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This document contains Chapters 14 to 16 CHAPTER 14 Compensating Expatriates IX. Discussion Questions and Suggested Answers Discuss the strengths and weaknesses of the following methods for establishing base pay in international contexts: home country-based pay, headquarters-based pay, and host country-based pay. The home country-based pay method is often most appropriate for expatriates. Equity problems are not very likely to arise because expatriates’ assignments are too short to establish local national employees as pay referents. Instead, expatriates will base pay comparisons on their home country standards. In general, the home country-based pay method is most suitable when expatriate assignments are short in duration and local nationals performing comparable jobs receive substantially higher pay. Expatriates may rely on local cultural norms over extended periods as the standard for judging the equitableness of their compensation. The host country-based method compensates expatriates based on the host countries’ pay scales. Companies use various standards for determining base pay, including market pricing, job evaluation techniques, and jobholders’ past relevant work experience. Other countries use different standards. For instance, the Japanese emphasize seniority. Expatriates’ base pay will be competitive with other employees’ base pay in the host countries. The host country-based method is most suitable when assignments are of long duration. The headquarters-based method compensates all employees according to the pay scales used at the headquarters. This method makes the most sense for expatriates who move from one foreign assignment to another and rarely, if ever, work in their home countries. This system is administratively simple because it applies the pay standard of one country to all employees regardless of the location of their foreign assignment or their country of citizenship. For a country of your choice, conduct research into the cultural characteristics that you believe should be important considerations in establishing a core compensation program for a U.S. company that plans to locate there. Discuss these characteristics. Discuss as well whether you feel that pay-for-performance programs are compatible. If compatible in any way, what course of action would you take to promote this compatibility? If a U.S. company were to decide to locate in Japan, certain cultural norms may need to be used by employees in order to safely establish a strong relationship with the people. For instance, in most food consumption areas it is polite to burp, take off ones shoes before entering, and sit down on the floor when eating. Pay-for-knowledge and pay-for-performance compensation plans may be best as the company is first starting out so as to pay their employees based upon how well they cope with the cultural differences and/or their knowledge of the customs. In order to promote this compatibility it may be best to hire an expert in the cultural norms and acceptances of the Japanese people. Discuss your reaction to the following statement: “U.S. companies should increase base pay to motivate employees to accept foreign assignments.” Increasing base pay in order to motivate employees to do anything is often a sound idea, however in terms of accepting foreign assignments it isn’t all together necessary. Many employees would be more than happy to try something new and even to be paid less for such adventurous assignments. Allowances and reimbursements for international assignments are costly. Should companies avoid international business activities? Explain your answer. If you answer no, what can companies to do minimize cost? Companies should not avoid international business activities because in turn they can be extremely profitable. In order to minimize the cost of such international business activities, companies can invest in a former expatriate’s career development and capitalize on expatriates’ experiences to gain a better understanding of foreign business environments. Companies must determine the method for setting expatriates’ base pay. Final determination should come only after companies carefully weigh the strengths and limitations of alternative methods. In addition, the purchasing power of base pay is an important consideration. Purchasing power affects the standard of living. Of the many reimbursements and allowances that U.S. companies make for employees who take foreign assignments, which one is the most essential? Discuss your reasons. The most essential reimbursement and allowance that U.S. companies make for employees who take foreign assignments is home-leave benefits and travel reimbursements. Under this allowance, companies offer home-leave benefits to help expatriates manage the adjustments to foreign cultures and to maintain direct personal contact with family and friends. As the name implies, home-leave benefits enable expatriates to take paid time-off in the United States. Most companies reimburse expatriates for expenses associated with travel between the foreign post and the United States. These reimbursements apply to expatriates and to reimburse the cost of round-trip airfare, ground transportation, and accommodations while traveling to and from the foreign post. