Comparative International Compensation

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Increasingly, today, globalization is a reality for organizations of almost any size. Only the smallest companies seem unaffected by the disappearance of global boundaries among organizations, markets, and people. Globalization has increased awareness of and concern for creating internationally equitable compensation systems in many companies. The complex nature of international compensation dictates that it receives special attention from organization operating in a multi-national environment. It is crucial that organizations understand the kind of employees employed by international firms, the elements that comprise an international compensation system, and the special problems associated with returning citizens on overseas assignments to their home corporation. An expatriate, sometimes referred to as an expat, is a citizen of the country in which the organization's headquarters is domiciled. For example, an American working for U.S. subsidiary or branch located in Thailand is an expatriate. An organization may elect to send a domestic employee or manager to an overseas assignment for any number of reasons: to broaden an employee's or manager's perspectives relative to international operations, to start or staff new ventures, to train local employees, to utilize specific expertise possessed by the employee, to protect the organization's interests, to help develop the employee or manager, to assist in the transfer of technology or skills, or to market products. Evidence suggests that American firms use expatriates to a much lesser extent than do Japanese firms. Objectives of international compensation

Should be consistent with the overall strategy, structure and business needs of the multinational. •Must work to attract and retain staff in the areas where the multinational has the greatest needs and opportunities, hence must be competitive and recognize factors such as incentive for foreign service, tax equalization and reimbursement for reasonable costs. •Should facilitate the transfer of international employees in the most cost-effective manner for the firm. •Must give due consideration to equal remuniration

Key Components of international compensation
The area of international compensation is complex, primarily because multinationals must cater to three categories of employees:

oPCNs, TCNs and HCNs
oKey Components:
Base salary
Foreign services inducement
Hardship premium

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, many allowances are directly related to base salary (e.g. foreign service premium, cost-of-living allowance, housing allowance) •It is the basis for in-service benefits and pension contributions – 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 compensation rate is paid.

Foreign Service Inducement and 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. oThe definition of hardship, eligibility for the premium and amount and timing of payment must be addressed. oIn cases in which hardship is determined, U.S. firms often refer to the U.S. Department of State’s Hardship Post Differentials Guidelines to determine an appropriate level of payment. •Foreign service inducements are usually made in the form of a percentage of salary, 5-40% of base pay. oSuch payments vary, depending upon the assignment, actual hardship, tax...
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