HRM textbook

592 PART 5 EMPLOYEE RELATIONS
TABLE 17-1 The Balance Sheet Approach (Assumes U.S.
Base Salary of $160,000)
Annual Expense
Chicago, U.S.
Shanghai, China
(US$ Equivalent)
Allowance
Housing & utilities $35,000 $44,800 $9,800
Goods & services 6,000 7,680 1,680
Taxes 44,800 57,344 12,544
Discretionary income 10,000 12,800 2,800
Total $95,800 $122,624 $26,824
Table 17-1 illustrates the balance sheet approach for someone transferring from
Chicago to Shanghai, China. The U.S. Government State Departments estimates the
cost of living in Shanghai at 128% of the U.S. cost of living. 97 In this case, the manager s
base salary is $160,000, and she faces a U.S. income tax rate of 28%. Other costs are
based on the index of living costs abroad published in the U.S. Department of State
Indexes of Living Costs Abroad, Quarters Allowances, and Hardship Differentials,
available at http://aoprals.state.gov/content.asp?content_id= 186&menu_id=81.
Employers also pay their expatriates and local managers abroad performance
incentives. Executive compensation systems around the world are becoming more
similar. 98 U.S. firms that offer overseas managers long-term incentives often use overall
corporate performance criteria (like worldwide profits) when awarding incentive pay.
EXPATRIATE PAY EXAMPLE
company CEMEX:
As a specific example, expats working for the
get foreign service premium equal to a 10% increase in salary. Some get a hardship
premium, depending on the country; it ranges from zero in a relatively comfortable
posting to, for example, 30% in Bangladesh. We pay for their housing. We pay for
their children s schooling up to college. There s home leave a ticket back to their
home country for the entire family once a year. There are language lessons for the
spouse. And we gross up the pay of all expats, to take out the potential effects of
local tax law. Say you have an executive earning $150,000. This person would cost
close to $300,000 as an ex-pat. 99
INCENTIVES Employers use various incentives in international compensation.
First, as mentioned, employers pay various incentives to encourage the employee to
take the job abroad. For example, foreign service premiums are financial payments
over and above regular base pay. These typically range from 10% to 30% of base pay,
and appear as weekly or monthly salary supplements. Hardship allowances compensate
expatriates for hard living and working conditions at certain foreign locations.
(U.S. diplomats posted to Iraq receive about a 70% boost in base salary, among other
incentives. 100 ) Mobility premiums are typically lump-sum payments to reward
employees for moving from one assignment to another.
In terms of buying power, American managers don t rank near the top in terms of
managerial pay. Companies are operating in an increasingly open and competitive
global economy, and emerging markets are offering managers higher disposable
incomes than established countries. Average disposable income for managers ranges
from about $72,000 in Indonesia to $98,000 in France; $105,000 in the United States;
$124,000 in Brazil; $149,000 in the Ukraine; and $229,000 in Saudi Arabia. 101
STEPS IN ESTABLISHING A GLOBAL PAY SYSTEM Balancing global
consistency in compensation with local considerations starts with establishing a
rewards program that makes sense in terms of the employer s overall strategic
needs. 102 Then the employer can turn to more micro issues, such as, is how we re
paying our employees abroad competitive? And are we basing our overseas pay