International Industrial Relations 146e4r

INTERNATIONAL INDUSTRIAL RELATIONS: INTERNATIONAL INDUSTRIAL RELATIONS Objectives of IR: Objectives of IR Development & promotion of harmonious labour relations in labour & management Avoidance of conflicts by maintaining industrial peace & goodwill To safeguard interest of labour, management, industry, & national economy To boost the morale, discipline in workers To raise productivity levels The Challenge to the Multinationals: The Challenge to the Multinationals Standardization vs. local adaptation Global mindset and local responsiveness International IR – Issues & Concerns: International IR – Issues & Concerns IR policy of MNCs Unions‟ influence on International IR MNCs characteristics in neutralising the power of labour unions MNCs strategy towards International IR 1.IR policy of MNCs: 1.IR policy of MNCs Degree of inter-subsidiary production integration Nationality of ownership of the subsidiary IHR management approach Subsidiary characteristics Characteristics of the home product market 2. Unions’ influence on International IR: 2. Unions‟ influence on International IR Influencing wage levels Affecting the MNCs ability to vary employment levels at will Restricting MNCs discretion of social dumping 3. MNCs characteristics in neutralising the power of labour unions: 3. MNCs characteristics in neutralising the power of labour unions Massive financial resources to absorb losses in a foreign subsidiary Options to shift production units to other countries Distance between HQ & Subsidiary 4. MNCs strategy towards International IR: 4. MNCs strategy towards International IR Conflict or inflexible, uncompromising hostility Armed truce attitude Power bargaining Accommodation Cooperation Collusions Difference in MNE Approached to International Industrial Relations: Difference in MNE Approached to International Industrial Relations Degree of centralization or decentralization can be influenced by several factors: Degree of inter-subsidiary production integration Nationality of ownership of the subsidiary IHR management approach MNE prior experience in industrial relations Subsidiary characteristics Characteristics of the home product market Management attitudes towards unions Degree of Inter-subsidiary Production Integration and ILR: Degree of Inter-subsidiary Production Integration and ILR High degree of integration was found to be the most important factor leading to the centralization of the IR function within the firms studied. Industrial relations throughout a system become of direct importance to corporate headquarters when transnational sourcing patterns have been developed, that is, when a subsidiary in one country relies on another foreign subsidiary as a source of components or as a of its output. In this context, a coordinated industrial relations policy is one of the key factors in a successful global production strategy. Nationality of Ownership of the Subsidiary: Nationality of Ownership of the Subsidiary US firms tend to exercise greater centralized control over labor relations than do British or other European firms. US firms tend to place greater emphasis on formal management controls and a close reporting system (particularly within the area of financial control) to ensure that planning targets are met. Foreign-owned multinationals in Britain prefer single-employer bargaining (rather than involving an employer association), and are more likely than British firms to assert managerial prerogative on matters of labor utilization. US-owned subsidiaries are much more centralized in labor relations decision making than the British-owned , attributed to: More integrated nature of US firms Greater divergence between British and US labor relations systems than between British and other European systems, and More ethnocentric managerial style of US firms IHRM Approach: IHRM Approach An ethnocentric predisposition is more likely to be associated with various forms of industrial relations conflict. Conversely, more geocentric firms will bear more influence on host-country industrial relations systems, owing to their greater propensity to participate in local events. Prior Experience in Industrial Relations:

Prior Experience in Industrial Relations European firms tend to deal with industrial unions at industry level (frequently via employer associations) rather than at the firm level. The opposite is more typical for U.S. firms In the U.S., employer associations have not played a key role in the industrial relations system, and firm-based industrial relations policies are the norm. Subsidiary Characteristics: Subsidiary Characteristics Subsidiaries formed through acquisition of well-established indigenous firms tend to be given much more autonomy over industrial relations than are green-field sites. Greater intervention would be expected when the subsidiary is of key strategic importance to the firm and when the subsidiary is young. Where the parent firm is a significant source of operating or investment funds for the subsidiary – a subsidiary is more dependent on headquarters for resources – there will tend to be increased corporate