This document contains Chapters 13 to 14 CHAPTER 13 Compensating the Flexible Work Force: Contingent Employees and Flexible Work Schedules Learning Objectives 1. List and define each of the four groups of contingent workers and the reasons for U.S. employers’ increased reliance on them. 2. Discuss at least one compensation issue and one employee benefits issue for each of the four groups of contingent workers. 3. List the four categories of flexible work schedules. 4. Summarize one pay and employee benefits issue for flexible work schedules, compressed workweeks, and telecommuting arrangements. 5. Describe at least three reactions unions have about the use of contingent work and flexible work schedule arrangements. 6. Identify two strategic issues and choices companies have regarding the use of contingent workers. Outline I. The Contingent Workforce A. Overview B. Groups of Contingent Workers C. Reasons for U.S. Employers’ Increased Reliance on Contingent Workers II. Pay and Employee Benefits for Contingent Workers A. Legalities B. Part-time Employees C. Temporary Employees D. Leased Workers E. Independent Contractors, Freelancers, and Consultants III. Flexible Work Schedules: Flextime, Compressed Work Weeks, and Telecommuting A. Main Types B. Flextime Schedules C. Compressed Work Weeks D. Telecommuting E. Balancing the Demands of Work Life and Home Life IV. Pay and Employee Benefits for Flexible Employees A. Pay B. Benefits V. Unions’ Reactions to Contingent Workers and Flexible Work Schedules VI. Strategic Issues and Choices in Using Contingent and Flexible Workers A. Lowest-Cost Strategies B. Differentiation Strategies VII. Discussion Questions and Suggested Answers VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses IX. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses
Looking Ahead: As the needs of workers are rapidly changing, many employers are now accommodating with flexible work schedules. Companies that choose to employ contingent workers have to be made aware of both the consequences and the benefits of hiring such workers, and seek to strike a balance between standard work schedules and flexible work schedules.
Lecture Outline I. The Contingent Workforce A. Overview 1. Statistics a. 5.7 million contingent workers employed in February 2005 b. 27 million employees worked some form of a flexible schedule in May 2004 c. Contingent workers and those on a flexible schedule made up 27.5 percent of the civilian workforce 2. Many companies employ core and contingent workforces a. Core employees generally: i. Work at least 35 hours a week ii. Work eight hours a day, five days a week b. Contingent workers: i. They do not have an implicit or explicit contract for ongoing employment ii. Their duration of employment varies according to their convenience and employers’ business needs iii. They most commonly hold professional (e.g., accountants), clerical (e.g., secretary), or laborer (e.g., construction worker) positions iv. They perform jobs in service and retail trade industries c. More companies favor contingent employment to control: i. Staffing levels ii. Costs B. Groups of Contingent Workers 1. Five main groups: a. Part-time employees b. Temporary and on-call employees c. Leased employee arrangements d. Independent contractors, freelancers, and consultants
Example: Number of Contingent Employees in February 2005 • Part-time 2,294,000 • On-call 2,500,000 • Temporary 1,200,000 • Leased 813,000
2. Part-time employees a. Two kinds: i. Voluntary—by choice ii. Involuntary—forced by circumstances b. Work fewer than 35 hours weekly c. Voluntary i. To supplement family income ii. To tend to family needs iii. To follow spouse’s career pursuits iv. As a lifestyle choice v. Many core workers negotiate for part-time schedules d. Involuntary i. Can’t find gainful employment ii. Most part-timers are involuntary iii. Many hold entry-level positions e. Advantages i. Flexibility ii. Cost savings on discretionary benefits
Example: Benefits Costs, December 2012 Benefit Full-time Part Time Paid leave $2.52 $0.42 Supplemental pay 1.03 0.19 Insurance 2.92 0.76 Retirement and savings 1.31 0.25 Legally required benefits 2.62 1.65 Total hourly benefits costs $10.41 $3.26
iii. Considerable savings in the areas of paid leave, insurance, and legally required benefits iv. Cost savings on overtime expenses v. FLSA requires companies pay nonexempt employees 1.5 times hourly pay rates for overtime pay vi. Retail businesses save by employing part-time sales associates during peak holiday shopping seasons f. Job sharing i. Two or more part-time employees perform a single full-time job ii. May meet regularly to coordinate efforts iii. Represents a compromise between employees’ needs or desire not to work full-time and employers’ needs to staff jobs on a full-time basis
Example: Benefits of Job Sharing Benefits to Employers • Maintenance of productivity • Retention of skilled workers • Reduction or elimination of training costs • Greater flexibility • Minimization of hiring and training costs • Strengthening loyalty to company Benefits to Employees • Continued fringe benefits protection • Continued employment • Maintenance of family income • Continued participation in qualified retirement programs
3. Temporary and on-call employees a. Reasons for hiring temporary workers i. To fill in for core employees on approved leave ii. To have an extra set of hands during busy business activities iii. Allows employers to determine need for more core employees iv. Allows employers to evaluate performance of workers for possible full-time employment, similar to a probationary period v. Allows temporary workers the chance to determine if the company is the right employer for them vi. Save on discretionary benefits costs b. Temporary agencies i. Most common source of temporary employees - about 1.2 million in 2005 (most current data available at time of publication) ii. Most agencies placed mainly clerical and administrative workers, now also auditors, computer systems analysts, and lawyers iii. Use based on reputation and fees iv. Placement fees are based on a percentage of their placements’ pay rates v. Are the legal employers of the workers vi. Select, train, and provide compensation for employees c. Direct hire arrangements i. Companies hire temporary workers directly ii. Temporary employees usually work less than a year iii. The hiring company is the legal employer and therefore responsible for all HR functions d. On-call arrangements i. Work sporadically throughout year as needed ii. HR functions are the responsibility of hiring company iii. Skilled trade union workers can be on-call when unable to find full-time employment 4. Leased employee arrangements a. Generally for long-term assignments b. Leasing company bills hiring company for costs including i. Payroll ii. Benefits iii. Payroll taxes c. Their placement fees that are either a percentage of the client’s payroll or a fixed fee per employee d. Employees usually work for the duration of the contract e. Types of arrangements i. Food service like ARAMARK
