Global Compensation and Benefits Flashcards
Wage Compression
When a new hire comes in at a rate that is almost as high as those that have been with the company for years.
Indication that the company has not kept up with the external labor market in terms of increases in compensation for its current employee population
Compa ratio
Definition?
Calculation?
-Value that indicates how an EEs pay matches up to the midpoint of their pay grade.
-Shown as a percentage. A 90% compa ratio means that EE is 90% of the way towards the mid point of the pay grade. A 110% compa ratio indicates the EE is 10% higher that then mid point of the grade.
-Calculation:
Actual Salary/Mid Point of Pay Range=Compa Ratio
73,400.00/75,000.00= 0.98= 98% Compa
Reward Strategies:
Equity Theory (Adams)
Theory?
Types of Equity?
Based on an individuals subjective determination about their perception of pay fairness in comparing their pay against others.
-3 Types of Equity:
Internal- EE compares to other groups within the company.
External- EE compares to similar role outside of company.
Individual- EE compares to a peer doing the same role at the same company.
Alternative Compensation System:
- What type of company uses it?
- What is focus of performance?
- How is performance rewarded?
- Centralized or Decentralized?
- What makes an Alternative Compensation System successful (3 things)?
- Companies with changing markets, changing product lines, and growth rates.
- Relates compensation costs to revenues. Performance is defined by growth, market share growth, and productivity
- Relies on incentives over base pay for performance.
- Found more often in Decentralized decision making organizations.
- Successful Alternative Comp Systems are self financing. Requires:
- Sound projections about financial returns that will come from improved performance.
- Accurate methods of measuring improvements
- Effective methods of tying improvements to payouts.
Traditional Compensation System:
- What type of company uses it?
- What is focus of performance?
- How is performance rewarded?
- Centralized or Decentralized?
- Used by mature companies in stable markets with fixed products.
- Emphasis on cost control, standardization, and internal equity
- Relies on base pay and fixed benefits for performance. Heavily relies on internal job evaluation to measure performance
- Centralized decision making organizations use Traditional Comp Systems.
Red Circle Rate
Someone being paid above the maximum of the pay grade range.
Green Circle Rate
Someone being paid below the minimum of the pay grade.
Reward Strategies:
Maslow’s Need Hierarchy
Theory?
5 Levels?
Everyone follows along though a hierarchy of needs, beginning with basic needs and gaining in complexity as each need is met. The EE will not feel dissatisfied over an advanced need until the basic need is met. The most powerful EE need is the one that has not been satisfied.
- 5 levels of needs:
- Basic: Need sufficient salary to survive and pay bills.
- Safety/Security: Need enough wages to be able to feel safe and gain stability. Not just pay bills but also put extra aside. Not just afford any house, but one in a safe area.
- Social: Need to feel that they belong and not just earn a wage, but are a part of team and people like them.
- Esteem: Sense of self worth and achievement. Recognition and appreciation for the effort put into the work from others.
- Self-actualization: Fulfillment of full potential. Doing work that fully engages and leads to sense of importance. Walks with a swagger.
Reward Strategies:
Reward Theory/Reinforcement Theory
Theory?
EE’s will repeat behaviors that are rewarded and will avoid behaviors that are not rewarded.
Theory states that paying for time worked fails to motivate high performance because it rewards automatically for average effort.
Theory supports the idea that pay being contingent upon performance will directly influence behaviors.
Reward Strategies:
Expectancy Theory (Vroom)
Theory?
EE’s expectations determine effort and performance. Theory indicates that compensation policies and practices can influence the extent to which an EE believes they will be rewarded.
EE expectation: The better they perform, the more money they should get.
Reward Strategies:
Goal Setting Theory
Theory?
3 requirements for pay to motivate?
Only those rewards EE’s value can motivate behaviors. -Set mutual goals that reward both the company and the EE.
- 3 Requirements for pay to be a motivator:
- EE’s participate in setting the goals for which they will be rewarded and accept them as their own.
- Goals are specific and at the right challenge level.
- Specific monetary rewards are designated for each goal achieved.
Intrinsic Rewards
The psychological and intellectual rewards inherent to the job, like a gain in sense of accomplishment, or value from performing meaningful work. They depend of the nature of the work and the values of the worker.
Extrinsic Rewards
Rewards that drive from sources external to the job itself.
-Include both financial rewards (wages, benefits) and non-financial rewards (prestige, positive feedback)
Herzberg’s Hygiene Theory
- Definition?