involvement in industrial relations and human resource management. Poor subsidiary performance tends to be accompanied by increased corporate involvement in industrial relations. Characteristics of the Home Product Market: Characteristics of the Home Product Market Lack of a large home market is a strong incentive to adapt to hostcountry institutions and norms. If domestic sales are large relative to overseas operations (as is the case with many US firms ), it is more likely that overseas operations will be regarded as an extension of domestic operations. For European firms , international operations are more like to represent the major part of their business. Since the implementation of the Single European Market , there has been growth in large Europeanscale companies (formed via acquisition or t ventures) that centralize management organization and strategic decision-making. However, processes of operational decentralization with regard to industrial relations are also evident. Management Attitudes towards Unions: Management Attitudes towards Unions Knowledge of management attitudes or ideology concerning unions provides a more complete explanation of multinational industrial relations behavior than relying solely on a rational economic model. Competitive/confrontational versus cooperative Codetermination Works council Union density in western industrial societies Sweden has the highest level of union hip U.S. managers tend to hold a union avoidance value has the lowest unionization in the western world. Key Issues in International Industrial Relations: Key Issues in International Industrial Relations National differences in economic, political and legal systems produce markedly different IR systems across countries Multinationals generally delegate the management of IR to their foreign subsidiaries . However, a policy of decentralization should not keep corporate headquarters from exercising some coordination over IR strategy. Generally, corporate headquarters will become involved in or oversee labor agreements made by foreign subsidiaries because these agreements may affect the international plans of the firm and/or create precedents for negotiations in other countries. Labor Relations in the U.S.: Labor Relations in the U.S. National Labor Relations Act (1935), also known as the Wagner Act LaborManagement Relations Act (1947), also called the Taft-Harley Act An organizational behavioral approach: voluntary and informal, initiated by management, e.g. Participative management Employee empowerment Advocating market forces, efficiency, and effectiveness Collective bargaining at the firm level More adversarial labor relations German Industrial Democracy: German Industrial Democracy A formal-structural approach aimed at equalizing power Established since post WWII The Codetermination Act (1951) The Codetermination Law (1976) Supervisory Board Management Board Works council Union Structures: Union Structures Differ considerably among countries IR policies must be flexible enough in order to adapt to local traditions and institutional requirements. Industrial unions – Represent all grades of employees in an industry; Craft unions – Based on skilled occupational groupings across industries; Conglomerate unions – Represent in more than one industry; General unions – Open to almost all employees in a given country. Enterprise union - a single trade union within one plant or multi-plant enterprise, rather than within a craft or industry, common in Asia-Pacific countries. Trade Union Structures in Leading Western Industrial Societies: Trade Union Structures in Leading Western Industrial Societies Australia General, craft, industrial, white-collar Belgium Industrial, professional, religious, public sector Canada Industrial, craft, conglomerate Denmark General, craft, white-collar Finland General, white-collar, professional and technical enterprise Great Britain General, craft, industrial, white-collar, public sector Japan Enterprise The Netherlands Religious, conglomerate, white-collar

Norway Industrial, craft Sweden Industrial, craft, white-collar and professional Switzerland Industrial, craft, religious, white-collar US Industrial, craft, white-collar, public West Industrial, white-collar Trade Unions and International Industrial Relations: Trade Unions and International Industrial Relations Trade unions may limit the strategic choices of multinationals in three ways: By influencing wage levels to the extent that cost structures may become uncompetitive; By constraining the ability of multinationals to vary employment levels at will ; and By hindering or preventing global integration of the operations of multinationals. Trade Unions’ Response to Multinational: Trade Unions‟ Response to Multinational Seeing the growth of multinationals as a threat to the bargaining power of labor because of the considerable power and influence of large multinational firms. Multinationals are not uniformly anti-union , but their potential lobbying power and flexibility across national borders creates difficulties for employees and trade unions to develop countervailing power. There are