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case Name: Jenkins Goes Abroad Instructor Notes: Many Human Resources practitioners face the new challenge of expanding operations globally. Even if a company is sending just a few employees abroad, if the duration is longer than a year, possible adjustments must be made to the individual’s compensation. Companies must consider not only the need to maintain employee’s standard of living as they move into a different economy, but also the need to encourage the acceptance of an international assignment. Suggested Student Responses: How should Dale approach the determination of the consultant’s salaries as expatriates? Initially, Dale should consider the fact that the assignment is relatively long term. The consultants will be in the U.K. for a period of more than a year, and therefore, an adjustment to their pay is most likely appropriate. As the U.S. dollar is currently weak against the Pound, Dale should also consider the purchasing power of the consultants in the U.K. and the fact that the consultants’ current U.S. salary will likely lead to a lower standard of living. However, the assignment is not permanent and therefore the employees will need to eventually transition back into the U.S. culture. Therefore, maintaining purchasing power is a priority. Because of this, Jenkins should most likely take a balance sheet approach to determining the pay of the expatriates. Should Jenkins offer any incentive compensation or additional benefits to the expatriates? Why or why not? Recommendation for Jenkins: Yes, Jenkins should offer incentive compensation and additional benefits to the expatriates. Reasoning: 1. Cost of Living Adjustment: • Expatriates moving to a different economy may face higher living costs. Offering a cost of living adjustment ensures that their standard of living is maintained and helps offset any financial challenges associated with living abroad. 2. Hardship Allowance: • Moving to a new country can be challenging, both personally and professionally. Offering a hardship allowance acknowledges the additional challenges expatriates may face and provides financial support to help them adjust to their new environment. 3. Housing and Relocation Assistance: • Providing assistance with housing and relocation expenses can help ease the transition for expatriates and their families. This may include assistance with finding housing, covering relocation costs, and providing temporary housing allowances. 4. Tax Equalization and Tax Assistance: • Tax laws can vary significantly between countries, and expatriates may face complex tax situations. Offering tax equalization and tax assistance ensures that expatriates are not disadvantaged financially due to tax differences between their home country and the host country. 5. Healthcare and Insurance Benefits: • Expatriates may require specialized healthcare and insurance coverage while living abroad. Providing comprehensive healthcare and insurance benefits ensures that expatriates and their families have access to the care they need. 6. Education Allowance: • If expatriates have children, providing an education allowance can help cover the cost of international schooling or additional educational expenses associated with living abroad. Benefits of Offering Incentive Compensation and Additional Benefits: 1. Attract and Retain Top Talent: • Offering competitive incentive compensation and additional benefits helps attract and retain top talent for international assignments. Employees are more likely to accept and remain in international roles if they feel their financial and personal needs are being met. 2. Motivate and Engage Employees: • Providing incentive compensation and additional benefits motivates and engages expatriates, leading to higher job satisfaction and performance while on assignment. 3. Ensure Successful International Assignments: • By providing adequate financial and personal support, Jenkins can ensure the success of international assignments and maximize the return on investment for the company. In conclusion, offering incentive compensation and additional benefits to expatriates is essential for maintaining their standard of living, encouraging acceptance of international assignments, and ensuring the success of global operations for Jenkins. MYLAB QUESTIONS 14-8. Describe the four challenges that companies face in the development and the implementation of international compensation programs. How can a company prevent problems that are driven by repatriation? Answer: Challenges: 1) encourage employees to take foreign assignments, 2) minimize financial risk to employees, 3) promote a smooth transition back to life in the United States (i.e., repatriation), 4) promote U.S. businesses' lowest cost and differentiation strategies in foreign markets. Repatriation which is the third challenged described above can be resolved by the following: 1) Companies should invest in former expatriates' career developments, 2) companies should use expatriates' experiences to better understand foreign business environments. 14-9. Explain headquarters-based method to calculate expatriates based pay. Which incentive might work better for this method? Answer: In headquarters-based method, employees are paid based on headquarters pay scale. This method is more useful for expatriates who move from one assignment to another. Among the main incentives for expatriates, mobility premiums would be more suitable for headquarters-based method. This incentive rewards employees for moving from one assignment to another. XI. