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CHAPTER 7: Global compensation, benefits, and taxes. Learning objectives (chapter 7). Outline the basic objectives of global compensation and benefits (C&B); Distinguish between global remuneration and international assignment C&B;
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Learning objectives (chapter 7) • Outline the basic objectives of global compensation and benefits (C&B); • Distinguish between global remuneration and international assignment C&B; • Identify critical issues in C&B of the global workforce of the MNE; • Describe the types of compensation systems available for international assignees; • Explain the balance sheet approach, as well as other approaches, of designing international assignment C&B packages; • Identify the challenges of dealing with various tax structures and methods affecting international assignment C&B
Overview chapter 7: • Global remuneration in the MNE • C&B for international assignees • Global C&B management in the MNE
Global remuneration issues and challenges • Comparability • Cultures • Salary-benefit ratio • Tax laws • Sunshine rules and how to express salaries • Global law of economics
Table 7.1: Hourly compensation costs for production workers in manufacturing, 2004
Global remuneration issues and challenges • Labor relations • Laws and regulations • Government provided and mandated benefits • Due diligence • Stage of MNE development
Global benefits • Working hours • Holiday and vacation benefits
Global benefits • Pension plans • Insurance • Leaves • Flexible benefits • Equity compensation
Equity compensation considerations • Qualified or non- qualified plans • U.S. accounting rules for stock options • Tax rules and currency exchange restrictions • Local adaptation • Global stock plan administrator
Global benefits in practice • Global and local coordination • Qualitative and quantitative parity
The evolution of expatriate compensation • Problem of comparability within the organization and across borders
IA C&B strategy and policy • Ensure equity and consistency • Educate employees • Set objectives to ensure effectiveness
Determinants of IA compensation approach • What is the type of employee being relocated? • What is the purpose for the IA? • What is the anticipated duration of assignment? • What happens at end of assignment? • Where is employee leaving from and going to? • Who are considered peers? • What is the overall cost of the IA?
Approaches to IA compensation • Negotiation • Balance sheet • Localization • Other approaches
Negotiation • Used when there are few international assignees • Not recommended as each negotiation becomes the baseline for the next assignee
Balance sheet approach • Favored in the U.S. • Replication of home lifestyle in the home country • Based on four components • Home or host country approaches
Determining the type and amount of adjustments • Equalization adjustments • Norms • Spendables • Differentials
Home- and Assignment- Location Income Taxes Home-Country Equivalent Purchasing Power Home- Country Salary Income Taxes Premiums and Incentives Housing Income Taxes Income Taxes Housing Housing Housing Goods and Services Goods and Services Goods and Services Goods and Services Discretionary Income Discretionary Income Discretionary Income Discretionary Income Host Location Costs Host Location Costs Shared Between Employee & Firm Figure 7.1: The balance sheet Source: Organization Resource Counselors
Determining differentials • COLAs • Use international consulting firms • Variations in cost of living indices
Table 7.4: The 10 most expensive cities in the world in 2007
Determining the type and amount of allowances and incentives • Foreign premiums • Hardship premiums • Additional incentives
Additional important IA compensation issues • Method of payment • Impact of exchange rate fluctuations • Impact of inflation
Impact of exchange rate fluctuations on the balance sheet • Exchange rate fluctuations are inversely related to the differential
Impact of inflation on the balance sheet • Inflation is directly related to the differential
Localization • Employee wants to reIocate permanently to the host country • International assignment contract ends and employee wants to stay in the host country • Young returnees
Other IA compensation approaches • Lump sum • Cafeteria • Regional systems • Global systems
Additional important IA compensation issues • Social security: • Totalization agreements • Certificate of coverage • Taxes: • Dual taxation home and host countries
Alternative tax strategies • Laissez faire • Tax equalization • Tax protection • Ad hoc
Special U.S. issues in IA compensation • Taxation of U.S. international assignees • Compensation by foreign multinationals in the United States • Compensation and taxation of foreign nationals working in the United States
Additional global C&B concerns • Salary data • Payroll maintenance • Data privacy • Cost concerns • Benchmarking
Key terms • Balance sheet • Cafeteria plan • Cost of living allowance (COLA) • Differential index • Efficient purchaser index • Expatriate compensation • Global remuneration • Hardship allowance • Home country spendable • Host country spendable • Housing norm • Hypothetical tax • Incentives and premiums • International assignment compensation • Laissez faire • Localization • Lump sum • Reserves • Split-payroll • Stock options • Tax equalization • Tax protection