several ways in which multinationals have an impact upon trade union and employee interests. The Response of Trade Unions to Multinationals: The Response of Trade Unions to Multinationals The response of labor unions to multinationals has been threefold: Form international trade secretariats (ITSs) Lobby for restrictive national legislation, and Try to achieve regulation of multinationals by international organizations. International trade secretariats (ITSs). There are 15 ITSs, which function as loose confederations to provide worldwide links for the national unions in a particular trade or industry (e.g. metals, transport and chemicals). The secretariats have mainly operated to facilitate the exchange of information. Slide 25: 15 TUs - links with National unions in a particular trade Function – to achieve transactional bargaining with each of the MNCs in its industry To lobby on political level for restrictive national legislation To attempt regulations of MNCs by international organisations (ILO,EU) through voluntary codes ICFTC, WCL – promote solidarity between different countries & concerns with TU recognition – training & education to d unions – negotiations Strategies of Trade Unions: Strategies of Trade Unions Company councils – International TU build networks to bargain Collection & exchange of information – health standards, shifts in production schemes – 1970s costly – MNCs not recognising it Transnational bargaining – identify the mutual interests of diverse labour markets – diversity of international business forms Slide 27: International labour standards – link workers right with trade Industrial Solidarity – Solidarity messages – voicing for action in the corporation Ad-hoc assistance – legal, financial Corporate campaigning – union recognition, renewal of agreement SUNLIGHT STRATEGY – Pressure HQ to solve the dispute in the subsidiary – solve it or get widespread attention 7 Characteristics of MNEs as the Source of Trade Union Concern: 7 Characteristics of MNEs as the Source of Trade Union Concern Formidable financial resources Alternative sources of supply The ability to move production facilities to other countries A remote locus of authority Production facilities in many industries Superior knowledge and expertise in industrial relations The capacity to stage an „investment strike‟ Refuse to invest any additional funds in a plant, thus ensuring that the plant will become obsolete and economically non-competitive Offshoring Sources of Expat Failure: Sources of Expat Failure Spouse/family‟s inability to adjust to cultural/physical environment 0% 10% 20% 30% 40% 50% 60% 70% Lack of technical competence Inability to adapt to changing business priorities or organizational realignment Inability to integrate job expertise with larger responsibilities of assignment Personality or emotional maturity Lacks skills necessary to conduct business in host country culture Other family related problems Expat's inability to adjust to cultural environment 3 determinants of expatriate family adjustment (Alietal, 2003): 3 determinants of expatriate family adjustment (Alietal, 2003) Personality traits Family characteristics Work-life Personality Traits: Personality Traits Cultural Empathy Open-mindedness Social Imitative Flexibility Emotional Stability

Family Characteristics: Family Characteristics Family Cohesion Family Adaptability Family Communication Work-Life: Work-Life Expatriate work satisfaction from the international company Other social s Theory of Expatriate and Spousal Adjustment (adaptation of Caligiuri model): Theory of Expatriate and Spousal Adjustment (adaptation of Caligiuri model) Personality Traits Cultural Empathy Open-mindedness Social Initiative Flexibility Emotional Stability Family Characteristics Family Cohesion Family Adaptability Family Communication Work-Life Expatriate Work Satisfaction from the international company Other Social Networks Intercultural Adjustment Psychological Adjustment Socio-cultural Adjustment Work Family Culture Traditional EAPs inadequate to serve expatriate populations: Traditional EAPs inadequate to serve expatriate populations Most EAPs are U.S. centric and do not fully for local and cultural needs. Expatriates & families tend not to use traditional EAPs. Many EAPs are ive. Delivering consistent EAP services globally has proven complicated. Traditional EAP alone is not sufficient to meet the complex needs at each stage of an expatriate assignment assignment. 