:
7. Global
 An approach being followed, at least for expats above a certain
pay level (i.e., therefore, for professional/technical/managerial
employees), is to implement a common global pay and benefits
package for each covered job classification applied to everyone in
that classification, worldwide.
 For many specialized occupations, there is in fact a global labor
market, with qualified specialists from anywhere and everywhere
in the world all applying for the same jobs.
 In this approach, MNEs will have two general pay classifications:
local employees below a defined level and international.
 The international level will almost always include a performance-
based component. The standard used is usually the level paid for
those occupations at the firm’s headquarters.
 Biggest challenges are that employees who move from one
country to another are confronted with widely disparate tax
systems, philosophies, and rates. And to make things even
more difficult, tax systems and rates are constantly
changing, often every year.
 An effective tax rate (ETR) can be defined as a measure
intended to estimate the real tax burden on an economic
activity.
 Expatriates (or their firms) are responsible for taxes on their
(expatriates’) incomes. (This can mean in both their home
countries and their host countries.)
 Since typical MNE policies establish that the firm will cover
these costs for their expatriates (at least any differential over
what the expatriate would pay in her or his home country),
the use of parent-country expats can be very expensive.
  National income tax rates: approximations, ranked from high
to low (annual salary US$150,000, married filing jointly:

Country Total tax liability (US$) Effective tax rate (%)

Sweden 79,076 54.02

Netherlands 69,304 46.20
Japan 47,908 45.00
Australia 66,287 44.19
South Africa 64,061 42.71
Germany 53,844 35.35
UK 48,810 34.13
Mexico 48,954 32.66
France 46,815 32.00
Thailand 43,094 29.32
Brazil 37,209 24.96
US 34,051 34,051
 MNEs follow one of four strategies: laissez-faire, tax
equalization, tax protection, or an ad hoc policy
1. Laissez-faire -- This approach is uncommon, but smaller
employers and those employers just beginning to conduct
international business may fall into this category with their
taxation policies.
 In essence, under this approach the expatriate is expected to
take care of his or her own taxation, even if it means tax
obligations in both home and host countries.
2. Tax equalization -- Under this strategy, the firm withholds
from the expatriate’s income the tax obligation in the home
country (that they would otherwise have to pay, anyway) and
then pays the taxes in the host country.
 The taxes that the expatriate must pay are equalized between
home and host countries, with the expatriate obligated only
for their home-country taxes.
 MNEs follow one of four strategies: laissez-faire, tax
equalization, tax protection, or an ad hoc policy
3. Tax protection -- The employee pays his or her taxes up to
the amount that would be owed in the home country, with
the employer paying the difference.
 The employer pays the expatriate any excess of foreign
income tax over the home-country income tax.
4. Ad hoc -- each expatriate is handled differently depending
on the individual package she or he has been able to
negotiate with her or his employer.
 The typical allowances paid to expatriates are often viewed as
taxable income.
 Surveys find that at least 75 percent of responding firms
provide the following benefits tax-free to their employees on
foreign assignment (usually by adding to the pay check the
costs of the taxes for these items – referred to as “grossing up”
the salary):
 Tax reimbursement payments
 International premium.
 Cost-of-living adjustment.
 Housing allowances.
 Automobile reimbursements (for business use).
 Emergency leave.
 Moving expenses.
 Dependent education.
 The MNE’s efforts to design a global compensation program will have to
address the followings:
 Under which country’s benefit and compensation programs should
employees be covered – home country, host country (for those who
relocate), or some specially designed program for everyone?
 How should potential gaps or inequities in pension and health care
coverage be bridged? Can employees be covered under a single plan
throughout their careers?
 Is benefits coverage adequate for all employees? What’s more, is the
benefits package equitable when compared with the benefits of peers in
other countries, both within and without the parent firm? Should
employees be covered under the provisions of selected home and foreign
programs?
 How can the cost of providing social benefits be minimized? Can
coverage under employees’ home-country social programs be maintained,
even as they move around? Should there be a global umbrella program to
provide equitable coverage for everyone?
 What are the tax effects to employers and employees of special benefit
arrangements for all global employees?
 The MNE’s efforts to design a global compensation program will have to
address the followings:
 Under which country’s benefit and compensation programs should
employees be covered – home country, host country (for those who
relocate), or some specially designed program for everyone?
 How should potential gaps or inequities in pension and health care
coverage be bridged? Can employees be covered under a single plan
throughout their careers?
 Is benefits coverage adequate for all employees? What’s more, is the
benefits package equitable when compared with the benefits of peers in
other countries, both within and without the parent firm? Should
employees be covered under the provisions of selected home and foreign
programs?
 How can the cost of providing social benefits be minimized? Can
coverage under employees’ home-country social programs be maintained,
even as they move around? Should there be a global umbrella program to
provide equitable coverage for everyone?
 What are the tax effects to employers and employees of special benefit
arrangements for all global employees?