BUS 681 Week 6 Final Assignment
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BUS681Chapter13.pdf
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13 Compensating Expatriates
Learning Objectives
When you �inish studying this chapter, you should be able to:
13-1. Discuss competitive advantage and how international activities �it in. 13-2. Describe and explain preliminary considerations compensation professionals should take under
advisement before designing international compensation programs.
13-3. List the main components of international compensation programs. 13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages.
13-5. Describe repatriation issues.
CHAPTER WARM-UP!
If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Warm-Up! and see what you already know. After reading the chapter, you’ll have a chance to take the Chapter Quiz! and see what you’ve learned.
International compensation programs have strategic value as U.S. businesses continue to establish operations in such foreign locales as Paci�ic Rim countries, Eastern Europe, and Mexico. The general trend for expanding operations overseas serves as just one indicator of the globalization of the economy. U.S. companies place professional and managerial (U.S. citizen) employees overseas to establish and operate satellite plants and of�ices. Although there are many glamorous aspects about working overseas, the glamour comes at the price of personal and, sometimes, professional sacri�ices. Compensation takes on strategic value by providing these employees minimal �inancial risk associated with working overseas, as well as lifestyles for them and their families comparable to their lifestyles in the United States. Multinational companies develop special compensation packages to help compensate for the personal sacri�ices international assignees and their immediate families make. These sacri�ices are associated with cultural variations that affect their lifestyle.
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13.1 COMPETITIVE ADVANTAGE AND HOW INTERNATIONAL ACTIVITIES FIT IN
13-1 Discuss competitive advantage and how international activities �it in.
The presence of U.S. companies in foreign countries is on the rise. You might forget that you are in China while taking a taxi ride through the streets of Beijing: Billboards and establishments for such U.S. companies as McDonald’s, Pizza Hut, Pepsi, and Coca-Cola are common sights. In addition, many large U.S. companies such as General Motors have manufacturing establishments there.
Several factors have contributed to the expansion of global markets. These include such free trade agreements as the North American Free Trade Agreement (NAFTA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss300) , the uni�ication of the European market, and the gradual weakening of Communist in�luence in Eastern Europe and Asia. Likewise, foreign companies have greater opportunities to invest in the United States.
Lowest-Cost Producers’ Relocations to Cheaper Production Areas
Many U.S. businesses have established manufacturing and production facilities in Asian countries and in Mexico because labor is signi�icantly less expensive than it is in the United States. There are two key reasons for the cost difference. First, labor unions generally do not have much bargaining power in developing Asian countries or in Mexico, where the governments possess extensive control over workplace affairs. Second, some Asian and South American governments historically have not valued individual employee rights as much as does the U.S. government.
Differentiation and the Search for New Global Markets
Coca-Cola and Pepsi products are well known worldwide because these companies aggressively introduced their soft drink products throughout numerous countries. Coke and Pepsi products worldwide could distinguish themselves from competing companies by taking on new business initiatives that depart from “business as usual” and meet speci�ic market needs.
For Coke and Pepsi, “business as usual” means marketing soft drink products (i.e., carbonated water with arti�icial colors and �lavors). Marketing bottled spring water would clearly be a departure from business as usual for them. The People’s Republic of China (PRC) possesses a de�inite need for bottled spring water: The Chinese government is unable to provide its citizens and visitors with drinkable water because the country does not maintain adequate water puri�ication plants. Coke and Pepsi could distinguish themselves from other soft drink companies by marketing spring water along with their regular soft drink products. Coke and Pepsi would be known as companies that serve necessary (bottled water) and recreational (soft drinks) beverage needs.
How Globalization Is Affecting HR Departments
The globalization of business requires that companies send employees overseas to establish and operate satellite plants and of�ices. Companies naturally must invest in the development of appropriate human
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resource (HR) practices. International business operations are destined to fail without the “right” people.1
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end1) HR professionals must be certain to identify the selection criteria that are most related to successful international work assignments. For example, do candidates possess adequate cultural sensitivity? Do they believe that U.S. customs are the only appropriate way to approach problems? Are candidates’ families willing to adjust to foreign lifestyles?
Another key HR function is training. Expatriates must understand the cultural values that predominate in foreign countries; otherwise, they risk hindering business. For example, one of Procter & Gamble’s Camay soap commercials was successful in the United States, but the Japanese perceived the very same commercial that aired in Japan to be rude. The commercial depicted a man barging into the bathroom on his wife while she was using Camay soap. Japanese cultural values led Japanese viewers to judge this commercial as offensive. The Japanese deemed the commercial as acceptable after Procter & Gamble modi�ied the commercial to show a woman using Camay soap in privacy. Language pro�iciency is another critical focus. For instance, many languages rely on nouns that can be feminine or masculine. In Italian, the word ‘the’ is either “il’ or ‘gli’ (masculine), or ‘la’ or ‘le’ (feminine). Not using these words appropriately could undermine an expatriate’s credibility and ability to get work done. Many other topics include differences in negotiation style and interpersonal exchanges such as gestures for greetings (hand shaking versus bowing). In the Watch It! video, Chris Denars, a senior talent recruiter at CH2MHill, discusses the bene�its of international assignments as well as the challenges that are faced in preparing for them.
WATCH IT!
If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the video exercise titled CH2MHill: Management in the Global Environment.
Companies’ investments in cross-cultural training vary. Some companies provide release time from work to take foreign-language courses at local colleges or universities. Globally focused, progressive companies, speci�ically among many, GE and McDonald’s, run corporate universities that offer preparation for overseas assignments.
The use of international assignments is an important issue addressed by companies located in countries across the world. A multitude of large consulting �irms (e.g., Mercer, www.mercer.com (http://www.mercer.com) ) conduct extensive research for client companies to ensure the most effective deployment of expatriates worldwide. Such consulting �irms focus on pay and bene�its issues for expatriates, labor law, and useful information to help expatriates select and train local country nationals. For example, “The most sophisticated companies are trying to integrate international programs with talent management programs,” said ORC Worldwide executive vice president Geoffrey W. Latta: “These companies understand the importance of integrating international experience with local talent, particularly if the company wants to become a true leader among global organizations.”2
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end2) GE Crotonville is an exemplar of this approach, educating management- and executive-level employees to take on challenge assignments around the world.