4 key elements in Expatriate EAP: 4 key elements in Expatriate EAP Proactive Outreach (by phone and e-mail) to all new & existing expats and spouses to lend and identify any issues Intervention (face-to-face or phone) with "in-country" professional coach or counselor (up to six visits) Educational facilitated teleconferences, webinars, and web site PreDeparture Meeting Meet with new expats and spouses prior to departure to prevent or anticipate problems Expatriate Employee Assistance Program (EAP): Expatriate Employee Assistance Program (EAP) The EAP is. . . Confidential Proactive and strategic Free of charge to the expatriate families Ultimately voluntary Slide 38: Spouse - isolated and afraid to leave the house in Mexico Child - not fitting in at school in the U.K. Expat employee - extramarital affair in China Expat employee - drinking excessively in Brazil NON-EXPATRIATES: NON-EXPATRIATES People who travel internationally yet they don‟t relocate themselves International business travellers Road warriors, Globe trotters, Frequent fliers Perform international assignment as normal duties Stress Stressors - Defrank et al: Stressors - Defrank et al Home & Family issues Work arrangements Travel Logistics Health Concerns Host cultural issues Advantages: Advantages Enjoy the excitement & thrills in foreign locations Agents of Socialisation, network builders, boundary spanners, language nodes INTERNATIONAL HRM: INTERNATIONAL HRM INTRODUCTION: INTRODUCTION International management encounters many problems above those faced by a domestic organization. Geographic distance and a lack of close, day-to-day relationships with headquarters represent a major challenge to multinationals. "It is essential, therefore, that special attention is given to the staffing practices of overseas units" Slide 3: Many challenges exist when staffing a business that functions globally. Differences in cultures provide many opportunities for establishing a diverse workforce. If the parent company is located in the U.S and separate offices are being established in other areas of the world, the HR Manager will be responsible for making sure that the goals and timeline to reach those goals are met. Slide 4: Depending on the type of business, the HR Manager will need to establish a way for the policies and philosophy of the company to be consistent in all branches, regardless of location. The easiest, but probably the most costly,

solution is for the HR Manager to place home-country employees in the foreign locations in an effort to establish a program to meet the needs of the parent company. Slide 5: Geographic differences will present issues for communication, time zone differences, language difference and more. staffing: staffing “ Staffing is the process of acquiring , deploying and retaining a workforce of sufficient quantity and quality to create positive impacts on the organization's effectiveness ” Factors Affecting Staffing: Factors Affecting Staffing General staffing policy on key positions at headquarters and subsidiaries Constraints placed by host government Staff availability Pigors - 3 different sources of employees : Pigors - 3 different sources of employees First , the company can send employees from its home country, which are referred to as expatriates, expats or home country nationals. Second, it can recruit host country nationals (natives of the host country), Third , it can hire third country nationals who are natives of a country other than the home country or the host country. Challenging aspects: Challenging aspects One of the challenges is staffing the operation. Most times bringing employees from one country to another is expensive for many reasons. First , the initial cost of airfare, living expenses and transportation in the host country. The second expense incurred with bringing expatriates in to the international operation is the training involved in making sure the people going to the host country are familiar with, laws, rules, culture, and expectations in the new country. There are also expenses incurred of the expatriate is not fluent in the host countries language. Slide 10: The main challenge with hiring host-country employees is their lack of understanding about how the organization functions at home and what the goals are. There may be challenges when having a person from the host county come to train the individual, and then leaving to allow this person to run the operation with a short amount of training from the organizations superiors. Slide 11: One of the challenges in hiring a third-country national is the training and cost to relocate the individual. Though many of these hires are smart choices because of culture and language there are still costs incurred in relocation and also in training. Slide 12: When international expansion of the company is in its infancy, management is heavily relying on local staff, as it is extremely respondent to local customs and concerns. Slide 13: As the company′s international presence grows, home-country managers are frequently expatriated to stabilize operational activities (particularly in less developed countries). At later stages of internationalization, different companies use different staffing strategies; however, most employ some combination of host-country, homecountry, and third-country nationals in the top management team" Staffing policies of MNCs – 4 categories: Staffing policies of MNCs – 4 categories Ethnocentric policy Polycentric policy Geocentric policy Regiocentric policy Ethnocentric policy: Ethnocentric policy The ethnocentric staffing policy refers to the strategy of a multinational company to employ managers for key positions from the parent headquarters instead of employing local staff Strategic decisions are made at headquarters Limited subsidiary autonomy Key positions in domestic and foreign operations are held by headquarters‟ personnel PCNs manage subsidiaries Advantages: :

