Unit 4 Expatriate Compensation

Expatriate
Compensation
Who is an Expatriate?
An expatriate is an employee who is working and

temporarily residing in a foreign country
‘international assignees
An employee who is relocated from his/her home country
to work at one of the subsidiaries abroad or at Corporate
Headquarters for a period
Expatriate Assignment Approaches
Short-term: upto 3 months- troubleshooting, project supervision, or a stopgap measure until a
more permanent arrangement
Extended: up to one year - similar activities as that for short-term assignments.
Long-term: varies from one to five years, - clearly defined role in the receiving operation (e.g. a
senior management role in a subsidiary)
Commuter assignments – special arrangements where the employee commutes from the home
country on a weekly or bi-weekly basis to the place of work in another country
particular problem must be solved and the assigned employee due to their experience and
qualifications is needed in two places at the same time or that the target country is
Expatriate Assignment Approaches
Rotational assignments – employees commute from the home country to a place of work in
another country for a short, set period followed by a break in the home country, family usually
remains in the home country. This arrangement is commonly used on oil rigs and with hardship
locations in the global mining industry.
 Contractual assignments – used in situations where employees with specific skills vital to an
international project are assigned for a limited duration of 6 to 12months
Virtual assignments- the employee does not relocate to a host location but manages, from
home-base, various international responsibilities for a part of the organization in another
country. In this case, the manager relies heavily on communication technologies such as
telephone, email or video conferences.
Self-initiated assignments – While standard expatriations are usually initiated by the
organization, self-initiated assignments are initiated by the individual
Expatriate Compensation
Objectives
◦ Attract employees who are qualified , experienced and interested in international
assignments
◦ Facilitate the movement of expatriate’s from one subsidiary to another, from home to
subsidiary, and back from subsidiary to home.
◦ Provide a consistent and reasonable relationship between the pay levels of employees at
headquarters, domestic affiliates and foreign subsidiaries
◦ Be cost effective by reducing unnecessary expenses
◦ Should be easily understood and easy to administer
Components of Expatriate Compensation
Base Salary:
◦ amount of money that an expatriate - receives in the home country
◦ Salaries usually are paid in Home currency, local currency, or a combination of the two
◦ Base pay - benchmarks - bonuses and benefits are calculated.
Benefits
◦ constitute a substantial portion - approx. one third of compensation
◦ Entertainment, Festival celebrations, Gifts, Use of club facilities, provision of
hospitality including food and beverage, employee welfare, use of health club,
Conveyance tour and travel, Hotel Board and Lodging, vehicles, telephone and
other telecommunication facilities, Sponsorship of children
◦ Employee tends to join and stay with an org- attractive benefits programme
◦ Vacation along with holidays and rest breaks – reduce fatigue and enhance
productivity
Long term Benefits:
1. Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and
issuance to key employees
2. Restricted Stock Unit (RSU) –Units of stocks are provided with restrictions on when they can
be exercised. It is usually issued as partial compensation for employees
3. Employee Stock Purchase Plan (ESPP) –Company sells shares to its employees at a discount.
Company deducts the purchase price of these shares every month from the employee’s
salary
Allowance - inevitable feature
◦ common allowance relates to the cost of living – an adjustment for
different in the cost of living between the home country and foreign
country assignment.
◦ Spouse assistance, housing allowance, home leave allowance, relocation
allowance and educational allowance
◦ Depends upon tax – equalization policies and practices in both the home
and the host countries.
Incentives:
◦ An additional payment as a means of increasing output
◦ Special incentive programmes - one – time, lump-sum premium instead of
ingoing premium
Foreign Service / Hardship Premium:
◦ Salary premium to accept an overseas assignment – 5-40 % of base salary
◦ Actual salaries depend upon the assignment, actual hardship, tax consequences and
length of assignment.
◦ Work – week in the host country is longer than in the home country , the assignee will
be paid for the extra hours worked.
◦ Expatriates (eg. Afghanistan)environments are paid 2-3 times more than their domestic
salaries
Approaches to Expatriate Compensation
1. Home-based policy (the balance sheet approach)- most common
◦ Home country’s salary structure, Financial inducements to home package- Foreign hardship allowance
◦ Goods and services– home-country outlays for items food, personal care, clothing, household furnishings, recreation, transportation,
medical care
◦ Housing – the major costs associated
◦ Income taxes – parent-country and host-country income taxes
◦ Reserve – contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security
taxes
Advantages
◦ Equity between assignments and between expatriates of the same nationality
◦ Facilitates expatriates’ re-entry
Disadvantage
◦ Disparity between expatriate and locals and with different nationals

