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CHAPTER 7: Global compensation, benefits, and taxes

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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CHAPTER 7: Global compensation, benefits, and taxes

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  1. CHAPTER 7: Global compensation, benefits, and taxes

  2. 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

  3. Overview chapter 7: • Global remuneration in the MNE • C&B for international assignees • Global C&B management in the MNE

  4. Global remuneration in the MNE

  5. Global remuneration issues and challenges • Comparability • Cultures • Salary-benefit ratio • Tax laws • Sunshine rules and how to express salaries • Global law of economics

  6. Table 7.1: Hourly compensation costs for production workers in manufacturing, 2004

  7. Global remuneration issues and challenges • Labor relations • Laws and regulations • Government provided and mandated benefits • Due diligence • Stage of MNE development

  8. Global compensation

  9. Global benefits • Working hours • Holiday and vacation benefits

  10. Table 7.2: Hours per year per person in employment

  11. Table 7.3: Vacation, holidays, and working hours

  12. Global benefits • Pension plans • Insurance • Leaves • Flexible benefits • Equity compensation

  13. Box 7.1: Types of equity compensation

  14. 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

  15. Global benefits in practice • Global and local coordination • Qualitative and quantitative parity

  16. C&B for international assignees

  17. The evolution of expatriate compensation • Problem of comparability within the organization and across borders

  18. IA C&B strategy and policy • Ensure equity and consistency • Educate employees • Set objectives to ensure effectiveness

  19. 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?

  20. Approaches to IA compensation • Negotiation • Balance sheet • Localization • Other approaches

  21. Negotiation • Used when there are few international assignees • Not recommended as each negotiation becomes the baseline for the next assignee

  22. 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

  23. Determining the type and amount of adjustments • Equalization adjustments • Norms • Spendables • Differentials

  24. 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

  25. Determining differentials • COLAs • Use international consulting firms • Variations in cost of living indices

  26. Table 7.4: The 10 most expensive cities in the world in 2007

  27. Determining the type and amount of allowances and incentives • Foreign premiums • Hardship premiums • Additional incentives

  28. Additional important IA compensation issues • Method of payment • Impact of exchange rate fluctuations • Impact of inflation

  29. Impact of exchange rate fluctuations on the balance sheet • Exchange rate fluctuations are inversely related to the differential

  30. Impact of inflation on the balance sheet • Inflation is directly related to the differential

  31. 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

  32. Other IA compensation approaches • Lump sum • Cafeteria • Regional systems • Global systems

  33. Additional important IA compensation issues • Social security: • Totalization agreements • Certificate of coverage • Taxes: • Dual taxation home and host countries

  34. Table 7.7: Taxation of wage income (2006)

  35. Alternative tax strategies • Laissez faire • Tax equalization • Tax protection • Ad hoc

  36. 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

  37. Global C&B management in the MNE

  38. Additional global C&B concerns • Salary data • Payroll maintenance • Data privacy • Cost concerns • Benchmarking

  39. 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

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