- 2 Factors?
Theory tries to explain what causes overall EE attitude and motivation. Factors causing satisfaction (motivation) were different from those causing dissatisfaction (required for maintenance but alone do not satisfy). ER must provide both to ensure EEs stay motivated.
- 2 Factors:
- Motivators (Satisfiers, intrinsic)-factors that truly change EE behavior (praise, recognition, challenging work, job enrichment).
- Hygiene Factors ( Dissatisfiers,extrinsic)- basic elements that EEs expect (policy, pay, benefits, working conditions)
Job Design
Structuring job elements to create role.
- What is the scope of the role? - how do you expect the job to work? - Job Enlargement and Job Enrichment can be a part of Job Redesign
Job Analysis
Reduction of a job into duties, tasks, and elements. to help build out job specifications (skills, abilities), or personnel processes (selection, performance appraisal, training, comp).
Job Description
End product of a job analysis. Summary of duties and responsibilities. Allows anyone to see what the worker does, how and why.
Job Evaluation
Definition?
4 Categories?
- The process of systematically determining and the relative internal worth of the position to the organization and against each other job in the organization to set grades and job groups.
- 4 Categories for evaluation:
- Skill (education, dexterity, knowledge, ability)
- Effort (concentration, fatigue, physical effort, stress)
- Responsibility (decision making, safety, responsible for others, property)
- Working Conditions (Temperature, noise, health, safety)
Job Evaluation:
Point Method
- Most commonly used job content evaluation system.
- Rates each job on several compensable factors. All factors have degrees, which all have points. Rank the factors used in the role and to what degree. All points are added up for a final overall score.
- First, a rating scale is constructed for each compensable factor.
Job Evaluation:
Ranking Method
- Ordering jobs from highest to lowest based on some definition of value or contribution to the organization.
- Pay is based on ranking within the order.
Components of International Compensation:
Higher of Host or Home
- Allows expat to choose whether they are paid in their home country currency/rates, or the host country. Whichever is higher.
- Can be attractive to potential expat due to passive savings. Example, assignment is in Mexico but EE gets paid in USD. The cost of living in Mexico means that the EE would be able to keep more of their paychecks
- Not generally cost effective for the company.
Components of International Compensation:
Balance Sheet Approach
Definition?
2 Types?
-The procedure of ensuring that an expat remains whole while on assignment in regards to compensation, housing, living standards.
Utilizes tax equalization, COLA comparison, Purchasing Power Parity (PPP), and additional payments to balance out the gaps.
-2 Types of Balance Sheets:
-Home Balance Sheet: Balances Expat to home country.
-Headquarters Balance Sheet: Balances Expat to headquarters country. Usually used when expat moves from assignment to assignment and is not actively aligned to a single home country.
Components of International Compensation:
Net to Net Approach
- Expats base pay is reduced by a Hypothetical Home Country Tax. The net amount is then adjusted for COLA differences and grossed up for local/state taxes and housing costs. Next the home country net pay is converted to local net pay level to afford the expat the same standard of living.
- Compare net purchasing power in home country vs purchasing power in host country and adjust the pay to ensure that the expat does not lose any value. This ensures that the expat has the ability to live and purchase goods in their host country at the same level as they would in their home country.
Components of International Compensation:
Premiums and Allowances
Why do expats receive them?
Examples?
- These payments are made to incentivize EE’s to take assignments. They compensate expats for their willingness to take on difficult roles. These difficulties can range from isolation and separation from family, to poor standards of living, or even personal safety concerns.
- Danger Pay: Allowance given to expats working in areas that threaten physical harm or danger to their health and well being. Civil Wars, Terrorism, kidnapping. Rates determined by State Department.
- Hardship Pay: Allowances given to expats assigned to areas that are challenging to live in due to culture, climate, remoteness. Rates are determined by the State Department based on intelligence reports and current events.
- Foreign Service Premium: Intended to help offset any out of pocket expenses incurred due to assignment.
- Mobility Payments: Payments given to expats to offset costs and challenges of mobilizing/demobilizing.
Components of International Compensation:
Big Mac Index
Process used to check that the expat still has the same level of purchasing power in host country as they would in home country.
- Compare cost of Big Mac in Home and Host Country. Chosen due to its consistency of source goods and availability globally. McDonalds are everywhere and the Big Mac ingredients are mostly consistent (providing a common pricing point).
- Example: Big Mac in US=$2.00, Big Mac in China = $1.00. Big Mac in UK= $3.00.