Example: Leasing Company • ARAMARK Food Services • Provides cafeteria services • Workers include: • Cooks • Food preparers • Checkout clerks • Workers are leasing company’s employees, not the client company’s
ii. Security iii. Building maintenance iv. Administrative services f. Responsible for all HR functions g. Differ from temporary agencies in that their placements generally remain in effect for the duration of the contract with the host company 5. Independent contractors, freelancers, consultants a. Establish working relationships directly with host companies b. Typically possess specialized skills that are in short supply in the labor market c. Independent contractors hired to complete particular projects that generally last for a year or less d. Adjunct college professors are hired to cover i. For professors on sabbatical ii. Until a tenure-track professor is hired C. Reasons for U.S. Employers’ Increased Reliance on Contingent Workers 1. Five main reasons: a. Economic recessions b. International competition c. Shift from a manufacturing to a service economy d. Rise of women in workforce e. Runaway costs to provide employer-sponsored health insurance 2. Economic recessions a. Reduction in core employees to control costs b. Contingent workers used to restore staffing until economy stability and need for more core employees is determined c. Hiring contingent employees represents a form of risk control d. Contingent workers are easier to terminate 3. International competition a. Foreign businesses can manufacture goods more cheaply b. Forces U.S. businesses to streamline operations by lowering labor costs 4. Shift from a manufacturing to a service economy a. Six broad divisions of service industries: i. Transportation ii. Communication iii. Public utilities iv. Wholesale trade v. Retail trade (finance, insurance, real estate) vi. Government b. By 2018 i. Jobs in manufacturing and mining sectors are expected to continue to decline ii. Service opportunities are expected to rise by fifteen million jobs c. Service jobs are more labor intensive than capital intensive jobs d. Expected trends i. More business-oriented services, like upgrading of software and intelligent machinery, and construction-related services ii. More consultants to improve business processes iii. More social services like daycare and residential care 5. Rise of women in the workforce a. Rise in single parent families b. Need to supplement family income c. Desire to follow husband’s career pursuits d. Allows mothers to balance work and family responsibilities e. Rise of single-parent households—single parents with low levels of education and limited job opportunities f. Dual career pressures 6. Runaway costs to provide employer-sponsored health insurance a. Approximately 86 percent of all full-time private sector employees had access to employer-sponsored health insurance programs in 2012 b. 39 percent of part-time employees had access to such plans c. Most companies choose not to offer health care benefits to part-time workers (and other contingent workers for that matter) because the cost of employers’ contributions to provide health insurance coverage is about the same for full- and part-time employees
• Insurance Costs (including life, health, and disability) and Contingent Workers Part-time employees work far fewer hours than full-time employees, in effect making the hourly cost of benefits substantially higher for part-time employees than for full-time employees For example, the average monthly health insurance premium in was $467 per employee The employer’s hourly cost to provide health care insurance is approximately $2.92 for an employee who works 160 hours per month (i.e., 40 hours per week based on 4 weeks per month: $467/160) For part-time employees, assuming 80 hours per month (that is, an assumed 20-hour work week based on 4 weeks per month) the hourly cost is $5.84 ($467/80)
d. Substantially higher rate increases for medical services may be explained by several factors, including: i. Longer life expectancies ii. Aging baby boomers iii. Advances in medical research iv. The tendency to prolong life of terminally ill II. Pay and Employee Benefits for Contingent Workers A. Legalities 1. All parties involved employing contingent workers possess liability under federal and state laws, including: a. Overtime and minimum wage guidelines under FLSA b. State workers’ compensation insurance premiums c. Nondiscriminatory compensation and employment practices under i. ERISA ii. NLRA iii. Civil Rights Act of 1964 iv. ADEA d. Temporary employment agencies and leasing companies are liable under these laws e. Client companies may also be liable B. Part-Time Employees 1. Challenges for employers a. Should companies pay part-time workers on an hourly basis or salary basis? b. Will equity problems arise between core employees and part-time employees? c. Should companies offer part-time workers benefits? 2. Pay a. Part-time workers generally earn less b. The following table shows average wages from March 2012
Average Hourly Wages in March 2012
Full Time Part Time
Private Industry $23.22 $11.95
Management and Professional Workers 37.05 26.70
Production Workers 17.57 11.09
Service Employees 12.16 9.18
