1. Global Benefits Expatriate Issues Europe The Americas Asia And, more Benefits and Beyond C. 13

2. New markets for products and services New sources of supply of raw materials and labor Economies of scale, logistics, and outsourcing New demand for similar products Trade Agreements open commerce among nations (quotas and tariffs) Thomas E. Murphy 3 What’s Driving Global Market 12/21/10

3. Business is facing new competitors with varying cost structures Importantly, wage and benefit costs – globally – are becoming very relevant from a competitive standpoint Costs determine how and where they will locate and how they will compete. How do we compensate expatriates? Thomas E. Murphy 4 And. . . 12/21/10

4. Domestic production – domestic markets Then, it starts sending products abroad Should it buy or build a plant or service center abroad? Economics usually drives this answer Over time the company integrates all of its operations (see Ford, P&G, Unilever, Convergys) Query: What are the compensation and benefit implications of this change? Thomas E. Murphy 5 Evolution of Global Enterprise 12/21/10

5. Global--treats world as single-integrated unit. International--treats overseas units as offshoots of domestic strategy. Multinational--treats the world as a portfolio of national opportunities. Thomas E. Murphy 6 Global Integration of Enterprise 12/21/10

6. Raw materials Technology Capital Facilities Human Resources Thomas E. Murphy 7 Global Sourcing 12/21/10

7. Values aligned with Global Strategy Must develop global leadership and technical talent – cannot rely solely on home country Respect local culture and customer traits All HR, Financial, MIS systems support the Global Strategy Integrate systems and policies as much as possible, but recognize cultural and national differences. Thomas E. Murphy 8 Global Culture 12/21/10

8. Global Core Competencies The Organization Individual leadership Competitiveness Complexity Alignment Change Multiculturalism Learning Cultural sensitivity Negotiation and conflict resolution Encourage creativity Select and develop people Ethical and legal compliance 12/21/10 Thomas E. Murphy 9

9. Access new markets, strategic relationships, M & A opportunities. Access new raw materials or acquire inventory of products to sell. Find lower labor costs? Leverage supply chain 12/21/10 Thomas E. Murphy 10 What’s the Business Strategy?

10. There are some very basic territorial, political, legal, and economic factors to consider. Thomas E. Murphy 11 But . . . 12/21/10

11. Work councils Layoff restrictions Intellectual property rights Taxation of total reward system Financing sources, different capitalization process vis a` vis U.S.A. Risk averse reward systems Publically provided benefits. Thomas E. Murphy 12 Factors: Political and Legal 12/21/10

12. Industry wide union agreements Strong Social Welfare Programs Totally different reward system Less emphasis on litigation Importance of relationships The Tribe 12/21/10 Thomas E. Murphy 13 Factors: Political and Legal

13. Organizational differences between U.S. and EU businesses. Shareholder-based versus bank ownership Subsidization and privatization. The importance of employment standards in EU; EEO in US. Thomas E. Murphy 14 Factors: Political and Legal 12/21/10

14. Economic: High Tax Rates Take-home pay Government subsidies and mandates Less emphasis on results based compensation “Add-ons” -- one month’s pay, bonus, “vesting of benefits,” all of which affect cost of labor. Short-term versus longer term results. Thomas E. Murphy 15 Factors - Economic 12/21/10

15. Vocationally trained work force Education levels Work ethics, team, or individual Labor intensive vs.. technology Dependency Ratio Incentives (extrinsic vs. intrinsic) Work-life balance Thomas E. Murphy 16 Factors – Human Capital 12/21/10

16. How do your values and administrative procedures fit? Power and Distance Individual vs. Collective Risk Tolerance Masculinity Pay relationships between executives and workers Thomas E. Murphy 17 Factors: Culture 12/21/10

17. National government taxes, finances, sets budgets, and distributes health care funds through regional health agencies. All agencies are not for profit There are limited means to effect competition The national government sets standards, plan of benefits, coverage requirement, and the reimbursement levels Thomas E. Murphy 18 Europe – Health Care 12/21/10

