International HRM- Paying Expatriates  -Meenu Singh

                                                                                        

                                                            

                                                                                                                              

Globalization of business has probably touched HR managers more severely than any other functional head. The process of Procuring, allocations and effectively utilizing human resources in an international business is called international human resource management (IHRM).

Model of IHRM

    

One activity that receives considerable attention of an International HR manager is designing

attractive remuneration packages for the expatriate.

OBJECTIVES WHILE DESIGNING EXPAT PAY PACKAGES:

Any expatriate remuneration package needs to be designed to achieve the following objectives:-

1.     1. Attract employees who are qualified and interested in international assignments.

2.     2.  Facilitate movement of expats from one subsidiary to another, from home country to subsidiaries and from subsidiaries back to the home country

3.     3. Provide a consistent and reasonable relationship between pay levels of employees at Head quarters, domestic affiliates and foreign subsidiaries.

4.     4. Be cost effective

CHALLENGES WHILE DESIGNING AN INTERNATIONAL REMUNERATION PACKAGE:

Generally, following problems come up while designing an international remuneration package:-

1.      1.  Discrepancies in pay between, parent, host and third country nationals

2.      2.  Need to vary compensation packages depending on employee’s stage of life and customize it accordingly (e.g. young children, children in college etc)

3.      3. Remuneration issues related to re entry into parent-country organization or home country.

4.      4. Remuneration issues to deal with changes in international business environment

Factors influencing international Compensation

Expat compensation depends on Internal and external factors

Components of Expat Compensation                                                     

1. Base Salary

2. Benefits

3. Allowances

4. Incentives  

5. Taxes          

Base Salary

This acquires a slightly different meaning from the domestic setting. In domestic sense, base salary denotes cash compensation that serves as benchmark for bonuses, benefits etc.

For Expats, this is the primary component of a package of allowances many of which are directly related to the base salary (e.g. COLA, Housing allowance etc) and is the basis for in- service benefits and pension contributions.

BS may be paid in the currency or home or host country.

This is the founding block for international remuneration.

Base pay can be decides based on 2 methods:-

1.      Home country based method – setting the base in relation to how the employee would be paid for doing the same job in the home country

2.      Host country based method – Setting Base pay in relation to how the job is paid in the host country. Advantage- Creates parity among host country nationals and expats. Concern- Disparity  with one’s own income in host country

Benefits – these constitute a major element of remuneration of a regular employee. These usually include things such as insurance, retirals, social security contributions, etc..                                                                                                                         

Benefits could be :-

1. Required benefits mandated by Law
2. Discretionary benefits like health insurance, retirals,

Following is the list of issues surrounding benefits package to expats:-

-          Whether MNCs should maintain expats in home country benefits programs especially if these programs are not tax deductable

-          Whether companies have option of enrolling employees in host country benefits program and making up for any difference in coverage

-          Whether host country regulations regarding termination of employment affects employee benefit entitlement

-          Whether home/host country is responsible for employee’s social security benefits

-          Whether benefits should be subject to requirements of home or host country

-          Which country should pay for benefits

-          Whether other benefits should be used to offset any loss/shortfall in coverage

-          Whether home country benefits program should be available to local citizens

-          What happens to continuity of benefits once the expat returns to his origin country

Allowances- these are an expensive feature. One common allowance is COLA (cost of Living allowance) – payment for difference between home & host country to provide the expat with the same standard of living enjoyed by him/her in the home country.

Other allowances could be – relocation allowance (to move house hold goods etc), Children’s education allowances, hardship allowance etc..

There could be some unique allowances such as spouse assistance. In case of loss of income of spouse on account of the employee’s move- the company could either cover for the loss through remuneration or alternatively look at providing a suitable opening in its subsidiary in the host country.

Incentives – There could be an incentives program to keep the expat motivated.

This could be in the form of ongoing premiums or one time lump sum. Most companies giving such incentives are following the lump sum premium approach paid only at the time of acceptance of assignment. The payment retains its motivational value and cost to company is less as there is only one payment with no future financial commitment. This is also because incentive is a separate payment distinguishable from regular pay and is more readily available for spending or saving.

Taxes –

Final component of remuneration relates to taxes.

This needs to be considered separately as the expat may have to pay tax in both home and host country if the 2 countries don’t have a reciprocal tax treaty.

MNCs usually follow one of the following approaches to handle international taxation:-

-          Tax equalization- The employee should pay no more or no less tax than he would have paid had he never left his former home. Hence, the company should be paying all related worldwide effective taxes for the assignee. With this intention, firms withold an amount equal to the home country tax obligation of the expat and pays taxes in the host country. This also called Hypo tax

-          Tax Protection – employee pays tax that s/he would pay on remuneration in the home country. The employee in this situation is entitled to any windfall received if total taxes are less in host country than home country.

Tailoring the Expat salary packages

      

Working with the components described above, MNCs seek to tailor packages to fit specific situations.

Approaches followed by MNCs :-

1. Balance sheet approach – Compensation package which equates or balances an expats purchasing power in the host country with the purchasing power in the home country. For this purpose, companies provide with additional salary. The increased salary includes adjustment for difference in taxes, housing, cost of basic goods & services.
2. Going rate approach – Expat compensation is linked to the salary structure in the host country
3. Lump sum Method – giving a predetermined pay and letting the individual decide how to spend/save the money
4. Cafeteria approach – giving an expat a series of options and letting individual decide how to spend available funds
5. Regional systems – Company creates /sets a compensation system for all expats assigned to a particular region