c. Salaried, full-time employees versus contingent workers i. Salaried employees’ effective hourly rate decreases with the increase in hours worked ii. Less-skilled contingent workers hourly pay may actually outpace salaried employees 3. Employee benefits a. Generally different dependent on: i. The size of the company ii. Whether the employer is private or public b. Employers are not required to offer protective insurance unless covered by COBRA c. Part-time employees may be eligible to participate in a company’s retirement plan if: i. They are age 21 or older ii. The work at least 1000 hours in 12 months (year of service) 4. Seasonal employees’ special considerations for retirement plan eligibility a. Generally do not meet annual service pension eligibility criterion b. Secretary of Labor defines 125 service days as the “year of service” c. Seasonal employees cannot be excluded from participation if they meet year of service criterion C. Temporary Employees 1. Temporary employment agencies are responsible for complying with all federal employment legislation, except worker’s compensation 2. Possible compensation challenges a. Do equity problems arise between core employees and temporary employees? b. How do FLSA overtime provisions affect temporary employees? c. Do companies offer temporary workers benefits? d. Who is responsible for providing workers’ compensation protection: the temporary agency or the client company? 3. Core compensation—Pay a. In February 2005, they earned an average of $224 per week, it varies by: i. Occupation ii. Employee qualifications b. Many may work diligently to prove their worth for possible full-time employment c. Is affected if temporary employees move from one employer to another i. Some have no desire for full-time employment ii. A few are concerned with equity issues iii. Most don’t shop around and compare employers iv. Those who lost full-time positions due to sudden layoffs may not work as diligently d. Differences between temporary and seasonal employees i. For determining minimum wage and overtime pay eligibility under FLSA ii. Temporary workers can work any time throughout year, seasonal workers work during regular periods iii. Seasonal workers, like life guards and summer camp counselors, are exempt unless the employer operates over seven months a year 4. Employee benefits a. Companies generally do not provide discretionary benefits b. Temporary employees are eligible to participate in qualified pension benefits if they meet ERISA’s minimum service requirement of 125 days of work. c. Dual employer common law doctrine establishes temporary workers’ rights to receive workers’ compensation since they are employees of both the temporary agency and the hiring company D. Leased Workers 1. Who the legal employer is - is less clear than it is for a. Temporary employees b. Part-time employees 2. Pay a. In February 2005, they earned an average weekly wage of $204 for part-time and $756 for full-time b. Other compensation data is very limited 3. Benefits a. Leased employees are generally entitled to participation in the client companies’ qualified retirement programs b. Leasing companies become responsible for leased employees’ retirement benefits when the safe harbor rule requirements are met
• Safe Harbor Rules The leased employee must be covered by the leasing company’s pension plan, which must Be a money purchase plan with a nonintegrated employer contribution rate for each participant of at least 10% of compensation Provide for full and immediate vesting Allow each employee of the leasing organization to immediately participate in such a plan Leased employees cannot constitute more than 20% of the recipient’s non highly compensated worker Non highly compensated workforce means the total number of Non highly compensated individuals who are employees of the recipient and who have performed services for the recipient for at least a year, or Individuals who are leased employees of the recipient (determined without regard to the leasing rules)
c. Under COBRA, the IRC requires employers to provide leased workers continued coverage of: i. Group medical insurance ii. Group life insurance iii. Educational assistance programs E. Independent Contractors, Freelancers, and Consultants 1. Pay levels not monitored by the Bureau of Labor Statistics 2. Hiring companies not obligated to pay: a. Federal income tax withholding b. Overtime and minimum wages required under FLSA, however, employers are obligated to pay financially dependent workers overtime and minimum wages c. Insurance premiums required under state workers’ compensation laws, except where states explicitly require that companies maintain workers’ compensation coverage for all workers regardless of whether they are independent contractors d. Protection under i. ERISA ii. FMLA iii. NLRA iv. ADA v. Title VII of the Civil Rights Act of 1964 e. Economic reality test i. Used to determine if employees are financially dependent ii. Concerns FLSA coverage
• Economic Reality Test Criteria The extent the worker has the right to control the result of the work and the manner it is performed The amount of control the employer has over the individual’s opportunity to realize a profit or sustain a loss The extent to which the services are an integral part of the employer’s business operations The amount of initiative or level of skill required for the worker to perform the job The permanency, exclusivity, or duration of the relationship between the employer and the worker The extent of the worker’s investment in equipment or materials required for the job
• Example: Economic Reality Test Nightclub dancers eligibility for minimum wages Owners didn’t think they were eligible because The dancers could perform whenever and wherever they wanted The club had no control over the manner of performance The dancers furnished their own costumes Courts determined they were eligible because the club owners Set hours in which the dancers could perform Issued guidelines on dancers’ behavior at the club Deducted 20 percent from the credit card tips of each dancer to cover administrative costs