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Independent Contractor or Part-time Employee? Instructor Notes: Uncertainty and the need for flexibility lead many employers to engage contingent workers as part of their workforce. Independent contractors are often hired for their specialized skills to complete specific projects or perform a job for a designated amount of time. Often a company will prefer to hire someone as an independent contractor in order to have more flexibility and also to contain benefit costs as the company does not provide benefits to an independent contractor. However, as an employer does not have certain obligations to an independent contractor, it is important that they are properly classified under state and federal employment laws. Suggested Student Responses: Why would EcoSafe prefer to engage Laney as an independent contractor? EcoSafe would have fewer obligations to Laney as an independent contractor. They would not be obligated to pay Federal income tax withholding, overtime pay, insurance premiums for worker’s compensation, or provide protection under several employment laws. Further, Laney would not be eligible to participate in company sponsored benefit programs such as paid time off and health plan insurance. Finally, should EcoSafe at some point no longer need Laney’s services, it is easier to end the relationship. Based on the information provided, do you think Laney should be engaged as an independent contractor? Because of the legal implications of the classification as an independent contractor, it is important to properly classify an employee. Under the IRS’s 20-factor test to determine if a person is an employee or an independent contractor, there are several considerations for Laney’s case. Most indicate that Laney cannot be classified as an independent contractor. For example, EcoSafe intends to have control over when and how she will work. She will be integrated into the firm with an office, equipment and the use of the administrative staff. They have implied an ongoing relationship including discussions about eventually transitioning into a full-time position. Finally, Laney intends to cease her work with other clients, making EcoSafe her only relationship. All of these factors suggest that Laney must be hired as an employee. CHAPTER 15 Pay and Benefits Outside the United States VI. Discussion Questions and Suggested Answers Discuss the main differences between the minimum pay regulations in the United States (Chapter 2) and one other country’s practices discussed in this chapter. How do these differences affect companies’ ability to compete with other companies worldwide? The answer may vary depending on the country chosen by students. In 2007, U.S. Congress passed an increase in the federal minimum wage from $5.15 in increments to $7.25 in 2009. Currently, approximately 24 states have minimum wage laws that specify higher minimum wage rates than federal level specified in the FLSA. Specific FLSA exemptions permit employers to pay some workers less than the minimum wage such as students employed in retail or service businesses, on farms, and etc. (with the consent of the DOL). In some countries governments establish nationally uniform minimum wage rates, while in other countries minimum wage rates are established depending on regions or occupations. For instance, in Brazil, the minimum wage rate is nationally uniform (545 RS in 2010). In Canada, the jurisdiction defined by province determines the minimum hourly rate. For instance, the minimum wage rate in Alberta is $9.95 and in Nunavut (the highest rate) it is $11.00. In China, there is no national minimum wage rate. Instead, it varies by region. In 2011, the monthly minimum wage was 1,300 yuan in Guangzhou (the highest in China) and 1,120 yuan in Shanghai with the lowest amount in Anhui Province and Jiangxi Province at 500 yuan. Mexico has two minimum wage rates: 1) general minimum wage applies to all workers and the amount depends on the region of the country (In 2011, minimum wage in Geographic area C was 56.70 pesos per day and 59.80 pesos per day in Geographic area A) and 2) occupational minimum wages. In India, minimum wage rates are determined by the government for certain sectors, and collective agreement determines others. In Germany, minimum wage rate is set by a collective bargaining process. German government does not mandate a minimum wage except for construction workers, electrical workers, janitors, roofers, painters, and letter carries. Companies’ ability to compete globally would be affected by the minimum pay regulations of the country where they operate. Companies operating in countries or regions with lower minimum wage rate may benefit from lower labor costs. Discuss the main differences between retirement systems in the United States (taking into account legally required and discretionary programs) and one other country discussed in this chapter. Does it appear that the costs of retirement programs are creating burdens for competitive advantage? In the United States, individuals may receive retirement benefits from three sources: 1) employer-sponsored retirement plans provide employees with income after they have met a minimum retirement age and have left the company, 2) OASDI program provides government-mandated retirement income to employees who have made sufficient contributions through payroll taxes, 3) individuals may use their initiative to take advantage of tax regulations that have created such retirement programs as individual retirement accounts (IRAs) and Roth IRAs. Canada has two different state pension plans: 1) for Quebec residents and 2) for the rest of the