MGMT3025 Chap.9 International Compensation and Taxation
International Compensation and Taxation
Paying people who move between countries is one of the most technical parts of international HRM, and this chapter follows the Week 9 lecture from purpose to method. It starts with why global pay matters to the firm, as a control device and a carrier of corporate culture, and with the four objectives a pay policy should meet.
It then lists the questions that decide an assignment package: who is moving, why, for how long, between which locations, what happens at the end and who the comparison peers are. The package itself is broken into base salary, the foreign service and hardship premiums, allowances and benefits. Three methods are compared in detail, the going rate, the balance sheet and local plus, with the balance sheet drawn layer by layer.
The chapter closes with survey evidence on global benefits policies and the four ways multinationals handle an assignee's income tax.
What this chapter covers
- 01
Pay as a control device and the four objectives of policy
- 02
Questions that decide an assignment package
- 03
Base salary, premiums and the main allowances
- 04
Going rate, balance sheet and local plus compared
- 05
The four balance sheet categories and their adjustments
- 06
Global benefits policies and pension transportability
- 07
Tax equalisation, tax protection, ad hoc and laissez-faire
Worked example · free
Which global benefits should a pharmaceutical firm set first for its mobile scientists?
- +1Start with one overarching mobility benefits policy, which 85% of surveyed firms already have, so every mobile scientist is covered by the same rules.
- +2Globalise medical cover first: 76% of firms have a global medical policy, and medical is the usual exception to keeping PCNs in their home plan.
- +2Expect retirement to be hardest: only 55% have a global retirement policy and 22% an international retirement plan, because pension and social security transportability varies by country.
- +1Settle the remaining choices explicitly: home or host basis for each benefit, which social security system applies, and who pays.
Key terms
- Local plus approach
- A hybrid pay method that pays the host country's salary levels and structure and adds a limited set of expatriate benefits.
- Cost of living allowance
- A payment that offsets the difference in spending on goods and services between the home and host country, usually scaled by family size.
- Foreign service inducement
- A premium on base pay offered to persuade an employee to accept an overseas posting.
- Tax protection
- A tax policy under which the assignee pays no more than the tax they would owe at home on the same compensation.
- Hardship premium
- Extra pay that compensates an assignee for working in a difficult or challenging location.
International Compensation and Taxation FAQ
What are the three main approaches to expatriate pay?
The lecture compares the going rate, which ties pay to host-country market surveys; the balance sheet, which builds up from the home package to keep the home living standard; and local plus, which pays host salary with a few expatriate benefits. It links them respectively to long-term geocentric moves, traditional ethnocentric postings and self-initiated or permanent relocations.
How does tax equalisation differ from tax protection?
With equalisation the employer withholds the assignee's tax obligation and pays every host-country tax, so the posting leaves their tax burden unchanged. With protection the employee pays at most the home amount, which means anyone posted to a lower-tax location keeps the saving. Equalisation is described as by far the most common choice among multinationals.
What does a local plus package usually leave out?
It typically omits the cost of living allowance, hardship allowances and mobility premiums, familiarisation visits and home leave, cross-cultural training, and other help before departure or for a spouse. What remains is host-country salary under local rules plus selected benefits such as housing or schooling, which is why it costs less than a balance sheet but can feel unequal.
How is a cost of living allowance usually calculated?
Several indices exist, covering items such as transport, furniture and appliances, medical spending, car maintenance and domestic help, but the lecture identifies family size as the predominant basis. Payments rise with an increment for each additional child, so two assignees in the same city can receive different allowances.
What objectives should an international pay policy meet?
Four are listed. Policy should be consistent with the multinational's strategy, structure and business needs; attract and retain staff where its greatest needs and opportunities lie; support the transfer of international employees cost-effectively; and give due weight to equity and ease of administration. Expatriates add their own expectations about protection, advancement, family needs and re-entry.
Exam move
Learn the three pay methods as a comparison grid you can draw from memory: basis, direction (top-down or bottom-up), cost, and the assignment type each suits. Then practise the balance sheet as a layered drawing, naming the four categories and the adjustment that closes each gap.
For scenario questions, run the determinant questions in order before naming a method: who is moving, for what purpose and how long, from where to where, what happens at the end, and who the peer group is. Keep a separate card for tax, with one sentence on each of the four policies and which party gains when the host rate is lower or higher.
Finally, link this chapter back to staffing: ethnocentric staffing and the balance sheet tend to travel together.
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