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Compensation & other benefits to managers in foreign

Assignments

Compensation & Benefits is a sub-discipline of Human-Resources, focused on employee

compensation and benefits policy making.It is also known in the UK as “Total Reward” and

as “Remuneration” in Australia and New Zealand.

BASIC COMPONENTS OFCOMPENSATION

1. Guaranteed Pay – monetary (cash) paid by an employer to an employee based on

employee/employer relations. The most common form of guaranteed pay is the base salary.
2. Variable Pay – monetary (cash) reward paid by an employer to an employee that is
contingent on discretion, performance or results achieved. The most common forms are
bonuses and sales incentives.
3. Benefits – programs an employer uses to supplement employees’ compensation, such as
paid time-off, medical insurance, company car, and more.
4. Equity Based Compensation – a plan using the employer’s share as compensation. The
most common examples are stock options.

Guaranteed Pay

Guaranteed pay is a monetary (cash) reward.

The basic element of the guaranteed pay is the base salary, paid based on an hourly, daily, weekly,
bi-weekly or a monthly rate. The base salary is typically used by employees for ongoing consumption.
Many countries dictate the minimum base salary defining a minimum wage.Individual skills and level
of experience of employees leave room for differentiation of income-levels within the job-based pay
structure.In addition to base salary, there are other pay elements which are paid based solely on
employee/employer relations, such as 13th salary, seniority allowance, and more.

Variable Pay
Variable pay is a monetary (cash) reward that is contingent on discretion, performance or
results achieved. There are different types of variable pay plans, such as bonus schemes, sales
incentives (commission), overtime pay, and more.
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An example where this type of compensation plan is prevalent is the real estate industry and
real estate agents. A common variable pay plan might be the sales person receives 50% of
every dollar they bring in up to a level of revenue at which they then bump up to 85% for
every dollar they bring in going forward. Typically, this type of plan is based on an annual
period of time requiring a "resetting" each year back to the starting point of 50%. Sometimes
this type of plan is administered so that the sales person never resets and never falls down to a
lower level.

Benefits

There is a wide variety of employee benefits, such as paid time-off, insurances (life
insurance, medical/dental insurance, and work disability insurance), pension plan, company
car, and more. A benefit plan is designed to address a specific need and is often provided not
in the form of cash.
Many countries dictate different minimum benefits, such as minimum paid time-off,
employer’s pension contribution, sick pay, and more.

Equity Based Compensation

Equity based compensation is an employer compensation plan using the employer’s shares as
employee compensation. The most common form is stock options, yet employers use
additional vehicles such as Restricted Stock, Restricted Stock Units (RSU), Employee Stock
Purchase Plan (ESPP), and Stock Appreciation Rights (SAR).The classic objectives of equity
based compensation plans are retention, attraction of new hires and aligning employees’ and
shareholders’ interests.
C&B Organizational Place
In most companies, compensation & benefits (C&B) is a sub-function of the Human-
Resources (HR) function.
HR organizations in big companies are typically divided into three: HR Business Partners
(HRBPs), HR Centers of Excellence, and HR Shared Services. C&B is an HR center of
excellence, like Staffing and Organizational Development (OD).

C&B Main Influencers

Employee compensation and benefits main influencers can be divided into two: internal
(company) and external influencers.
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The most important internal influencers are the business objectives, labor unions, internal

equity (the idea of compensating employees in similar jobs and similar performance in a
similar way),organizational culture and organizational structure.
The most important external influencers are the state of
the economy, inflation, unemployment rate, the relevant labor market, labor law, tax law, and
the relevant industry habits and trends.

Bonus Plans
Bonus plans are Variable Pay plans. They have three classic objectives:

1. Adjust labor cost to financial results - the basic idea is to create a bonus plan where the
company is paying more bonuses in ‘good times’ and less (or no) bonuses in ‘bad times’. By
having bonus plan budget adjusted according to financial results, the company’s labor cost is
automatically reduced when the company isn’t doing so well, while good company
performance drives higher bonuses to employees.

2. Drive employee performance - the basic idea is that if an employee knows that his/her
bonus depend on the occurrence of a specific event (or paid according to performance, or if a
certain goal is achieved), then the employee will do whatever he/she can to secure this event
(or improve their performance, or achieve the desired goal). In other words, the bonus is
creating an incentive to improve business performance (as defined through the bonus plan).