country. Both of the plans are similar to 401(k) plans in the US. Mexico’s former social insurance system has been transforming into mandatory individual account system. In addition to social insurance, in Brazil, there is also voluntary coverage for housewives, students, the unemployed and other categories. Also, they have a special system for public-sector employees and military personnel. In China, there has been a new law to decouple the employment relationship from the social insurance system, setting up a unified basic pension system. The new system has social insurance and mandatory individual accounts. Countries have differences and similarities in terms of retirement systems. The cost of retirement programs may create burdens for competitive advantage for companies operating in countries where government contributions are lower and mandated employer/employee contributions are higher. VII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Case: North American Expansion for Threads Apparel Instructor Notes: Organizations that expand their operations internationally must understand the basic legal requirements as well as norms for pay and benefit in the country where they are doing business. The North American Free Trade Agreement (NAFTA) has increased trade between the United States, Canada, and Mexico and as a result, more organizations are doing business in one or both of these countries. However, employment practices in Canada and Mexico still differ from the United States and a company entering into one of these countries must understand the labor environment. Suggested Student Responses: What are some labor-related factors that Threads should consider when comparing Mexico and Canada? Labor-Related Factors for Threads to Consider When Comparing Mexico and Canada: 1. Minimum Wage Laws: • Threads should research and understand the minimum wage laws in both Mexico and Canada. Minimum wage rates can vary significantly between countries and may impact labor costs. 2. Labor Laws and Regulations: • Threads should familiarize themselves with labor laws and regulations in Mexico and Canada, including laws related to working hours, overtime pay, employee rights, and workplace safety standards. 3. Employment Contracts and Termination Policies: • Threads should understand the requirements for employment contracts and termination policies in Mexico and Canada. These may differ from U.S. practices and can impact hiring and employment practices. 4. Benefits and Social Security: • Threads should compare benefits and social security requirements in Mexico and Canada, including healthcare, retirement benefits, and other mandatory employee benefits. 5. Unionization and Collective Bargaining: • Threads should consider the level of unionization and collective bargaining practices in Mexico and Canada. Labor relations may differ between countries, and understanding union dynamics is important for managing employee relations. 6. Cultural and Language Considerations: • Threads should consider cultural and language differences that may impact labor relations and employee management in Mexico and Canada. Understanding cultural norms and communication styles is essential for effective HR management. 7. Workforce Availability and Skills: • Threads should assess workforce availability, skills, and education levels in both Mexico and Canada. This can impact recruitment, training, and talent management strategies. 8. Compliance and Reporting Requirements: • Threads should ensure compliance with all labor-related reporting requirements in Mexico and Canada, including tax reporting, employee documentation, and government filings. 9. Trade Agreements and Cross-Border Employment: • Threads should consider the implications of trade agreements such as NAFTA (now USMCA) on cross-border employment between the United States, Mexico, and Canada. Understanding the provisions of these agreements can impact HR and employment practices. 10. Cost of Living and Compensation Benchmarks: • Threads should compare the cost of living and compensation benchmarks between Mexico and Canada to ensure that employee salaries and benefits are competitive and aligned with local market standards. By considering these labor-related factors, Threads can effectively navigate the labor environments in Mexico and Canada and ensure compliance with local laws and regulations while expanding its operations in North America. What are some labor-related factors that would favor Canada as the location of the new facility? Mexico? The employment environment in Canada is more similar to the United States than Mexico. As such, Thread’s management may find it easier to transition into the Canadian work environment. With higher paid workers, Threads could potentially more easily maintain the high quality standards that they have based their reputation on. Canada also has a public healthcare system, which reduces the burden placed on employers. Threads may choose to provide additional healthcare benefits, but costs will likely be lower than they pay for U.S. workers. Mexico is more attractive from a cost management standpoint. Labor costs are far below those in Canada, which are more in line with U.S. norms. Mexico has lower pay rates, and the government provides most healthcare and retirement benefits. MYLAB QUESTIONS 15-5. Why is it important for HR and compensation professionals to learn about compensation practices in other parts of the world? Discuss. Answer: Answer should include the following points: The current state