Complexity of International Compensation Programs
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The development and implementation of international compensation programs typically pose four challenges to companies that U.S. compensation programs do not have to consider. First, successful international compensation programs further corporate interests abroad and encourage employees to take foreign assignments. Second, well-designed compensation programs minimize �inancial risk to employees and make their and their families’ experiences as pleasant as possible. Third, international compensation programs promote a smooth transition back to life in the United States upon completion of the international assignment. Repatriation (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss377) is the process of making the transition from an international assignment and living abroad to a domestic assignment and living in the home country. Fourth, sound international compensation programs promote U.S. businesses’ lowest-cost and differentiation strategies in foreign markets.
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13.2 PRELIMINARY CONSIDERATIONS
13-2 Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs.
We must take some basic issues under advisement before examining the elements of international compensation programs. Compensation professionals must distinguish among host country nationals (HCNs), third country nationals (TCNs) (to be discussed next), and expatriates as compensation recipients with their own unique issues. In addition, compensation professionals should consider such matters as terms of the international assignment, staff mobility, and equity because these factors pertain directly to the design elements of international compensation programs.
Host Country Nationals, Third Country Nationals, and Expatriates: De�initions and Relevance for Compensation Issues
There are three kinds of recipients of international compensation:
Host country nationals (HCNs)
Third country nationals (TCNs)
Expatriates
We will de�ine these recipients as employees of U.S. companies doing business in foreign countries; however, these de�initions also apply to employees of non-U.S. companies doing business in foreign countries.
Host country nationals (HCN) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss201) are foreign national citizens who work in U.S. companies’ branch of�ices or manufacturing plants in their home countries. Japanese citizens working for General Electric in Japan are HCNs.
Third country nationals (TCN) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss447) are foreign national citizens who work in U.S. companies’ branch of�ices or manufacturing plants in foreign countries —excluding the United States and their own home countries. Australian citizens working for General Motors in the People’s Republic of China are TCNs.
Expatriates (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss145) are U.S. citizens employed in U.S. companies with work assignments outside the United States. U.S. citizens employed in CitiBank’s London, England, of�ice are expatriates.
Our primary focus is on compensation for expatriates. Following an extensive discussion of expatriate compensation, we will consider some of the challenges compensation professionals face when compensating HCNs and TCNs.
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As a reminder, our focus is on U.S. companies, and these de�initions re�lect this focus. Other countries can be the focus as well. For example, let’s de�ine HCN, TCN, and expatriate from the Australian perspective. BHP, an Australian company, conducts business worldwide in such countries as the People’s Republic of China and the United States. A Chinese citizen who works for BHP in Shanghai is an HCN. A U.S. citizen who works for BHP in Shanghai is a TCN. An Australian citizen who works for BHP in Shanghai is an expatriate.
HR professionals construct international compensation packages on the basis of three main factors:
Term of international assignment
Staff mobility
Equity: pay referent groups
Term of International Assignment
The term of the international assignment is central in determining compensation policy. Short-term assignments (i.e., usually less than 1 year in duration) generally do not require substantial modi�ications to domestic compensation packages; however, extended assignments necessitate features that promote a sense of stability and comfort overseas. These features include housing allowances, educational expenses for children, and adjustments to protect expatriates from paying “double” income taxes (i.e., U.S. federal and state taxes as well as applicable foreign taxes).
Staff Mobility
Companies must also consider whether foreign assignments necessitate employees’ moving from one foreign location to another (e.g., from Beijing, China, to the Special Economic Zone in China or from England to Brazil). Such moves within and across foreign cultures can disrupt expatriates’ and their families’ lives. Staff mobility comes at a price to companies in the form of monetary incentives and measures to make employees’ moves as comfortable as possible.
Equity: Pay Referent Groups
Well-designed U.S. compensation programs promote equity among employees: Employees’ pay is commensurate with performance or knowledge attainment. Expatriates are likely to evaluate compensation, in part, according to equity considerations. Many U.S. companies use domestic employees as the pay referent groups when developing international compensation packages because virtually all expatriate employees eventually return to the United States.
Some companies use local employees as the pay referent groups for long-term assignments because they wish to facilitate expatriates’ integration into foreign cultures. As we discuss later, Mexican managerial employees’ compensation packages include base pay and such cash allowances as Christmas bonuses. On the other hand, the main components of U.S. managerial employees’ compensation packages include base pay and long-term incentives. U.S. expatriates working in Mexico on long-term assignments are likely to have compensation packages that are similar to Mexican managerial employees’ compensation packages.
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13.3 COMPONENTS OF INTERNATIONAL COMPENSATION PROGRAMS
13-3 List the main components of international compensation programs.
The basic structure of international compensation programs is similar to the structure of domestic compensation programs. The main components include base pay and employee bene�its. The inclusion of nonperformance-based incentives and allowances distinguishes international compensation packages from domestic compensation packages. Table 13-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#ch13tab01) lists the main components of international compensation programs.
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13.4 SETTING BASE PAY FOR U.S. EXPATRIATES
U.S. companies must determine the method for setting expatriates’ base pay. Final determination should come only after companies carefully weigh the strengths and limitations of alternative methods. In addition, the purchasing power of base pay is an important consideration. Purchasing power affects standard of living. The following quote from a U.S. expatriate stationed in Italy captures the essence of purchasing power for expatriates: “Does the euro in Italy purchase as much macaroni today as it did yesterday?” Two key factors in�luence purchasing power: the stability of local currency and in�lation, both of which we discuss shortly.