2. Host-based policy (going rate approach)
◦ Base salary for expatriates is linked to the salary structure and standard of the host country
◦ Local market rate
◦ Base pay and benefits - additional payments for low-pay countries
Advantage
◦ Equity among employees from different nationalities or local employees
Disadvantages
◦ variations between assignments for the same employee and potential re-entry problems
3. Local Plus approach
 hybrid version of Balance Sheet and Going Rate -optimum benefits of both
 Paid according to the prevailing salary levels of host location plus ‘expatriate type’ benefits such as
assistance with transportation, housing, and dependents’ education
 Benefits may be paid in-kind (directly by the MNE)
 does not typically include tax equalization, COLA, mobility premiums, hardship allowances, familiarization visits,
home leave, cross-cultural training and other pre-departure programs, or spouse assistance
 Pension benefits are optional depending on the nature of the assignment
 Local Plus- Driving force - reduce international assignment costs- low-cost alternative salary packages
 Local Plus Approach
 Suited to expatriates’ - acquire valuable international skills- reduced pay
 Junior and middle management staff - accept Local Plus - future careers
 Local Plus - long-term, permanent transfers, intra-regional transfers, assignments low to
high wage locations
 TCNs -difficult to administer either a home or host based approached - offering ‘plus’
benefits
 Companies headquartered in Asia - Local Plus policy in place
 Asia’s economic growth - fuelling the demand for a more globalized workforce
 Retention is difficult- find opportunities at higher wages
Taxation
1. Tax equalization: Firms withhold an amount equal to the home country tax obligation of the
expatriate, and pay all taxes in the host country
2. Tax protection: Employee pays up to the amount of taxes would pay on remuneration in the
home country
1. ad hoc (each expatriate is handled differently)
2. laissez-faire (employees are ‘on their own’ in conforming to host-country and home-
country taxation laws and practices)
◦ Top five highest taxation countries – Netherlands (52%), Belgium (50%), Germany (45%),
Australia(45%) and Italy (43%)
◦ No taxation- UAE, Oman, Kuwait, Saudi Arabia
Expatulator
International Cost of Living Calculator
Salary Purchasing Power Parity Calculator
Calculate an equivalent salary- salary is adjusted for cost of living variances between the two to
ensure the same standard of living.
Cost of Living Comparison: Cost of living allowance calculator, compares cost of living and hardship
and calculates a cost of living allowance based on the difference
International Cost of Living Index: Cost of living index calculator, compares multiple locations to a
home base (e.g. international offices compared to HQ)
International Assignment: International assignment management calculator, for global mobility
managers who use the build-up approach for detailed international assignment salary and allowance
calculations
COLA - additional allowance (over and above the current salary) an individual needs to earn in
another location to compensate for a higher cost of living
COLI - cost of living indexes for the host locations
Cost of living data
“Cost of living” is the amount of money you need to sustain a certain lifestyle
in a given place.
 Cost of Living Index- the after-tax cost for a
professional/managerial standard of living
 Cost of Living Index is the expenditure patterns of individuals for goods
and services
Cost of living - housing affordability, transportation expenses, healthcare,
food prices and entertainment costs
Cost of living is also tied to income, as salary levels in a geographic area are
measured against these expenses.
Mercer’s 2017 Cost of Living Survey
1. Luanda
2. Hong Kong
3. Tokyo
4. Zurich
5. Singapore
6. Seoul
7. Geneva
8. Shanghai
9. New York City
10. Bern
Cost of Living
CPI reflects the increase in cost of living- price changes
Dearness Allowance can be either linked or not linked to Consumer
Price Index
CPI – Weighted Average of Price changes for each item in basket of
goods and services, such as transportation, food and medical care
Good are weighted based on their importance
`1
CPI
Expatriate Management
Expatriate Management Process
Selection- Managers
◦ Individual most capable of handling assignments in another country
◦ Motivation, language ability, family, adaptability
◦ Technical Competence
◦ People Management Skills
◦ Learning Style
◦ Problem solving skills
◦ Developing future leaders
◦ Communication and knowledge transfer to HCN
◦ Adapt to new culture
Training – cultural, language, family cross-cultural programs, Pre departure
and Post Arrival
Spouse’s Career – assistance with career counseling, outplacement, or
work permit application as part of the pre-departure
Performance- Feedback based on local culture,
Health Care Support
Make Spouse feel included and consulted
Emotional Stages –Expatriate Cycle
Preparation- mixed emotion- excitement,
anxiety
Honeymoon- Enjoy novelty of new culture,
similarities, dissimilarities
Culture Shock – differences, isolation,
stereotyping, discomfort
Adjustment – (Cultural, Work and
Interaction)
personal factors, organizational support,
spouse support, Time Spend in country
Adaptation
Repatriation
Success Factors of International career
FOUR MAIN FACTORS SUPPORTING FACTORS
Expatriate selection criteria
Bullock and Sh. Oswald (2002)
training techniques
1) technical competences family and social support
2) human relational skills support from organization
3) spouse and family adaptability compensation
4) desire to work abroad cross-cultural competences
emotional competences
 previous international experience
 language fluency
cultural empathy, flexibility
Repatriation
Activity of bringing the expatriate back to the home country.
Refers to the termination of the overseas assignment and coming back to the home country
or to the country where the headquarters is located or to the home subsidiary from where
the employee was expatriated.
Treat it as re-expatriation
Repatriation Process
Repatriation strategies

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Expatriate

An expatriate is an employee who is working and

◦ Equity between assignments and between expatriates of the same nationality

◦ Facilitates expatriates’ re-entry

◦ Disparity between expatriate and locals and with different nationals

 Pension benefits are optional depending on the nature of the assignment

Activity of bringing the expatriate back to the home country.

the employee was expatriated.

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