Page 151 - DMGT548_GLOBAL_HRM

Global HRM

Notes offer regular surveys calculating cost-of-living index that can be updated in terms of currency
exchange rates.
Multinationals using the balance sheet approach must constantly update compensation packages
with new data on living costs, an ongoing administrative requirement. This is an issue to which
expatriate employees pay great attention, and forms the basis of many complaints if updating
substantially lags behind any rise in living costs. Multinationals must also be able to respond to
unexpected events, such as the currency and stock market crash that suddenly occurred in a
number of Asian countries. Some countries, such as Indonesia, faced a devaluation of their
currency by over 50% against the U.S. dollar in a matter of weeks, which had a dramatic impact
on prices and the cost of living.
MNCs should focus on business costs rather than living costs for expatriates because the
multinational firm is interested in the overall cost of doing business in a particular country as
well as the more micro issue of expatriate living costs.
Germany is the most expensive country overall because of its very high basic wages, while the
second most expensive rank for the United States is in large part because of high executive
salaries. In general, developed countries rank as more expensive than developing countries
because their wage costs are higher.

Self Assessment

Fill in the blanks:
5. The two main approaches in the area of international compensation are
…………………Approach and Balance Sheet Approach.
6. In going rate approach, the base salary for international transfer is linked to the salary
structure in the ………… country.
7. ………… approach links the base salary for PCNs and TCNs to the salary structure of the
relevant home country.

8. ………… approach can result in great disparity between expatriates of different nationalities
and between the expatriates and local nationals.
9. ……….. set of compensation elements assumes that regional managers have discretion to
choose from a menu of compensation forms.

8.3 Key Components of International Compensation Programme

The area of international compensation is complex primarily because multinationals must cater
for three categories of employees: PCNs, TCNs, and HCNs. The key components of international
compensation include base salary, Foreign Service inducement/hardship programme,
allowances, benefits and taxation.
1. Base Salary: The term base salary acquires a different meaning when employees go
abroad. In a domestic context, base salary denotes the amount of cash compensation that
serves as a benchmark for other compensation elements (example, bonuses and benefits).
For expatriates, it is the primary component of a package of allowances, many of which
are directly related to base salary (example, Foreign Service premium, cost-of-living
allowance, and housing allowance) as well as the basis for in-service benefits and pension
contributions. The base salary is the foundation block for international compensation and
the employee’s package depending on whether the base salary is linked to the home
country of the PCN or TCN or whether an international rate is paid.

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