Advantages: To ensure new subsidiary complies with overall corporate objectives and policies Has the required level of competence Overcomes lack of qualified managers in host nation Unified culture Helps transfer core competencies (and skills back) Disadvantages: : Disadvantages: Limits the promotion opportunities of HCNs, leading to reduced productivity and increased turnover among the HCNs Longer time for PCNs to adapt to host countries, leading to errors and poor decisions being made High cost Produces resentment in host country Can lead to cultural myopia Reasons for relying on parent country nationals (PCNs): Reasons for relying on parent country nationals (PCNs) The expatriate′s technical and business expertise. Ability to transfer the headquarters′ culture to the foreign operation (infusing central beliefs throughout the organization). Political understanding of the headquarters′ organization. Effective communication between headquarters and the subsidiary. Lack of qualified host country nationals (HCNs). Greater ability of expatriates to transfer knowhow from the parent to the subsidiary. Measure of control over the subsidiary. Career and promotion opportunities for PCNs. Personnel development. No need of well-developed international internal labor market. Rapid substitution of expatriates possible. Major problems with this approach : Major problems with this approach Parent country nationals continue to experience difficulties to adjust to international assignments. The adaptation of expatriates is uncertain. Complicated personnel planning procedures. The private life of expatriates is severely affected. Difficulties in constant mentoring during the stay abroad. This approach to staffing limits the promotion and career opportunities of local managers, which may lead to low moral and increased turnover. PCNs are not always sensitive to the needs and expectations of their host country subordinates. Tensions between the expatriate executives and the HCNs (caused by philosophical issues such as the clash of cultures and also by some fairly hard issues such as the often substantial income gap). Expatriates are very expensive in relation to HCNs. Legal regulations of the host country. Government restrictions. Repatriation. High failure rate. Polycentric : Polycentric Each subsidiary is a distinct national entity with some decision-making autonomy HCNs manage subsidiaries who are seldom promoted to HQ positions PCNs rarely transferred to subsidiary positions. Hostcountry nationals manage subsidiaries Parent company nationals hold key headquarter positions Best suited to multi-domestic businesses Advantages:: Advantages: Employment of HCNs eliminates language barriers, reduces the need for cultural awareness training programs Employment of HCNs allows a multinational company to take a lower profile in sensitive political situations Employment of HCNs is less expensive Employment of HCNs gives continuity to the management of foreign subsidiaries (lower turnover of key managers) Alleviates cultural myopia. Inexpensive to implement Helps transfer core competencies Disadvantages:: Disadvantages: Difficult to bridge the gap between HCN subsidiary managers and PCN managers at headquarters (language barriers, conflicting national loyalties, cultural differences) HCN managers have limited opportunities to gain experience outside their own country PCN managers have limited opportunities to gain international experience Resource allocation and strategic decision making will be constrained when headquarter is filled only by PCNs who have limited exposure to international assignment Geocentric : Geocentric A global approach - worldwide integration View that each part of the organization makes a unique contribution Best suited to Global and trans-national businesses Nationality is ignored in favor of ability: Best person for the job Color of port does not matter when it comes to rewards, promotion and development. Advantages:: Advantages: Ability of the firm to develop an international executive team Overcomes the federation drawback of the polycentric approach cooperation and resource sharing across units Enables the firm to make best use of its human resources Equips executives to work in a number of cultures Helps build strong unifying culture and informal management network Disadvantages:: Disadvantages: Host government may use immigration controls in order to increase HCNs employment Expensive to implement due to increased training and relocation costs Large numbers of PCNs, HCNs, and TCNs need to be sent across borders Reduced independence of subsidiary management National immigration

