Where Can I Find Information on International Compensation and Benefits? Compensation can define as financial and non-financial rewards, such as basic salary, benefits, perks, and long-term and short-term benefits, valued by employees based on their relative contribution to the performance of an MNC.
Why are International Compensation and Benefits Important?
Compensation is a critical economic issue that continues to account for an increasing proportion of its operating costs. HR executives of global firms put a lot of time and effort into the design and management of compensation programs due to their high cost and their effect on corporate performance, employee commitment, and retention.
The objectives of international compensation are: To attract qualified, experienced, and interested employees for international assignments. To facilitate the relocation of expatriates from home to the subsidiary and back from home to the subsidiary. Also, To provide a consistent and reasonable ratio between the pay levels at headquarters, home affiliates, and foreign subsidiaries; to be cost-effective by reducing unnecessary expenses; and to be easy to understand and administer.
What are the components of international compensation?
The international compensation and benefits program is complex and requires a high level of expertise to achieve all the objectives. Also, The main components are base pay, incentives, and total compensation package trends.
What is base pay?
The basic component of an international compensation package is the base salary. It can be paid in home currency or local currency. Also, It is the foundation of the compensation structure and determines the employee’s status, rank, or grade. It is the basis upon which all other components are constructed and retirement benefits are calculated in both domestic and international compensation.
What are incentives?
The incentives are used to encourage employees to perform better and take on foreign assignments.
What are Employee retention and referral bonuses?
Employee retention is one of the most common challenges an organization faces at some point in time. Referral bonuses are used to reward employees who bring in qualified new employees that meet the selection criteria. This helps to reduce recruitment costs and time for the organization.
Besides money, many other factors influence employee retention. These include quality of life, flexibility in working hours, difficult tasks, benefits, and career progression.
What are Allowances?
- Allowances include foreign service premiums. These are most common for employees who are on a long-term assignment (more than one year). These premiums are more often paid to PCNs than TCNs.
- Hardship allowances are based on government data that takes into account factors. Such as isolation, crime and natural hazards, and political violence. These rates can be found in consulting organizations like International SOS.
- Relocation allowances are for costs associated with relocating to the host country. Such as transport costs, storage costs, temporary accommodation, appliance, and vehicle costs, etc.
- Education allowances are for the children of the assignee. These may include language classes, books, school fees, home country boarding school fees, etc.
- Home leave is a provision that allows the assignee and their family to return home regularly during the duration of the assignment.
What are the Benefits?
These are also known as indirect compensation. The purpose of these benefits is to reduce the payments and improve the quality of life. Examples of benefits include the use of health clubs, medical treatment for the family, upkeep of the house, servants, etc.
What are the Taxes?
Taxes are a major portion of the salary to the governments of both the home country and the host country. MNCs follow a tax equalization policy. This means that the expatriate pays only the taxes required in the home country. While the host country pays what requires in the host country.
What are the Long-term Benefits?
- Employee stock purchase plan (ESPP): The company sells shares to employees at a discounted price. The purchase price of the shares deducts from the employee’s salary every month.
- Employees’ stock option plan (ESOP): A limited number of shares issued to key employees.
- Restricted stock unit (RSU): The company provides restricted stock units with restrictions on when the shares can exercise.
What are the Approaches to International Compensation?
When it comes to international compensation, there are two main approaches:
The Going Rate Approach
The main features of this approach are:
- It is based on local market trends & rates
- It relies on survey comparisons of local nationals (HCN) / expatriates of the same nationality/ex-pats of all nationalities (compensation based on selected survey)
- The base pay and benefits of the international transfer may supplement with additional payments for low-pay countries
- The base salary of the international transfer connect to the salary system of the host country
- If the location is located in a low-pay country, the multinational typically supplements base pay with benefits and payments
The Balance Sheet Approach
Multinational companies often use the balance-sheet approach to determine expatriate compensation. The balance-sheet approach gives an expatriate a compensation package that tries to equalize or balance their purchasing power in their home country.
Multinational companies typically offer an additional salary to compensate for the difference between the compensation received for an international assignment and the compensation received in their home country. The additional salary includes adjustments for taxes, housing costs, and the cost of essential goods and services.