TABLE 13-1 U.S. Expatriates’ Compensation Package
Core Compensation
Base pay
Incentive compensation
Foreign service premium
Hardship allowance
Mobility premium
Employee Bene�its Standard bene�its
Protection programs
Paid time off
Enhanced Bene�its Relocation assistance
Educational reimbursement for expatriates’ children
Home leave and travel reimbursement
Rest and relaxation leave allowance
Methods for Setting Base Pay
U.S. companies use one of three methods to calculate expatriates’ base pay:
Home country-based method
Host country-based method
Headquarters-based method
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HOME COUNTRY-BASED METHOD
The home country-based pay method (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss195) compensates expatriates the amount they would receive if they were performing similar work in the United States. Job evaluation procedures enable employers to determine whether jobs at home are equivalent to comparable jobs in foreign locations based on compensable factors. How does location create differences in jobs that are otherwise considered equal? One example may be that foreign-language skills are probably essential outside English-speaking countries. Adjustments to expatriates’ pay should re�lect additional skills.
The home country-based pay method is often most appropriate for expatriates. Equity problems are not very likely to arise because expatriates’ assignments are too short to establish local national employees as pay referents. Instead, expatriates will base pay comparisons on their home country standards. In general, the home country-based pay method is most suitable when expatriate assignments are short in duration and local nationals performing comparable jobs receive substantially higher pay. As we discussed earlier, expatriates may rely on local cultural norms over extended periods as the standard for judging the equitableness of their compensation.
HOST COUNTRY-BASED METHOD
The host country-based method (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss200) compensates expatriates based on the host countries’ pay scales. Companies use various standards for determining base pay, including market pricing, job evaluation techniques, and jobholders’ past relevant work experience. Other countries use different standards. For instance, the Japanese emphasize seniority. Expatriates’ base pay will be competitive with other employees’ base pay in the host countries, and companies may be seen as more legitimate employers by following local norms.3
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end3)
The host country-based method is most suitable when assignments are of long duration. As we noted previously, expatriates are then more likely to judge the adequacy of their pay relative to their local coworkers rather than to their counterparts at home. In addition, sacri�icing large incentive payments for host-country pay standards is considered to be reasonable when promotional opportunities are made available for employees upon return from international assignments.4
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end4)
HEADQUARTERS-BASED METHOD
The headquarters-based method (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss187) compensates all employees according to the pay scales used at the headquarters. Neither the location of the international work assignment nor home country in�luences base pay. This method makes the most sense for expatriates who move from one foreign assignment to another and rarely, if ever, work in their home countries. This system is administratively simple because it applies the pay standard of one country to all employees regardless of the location of their foreign assignment or their country of citizenship.
Purchasing Power
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Decreases in purchasing power lead to lower standards of living. Expatriates quite simply cannot afford to purchase as many goods and services as they could before, or they must settle for lower quality. Diminished purchasing power undermines the strategic value of expatriates’ compensation because top- notch employees are probably not willing to settle for lower standards of living while stationed at foreign posts. In addition, changes in the factors that immediately in�luence standard of living (i.e., the stability of currency and in�lation) are somewhat unpredictable. This unpredictability creates a sense of uncertainty and risk. As we will discuss later in this section, most U.S. companies use the balance sheet approach to minimize this risk.
CURRENCY STABILIZATION
Most U.S. companies award expatriates’ base pay in U.S. currency, not in the local foreign currency; however, foreign countries as a rule do not recognize U.S. currency as legal tender. Expatriates must therefore exchange U.S. currency for local foreign currency based on daily exchange rates. An exchange rate (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss137) is the price at which one country’s currency can be swapped for another.5
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end5) Exchange rates are expressed in terms of foreign currency per U.S. dollar or in terms of U.S. dollars per unit of foreign currency. For example, on April 10, 2015, the exchange rate for the Chinese yuan was 6.21 yuan renminbi for each U.S. $1. It is also possible to receive fewer units of foreign currency for each U.S. dollar exchanged. On the same day, the exchange rate was 0.64 British pound sterling for each U.S. dollar exchanged.
Government policies and complex market forces cause exchange rates to �luctuate daily. Exchange rate �luctuations have direct implications for expatriates’ purchasing power. For example, let’s start with the previous exchange rate of 6.21 Chinese yuan renminbi per U.S. $1. In addition, the exchange rate was 8.27 Chinese yuan renminbi per U.S. $1 on December 31, 1999. This example illustrates a decline in the exchange rate for Chinese money. U.S. expatriates experience lower purchasing power because nowadays they receive less Chinese yuan renminbi for every U.S. $1 they exchange.
INFLATION
In�lation (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss219) is the increase in prices for consumer goods and services. In�lation erodes the purchasing power of currency. Let’s assume that ABC Corporation did not award pay increases to its expatriates stationed in the United Kingdom during 2012 and 2013. Expatriates’ purchasing power remains unaffected as long as there isn’t any in�lation (and reduced exchange rate) during the same period. These expatriates, however, had lower purchasing power because in�lation was between 2 and 3 percent, respectively. Figure 13-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#ch13�ig01) shows the annual in�lation rates for various countries for the years 2012 and 2013.
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FIGURE 13-1 HICP Monthly and Annual Comparison, 16 Countries Source: U.S. Bureau of Labor Statistics, Division of International Labor Comparisons
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13.5 INCENTIVE COMPENSATION FOR U.S. EXPATRIATES
In the United States, companies offer incentives to promote higher job performance and to minimize dysfunctional turnover, which results when high performers quit their jobs. International compensation plans include a variety of unique incentives to encourage expatriates to accept and remain on international assignments. These incentives also compensate expatriates for their willingness to tolerate less desirable living and working conditions. The main incentives are foreign services premiums, hardship allowance, and mobility premiums.
Foreign Service Premiums
Foreign service premiums (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss166) are monetary payments above and beyond regular base pay. Companies offer foreign service premiums to encourage employees to accept expatriate assignments. These premiums generally apply to assignments that extend beyond 1 year. The use of foreign service premiums is widespread.
Companies calculate foreign service premiums as a percentage of base pay, and these premiums range between 10 and 30 percent of base pay. The percentage amount increases with the length of the assignment. Larger amounts are sometimes necessary when there is a shortage of available candidates. Companies disburse payment of the foreign service premium over several installments to manage costs and to “remind” expatriates about the incentive throughout their assignments.
