Question

explain with example on the 5 main components of international compensation

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Answer 1

International Compensation also known as the internal rate of return refers to all forms of tangible benefits and financial returns that the international organization employees receive get form their employer for providing their labor services and commitment towards the organization. The IC has 7 key components in total and the same are explained below:

1. Base Salary

This component has a domestic context. It basically shows the amount of cash compensation which creates a benchmark for other elements of compensation like social benefits and bonus. It helps in denoting the important component of a allowance packages that has a direct relation to the base salary and also acts a basis for  pension contributions and in-service benefits. Base salary actually is the important pillar of the international compensation.

2. Foreign Service/ Hardship Premium

It is the total compensation package which the employees of the organization get so that they are encouraged to take up foreign assignments. The objective is to compensate the employees for their possible hardships that they may encounter while they are overseas. Such compensation is usually made in terms salary percentage which varies depending upon the content of the assignment and the tenure. Many a times differentials may be taken into consideration. For example, A host country whose work week is longer as compared to the home country, in lieu of overtime a differential payment can be initiated.

3. Allowances

Allowance that is very common internationally is known as the Cost of Living Allowance. It includes a payment for compensating the difference of cost of living between the two nations which creates  an eventual difference in the expenditure that is made. Compensating for the inflation differential is a very common example. Payments for housing and other utilities, personal income tax etc are also included under COLA.

Example of allowances may include:

• Education allowance
• Spouse assistance
• Home leave allowance
• Relocation allowance

Big companies pay for these allowances for motivating the employees to go for international assignments.

4. Benefits

Benefits are very complicated type of compensation that is given to the employees.

When deciding about the benefits to be given and how to give them firms need to look into many issues. The main issue to be addressed includes deciding to cover the expatriates either under the home country benefit programme or under the programme of the host country. Most of the officials in the US get a cover from their home country benefit programme.

Examples of benefits are:

• Special and vacation leaves
• Rehabilitation and rest leaves
• Emergency provisions such as illness or death in the family

5. Incentives

MNC;s nowadays design special incentives programmes to keep their employees motivated. As a result a large number of organizations are going for on time lump-sum premium as compared to the ongoing premium for overseas assignment. The lump-sum payment has three positive points.

• Employees understand that they are being paid this when they accept an overseas assignment and that too only once. As a result the payment acts as motivation
• Company cost are less because of no future financial commitment and the company having only one payment to deal in.
• Since the incentive is a separate payment,  and can be distinguish for a regular pay it  becomes available for saving or spending.

6. Taxes

The final component of the employee compensation are taxes. Companies usually go for one of the following approaches so that they can deal with international taxation.

• Tax equalization: – Organizations keep an amount which is equal to the home country tax obligation of the employee and pay all taxes in the host country.
• Tax Protection :- The amount an employee would have payed for remuneration in the home country the same amount he or she pays as taxes, Here the expatriate is privileged to receive any unexpected gain if in case the total taxes are less in the foreign country as compared to the home country.

7. Long Term Benefits or Stock Benefits

Long term benefits offered to MNC employees are Employee Stock Option Schemes (ESOS). ESOS are usually used for rewarding the top management in the organization .

Examples of the stock option schemes are:

• Employee Stock Option Plan (ESOP)
• Restricted Stock Unit (RSU)
• Employee Stock Purchase Plan (ESPP)