Objectives of International

compensation, Key Components,

Approaches, Patterns of
international pay
 Objectives of international compensation –
Organization
• Policy should be consistent with the overall strategy, structure and
business needs of the multinational.
• Policy must work to attract and retain staff in the areas where the
multinational has the greatest needs and opportunities.
• Policy must be competitive and recognize factors such as incentive for
foreign service, tax equalization and reimbursement for reasonable
costs.
• Policy should facilitate the transfer of international employees in the
most cost-effective manner for the firm.
• Policy must give due consideration to equity and ease of administration.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 2

 Objectives of international compensation –
Employee
• Employee will expect the policy to offer financial protection in
terms of benefits, social security and living costs in the foreign
location.
• Employee will expect a foreign assignment to offer
opportunities for financial advancement through income
and/or savings.
• Employee will expect issues such as housing, education of
children and recreation to be addressed in the policy.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 3

 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.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 4

 Key components of an international
compensation program
• 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 to the
home country of the PCN or TCN, or whether an international rate is paid.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 5

 Key components of an international
compensation program (cont.)
• Foreign service inducement/hardship premium
– Parent-country nationals often receive a salary premium as an inducement
to accept a foreign assignment or as compensation for any hardship caused
by the transfer.
• The definition of hardship, eligibility for the premium and amount and timing of
payment must be addressed.
– Making international comparisons of the cost of living is problematic.
– These payments are more commonly paid to PCNs than TCNs. Foreign
service inducements, if used, are usually made in the form of a percentage
of salary, usually 5–40 per cent of base pay.
• Such payments vary, depending upon the assignment, actual hardship, tax
consequences and length of assignment.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 6

 Key components of an international
compensation program (cont.)
• Allowances
– The cost-of-living allowance (COLA), which typically receives the most
attention, involves a payment to compensate for differences in
expenditures between the home country and the foreign country (to
account for inflation differentials, for example).
– Housing allowance
– Home leave allowances
– Education allowances
– Relocation allowances
– Spouse assistance

12/08/2021 Dr.B.Sripirabaa, GRGSMS 7

 Key components of an international
compensation program (cont.)
• Benefits
– Pension plans are very difficult to deal with country-to-country, as national
practices vary considerably.
– Firms need to address many issues when considering benefits, including:
• Whether or not to maintain expatriates in home-country programs, particularly if the
firm does not receive a tax deduction for it.
• Whether firms have the option of enrolling expatriates in host-country benefit programs
and/or making up any difference in coverage.
• Whether expatriates should receive home-country or host-country social security
benefits.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 8

 Key components of an international
compensation program (cont.)
• Benefits (cont.)
– Laws governing private benefit practices differ from country to country, and firm practices
also vary.
– Multinationals also provide vacations and special leave.
– Included as part of the employee’s regular vacation, annual home leave usually provides
airfares for families to return to their home countries.
– Rest and rehabilitation leave, based on the conditions of the host country, also provides the
employee’s family with free airfares to a more comfortable location near the host country.
– Emergency provisions are available in case of a death or illness in the family.
– Employees in hardship locations often receive additional leave expense payments and rest
and rehabilitation periods.
– Multinationals have generally done a good job of planning for the retirement needs of their
PCN employees, but this is generally less the case for TCNs.
• TCNs may have little or no home-country social security coverage;
• They may have spent many years in countries that do not permit currency transfers of accrued
benefit payments;
• Or they may spend their final year or two of employment in a country where final average salary
is in a currency that relates unfavorably to their home-country currency.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 9

 Approaches to international compensation
• Going rate approach
– Based on local market rates
– Relies on survey comparisons among
• HCNs
• Expatriates of same nationality
• Expatriates of all nationalities
– Based on selected survey comparison
– Base pay and benefits supplemented by additional payments for low pay countries
• Balance sheet approach
– Maintain home country standard of living
– Adjustments to home package to balance additional expenditure
– Financial incentives
– The four major categories of outlays incurred by expatriates in the Balance Sheet Approach:
• Goods and services – home-country outlays for items such as food, personal care,
clothing, household furnishings, recreation, transportation, and medical care.
• Housing – the major costs associated with housing in the host country.
• Income taxes – parent-country and host-country income taxes.
• Reserve – contributions to savings, payments for benefits, pension contributions,
investments, education expenses, social security taxes, etc.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 6/10

 Advantages and disadvantages
Advantages Disadvantages
Going rate approach
1. Equality with local nationals 1. Variation between assignments for
2. Simplicity same employee
3. Identification with host country 2. Variation between expatriates of same
4. Equity amongst different nationalities nationality in different countries
3. Potential re-entry problem
Balance Sheet Approach
1. Facilitates expatriate re-entry 1. Can be complex to administer
2. Easy to communicate to employees 2. Can result in great disparities
3. Equity Between expatriates of different
Between assignments nationalities
Between expatriates of the same Between expatriates and local
nationality nationals

12/08/2021 Dr.B.Sripirabaa, GRGSMS 11

 Approaches to international compensation –
Taxation
• Tax equalization
• Tax protection
• Therefore, companies need to address many issues when
considering benefits, including:
• Whether or not to maintain expatriates in home-country programs, particularly if the
company does not receive a tax deduction for it.
• Whether companies have the option of enrolling expatriates in host-country benefit
programs and/or making up any difference in coverage.
• Whether host-country legislation regarding termination affects benefit entitlement.
• Whether expatriates should receive home-country or host-country social security
benefits.
• Whether benefits should be maintained on a home-country or host-country basis,
who is responsible for the cost, whether other benefits should be used to offset any
shortfall in coverage and whether home-country benefit programs should be
exported to local nationals in foreign countries.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 12

 Approaches to international compensation
(cont.)
• International living costs data
• Differentiating between PCNs and TCNs
– One of the outcomes of the Balance Sheet Approach is to produce
differentiation between expatriate employees of different nationalities
because of the use of nationality to determine the relevant home-country
base salary.
– This is a differentiation between PCNs and TCNs.
• Many TCNs have a great deal of international experience because they often
move from country to country in the employ of one multinational (or several)
headquartered in a country other than their own (for example, an Indian banker
may work in the Singapore branch of a US bank).

12/08/2021 Dr.B.Sripirabaa, GRGSMS 13

 Some tentative conclusions: patterns in
complexity

• It may be that international compensation administration is more

complex than its domestic counterpart, but not radically different
in pattern or form. Recent developments in the study of global
pay issues may be seen to operate at three distinct levels:
– The basic level of cultural values and assumptions;
– The level of pay strategy, practices and systems design; and
– The level of pay administration and form.

12/08/2021 Dr.B.Sripirabaa, GRGSMS 14

 Some tentative conclusions: patterns in
complexity (cont.)

Figure 1: Patterns for international pay

12/08/2021 Dr.B.Sripirabaa, GRGSMS 15