Employers that use foreign service premiums should consider the possible drawbacks. First, employees may misconstrue this premium as a regular permanent increase to base pay, and resentment toward the employer may develop following the last installment. Second, foreign service premiums may not have incentive value when employers make several small installments rather than fewer large installments. Third, employees may feel as if their standard of living has declined when they return to the United States because they no longer receive this extra money.
Hardship Allowances
The hardship allowance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss186) compensates expatriates for their sacri�ices while on assignment. Speci�ically, these allowances are designed to recognize exceptionally hard living and working conditions at foreign locations. Employers disburse hardship allowances in small amounts throughout the duration of expatriates’ assignments. It is easy for expatriates to lose sight of the foreign service premiums and hardship allowances because they appear as relatively small increments to their paychecks. Companies should take care to communicate the role of these payments.
Companies offer hardship allowances at exceptionally severe locations only. The U.S. Department of State has established a list of hardship posts where the living conditions are considered unusually harsh. Most multinational companies award hardship allowances to executive, managerial, and supervisory employees. Hardship allowances range from 5 percent to 35 percent of base pay (i.e., the greater the hardship, the higher the premium). The U.S. Department of State uses three criteria to identify hardship locations:
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Extraordinarily dif�icult living conditions (e.g., inadequate housing, lack of recreational facilities, isolation, inadequate transportation facilities, and lack of food or consumer services)
Excessive physical hardship, including severe climates or high altitudes and the presence of dangerous conditions affecting physical and mental well-being
Notably unhealthy conditions (e.g., diseases and epidemics, lack of public sanitation, and inadequate health facilities)
The U.S. Department of State has deemed more than 150 places as hardship locations. Table 13-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec5#ch13tab02) lists examples of hardship locations and recommended hardship differentials.
TABLE 13-2 Hardship Locations, Differentials, and Danger Pay, Effective April 5, 2015
Country Name Post Name Rate (%)
AFGHANISTAN Kabul 35
CHINA Beijing 15
INDIA Mumbai 20
IRAQ Baghdad 30
KENYA Wangige 25
MEXICO Mexico City, D.F. 15
PHILIPPINES Manila 15
RUSSIA Saint Petersburg 15
TAIWAN Taipei 0
VENEZUELA Caracas 20 Source: A complete listing of current locations with hardship differential for federal civilian employees can be found in Section 920 of the Department of State Standardized Regulations (Government Civilians, Foreign Areas), available from the Superintendent of Documents, U.S. Government Printing Of�ice, Washington, DC 20402. Available: http://aoprals.state.gov/Web920/hardship.asp (http://aoprals.state.gov/Web920/hardship.asp) , accessed April 5, 2015.
Mobility Premiums
Mobility premiums (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss286) reward employees for moving from one assignment to another. Companies use these premiums to encourage employees to accept, leave, or change assignments—usually between foreign posts or between domestic positions to ones in a foreign country. Expatriates typically receive mobility premiums as single lump sum payments.
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13.6 ESTABLISHING EMPLOYEE BENEFITS FOR U.S. EXPATRIATES
Bene�its represent an important component of expatriates’ compensation packages. Companies design bene�its programs to attract and retain the best expatriates. In addition, companies design these programs to promote a sense of security for expatriates and their families. Furthermore, well-designed programs should help expatriates and their families maintain regular contact with other family members and friends in the United States.
Bene�its fall into three broad categories: protection programs, paid time off, and services. Protection programs provide family bene�its, promote health, and guard against income loss caused by such catastrophic factors as unemployment, disability, or serious illnesses. Paid time off provides employees such paid time off, such as vacation. Service practices vary widely. Services provide such enhancements as tuition reimbursement and day care assistance to employees and their families.
Just like domestic employee bene�its packages, international employee bene�its plans include such protection programs as medical insurance and retirement programs. In most cases, U.S. citizens working overseas continue to receive medical insurance and participate in their retirement programs.
International and domestic plans are also similar in that they offer paid time off; however, international packages tend to incorporate more extensive bene�its of this kind, which we will discuss later. Moreover, international employee bene�its differ from domestic compensation with regard to the types of allowances and reimbursements. For international assignees, these payments are designed to compensate for higher costs of living and housing, relocation allowances, and education allowances for expatriates’ children.
Employers should take several considerations into account when designing international bene�its programs, including:6 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end6)
Total remuneration: What is included in the total employee pay structure (e.g., cash wages, bene�its, mandated social programs, and other perquisites)? How much can the business afford?
Bene�it adequacy: To what extent must the employer enhance mandated programs to achieve desired staf�ing levels? Programs already in place and employees’ utilization of them should be critically examined before determining what supplementary programs are needed and desirable.
Tax effectiveness: What is the tax deductibility of these programs for the employer and employee in each country, and how does U.S. tax law treat expenditures in this area?
Recognition of local customs and practices: Companies often provide bene�its and services to employees based on those extended by other businesses in the locality, independent of their own attitude toward these same bene�its and services.
International employee bene�its packages contain the same components as domestic employee bene�its packages and enhancements. U.S. expatriates receive many of the same standard bene�its as their counterparts working in the United States. Expatriates also receive enhanced bene�its for taking overseas assignments.
Standard Bene�its for U.S. Expatriates
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Protection programs and paid time off are the most pertinent standard bene�its.
PROTECTION PROGRAMS
We previously discussed legally required protection programs and discretionary protection programs. Let’s consider the application of each kind to the international context.
Equal employment opportunity laws apply to U.S. expatriates: Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the Equal Pay Act. Additionally, expatriates continue to participate in the main Social Security programs (i.e., retirement insurance, bene�its for dependents, and Medicare). The Family and Medical Leave Act also applies to expatriates; however, state workers’ compensation laws generally do not. Instead, U.S. companies can elect to purchase private insurance that provides equivalent protection.
Discretionary protection programs provide family bene�its, promote health, and guard against income loss caused by such catastrophic factors as unemployment, disability, or serious illnesses. U.S. companies provide these protection programs to expatriates for the same reasons they do in the United States (i.e., as a strategic response to workforce diversity and to retain the best-performing employees). Withholding these bene�its from expatriates would create a disincentive for employees to take international assignments.
