Join Wayne Cascio for an in-depth discussion in this video Compensating international employees, part of Human Resources Foundations.
- Consider this situation. You've just been offered a position as director of international business development for the coffee company you work for. If you accept the job, you, your spouse, and your two young children will be based in Shanghai for the next three years. Your boss asks you to discuss this opportunity with your spouse, and to meet next week to discuss it further if you're interested. Your spouse is excited about the move, as are you, although both of you have many questions.
The most urgent of these involves the compensation package that the company's willing to offer. It's now time to meet with your boss. She's anticipated most of your questions about international compensation, and is fully prepared to discuss those at the meeting. As you're walking into the meeting, there are several issues you want to discuss. Will the financial incentives be attractive enough for you to leave your home country? Will you be able to maintain your standard of living while in Shanghai with due consideration of your career and family needs? Will the company ensure a smooth reentry back home at the end of your assignment? At a general level, many companies use a balance sheet approach to international compensation.
The objective of this approach is to keep employees whole. That is, to allow them to maintain the purchasing power of their salaries in the new location. Let's say just for illustration that you and your family spend 25% of your monthly income on housing, another 25% on goods and services, a third 25% on income taxes, and that the remainder goes to savings. In Shanghai, you can expect to pay 25% more for housing.
Likewise, goods and services will also be 25% more expensive. You'll also be paying in income taxes both in China as well as in your home country. The good news is with the balance sheet approach companies will cover all of the excess costs that you incur for housing, goods and services, and income taxes. As a result, you would still be able to save 25% of your income each month, and you'll be no worse off financially than if you had never left home.
An international pay package consists of four key components, a base salary, a foreign-service and hardship premium, a variety of allowances, and employee benefits. While physical threats, danger, and discomfort due to the environment are not major concerns in Shanghai, the cultural differences are considerable as is the inconvenience of relocating and placing your children in the local educational system. As a result, in this example, the company would be willing to add a foreign-service and hardship premium of 20% to your base pay.
In addition you'll receive allowances for the difference in the cost of living, the cost of housing and education, an allowance to cover home leave for you and your family once a year, the full cost of relocation, and since your spouse also works, a spousal-assistance package. Companies in general also pay for tax preparation and they guarantee that you do not pay any more in total taxes than you would have at home. This is called tax equalization.
Finally, most companies also provide international medical coverage and all required benefits. The total cost? A three-year international assignment typically costs three to five times home country salary alone. As you can see, there are lots of issues to consider before you accept an international assignment. Doing your homework ahead of time can ensure that you get the best possible deal for you and for your family.
- Administrative vs. strategic HR
- Managing talent
- Developing employees through training and career development
- Managing performance
- Managing international employees