f. Right to control test i. IRC test ii. Used to determine whether an individual is an employee or an independent contractor iii. Possessing the right to control work activities classifies individuals as employers rather than independent contractors III. Flexible Work Schedules: Flextime, Compressed Work Weeks, and Telecommuting A. Main Types 1. Flextime schedules 2. Compressed work weeks 3. Telecommuting B. Flextime 1. Along with compressed work schedules flextime is the most common 2. Applies to both core and contingent employees 3. Employee can set work hours within parameters 4. Total work hours not affected 5. May be required to be on-site during core business hours a. When business activity is high b. When important business activity is conducted 6. Possible employer benefits a. Lower tardiness and absenteeism b. Higher productivity c. Extended business hours and better service 7. Possible drawbacks a. Increased overhead costs b. Coordination problems C. Compressed Work Weeks 1. Same work hours in fewer days per week like: a. Four 10-hour days b. Three 12-hour days 2. Possible benefits a. Can promote recruitment and retention b. Can reduce commuting time c. Can allow more family time D. Telecommuting 1. Employees perform work away from business like: a. Home b. Remote locations 2. Work time generally split between business and off-site locations
• Example: Alternative Telecommuting Arrangements Satellite work centers - employees work from a remote extension of the employer’s office that includes a clerical staff and a full-time manager Neighborhood work center - employees work from a satellite office shared by several employers Nomadic executive office - executives who travel extensively maintain control over projects through use of telephone, fax, and e-mail Some employees work entirely outside the office, while others might work off-site only once a month or two to three days a week Telecommuters can be full- or part-time employees Telecommuting arrangements can be temporary or permanent. A temporarily disabled employee may work at home until fully recovered. A permanently disabled employee may work at home exclusively
3. Appropriate for work that does not require regular direct contact with other employees like: a. Accounting b. Systems analysis c. Telephone sales 4. Employees stay in-touch with superiors and coworkers by: a. E-mail b. Faxes c. Telephone 5. Possible employer benefit a. Increased productivity b. Lower overhead costs c. Effective recruiting and retention practices 6. Possible employee benefits a. More family time b. Minimize commuting time c. Reduces commuting costs d. Separation from “office politics” e. Higher job performance 7. Possible disadvantages a. Fewer direct employee interactions b. Difficulty conducting accurate performance appraisals c. May disrupt personal life E. Balancing the Demands of Work Life and Home Life 1. Flextime, compressed work weeks, and telecommuting should provide single parents or dual-career parents the opportunity to spend more time with their children 2. Flextime gives parents the opportunity to schedule work around special events at their children’s schools 3. Compressed work weeks enable parents on limited incomes to save on daycare costs by reducing the number of days at the office 4. Compressed work weeks and telecommuting reduce the time spouses have to spend away from each other IV. Pay and Employee Benefits for Flexible Employees A. Pay a. Influence of FLSA’s overtime pay provision i. Was based on a five day 40-hour work week ii. Flexible employees weekly hours may vary, but average out over time iii. Led to Supreme Court ruling Walling v. A.H. Belo Corporation b. Walling v. A.H. Belo Corporation i. Supreme Court ruling concerning employers’ guarantee of fixed weekly pay for flexible employees when employer typically cannot determine the number of hours employees will work each week ii. The work week period fluctuates both above and below 40-hours per week c. Overtime for compressed work week schedules is difficult because: i. The Federal government bases regular hours as 40 per week ii. States vary on their determination of a “regular work week” B. Employee benefits issues a. Flexible work week schedules have the greatest impact on paid time-off benefits like: i. Sick leave ii. Vacation time iii. Holidays b. Employers need to maintain equity among employees by offering comparable time-off if holidays fall on employees’ regular days off c. Working condition fringe benefits i. Provide telecommuters the necessary equipment to do work like computers, telex machines, copier, and sundry office supplies ii. The IRS treats equipment as taxable income when the use falls outside the established telecommuting relationship iii. The IRS treats the equipment as a working condition fringe benefit if it is within the telecommuting relationship V. Unions’ Reactions to Contingent and Flexible Workers 1. Most do not support the use of contingent workers and flexible work schedules a. They believe it might threaten job security b. They believe that it may lead to unfair, inequitable treatment 2. Common concerns a. Employers exploit contingent workers by paying them lower wages and benefits b. Employer’s efforts to get cheap labor will lead to a poorly trained and less skilled workforce that will hamper competitiveness c. Part-time employees are difficult to organize because their interests are centered on activities outside the workplace d. Part-time employment erodes labor standards: often denied fringe benefits, job security, and promotion opportunities e. Temporary employees generally have little concern for improving the productivity of a company f. The union’s bargaining power becomes weak when companies demonstrate their ability to perform effectively with temporaries g. The long days of compressed work weeks for flextime could endanger workers’ safety and health, even if the workers choose these long days h. Other issues include concerns about employee isolation, uncompensated overtime, and company monitoring in the home 3. Some unions are beginning to accept flexible work schedules, believing that doing so will strengthen their bargaining power VI. Strategic Issues and Choices in Using Contingent and Flexible Workers A. Cost Control Objectives 1. Contingent employment allows for lower discretionary benefit costs and provides less generous amounts of such benefits 2. Well-trained contingent workers can reduce training costs 3. Company-specific training a. Represents a significant cost to companies b. Training short-term contingent workers undermines strategy because of: i. The cost of training