PAID TIME OFF
Standard paid time off bene�its include annual vacation, holidays, and emergency leave.
Expatriates typically receive the same annual vacation bene�its as do their domestic counterparts. These bene�its are particularly common among expatriates with relatively short-term assignments. Companies do not provide expatriates extended regular vacation leave because expatriates are likely to perceive the removal of these bene�its on their return to domestic assignments as punitive; however, U.S. companies must comply with foreign laws that govern the amount of vacation awarded.
Expatriates generally receive paid time off for foreign national or local holidays that apply to their foreign locations. Foreign holiday schedules may provide fewer or more holidays than the United States. In addition, some countries require employers to provide all employees paid time off for recognized holidays. In the United States, companies offer paid holidays as a discretionary bene�it or as set in collective bargaining agreements.
Paid leave for personal or family emergencies is also a component of most expatriate compensation packages. Such emergencies may include critically ill family members or their deaths in the United States or in the foreign posts. Most companies provide paid emergency leave, but some companies provide unpaid leaves of absence. In either case, companies cover travel expenses between the foreign post and the United States.
Enhanced Bene�its for U.S. Expatriates
Enhanced bene�its for U.S. expatriates include:
Relocation assistance
Education reimbursements for expatriates’ children
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Home leave bene�its and travel reimbursements
Rest and relaxation leave and allowance
RELOCATION ASSISTANCE
Relocation assistance payments (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss376) cover expatriates’ expenses to relocate to foreign posts. Table 13-3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec6#ch13tab03) lists the items most commonly covered under relocation assistance programs. Relocation assistance is generally large enough to pay for major expenses. Companies usually base these payment amounts on three main factors: distance, length of assignment, and rank in the company.
EDUCATION REIMBURSEMENTS FOR EXPATRIATES’ CHILDREN
Expatriates typically place their children in private schools designed for English-speaking students. Tuition in foreign countries is often more expensive than tuition for private U.S. schools. These companies choose to reimburse expatriate children’s education for two reasons. First, some foreign public schools are generally not comparable to U.S. public schools. Some are better, and others are below the U.S. standard. Companies make generous educational reimbursements where public school quality is low. Second, most U.S. children do not speak foreign languages �luently. Thus, they cannot enroll in foreign public schools.
HOME LEAVE BENEFITS AND TRAVEL REIMBURSEMENTS
Companies offer home leave bene�its to help expatriates manage the adjustment to foreign cultures and to maintain direct personal contact with family and friends. As the name implies, home leave bene�its (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss196) enable expatriates to take paid time off in the United States. Home leave bene�its vary considerably from company to company. The length and frequency of these leaves usually depend on the expected duration of expatriates’ assignments (i.e., longer assignments justify longer home leaves). In addition, expatriates must serve a minimum period at the foreign post before they are eligible for home leave bene�its (i.e., anywhere from 6 to 12 months). Companies offer these extended bene�its along with the standard paid time off bene�its.
TABLE 13-3 Relocation Assistance Payments
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The relocation allowance or reimbursement provides employees with money for:
Temporary quarters prior to departure because the expatriate’s house has been sold or rented
Transportation to the foreign post for employees and their families
Reasonable expenses incurred by the family during travel
Temporary quarters while waiting for delivery of household goods or while looking for suitable housing
Moving household goods to the foreign post
Storing household goods in the United States
Companies compensate expatriates while they are away on home leave. In addition, most companies reimburse expatriates for expenses associated with travel between the foreign post and the United States. These reimbursements apply to expatriates and to family members who live with expatriates at foreign posts. Companies typically reimburse the cost of round-trip airfare, ground transportation, and accommodations while traveling to and from the foreign post.
REST AND RELAXATION LEAVE AND ALLOWANCE
Expatriates who work in designated hardship foreign locations receive rest and relaxation leave bene�its. Rest and relaxation leave represents additional paid time off. Progressive employers recognize that expatriates working in hardship locations may need extra time away from the unpleasant conditions to “recharge their batteries.” Rest and relaxation leave bene�its differ from standard vacation bene�its because companies designate where expatriates may spend their time. For example, many U.S. companies with operations in China’s Special Economic Zone designate Hong Kong as an acceptable retreat because it is relatively close by and has many amenities not present in the Special Economic Zone (e.g., diverse ethnic restaurants and Western-style entertainment).
Rest and relaxation leave programs include allowances to cover travel expenses between the foreign post and the retreat location. Companies determine allowance amounts based on such factors as the cost of round-trip transportation, food, and lodging associated with the designated locations. Allowances usually cover the majority of the costs. The U.S. Department of State publishes per diem schedules for various cities. Location and family size determine per diem amounts.
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13.7 BALANCE SHEET APPROACH FOR U.S. EXPATRIATES’ COMPENSATION PACKAGES
13-4 Discuss the balance sheet approach for U.S. expatriates’ compensation packages.
Most U.S. multinational companies use the balance sheet approach to determine expatriates’ compensation packages. The balance sheet approach (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss19) provides expatriates the standard of living they normally enjoy in the United States. Thus, the United States is the standard for all payments.
The balance sheet approach has strategic value to companies for two important reasons. First, this approach protects expatriates’ standards of living. Without it, companies would have a dif�icult time placing quali�ied employees in international assignments. Second, the balance sheet approach enables companies to control costs because it relies on objective indexes that measure cost differences between the U.S. and foreign countries. We will discuss these indexes shortly.
The use of the balance sheet approach is most appropriate when:
The home country is an appropriate reference point for economic comparisons.
Expatriates are likely to maintain psychological and cultural ties with the home or base country.
Expatriates prefer not to assimilate into the local foreign culture.
The assignment is of limited duration.
The assignment following the international assignment will be in the home country.
The company promises employees that they will not lose �inancially while on foreign assignment.
Companies that use the balance sheet approach compare the costs of four major expenditures in the United States and the foreign post:
Housing and utilities
Goods and services
Discretionary income
Taxes
Employees receive allowances whenever the costs in the foreign country exceed the costs in the United States. Allowance amounts vary according to the lifestyle enjoyed in the United States. In general, individuals with higher incomes tend to live in more expensive homes, and they are in better positions to
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enjoy more expensive goods and services (e.g., designer labels versus off-brand labels). Higher income also means higher taxes.