of globalization has resulted in a high level of interconnections between the economies of various parts of the world. U.S. employers will increasingly conduct business with entities in a variety of other countries as former underdeveloped parts of the world experience tremendous economic, trade, and standard of living growth. In addition, the move from traditional manufacturing to knowledge- and service-based employment also means that jobs as well as markets are more likely to be dispersed geographically. As the need for employers to interact globally increases, HR management professionals are going to have increased opportunities to develop compensation and benefits programs for U.S. employees in foreign assignments, as well as for indigenous employees in foreign offices of the parent company. It is essential that compensation professionals know the basic legal employment context and the minimum employment statutory employment standards of the country where they propose to do business. After that, compensation professionals may consider the norms for competitive pay and benefits needed to attract the desired talent. 15-6. Briefly compare minimum wage rates and paid time off policies in Canada and Mexico. Answer: Answer should include the following main points about each country: Canada (wage rates) In Canada, there is a statutory minimum wage law. Provincial governments must set minimum rates of pay. In 2011, British Columbia and Canada had the lowest minimum wage rate ($8.75). The highest minimum wage rate is in Nunavut ($11.00). Mexico (wage rates) Workers are entitled to paid time-off during public holidays and workers required to work during a mandatory holiday are entitled to double pay. Female employees are entitled to maternity leave—6 weeks leave prior to giving birth and 6 weeks leave after birth on full salary. Employees are entitled to 6 vacation days after being employed for 1 year and to 2 more days for each subsequent year, up to a maximum of 12 days. Canada (paid time off) Canadian employment law holds that employees are entitled to between 8 and 9 annual paid holidays as well as 2 weeks paid vacation time along with a sum of money as vacation pay (increasing to 3 weeks after 6 years of employment). The amount of vacation pay is equal to 2% of employee's pay for the preceding year per week of vacation. Employees are eligible for a total of 17 weeks' benefits during pregnancy and after childbirth. Mexico (paid time off) There are two minimum wage rate applications in Mexico. General minimum wage applies to all workers and the amount changes depending on the region of the country. In 2011, minimum wage was 56.70 pesos per day in Geographic area C, 59.80 pesos per day in Geographic area A. Occupational minimum wage is the second type and it is higher than the general minimum wage. VIII. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Case: Expatriate Problems at Global Appliance Instructor Notes There are many human resource management practices that affect the success of international assignments including the selection and training of expatriates. The design of the compensation package also has a significant effect on the success of international assignments. There must be incentives for employees to take international assignments and also financial risk to the employee should be minimized. In ensuring the success of expatriates, careful attention should be paid to the pay and benefits given to those asked to work in an international assignment. In this case, the Human Resources Director most likely needs to speak with more employees and current expatriates to understand their concerns, but initially examining their compensation program is a good first step. Suggested Student Responses: How can compensation practices affect the willingness of executives at Global Appliance to take international assignments? Easing financial concerns helps make an international assignment more attractive. Often, an employee may respond positively to incentives, but at a minimum does not want an international assignment to affect him or her negatively from a financial aspect. Employers must also consider the effects on the employee’s family while on an international assignment. As Global’s expatriate compensation program has changed over the years, it is reasonable to suspect that those changes may have impacted satisfaction with international assignments. What are some aspects of Global’s compensation practices that Jackson should examine? Jackson should first examine the base pay of the expatriates and ensure that their process for setting base pay at least allows the expatriates to maintain their same purchasing power. He should also examine incentives in place. If they do not currently offer a foreign service premium, they may want to consider doing so. He should also examine benefits such as rest and relaxation leave allowances and benefits to support the education of children. Further, Jackson should examine some of the unique incentives offered to some individuals over the years to ensure that such incentives are determined for appropriate business reasons and that they are fairly distributed. Finally, since some employees are indicating that it “isn’t worth it” to take on the assignments, Jackson should look at the repatriation practices of the company. CHAPTER 16 Challenges Facing Compensation Professionals IX. Discussion Questions and Suggested Answers This chapter discusses four important issues that will shape compensation professionals’ work for years to come. Which of these stands to create the greatest uncertainty for compensation professionals? Explain your answer. This is a subjective question and answers greatly depend on the student’s position and point of view. One can argue that challenges in health care reform create the greatest uncertainty for compensation professionals’ work as there exist some challenges to the legality of PPACA. Several groups of people have already filed lawsuits challenging its legality. They mainly claim that either proving coverage to employers will be very costly to businesses or that PPACA violates the constitutional rights of people. The next steps in these legal challenges entail appeals in various U.S. Courts of Appeals. Ultimately, the issue will likely be decided by the U.S. Supreme Court. In the meanwhile, the landscape for health care reform holds a significant uncertainty for employers and therefore for compensation professionals. Describe the most recent developments in health care reform. How do these developments compare to what is discussed in this chapter? To help answer this question, conduct a search on the internet using terms such as ‘health care reform’ or ‘Patient Protection and Affordable Care Act’. One of the recent developments in health care reform is that the U.S. Supreme Court agreed to hear a challenge to the PPACA on November 14, 2011. This development set the stage for oral arguments by March 2012 and a decision in late June 2012. Besides, as of October 2011, the constitutionality of PPACA has been upheld by three out of four federal appellate courts. The fourth one declared only the law’s individual mandate alone as unconstitutional. These developments show that health care reform continues to bring complexity for compensation professionals, but after the decision of the higher courts, the uncertainty around the health care reform probably will diminish.
Please identify one or more issues besides the ones discussed in this chapter that you feel will help define future of compensation professionals’ work. One of the challenges that were not mentioned specifically in the text is that there are detrimental budget problems in the United States. It is expected that several changes will be made in the IRS regulations to help relieve those budgetary problems, which will definitely affect employee compensation and benefits. The Bush tax cuts have been extended only two years by President Barack Obama. It is highly uncertain what will happen after that two year extension; upcoming changes heavily depend on the results of the 2012 Presidential election. MYLAB QUESTIONS 16-4. List the four challenges for compensation professionals. Among these, describe the challenges brought by wage issues in China. Answer: The four challenges: 1) impact of economic recession on compensation practice, 2) rising wages in China, 3) uncertainty and challenges associated with health care reform, 4) the influence of changing workforce demographics on employee benefits practice. Many U.S. manufacturers relocated their facilities to China to reduce labor cost. However, labor cost has been increasing in China rapidly. This is negatively affecting the companies that relocated their manufacturing facilities to China. These companies' competitive advantage that is gained by relocation is diminishing. Policy makers of China support the increased wages because higher wages increase domestic consumption, which in return decrease the reliance on exports to sustain country's growth. Labor shortage (due to one child policy) is another factor for wage increases. 16-5. Briefly discuss the uncertainties brought by health care reform and changing workforce demographics. Answer: The basis for the health care reform was brought by the Patient Protection and Affordable Care Act (PPACA) and its amendment (Health Care and Education Reconciliation Act of 2010). Before PPACA, companies chose whether to offer health care insurance to employees. With the reform, companies will pay significant penalties if they do not provide health insurance to their employees. There are higher fines for companies that offer unaffordable health insurance. Moreover, the lifetime benefits cap will be eliminated. There will be a limit for waiting periods before new employees may receive health care coverage. Therefore, cost of health insurance will be higher for companies with the health care reform. There have been lawsuits against the new laws and currently there is high uncertainty for employers regarding the health care reform. Benefit programs that is provide by the employer is most effective when the employees are relatively similar in terms of needs and preferences. Labor force diversity necessitates more flexible benefit offerings. The labor force diversity will continue to rise in terms of age, gender, race, and ethnicity as stated by the U.S. Bureau of Labor Statistics. For younger workers, labor force participation rate is expected to decline and for older workers labor force participation rate is expected to rise. Hispanic labor force is expected to be 30 million in 2018. While women's share of labor force participation is expected to increase by less than 1%, men's share is expected to decrease by less than 1%. The diverse labor force is a challenge for compensation professionals to design benefit plans that will accommodate the needs of their employees. Solution Manual for Strategic Compensation: A Human Resource Management Approach Joseph J. Martocchio 9780133457100, 9780135192146