3. Employee retention - retention is not a primary objective of bonus plans, yet bonuses are
thought to bring value with employee retention as well, for three reasons: a) a well designed
bonus plan is paying more money to better performers; a competitor offering a competing
job-offer to these top performers is likely to face a higher hurdle, given that these employees
are already paid higher due to the bonus plan. b) if the bonus is paid annually, employee is
less inclined to leave the company before bonus payout; often the reason for leaving (e.g.
dispute with the manager, competing job offer) 'goes away' by the time the bonus is paid. the
bonus plan 'buy' more time for the company to retain the employee. c) employees paid more
are more satisfied with their job (all other things being equal) thus less inclined to leave their
employer.
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The concept saying bonus plans can improve employee performance is based on the work
of Frederic Skinner, perhaps the most influential psychologist of the 20th century. Using the
concept ofOperant Conditioning, Skinner claimed that an organism (animal, human being) is
shaping his/her voluntary behavior based on its extrinsic environmental consequences - i.e.
reinforcement or punishmen.

INTERNATIONAL COMPENSATION-BALANCE-SHEET APPROACH

Organizations with employees in many different countries face some special compensation
pressures. Variations in laws, living costs, tax policies, and otherfactors all must be
considered in establishing the compensation for expatriate managers and professionals. Even
fluctuations in the value of the U.S. dollar must be tracked and adjustments made as the
dollar rises or falls in relation to currency rates in other countries. Add to all of these
concerns the need to compensate employees for the costs of housing, schooling of children,
and yearly transportationhome for themselves and their family members. When all these
different issues are considered, it is evident that international compensation is extremely
complex.

Balance-Sheet Approach

Many multinational firms have compensation programs that use the balancesheet approach.
The balance-sheet approach provides international employees with a compensation package
that equalizes cost differences between the international assignment and the same assignment
in the home country of the individual or the corporation. The balance-sheet approach is based
on some key assumptions, which are discussed next.

HOME-COUNTRY REFERENCE POINT

The compensation package is developed to keep global employees at a level appropriate to

their jobs in relation to similar jobs in the home country. Special benefits or allowances are
provided to allow the global employees to maintain a standard of living at least equivalent to
what they would have in the home country.
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LIMITED DURATION OF GLOBAL ASSIGNMENT 

Another basic premise of the balance- sheet approach is that expatriate employees generally
have international assignments lasting two to three years. The international compensation
package is designed to keep the expatriates “whole” for a few years until they can be
reintegrated into the home-country compensation program. Thus, the “temporary”
compensation package for the international assignment must be structured to make it easy for
the repatriated employee to reenter the domestic compensation and benefits programs. Also,
it is assumed that the international employee will retire in the home country, so pension and
other retirement benefits will be homecountry- based.

Increasingly, global organizations have recognized that attracting, retaining, and motivating
managers with global capabilities requires taking a broader perspective than just sending
expatriates overseas. As mentioned earlier, in many large multinational enterprises, key
executives have worked in several countries and may be of many different nationalities.
These executives are moved from one part of the world to another and to corporate
headquarters wherever the firms are based. It appears that there is a high demand for these
global managers, and they almost form their own “global market” for compensation purposes.

Unlike the balance-sheet approach, a global market approach to compensation requires that
the international assignment be viewed as continual, not just temporary, though the
assignment may take the employee to different countries for differing lengths of time. This
approach is much more comprehensive in that the core components, such as insurance
benefits and relocation expenses, are present regardless of the country to which the employee
is assigned. But pegging the appropriate pay level, considering rates in the host country,
home country, and/or headquarters country, becomes more complex. Further, the
acceptability of distributing compensation unequally based on performance varies from
country to country. Therefore, global compensation requires greater flexibility, more detailed
analyses, and greater administrative effort. Some factors affecting executive compensation
include the “cultural distance” from headquarters and how much responsibility and autonomy
the subsidiary incurs.
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Tax Concerns

Many international compensation plans attempt to protect expatriates from negative tax
consequences by using a tax equalization plan. Under this plan, the company adjusts an
employee’s base income downward by the amount of

estimated U.S. tax to be paid for the year. Thus, the employee pays only the foreign-country
tax. The intent of the tax equalization plan is to ensure that expatriates will not pay any more
or less in taxes than if they had stayed in the

United State