Where do U.S. companies obtain pertinent information about costs for foreign countries? U.S. companies may rely on three information sources. First, they can rely on expatriates who have spent considerable time on assignment or foreign government contacts. Second, private consulting companies (e.g., Towers Watson) or research companies (e.g., Bureau of National Affairs) can conduct custom surveys. Third, most U.S. companies consult the U.S. Department of State Indexes of Living Costs Abroad, Quarters Allowances, and Hardship Differentials, which is published quarterly. It is the most cost-effective source because it is available at no charge in libraries with government depositories as well as at www.state.gov (http://www.state.gov) .
Housing and Utilities
Employers provide expatriate employees with housing and utilities allowances (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss203) to cover the difference between housing and utilities costs in the United States and in the foreign post. The U.S. Department of State uses the term quarters allowances (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss362) . Table 13-4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#ch13tab04) displays pertinent information from the U.S. Department of State’s quarters allowances.
The quarters allowances table contains three main sections: the survey date, exchange rate, and annual allowance by family status and salary range. The survey date is the month when the Of�ice of Allowances received housing expenditure reports.
The exchange rate section includes three pieces of information: effective date, foreign unit, and number per U.S. dollar. We reviewed the concept of exchange rate earlier. It is expressed as the number of foreign currency units given in exchange for U.S. $1.
Table 13-4 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#ch13tab04) contains information on family status and salary range. The term single is self-explanatory. The term rate refers to rank within a company. Roughly, these are senior management, middle management, and entry- level management. In Beijing, the quarters allowance is $65,600 for single expatriates who are members of senior management. In Taipei, the allowance is $23,100!
TABLE 13-4 Quarters Allowances, 2015
Country and City
Family Status
Rate ($93,177 and Above)
Rate ($54,028 to $93,176)
Rate (Less than $54,028)
BELGIUM: Family 39,100 36,500 32,800
Brussels Single 36,500 34,300 28,700
CANADA: Family 48,600 41,400 37.200
Montreal Single 43,300 37,200 33,000
Source: U.S. Department of State. (2015). Annual Living Quarters Allowance in U.S. Dollars (Rates Effective: 04/5/2015). Washington, DC: U.S. Government Printing Of�ice. Available: www.state.gov (http://www.state.gov) , accessed April 10, 2015.
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Country and City
Family Status
Rate ($93,177 and Above)
Rate ($54,028 to $93,176)
Rate (Less than $54,028)
CHINA: Family 71,200 65,000 58,200
Beijing Single 65,600 58,200 58,200
MEXICO: Family 47,900 45,000 41,400
Mexico City Single 46,800 41,400 37,200
TAIWAN: Family 23,100 23,100 19,100
Taipei Single 23,100 23,100 19,100 Source: U.S. Department of State. (2015). Annual Living Quarters Allowance in U.S. Dollars (Rates Effective: 04/5/2015). Washington, DC: U.S. Government Printing Of�ice. Available: www.state.gov (http://www.state.gov) , accessed April 10, 2015.
The term family refers to two-or-more-person families, including married couples and domestic partnerships. Employees with larger families living with them at the foreign posts receive supplements. Families of two to three persons receive a 10 percent supplement, families of four or �ive persons receive a 20 percent supplement, and families of six or more persons receive a 30 percent supplement.
Goods and Services
Expatriates receive goods and services allowances (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss176) when the cost of living is higher in that country than it is in the United States. Employers base these allowances on indexes of living costs abroad (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss217) , which compare the costs (U.S. dollars) of representative goods and services (excluding education) expatriates purchase at the foreign location with the cost of comparable goods and services purchased in the Washington, DC, area. The indexes are place-to-place cost comparisons at speci�ic times and currency exchange rates.
Discretionary Income
Discretionary income (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss110) covers a variety of �inancial obligations in the United States for which expatriates remain responsible. These expenditures are usually of a long-term nature. Companies typically do not provide allowances because expatriates remain responsible for them despite international assignments. Table 13-5 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#ch13tab05) lists examples of discretionary income expenditures.
Tax Considerations
All U.S. citizens working overseas for U.S. corporations are subject to the Federal Unemployment Tax Act (FUTA).7 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end7) Expatriates continue to pay U.S. income taxes and Social Security taxes while on assignment. The Internal Revenue Service (IRS) taxes U.S. citizens’ income regardless of whether they earn income in the United States or
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while on foreign assignment.8
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end8) Expatriates must also pay income taxes to local foreign governments based on the applicable income tax laws. Paying taxes to both the U.S. government and foreign governments is known as “double” taxation.9
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec13#ch13end9) The Internal Revenue Code (IRC) includes regulations that address taxation issues.
EMPLOYER CONSIDERATIONS: TAX PROTECTION AND TAX EQUALIZATION
Under the balance sheet approach, companies choose between two approaches to help address concerns of double taxation:
Tax protection
Tax equalization
A key element of both tax protection and tax equalization methods is the hypothetical tax (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss208) . Employers calculate the hypothetical tax as the U.S. income tax based on the same salary level, excluding all foreign allowances. Under tax protection (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss441) , employers reimburse expatriates for the difference between the actual income tax amount and the hypothetical tax when the actual income tax amount—based on tax returns �iled with the IRS—is greater. Expatriates simply pay the entire income tax bill when the taxes are less than or equal to the hypothetical tax. Expatriates realize a tax bene�it whenever actual taxes amount to less than the hypothetical tax because they will have paid lower income taxes on their overseas assignments than on assignments in the United States.