policies may limit implementation Expensive to implement due to training and relocation Compensation structure can be a problem. Regiocentric : Regiocentric Reflects a regional strategy and structure; Regional autonomy in decision making; Staff move within the designated region, rather than globally; Advantages:: Advantages: Allow interaction between executives transferred to regional headquarters from subsidiaries in the region and PCNs posted to the regional headquarters Provide some sensitivity to local conditions Help the firm to move from a purely ethnocentric or polycentric approach to a geocentric approach Disadvantages:: Disadvantages: Constrain the firm from taking a global stance Staff‟s career advancement still limited to regional headquarters, and not the parent country headquarters Transfer of Staff for International Business Activities: Transfer of Staff for International Business Activities Reasons for International Assignments Types of International Assignments Expatriate and Non-expatriates – their roles Reasons For International Assignments: Reasons For International Assignments Position filling Skills gap, launch of new endeavor, technology transfer Management development Training and development purposes, assisting in developing common corporate values Organizational development Need for control, transfer of knowledge, competence, procedures and practices Types of International Assignments: Types of International Assignments Short term: up to 3 months Troubleshooting Project supervision A stopgap until a permanent arrangement is found Extended: up to 1 year May involve similar activities as short-term assignments Long term: varies from 1 to 5 years The traditional expatriate assignment Non-standard Assignments: Non-standard Assignments Commuter assignments Rotational assignments Contractual assignments Virtual assignments Some of these arrangements assist in overcoming the high cost of international assignments but are not always effective substitutes for the traditional expatriate assignment . Roles of an Expatriate: Roles of an Expatriate Agent of direct control Agent of socialization Network builder Boundary spanner Language node Transfer of competence and knowledge Roles of Non-expatriates: Roles of Non-expatriates People who travel internationally yet are not considered expatriates as they do not relocate to another country Road warriors, globetrotters, frequent fliers Much of international business involves visits to foreign locations, e.g. Sales staff attending trade fairs Periodic visits to foreign operations Non-expatriates enjoy positives as:: Non-expatriates enjoy positives as: A Glamorous life Excitement and thrills of conducting business deals in foreign locations Life style (top hotels, duty-free shopping, business class travel) General exotic nature experience a High level of stress: experience a High level of stress Home and family issues - Frequent absences Work arrangements Domestic side of position still has to be attended to Travel logistics waiting in airports, etc. Health concerns Poor diet, lack of sleep, etc. expatriate problem: expatriate problem Expatriate: citizens of one country working in another Expatriate failure: premature return of the expatriate manager to his/her home country Cost of failure is high: estimate = 3X the expatriate‟s annual salary plus the cost of relocation (impacted by currency exchange rates and assignment location) Inpatriates : expatriates who are citizens of a foreign country working in the home country of their multinational employer Reasons for expatriate failure:

Reasons for expatriate failure US multinationals Inability of spouse to adjust Manager‟s inability to adjust Other family problems Manager‟s personal or emotional immaturity Inability to cope with larger overseas responsibilities European multinationals Inability of spouse to adjust Slide 40: Japanese Firms Inability to cope with larger overseas responsibilities Difficulties with the new environment Personal or emotional problems Lack of technical competence Inability of spouse to adjust. Slide 42: Strategists - representing interests of the MNE‟s headquarters Daily Managers - run operations, to build local capabilities and gain international management experience Ambassadors - representing headquarter‟s interests in the subsidiaries and representing the interests of the subsidiaries when interacting with headquarters Trainers - for their replacements Expatriate Failure and Selection: Expatriate Failure and Selection (1) premature (earlier than expected) return (2) unmet business objectives (3) unfulfilled career development objectives Using the relatively easy-to-observe measure of premature return, studies in the 1980s reported that 76% of US MNEs have more than 10% expatriates failures, and 41% and 24% of European and Japanese MNEs, respectively, have a comparable number of failure cases Expatriate selection: Expatriate selection Reduce expatriate failure rates by improving selection procedures An executive‟s domestic performance does not (necessarily) equate his/her overseas performance potential Employees need to be selected not solely on technical expertise but also on cross-cultural fluency Four attributes that predict success: Four attributes that predict success Self-Orientation Possessing high self-esteem, self-confidence and mental well-being Others-Orientation Ability to develop relationships with host-country nationals Willingness to communicate Perceptual Ability The ability to understand why people