Essential goods and services include:
- Personal care
- Home furnishing
Categories of Balance Sheet Approach
There are four categories of Balance Sheet approach:
- Goods and Services – Expenses incurred in the home country for goods and services such as food and personal care; clothing; household furnishings; recreation; transportation; and medical care;
- Housing – the main expenses incurred in the host country for housing;
- Income tax – income taxes in the parent country and host country;
- Reserve – contributions to protection, payments for benefits, pension contributions, investments, education costs, and social security taxes;
In addition to the basic costs of relocating a family to an overseas assignment, some of these additional benefits and perks include:
- Multinational Service Premiums: These typically amount to 10% to 20% of base pay and use to compensate for accepting the personal and family difficulties that come with overseas assignments.
- Foreign Service Hardness Allowances: These are extra money that pays for particularly difficult postings due to issues like high risk and poor living conditions.
- Relocation Allowance: Many companies will pay a flat sum of one month’s salary at the start and end of an assignment to cover various costs associated with relocating a family.
- Home-Leave Allowances: These reimburse expatriates and expatriates’ families for transportation costs to return to their home country once or twice per year.
What is the Taxation?
- A company deducts an amount equivalent to the expatriate’s home country tax obligation and pays all taxes owed in the host country.
- On assignment, the employee pays no more tax and no less tax than they would have paid if they had stayed in their home country.
- The company pays all the actual tax due in both the home country and the host country.
- 80% of companies use this approach.
- The employee pays up to the same amount of taxes as they would pay on his or her home country’s remuneration.
- If the host country’s tax burden is less than the home country’s, the employee may end up paying less tax.
- The company reimburses the employee for excess tax due to higher tax rates
International Employee Benefits and Compensation
Before you start recruiting your first international employees, it’s important to have a plan in place to help you stay on track and compliant.
Here are some questions you might want to ask yourself to help you create your international employee benefit and compensation structure:
What are the requirements in the nation where you’re hiring?
The first thing you need to do is research the requirements of the country you’re planning to hire employees. Do your due diligence and make sure you’re up-to-date on the local payment methods and employment laws, as well as any other obligations as an employer.
What are the laws and rules in your nation?
For example, if you’re looking to hire employees in a country, you need to know the local collective bargaining laws, equal employment laws, discrimination protection laws, etc.
What’s the talent pool?
You’ll also need to have a working knowledge of your local job market, including:
Skill pool; economy; procedures; culture; worker readiness; worker capability status; typical recruiting process; and so on.
Do you need to hire experts for support?
As you embark on your international research & strategy development journey, you’ll need to decide whether you and your staff are ready to go it alone or if you need help from experts in all areas or specific areas. Compensation & benefits structuring in any country is complex, so hiring experts to help with the process is a good idea even if you don’t have expertise in any area. Hiring experts not only helps you stay compliant but also takes a lot of the burden off of you & your team so you can focus on the basics of your business strategy where you have expertise.
You can hire a wide range of local experts for your strategy, including local consultants & benefits experts, as well as local legal counsel & recruiting experts & market research firms.
What are your competitors doing?
The first step in your international analysis is to look at your competitors. If you can, take a look at your domestic competitors that are also operating in your target country. What kind of internal benefits do they offer in the country you want to do business in? What kind of compensation do they offer? Your goal is to have a better structure of benefits and compensation or at least one that’s at least similar to theirs. If you don’t, you will have a hard time attracting top talent.
What are your budget and compensation requirements?
To figure out how much you will need to operate in your target country, you will need to know how many employees you will need, what the cost of living in that country is, what the exchange rate is, and what the typical workload is in that country. This will give you an idea of how many full-time equivalent employees you will need in a given day or week.
How Will Your Employees Be Classified?
To determine how your employees will be classified, you will need to look at the labor laws of the country in which you have employees. For instance, in the United States, freelance workers are often paid differently than regular employees, and the eligibility for benefits will also vary between these two groups. The more clearly you define how your employees are classified, the fewer compliance issues you will face.
What will your benefit and compensation terminology be?
Different countries have different definitions of “wage,” “travel allowance,” “stipend,” “employee,” “full-time,” “part-time,” and “bonus,” so you will need to define them for each country you have employees.