TABLE 13-5 Discretionary Income Expenditures
Pension contributions
Savings and investments
Insurance payments
Equity portion of mortgage payments
Alimony payments
Child support
Student loan payments
Car payments
Under tax equalization (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss440) , employers take the responsibility for paying income taxes to the U.S. and foreign governments on behalf of the expatriates. Tax equalization is a process that ensures that the tax costs incurred by an expatriate
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approximate the cost of taxes had he or she remained at home. Under tax equalization, the expatriate neither suffers signi�icant �inancial hardship nor realizes a �inancial windfall from the tax consequences of an international assignment. Tax equalization starts with the calculation of the hypothetical tax. Based on this hypothetical tax amount, employers deduct income from expatriates’ paychecks that total the hypothetical tax amounts at year end. Employers reimburse expatriates for the difference between the hypothetical tax and actual income tax whenever the actual income tax amount is less. Expatriates reimburse their employers whenever the actual income tax amount exceeds the hypothetical income tax amounts.
Of the two approaches, employers stand to bene�it more from the tax equalization approach. Expatriates receive equitable treatment regardless of their location and do not keep the unexpected tax gain from being posted in countries with income tax rates lower than in the United States. As a result, employers should have an easier time motivating expatriates to move from one foreign post to another. In addition, companies save money by not allowing expatriates to keep tax windfalls.
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13.8 REPATRIATION PAY ISSUES
13-5 Describe repatriation issues.
Special compensation considerations should not end with the completion of international assignments. Effective expatriate compensation programs promote employees’ integration into their companies’ domestic workforces. Returnees may initially view their domestic assignments as punishment because their total compensation decreases. Upon return, former expatriates forfeit special pay incentives and extended leave allowances. Although most former expatriates understand the purpose of these incentives and allowances, it often takes time for them to adjust to “normal” compensation practices. Many expatriates may not adjust very well to compensation-as-usual because they feel their international experiences have made them substantially more valuable to their employers. Their heightened sense of value may intensify when former expatriates compare themselves with colleagues who have never taken international assignments. Two consequences are likely. First, former expatriates may �ind it dif�icult to work collaboratively with colleagues, which can undermine differentiation objectives. Second, strong resentments may lead former expatriates to �ind employment with competitors. Adding insult to injury, competitors stand to bene�it from former expatriates’ international experiences.
Companies can actively prevent many of these problems by the following two measures. First, companies should invest in former expatriates’ career development. Career development programs signal that companies value returnees. In addition, former expatriates may view their employers’ investments in career development as a form of compensation, reducing the equity problems described earlier. Second, companies should capitalize on expatriates’ experiences to gain a better understanding of foreign business environments. In addition, former expatriates can contribute to the quality of future international assignments by conveying what did and did not work well during their assignments.
COMPENSATION IN ACTION
International assignments can be one of the most rewarding experiences during an employee’s career. However, along with the excitement and novelty of living in a different part of the world comes the reality of dealing with new customs, living in different communities, and arranging a lifestyle in a way that makes the experience logistically enjoyable. As an HR manager or line manager, you will likely deal with expatriate employees on a number of occasions. By asking the right questions, establishing sound and consistent policy, and working to meet the requests and needs of the individual employee (within established guidelines), you can take steps to maximize the employee experience that in the long run could prove to have signi�icant value to the company.
Action checklist for line managers and HR—maximizing the experience of expatriate employees
HR takes the lead
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Identify what type of training or other areas of preparation are necessary prior to the employee beginning the expatriate assignment.
Sit down with the employee to discuss particulars that may need to be considered prior to the employee beginning the assignment (e.g., family needs, pets, and expectations of employee).
With compensation specialists, align the individual needs of the employee with the policies already in place in the company. For example, if the expatriate will be compensated on a home country-based pay method, are foreign service premiums necessary to “sweeten the deal”? Is the host country an area where hardship allowance will be awarded? Will the employee have a spouse or children who will need special bene�its (e.g., private schooling and language lessons)?
Line managers take the lead
Establish a pipeline of talented employees who are ready for an international assignment. As these opportunities arise, work with HR to identify which of those employees match up best with the speci�ic opportunities.
Partner with other line managers who have had experience working with expatriates to understand the ideal length of time for the assignment, and what issues should be considered to guarantee successful transition into the assignment (this should include discussions with domestic line managers and host country managers).
Work with HR to keep the expatriate employee connected to operations in the United States; prior to repatriation, establish a plan to keep the employee engaged through experiences wherein he or she can use the critical skills acquired during the assignment (e.g., mentoring an employee preparing for a similar experience). Accurately communicate changes in compensation and other areas which could be of concern to the employee so that appropriate expectations are established.
END OF CHAPTER REVIEW
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Go to mymanagementlab.com (http://mymanagementlab.com) to complete the problems marked with this icon .
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Summary
Learning Objective 1: The presence of companies in foreign countries is on the rise. There are a variety of reasons for this trend, which relate to lowest-cost producers’ relocations to less expensive production areas and differentiation and the search for new global markets. This trend also has implications for the role of the HR department and changes in the design of compensation packages.
Learning Objective 2: There are important preliminary considerations before establishing an international compensation program. These include understanding the differences between HCNs, TCNs, and expatriates. In addition, companies must determine the term of international assignment, staff mobility, and pay referent groups.
Learning Objective 3: International compensation components require choices about methods for setting base pay and employee bene�its, and, in doing so, recognize the role of purchasing power of currencies in other countries and other standard of living issues.
Learning Objective 4: The balance sheet approach provides expatriates the standard of living they normally enjoy in the United States. A number of considerations include housing and utilities costs, costs of goods and services, discretionary income, and taxation laws in other countries.
Learning Objective 5: Repatriation addresses an expatriate’s return to the home country, and a company anticipating readjustment to working and living at home, differences in the nature of work compared to the international assignment, and changes in the compensation package.
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Key Terms North American Free Trade Agreement (NAFTA) 307
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13#page_307) repatriation 308
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec1#page_308) host country nationals (HCN) 309
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec2#page_309) third country nationals (TCN) 309
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec2#page_309) expatriates 309
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec2#page_309) home country-based pay method 311
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_311) host country-based method 311
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_311) headquarters-based method 311
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_311) exchange rate 312
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_312) in�lation 312 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_312) foreign service premiums 313
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_313) hardship allowance 313
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec4#page_313) mobility premiums 314
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec5#page_314) relocation assistance payments 316
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec6#page_316) home leave bene�its 316
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec6#page_316) balance sheet approach 317
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec6#page_317) housing and utilities allowances 318
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_318) quarters allowances 318
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_318) goods and services allowances 319
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_319) indexes of living costs abroad 319
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_319) discretionary income 319
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_319) hypothetical tax 319
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_319)
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tax protection 319 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_319)
tax equalization 320 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch13lev1sec7#page_320)
MyManagementLab CHAPTER QUIZ! If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Quiz! and see what you’ve learned.