- Can assume that COLA in China is half what it is in US.
- Can assume COLA in UK is 50% more than US.
Components of International Compensation:
Efficient Purchaser Index
- A Cost of Living Index that is less generous that the Standard index. Used to calculate COLA by doing a goods comparison.
- Comparison of cost of goods between home and host country but assumes that the purchaser will seek out local/generic/discounted goods like an efficient shopper would.
Components of International Compensation:
Nominal Home Salary
-Definition?
-AKA Reference Salary. Home Country base salary that is used as a basis for balance sheet/build up calculations.
Components of International Compensation:
Balance Sheet
-An expat finds that his home country’s exchange rate has dropped by 10%, What should GM do when employing an equalization approach?
The exchange rates b/w 2 currencies specify how much one currency is worth in terms of the other. The Balance Sheet approach is a method of compensating expats for cost differences b/w countries that ensures the expat neither gains or loses while abroad. Therefore, if the value of the home currency has dropped, then the value of the host country pay should drop as well.
Components of International Compensation:
Balance Sheet
-When the cost of goods is LOWER in the host country than the home country, the differential is???
- When the cost of goods in the host country is lower than in the home country, the differential is NEGATIVE.
- For a balance sheet approach, that negative differential will be deducted from a positive allowance to avoid overcompensation of expats.
Components of International Compensation:
Balance Sheet Approach
-What are the four main categories of expenditures?
- Goods
- Housing
- Income Taxes
- Reserve (misc expenditures. pension contributions, education costs, social security payments, alimony, mortgage principal, improvements or maintenance of dwellings)
Totalization Agreement
- 2 purposes?
- when are these used?
- Eliminate dual Social Security taxation, when a worker from one country works in another and is required to pay Social Security taxes to both countries on the same earnings. The EE will be exempted from one of the countries taxes and benefits.
- Help fill the gaps in benefits protection for someone who divided their work b/w home and host country (ex. “break in service” can impact pension eligibility).
- Host country must have signed a Totalization Agreement with the US in order to utilize this Equalization option (US has agreements with 25 countries).
Providence Fund
Used in countries that have no formal Social Security system or retirement system.
-Mandated savings scheme that requires workers to contribute a percentage of their wages to a group investment fund for use in retirement.
Foreign Income Tax Exclusion
- Definition?
- Maximum exclusion per year?
- 2 ways to qualify?
- Maximum # of days EE can be in the US in 12 mo period to qualify?
- Reduces expats US income tax resulting from the foreign earned income and housing exclusions.
- Allows expat to exclude up to $100,000.00 of foreign earned income and housing costs.
- Bonafide Residence Test: EE must maintain a foreign tax home for one full CALENDAR year.
- Physical Presence Test: EE must be overseas for 330 days in a ROLLING year.
- 35 Days
Often, as a part of the home country balance sheet agreement, expats have their host country taxes paid by the MNC less this:
Hypothetical Tax
Requires expats to pay social security tax while on short term assignments:
Totalization Agreement.
Used to keep US citizen on their home country’s social security program during short term foreign assignments.
The theory of compensating assignees to provide pay parity between the different assignee countries is LEAST similar to: Totalization Equalization Higher of Host or Home Net to Net
Totalization.
The purpose of Totalization Agreements is to keep a US citizen or resident on their home country’s Social Security program. This concept is most dissimilar to Pay Parity.
The rest are all forms of balancing the pay parity between host and home countries.
This reward system for expats compares the standard balance sheet build up to the local pay levels to determine which will be applied: Higher of Host or Home Net to Net Equalization Hypo Tax
Higher of Host or Home.
Higher of host or home compares a standard balance sheet/build up calculation with the local market salary for an equivalent job. The expat receives the greater of the two amounts.
Sometimes known as a disturbance allowance
Relocation Allowance.
aka- Settling-in allowance, Misc allowance
Reasons for implementing a Broadband pay structure does NOT normally include which of the following?
- Improves administration of job evals, salary structure, and performance rewards.
- Enhances career development opportunities
- Company hires expats with broad workforce skills
- Increase promotional opportunities for expats
Increases promotional opportunities for expats.
-Companies that implement Broadbanding usually do so to limit or reduce the number of pay grades and ranges and thus decrease the promotional opportunities for EE’s.
Nominal Home Salary
The home country base salary that is used as a basis for balance sheet/build up calcs. It may reflect the assignee’s increased responsibility in the host location and is used for the calc of ongoing pension contributions