of other countries behave the way they do Being nonjudgmental and being flexible in management style Cultural Toughness Relationship between country of assignment and the expatriate‟s adjustment to it Components of expatriate pay : Components of expatriate pay Base Salary Same range as a similar position in the home country Foreign service Extra pay for work outside country of origin Allowances Hardship, housing, cost-of-living and education allowances Taxation Firm pays expatriate‟s income tax in the host country Benefits Level of medical and pension benefits identical overseas Slide 48: Compensation Benefits Employment and Taxation Laws Organization‟s Compensation Policy Competitors Standard of Living Political and Social Environment Allowances Economic Conditions Slide 49: E xpatriate costs may pose a multiple-fold expense in relation to employees who are not sent as expatriates to foreign destinations, and are usually significantly higher than the compensation accorded to HCNs and TCNs a Chinese manager with 15 years experience costs less than USD 70,000 per annum, while a US expatriate manager with corresponding expertise would cost his or her organization USD 300,000 per year Key Components of International Compensation Programme for Expatriates: Base Salary The base salary is usually the main component in international compensation, and is the main benchmark used for other elements in an expatriate compensation package, such as bonuses and benefits The base salary is either paid in the expatriate‟s home or parent country currency, or in the currency of the expatriate‟s host country Key Components of International Compensation Programme for Expatriates Slide 51: Hardship For expatriate‟s (usually PCNs, TCNs) who will encounter “hardships” caused by the transfer to a foreign location, determining the appropriate level of payment can be difficult Factors determining the hardship , usually expressed in of an expatriate‟s base pay, are typically: Assignment Actual hardship Tax consequences Length of assignment Slide 52: Allowances: There are many types of allowances in an international compensation package: Cost of Living Allowance – Payment made to the expatriate with a view to compensating for differences in expenditure between

the home or parent country and the host country. Factors such as inflation differentials and the price level need to be considered. Often, the cost of living allowance is difficult to determine Slide 53: Housing Allowance – Payment made to the expatriate with a view to ensuring that he or she can maintain their home-country living standard in the host country. Alternatively, an organization may provide housing facilities on a mandatory or optional basis. Also, services may be provided to the expatriate, for example, by helping sell or rent the expatriate‟s house in the home country Slide 54: Home Leave Allowance – Payment made to the expatriate with a view to facilitating their visit back to the home country, once or twice a year. Home leave enables the expatriate to renew business, family and social ties, and thus avoid adjustment problems subsequent to repatriation Relocation Allowance – Payment made with a view to enable the relocation of the expatriate to the assignment location. Includes moving, shipping, storage costs, subsidies for purchase of appliances and (possibly) an automobile Slide 55: Education Allowance – Payment made with a view to ing the education of the expatriate‟s children, i.e. tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment, room and boarding, school uniforms etc. Problems regarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations Slide 56: Miscellaneous Allowances – Depending on the level of seniority of the expatriate, payments to him or her for club hips, sport associations, maintenance of household staff etc. may be rendered In addition, the organization may render financial assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate Slide 57: Benefits – rendered to an expatriate in addition to the allowances provided. There are several types of benefits, more prominent examples being: Social Security Benefits (home country or host country?) Paid Vacations for expatriate and family Rest and Rehabilitation leave (especially for expatriates based in “hardship” assignment locations) Emergency Cases (severe illness, death) approaches: approaches There are two basic approaches used to determine an international compensation package: The Going Rate Approach The Balance Sheet Approach The Going-Rate Approach: The Going-Rate Approach Based on local market rates Relies on survey comparisons Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities Compensation based on the selected survey comparison Base pay and benefits may be supplemented by additional payments for low-pay countries Example: Should a Pakistani bank operating in London use local British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreign banks operating in London as the reference point for the base salary offered ADVANTAGES: ADVANTAGES Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities DISADVANTAGES: DISADVANTAGES Variation