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Discussion Questions 13-1. Discuss the strengths and weaknesses of the following methods for establishing base pay in
international contexts: home country-based pay, headquarters-based pay, and host country- based pay.
13-2. For a country of your choice, conduct research into the cultural characteristics and summarize these characteristics. Discuss whether you feel that pay-for-performance programs are compatible and provide your rationale.
13-3. Discuss your reaction to the following statement: “U.S. companies should increase base pay (beyond the level that would be paid in the United States) to motivate employees to accept foreign assignments.”
13-4. Allowances and reimbursements for international assignments are costly. Should companies avoid international business activities? Explain your answer. If you answer no, what can companies do to minimize costs?
13-5. Of the many reimbursements and allowances that U.S. companies make for employees who take foreign assignments, which one is the most essential? Discuss your reasons.
CASE Jenkins Goes Abroad
An additional Supplemental Case can be found on MyManagementLab.
Jenkins Consulting is a national �irm that helps companies improve their performance and effectiveness by advising on all aspects of business management and operations. Companies hire consultants from Jenkins Consulting for a variety of projects such as assisting with company-wide cost reduction initiatives or revenue growth initiatives, improving supply-chain management, and/or improving individual departments such as information technology. Jenkins employs consultants in 200 of�ices across the United States and will soon expand its operations internationally.
A company located in the United Kingdom has hired Jenkins for a major project that will be based at the company’s headquarters in London. Jenkins will assist the company with an organization-wide effort to restructure and reposition the company to succeed in a more competitive market. To complete this project, Jenkins will assign �ive full-time consultants for a period of approximately 2 years. Because of the signi�icant time commitment, Jenkins has decided to relocate the selected consultants to the United Kingdom for the duration of the project.
Dale Kugar, the human resource director at Jenkins, must prepare to transition the consultants to the new assignment. This is the company’s �irst exposure to expatriate management, and Dale needs to ensure that the consultants who move to the United Kingdom for the project are compensated appropriately. His intention is to have the consultants maintain their current bene�its, including health care insurance, retirement savings, and paid time off. However, he must make a recommendation on any changes to each consultant’s salary.
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Dale has a few concerns as he prepares his recommendation. First, the United Kingdom is currently experiencing a high level of in�lation. The value of the American dollar compared to the British pound is fairly low. That is, the consultant’s U.S. salary will not have the same purchasing power in the United Kingdom as it does at home. He is also concerned about the consultants’ interest in taking on the international assignment. Some of the consultants he spoke to about the assignment are concerned about the impact the assignment will have on their career. Because this is Jenkins’ �irst international experience, the consultants are concerned that being out of the country for 2 years may affect their future career opportunities because they will not have regular interactions with the �irm partners who make decisions on promotions. These concerns weigh heavily on Dale’s mind as he starts to draft his recommendation.
Questions:
13-6. How should Dale approach the determination of the consultant’s salaries as expatriates? 13-7. Should Jenkins offer any incentive compensation or additional bene�its to the expatriates? Why
or why not?
Crunch the Numbers! Calculating an Expatriate’s Base Pay and Incentives
An additional Crunch the Numbers! exercise can be found on mymanagementlab.com (http://mymanagementlab.com) .
One of your colleagues will be taking a 1-year work assignment in Beijing, China. As a compensation analyst, you must prepare an estimate of her new base pay and incentive payments. In particular, her base pay is being increased 5 percent from her current $75,000 because the assignment will require additional responsibilities. Your colleague will be awarded a 20 percent foreign service premium, a 15 percent hardship allowance, and a quarters allowance equal to $58,200.
Questions:
13-8. Calculate your colleague’s new base pay rate. 13-9. Calculate the (a) foreign service premium, (b) hardship allowance, and (c) quarters allowance. 13-10. Based on your calculations for the previous questions, how much will your colleague receive for
her 1-year assignment in Beijing, China?
MyManagementLab Go to mymanagementlab.com (http://mymanagementlab.com) for Auto-graded writing questions as well as the following
Assisted-graded writing questions:
13-11. Describe the two choices available to companies to protect expatriates from double taxation. Which of the two approaches is most fair to expatriates and why?
13-12. From the company’s standpoint, what are the pros and cons of following the balance sheet approach?
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13-13. MyManagementLab Only – comprehensive writing assignment for this chapter.
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Endnotes 1. Vorhauser-Smith, S. (2013). Global mobility: A win-win for you and your employer (October 31). Available: www.forbes.com (http://www.forbes.com) , accessed January 30, 2015.
2. Quotation excerpted from WorldatWork Web site, Companies Are Leveraging International Assignments to Better Compete Globally. Available: www.worldatwork.org (http://www.worldatwork.org) , accessed July 7, 2007.
3. Yanadori, Y. (2011). Paying both globally and locally: An examination of the compensation management of a US multinational �inance �irm in the Asia Paci�ic region. The International Journal of Human Resource Management, 22: pp. 3867–3887.
4. Crosby, M. (2013). Knowing when to use a host-based compensation program. Workspan (July): pp. 27–30.
5. Munn, G. G., Garcia, F. L., & Woelfel, C. J. (1991). Encyclopedia of Banking and Finance. Chicago, IL: St. James Press.
6. Horn, M. E. (1992). International Employee Bene�its: An Overview. Brook�ield, WI: International Foundation of Employee Bene�it Plans.
7. Internal Revenue Code, Section 306(c), paragraph 3306(j). 8. ORC Worldwide. (February 18, 2009). Savings Initiatives in Expatriate Programs Underway. Available: www.orcworldwide.com (http://www.orcworldwide.com) , accessed June 14, 2009.
9. Ibid.