materials and instructors’ fees ii. “Downtime” pay for training time iii. Inefficiencies that may result until employees master new skills 4. Training may increase long-term employees’ productivity and flexibility, outweighing the short-term costs 5. Overall, contingent workers demonstrate less absenteeism B. Product and Service Innovation Objectives 1. Requires employees that are: a. Creative b. Open-minded c. Risk-takers 2. Requires companies to take a longer-term focus to attain their pre-established objectives 3. Contingent employment could: a. Bring in an influx of new employees with new ideas b. Minimize groupthink, where employees agree on mistaken solutions because they share the same mindset and view issues through the lens of conformity 4. Flexible work schedules may: a. Enable employees to work when they are at their peak physical and mental best b. Allow employees to work with fewer distractions and worries about personal matters CHAPTER 14 Compensating Expatriates Learning Objectives 1. Summarize the four reasons international activities facilitate the attainment of competitive advantage. 2. Describe and explain the four preliminary considerations compensation professionals should take under advisement before designing international compensation programs. 3. List the three main components of international compensation programs, and provide a specific example of each one. 4. Explain the three approaches available to companies for setting expatriate employees’ base pay. 5. Summarize the three types of incentive payments that are commonly used in international compensation programs. 6. Give a description of two standard employee benefits and two illustrations of enhanced benefits for U.S. employees. 7. Describe the issue of repatriation. Outline I. Competitive Advantage and How International Activities Fit In A. Overview B. Lowest Cost Producers’ Relocations to Cheaper Production Areas C. Differentiation and the Search for New Global Markets D. How Globalization Is Affecting HR Departments E. Complexity of International Compensation Programs II. Preliminary Considerations A. Overview B. Host Country Nationals, Third Country Nationals, and Expatriates: Definitions and Relevance for Compensation Issues C. Term of International Assignment D. Staff Mobility E. Equity: Pay Referent Groups III. Components of International Compensation Programs IV. Setting Base Pay for U.S. Expatriates A. Methods for Setting Base Pay B. Purchasing Power V. Incentive Compensation for U.S. Expatriates A. Overview B. Foreign Source Premiums C. Hardship Allowances D. Mobility Premiums VI. Establishing Employee Benefits for U.S. Expatriates A. Overview B. Standard Benefits C. Enhanced Benefits VII. Balance Sheet Approach for U.S. Expatriates’ Compensation Packages A. Overview B. Housing and Utilities C. Goods and Services D. Discretionary Income E. Tax Considerations VIII. Repatriation Pay Issues IX. Discussion Questions and Suggested Answers X. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses XI. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I. Competitive Strategies and How International Activities Fit In A. Overview 1. Several factors have contributed to the expansion of the global market: a. Free trade agreements (such as NAFTA) b. Unification of the European markets c. Gradual weakening of the Communist influence in Easter Europe and Asia d. Greater opportunities for foreign companies to invest in the United States B. Lowest-Cost Producers’ Relocations to Cheaper Areas 1. Many U.S. businesses have established manufacturing and production facilities in Asian countries and in Mexico because labor is significantly less expensive than it is in the United States 2. Two key reasons for the cost difference: a. Labor unions generally do not have much bargaining power in developing Asian countries or in Mexico, where the governments possess extensive control over workplace affairs b. Asian governments historically have not valued individual employee rights as much as does the U.S. government c. The National Labor Relations Act of 1935 requires management to bargain with labor unions over terms of employment such as wages and some employee benefits C. Differentiation and the Search for New Global Markets 1. Coca Cola and Pepsi products are well known worldwide because these companies aggressively introduced their soft drink products throughout numerous countries 2. However, Coke and Pepsi could distinguish themselves from competing companies by taking on new business initiatives that depart from “business as usual” and meet specific market needs
• Example: Differentiation and Search for New Global Markets For Coke and Pepsi, “business as usual” means marketing soft drink products (i.e., carbonated water with artificial colors and flavors) Marketing bottled spring water would clearly be a departure from business as usual for them The People’s Republic of China (PRC) possesses a definite need for bottled spring water: the Chinese government is unable to provide its citizens and visitors with drinkable water because the country does not maintain adequate water purification plants Coke and Pepsi could distinguish themselves from other soft drink companies by marketing spring water along with their regular soft drink products Coke and Pepsi would be known as companies that serve necessary (bottled water) and recreational (soft drinks) beverage needs