between assignments for the same employee Rivalry between expatriates of same nationality in getting assignments to some countries Potential reentry problems in the home country Balance Sheet Approach: Based on the premise that employees on overseas assignments should have the same spending power as they would in their home country. The home country is the standard for all payments. The objective is to: Ensure cost effective mobility of people to global assignments Ensure that expatriates neither gain nor lose financially Minimize adjustments required of expatriates Balance Sheet Approach Slide 63: The balance sheet approach is widely used by international organizations to determine the compensation package for expatriates: Basic objective is the maintenance of home-country living standard, plus financial

inducement Home-country pay and benefits are the foundations of this approach Adjustments to home package to balance additional expenditure in the host country Financial incentives (expatriate / hardship ) added to make the package attractive Slide 64: The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country, and to provide incentives offset qualitative differences between assignment locations Outlays Considered in the B S A: Outlays Considered in the B S A BSA considers 4 types of outlays which are incurred by expatriates: Goods and services – Outlays incurred in the home country for food, personal care, clothing, household furnishings, recreation, transportation & medical care Housing – All major costs associated with housing in the host country Slide 66: Income Taxes – Parent country & host country income tax expenditures Reserve – Contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc. Where costs of host country > costs of home country  organization pays the expatriate to make up the difference Balance Sheet Approach: Balance Sheet Approach Allowances, paid by company Reserve $1,000 Goods and Services $2,000 Housing $2,000 Taxes $2,000 Home Country Salary $7,000 Reserve Goods and Services $700 Housing $1,000 Taxes $1,500 Relocation Bonus Equivalent Salary and Allowances, Host Country $10,200 ADVANTAGES: ADVANTAGES Equality between assignments & between expatriates of the same nationality Facilitates expatriate reentry Easy to communicate To employees DISADVANTAGES: DISADVANTAGES Can result in considerable disparities between expatriates of different nationalities & between expatriates & local nationals Can be quite complex to ister (e.g. changing economic conditions, taxation) Other Approaches: Other Approaches Negotiation Localization Lump Sum Cafeteria Plan Regional Systems Slide 73: Global compensation managers increasingly deal with two areas of focus. They must manage highly complex and turbulent local details, while Concurrently building and maintaining a unified, strategic pattern of compensation policies, practices and values. Expatriate Expectations: Expatriate Expectations Financial protection in of benefits, social security and living costs in the foreign location. Opportunities for financial advancement through income and/or savings. Issues such as housing, education of children and recreation to be addressed in the policy. Career advancement and repatriation. Key Components of International Compensation: Key Components of International Compensation The area of international compensation is complex, primarily because multinationals must cater to three categories of employees: PCNs, TCNs and HCNs Key Components: Base salary Foreign services inducement Hardship Allowances Benefits Expatriate Compensation Worksheet: Expatriate Compensation Worksheet Example of an Expatriate Compensation: Example of an Expatriate Compensation An expatriate working in a U.S. branch may receive: Base pay: $1,400/ mon Housing: up to $1,400/ mon (Optional) Itemized reimbursement: $500/ mon Discretionary expense (e.g., gifts & gratuity to clients and partners): $1000/special holidays Benefits: Social security/Medicare (Optional) Health care: $200/ mon paid by employer Unemployment coverage Workers comp REPATRIATION: REPATRIATION process of facilitating career anxiety experienced by repatriates (returning expatriates) psychological contract - informal understanding of expected delivery of benefits in the future for current services repatriates also experience a loss of status , spouse and children may also find it difficult to adjust back home

mentor - helps alleviate the “out-of-sight, out-of-mind” feeling by ensuring that the expatriate is not forgotten at headquarters and by helping secure a challenging position for the expatriate upon return EXPATRIATION vs. INPATRIATION: EXPATRIATION vs. INPATRIATION Addressing the expatriation problem, one solution is inpatriation – relocating employees of a foreign subsidiary to the MNE‟s headquarters for the purposes of filling skill shortages at headquarters and developing a global mindset for such inpatriates. Most inpatriates are expected to eventually return to their home country to replace expatriates. Unfortunately, many are ineffective. Inpatriates, just like expatriates, have their fair share of problems and headaches.