D. How Globalization Is Affecting HR Departments 1. Employee selection a. Culturally sensitive? b. Are families willing to adjust? 2. Training a. Cross-cultural b. In-house or outsourced 3. The use of international assignments is an important issue addressed by companies located in countries across the world 4. A multitude of large consulting firms conduct extensive research for client companies to ensure the most effective deployment of expatriates worldwide focusing on pay and benefits issues for expatriates, labor law, and useful information to help expatriates select and train local country nationals E. Complexity of International Compensation Programs 1. Globalization affects programs’: a. Development b. Implementation 2. Four main challenges: a. How to further corporate interests abroad and encourage employees to take foreign assignments b. How to minimize financial risks to employees and make their (and their families) experiences as pleasant as possible c. How to promote a smooth transition back to life in the United States after completing assignment overseas (repatriation) d. How to promote their lowest-cost and differentiation strategies in foreign markets II. Preliminary Considerations A. Overview 1. Distinguishing between employees a. Host country nationals (HCNs) b. Third country nationals (TCNs) c. Expatriates 2. Important compensation factors like: a. Terms of the assignment b. Staff mobility c. Pay equity B. Host Country Nationals, Third Country Nationals, and Expatriates: Definitions and Relevance for Compensation Issues 1. Three designations: a. Host country nationals (HCNs) b. Third country nationals (TCNs) c. Expatriates 2. HCNs a. Foreign national citizens who work in U.S. companies’ branch offices or manufacturing plants in their home country b. Example: a Japanese citizen working for GE in Japan 3. TCNs a. Foreign citizens who work in a U.S. company’s branch in a foreign country i. Other than the United States, or ii. Other than their home country b. Example: an Australian citizen working for GE in Japan 4. Expatriates a. U.S. citizens employed by a U.S. company in a foreign country b. Example: a U.S. citizen working for GE in Japan 5. HR professionals construct international compensation packages based on three main factors: a. Term of international assignment b. Staff mobility c. Equity: pay referent groups 6. Term of international assignments a. Short term i. Less than one year ii. Do not require major changes in domestic compensation packages b. Extended (long) term i. Over one year ii. Necessitates changes to promote a sense of stability and comfort c. Compensation package changes may include: i. Housing allowances ii. Educational expenses for children iii. Adjustments to protect expatriates from paying “double” income taxes – to the United States and to the host country 7. Staff mobility a. From the United States to host country and back b. From the United States to one host country and then to another host country c. May require financial incentives 8. Equity: pay referent groups a. Domestic employees b. Host country employees c. Commensurate with performance or knowledge attainment
• Example: Equity for Expatriates in Mexico Mexican managers’ compensation packages include base pay and cash allowances U.S. managers’ compensation packages include base pay and long term incentives U.S. expatriates on long term assignments in Mexico may receive a compensation package similar to a Mexican manager working for a Mexican company
III. Components of International Compensation Programs 1. Core compensation a. Base pay 2. Incentive compensation a. Foreign service premium b. Hardship allowance c. Mobility premium 3. Employee benefits 4. Standard benefits a. Protection programs b. Paid time off 5. Enhanced benefits a. Relocation assistance b. Educational reimbursement for expatriates’ children c. Home leave and travel reimbursement d. Rest and relaxation leave allowance IV. Setting Base Pay for U.S. Expatriates A. Methods for Setting Base Pay 1. Three main methods a. Home country-based b. Host country-based c. Headquarters-based 2. Home country-based method a. Expatriates receive amount they would get in the United States b. Job evaluation, based on compensable factors, used to compare jobs c. Adjustments should reflect the additional skills needed d. Most appropriate for expatriates on short term assignments e. Equity pay problems not an issue in short term assignments 3. Host country-based method a. Pay based on what employees in the host country receive b. Factors include market pricing, job evaluation techniques, or jobholder’s past relevant work experience c. Most suitable when assignments are extended term 4. Headquarters-based method a. All pay is set according to scales used at company headquarters b. Not based on home or host country pay levels c. Most suitable for expatriates who go from one foreign assignment to another d. Administratively simpler, since pay not based on assignment location B. Purchasing Power 1. Affects an employee’s standard of living 2. Diminished power undermines the strategic value of the compensation package to attract and maintain employees willing to work overseas 3. Two key factors: a. Stability of local currency b. Inflation 4. Many companies use the balance sheet approach to minimize risk factors such as stability of local currency and inflation 5. Currency stabilization a. Pay usually based on U.S. currency b. Many host countries do not accept U.S. currency as a legal tender c. Expatriates must exchange dollars for local currency based on current exchange rate d. Rate fluctuations affected by: i. Government policies ii. Market forces 6. Inflation a. Defined as the increase in prices for consumer goods and services b. Increases in inflation diminish purchasing power
Example: Exchange Rates • Defined as the price at which one country’s currency can be swapped for another • Expressed in terms of foreign currency per U.S. dollars or in terms of U.S. dollars per unit of foreign currency • On April 5, 2013: $1 would exchange for 6.48 Swedish kronas • On April 5, 2013: $1 would exchange for 0.77 Euro
V. Incentive Compensation for U.S. Expatriates A. Overview 1. Designed to: a. Promote higher job performance b. Minimize dysfunctional turnover 2. Three main incentives: a. Foreign services premiums b. Hardship premiums c. Mobility premiums B. Foreign Service Premiums 1. Monetary payments above and beyond regular base pay 2. Designed to encourage employees to accept expatriate assignments 3. Generally apply to assignments over a year in length 4. Calculated: a. As a percentage of base pay b. As a percentage generally between 10 percent to 30 percent c. Percentage increases with assignment length or because of a shortage of available candidates 5. Are distributed over several installments to: a. Manage costs b. Remind expatriates of the premium throughout their assignments 6. Possible drawbacks a. Employees might believe the premium is a regular, permanent increase b. May not have incentive value if given in several small installments c. Employees may worry that their standard of living will decrease after repatriation when they lose the premium C. Hardship Allowances 1. Designed to recognize exceptionally hard living and working conditions at foreign locations 2. Are disbursed in small amounts throughout the duration of assignment 3. The greater the hardship, the larger the allowance a. Range from 5 percent to 35 percent 4. Over 150 countries considered hardship locations
Example: Three criteria to identify hardship locations: • Extraordinarily difficult living conditions (e.g., inadequate housing, lack of recreational facilities, isolation, inadequate transportation facilities, and lack of food or consumer services) • Excessive physical hardship, including severe climates or high altitudes and the presence of dangerous conditions affecting physical and mental well-being • Notably unhealthy conditions (e.g., diseases and epidemics, lack of public sanitation, and inadequate health facilities)
D. Mobility Premiums 1. Designed to encourage employees to move from one assignment to another a. From a domestic position b. Between foreign assignments 2. Generally given in a one lump-sum payment VI. Establishing Employee Benefits for U.S. Expatriates A. Overview 1. Companies design benefits programs to attract and retain the best expatriates 2. International employee benefits plans include such protection programs as medical insurance and retirement programs 3. U.S. citizens working overseas continue to receive medical insurance and participate in their retirement programs 4. International and domestic plans are also similar in that they offer paid time off; however, international packages tend to incorporate more extensive benefits of this kind 5. Employers should take several considerations into account when designing international benefits programs, including: a. Total remuneration: What is included in the total employee pay structure (e.g., cash wages, benefits, mandated social programs, and other perquisites)? How much can the business afford? b. Benefit adequacy: To what extent must the employer enhance mandated programs to achieve desired staffing levels? Programs already in place and employees’ utilization of them should be critically examined before determining what supplementary programs are needed and desirable. c. Tax effectiveness: What is the tax deductibility of these programs for the employer and employee in each country, and how does U.S. tax law treat expenditures in this area? d. Recognition of local customs and practices: Companies often provide benefits and services to employees based on those extended by other businesses in the locality, independent of their own attitude toward these same benefits and services. B. Standard Benefits for U.S. Expatriates 1. Protection programs a. Two main types: i. Legally-required benefits ii. Discretionary benefits b. Laws that affect legally-required benefits i. Social Security Act of 1935 ii. Family and Medical Leave Act of 1993 iii. States’ workers’ compensation laws generally do not apply c. Discretionary benefits i. As a strategic response to workforce diversity ii. To retain the best-performing employees 2. Paid time off a. Benefits include: i. Annual vacations ii. Holidays iii. Emergency leave b. Expatriates typically receive the same annual vacation benefits as do their domestic counterparts c. U.S. companies must comply with foreign laws that govern the amount of vacation d. Leave for personal or family emergencies i. Paid ii. Travel expenses usually included C. Enhanced Benefits for U.S. Expatriates 1. Four main types: a. Relocation assistance b. Education reimbursements for expatriates’ children c. Home-leave benefits and travel reimbursements d. Rest and relaxation leave and allowance 2. Relocation assistance a. To and from the overseas assignment b. Payments based on three main factors: i. Distance ii. Length of assignment iii. Rank in the company
• Example: Relocation Assistance Payments The relocation allowance or reimbursement provides employees with money for: Temporary quarters prior to departure because the expatriate’s house has been sold or rented Transportation to the foreign post for employees and their families Reasonable expenses incurred by the family during travel Temporary quarters while waiting for delivery of household goods or while looking for suitable housing Moving household goods to the foreign post Storing household goods in the United States
3. Education reimbursements for expatriates’ children a. Generally for private, English-speaking schools b. Done for two reasons: i. Some foreign schools are not comparable to U.S. public schools ii. Most U.S. children do not speak a foreign language fluently c. Tuition is generally higher than in U.S. private schools 4. Home-leave benefits and travel reimbursements a. To manage the adjustment to the foreign culture b. To maintain direct personal contact with family and friends at home c. Vary company to company d. Reimbursements for the expatriate and family members typically include: i. Cost of round-trip airfare ii. Ground transportation iii. Accommodations while traveling e. Generally, expatriates have to be on the assignment at least six months 5. Rest and relaxation leave and allowances a. Provided by employers who realize that employees on assignments in hardship locations may need extra time off to “recharge their batteries” b. Companies can designate where the time can be spent c. Allowance to cover travel expenses between the foreign post and retreat locations, based on: i. Cost of transportation ii. Food iii. Lodging d. U.S. State Department publishes per diem schedules i. For various cities ii. Amounts set by location and family size
Example: Time-off designated area • Expatriates in China’s Special Economic Zone • Can go to Hong Kong • Hong Kong offers: • Diverse ethnic restaurants • Western-style entertainment
VII. Balance Sheet Approach for U.S. Expatriates’ Compensation Packages A. Overview 1. Protects expatriates’ standard of living 2. Enables companies to control costs because it relies on objective indexes that measure cost differences between the United States and foreign countries 3. Most appropriate when: a. The home country is an appropriate reference point for economic comparisons b. Employees are likely to maintain psychological and cultural ties with the home or base country c. Employees prefer not to assimilate into the foreign culture d. The assignment is of limited duration e. The assignment following the international assignment will be in the home country f. The company promises employees that they will not lose financially while on foreign assignment 4. Major expenditures a. Housing and utilities b. Goods and services c. Discretionary income d. Taxes 5. Allowances a. Are given when the costs are more in the foreign assignment b. Vary according to the customary lifestyle of expatriate 6. Determining costs in foreign countries a. Through interviews with returning expatriates b. From private consulting or research companies c. U.S. State Department Indexes of Living Costs Abroad, Quarters Allowances, and Hardship Differentials i. Published quarterly ii. Most cost-effective iii. Available At no charge in libraries with government depositories On the World Wide Web at (http://www.state.gov) B. Housing and Utilities 1. Housing and utilities costs 2. Three main sections: a. Survey data b. Exchange rates c. Annual allowance for family status and salary range 3. Survey data is from the month when the Office of Allowances received housing expenditure reports 4. Exchange rates contain three pieces of information: a. Effective date b. Foreign unit c. Number per U.S. dollar 5. The exchange rate is used to compute the Quarters Allowance 6. Quarters Allowances table a. Contains information on family status and salary ranges b. Family status i. Single ii. Family c. Family i. Refers to a two-or-more-person group ii. Larger families receive supplements iii. Families of two or three receive a 10 percent supplement iv. Families of four or five receive a 20 percent supplement v. Families of six or more receive a 30 percent supplement
Example: Quarter Allowances • $65,600 for single expatriates making over $93,177 in Beijing, China • $23,100 for single expatriates making over $93,177 in Tapei, Taiwan • $79,690 for a family of six earning over $93,177 in Beijing, China
C. Goods and Services 1. Base on indexes of living costs abroad 2. Indexes compare the costs of representative goods and services purchased at the foreign location to comparable goods and services purchased in the Washington D.C. area 3. Indexes are place-to-place cost comparisons at specific: a. Times b. Currency exchange rates 4. State Department’s Indexes of Living Costs Abroad a. Three pertinent sections: i. The survey data ii. Exchange rates iii. Local index b. Survey data represents the month the Department of State received the cost data c. The local index is a measure of the cost of living at foreign posts relative to Washington D.C.
Example: Indexes of Living Costs Abroad • Index for Washington is 100 • Index for Muscat, Oman is 131—costs are 31 percent higher than in Washington D.C. • Index for Tegucigalpa, Honduras is 99—costs are 1 percent lower than in Washington D.C. • Allowances not needed for Tegucigalpa, because the cost of living there is lower than in the United States
D. Discretionary Income 1. Covers a variety of financial obligations in the United States for which expatriates remain responsible while away 2. Expenditures a. Pension contributions b. Savings and investments c. Insurance payments d. Equity portion of mortgage payments e. Alimony support f. Child support g. Student loan payments h. Car payments E. Tax Considerations 1. Expatriates subject to a. FUTA b. Social Security c. Income taxes i. United States ii. Foreign country (where applicable) iii. Paying both is a form of double taxation 2. IRS includes regulations that address taxation issues 3. Employer considerations a. Under the balance sheet approach, companies choose between two approaches to help address concerns about double taxation: i. Tax protection ii. Tax equalization 4. Hypothetical tax method a. Calculated as the U.S. income tax based on the same salary level, excluding all foreign allowances b. A key element of both tax protection and equalization 5. Tax protection a. Employers reimburse expatriates for the difference between i. The actual income tax amount and ii. The hypothetical tax when the actual tax amount is greater 0b. Expatriates i. Pay the entire tax bill when the taxes are less than or equal to the hypothetical tax ii. Realize a tax benefit whenever actual taxes are less than the hypothetical tax, because they will have paid lower income taxes on their overseas assignments 6. Tax equalization a. Employers i. Take the responsibility for paying income taxes to the United States and foreign governments on behalf of the expatriates ii. Deduct income from the expatriates’ paychecks that totals the hypothetical tax amounts at year’s end iii. Reimburse expatriates for the difference between the hypothetical tax and the actual income tax whenever the actual income tax amount is less b. Employees reimburse the company when the actual tax is greater than the hypothetical tax c. Offers two advantages over tax protection i. Expatriates receive equitable treatment regardless of their locations ii. Employers save money by not allowing expatriates to keep tax windfalls VIII. Repatriation Pay Issues 1. Returning expatriates might initially view domestic assignments as a punishment because they lose their supplemental income and benefits 2. Some returning expatriates perceive their value to the company heightens because of their overseas assignments, more so than the company does 3. Returning expatriates may find it difficult to work collaboratively with colleagues, undermining differentiation objectives 4. Strong resentments may lead returning expatriates to find employment with competitors 5. Companies should invest in former expatriates’ career development a. To signal company’s commitment to the employee b. Investment may be seen as a form of compensation 6. Companies should capitalize on expatriates’ experiences to gain a better understanding of foreign business environments 7. Former expatriates can contribute to the quality of international assignments by conveying what did and did not work well during their assignments Instructor Manual for Strategic Compensation: A Human Resource Management Approach Joseph J. Martocchio 9780133457100, 9780135192146