18. Less reliance on employer sponsored benefits and widespread acceptance of universal health and retirement plans – financed by employers and taxpayers, or both. Result: basic health care is accessible to all. Thomas E. Murphy 19 And, for our purposes . . . 12/21/10

19. Result: there is more reliance on a national social security retirement income to replace income from work Less reliance on the use of capital markets to fund retirement benefits Thomas E. Murphy 20 And . . 12/21/10

20. How do other countries approach publicly funded health and retirement plans? What impact does this have on business? Does it mean higher taxes? Higher labor costs? What are the approaches employers take with respect to the compensation and benefits of expatriate workers in host countries? Thomas E. Murphy 21 So . . . There are three issues: 12/21/10

21. Thomas E. Murphy 22 Global Benefits 12/21/10

22. In the U.S. families (a) save for their children’s college education costs; (b) save for their own retirement, and (c) must share in some of the expense of their health care. Thomas E. Murphy 23 We should note: 12/21/10

23. These are paid for by the government and financed by individual and business taxes. Thomas E. Murphy 24 In many other countries 12/21/10

24. Long history of providing health care through the government sponsorship or mandates Universal access for all residents The mandated plan should provide comprehensive benefits sufficient to alleviate sickness and suffering. Cost sharing should not impede point of service care Thomas E. Murphy 25 Europe – some general principles 12/21/10

25. If possible, choice of physician should be preserved. Primary care should be the centerpiece of care. This better assures long term health. There should be cross border coordination among EU countries. Plans should assure accountability, efficiency, and quality. Thomas E. Murphy 26 Europe – some general principles 12/21/10

26. National government determines capital expenditures for hospitals and awards for research. Most doctors are private but are reimbursed by the government for services rendered. Some countries employ most doctors as government providers. In most countries, the patient can choose to see a provider outside the system. Thomas E. Murphy 27 Europe – some general principles 12/21/10

27. In such cases, the doctor will be paid directly by the patient or by his private insurance company. In many cases, the national system only reimburses the prescribed payment for certain treatment or service. If the doctor chooses to charge more, the patient or his private, supplemental insurance company must pay the difference. Thomas E. Murphy 28 Europe – some general principles 12/21/10

28. Almost in all cases, the reimbursement is made on a “fee for service” basis. In some countries, the physician might be paid a per capita fee based upon the number of “patients” in his or her region. In many countries, the public health care is administered in hospitals. There are few integrated practices in European countries. The Milan (Lombardia) experiment. Thomas E. Murphy 29 Europe – some general principles 12/21/10

29. In many countries, if the patient wants quicker service, and choice, he pays for them outside of the national plan. R/x care is often included but government uses leverage to reduce prices. Thomas E. Murphy 30 Europe – some general principles 12/21/10

30. In come countries, the health care plan is mandated upon employers to provide. They must choose from several TPAs in their region. The plan of benefits is set by the government. The TPAs are non-profit. For the unemployed, the government subsidizes the acquisition from among the same TPA. See Exhibit Tables 13.1, 13.2 comparing designs and outcomes. Thomas E. Murphy 31 Europe – some general principles 12/21/10

31. Payroll taxes paid by employers and employees The Value Added Tax General tax revenue In few cases, regional tax revenue There is a growing but still limited imposition of POS co-pays by patients Thomas E. Murphy 32 Sources of Benefit Financing (Europe) 12/21/10

32. Thomas E. Murphy 33 Who has the higher labor costs? 12/21/10

33. See: BLS International Wage Survey (3.1, 3.3) Estimates: France, employee earning €3000 per month, pays €350 for health care, and the employer pays €1200 per month. Labor Costs 12/21/10 Thomas E. Murphy 34

34. The budgeting process catches many providers short for the year – result poor or delayed service. The reimbursement levels are too low No market encouragement for research and development Spiraling costs – no limits or barriers to the utilization of health care resources. Efficacy: longevity, infant mortality, costs, survival rates for critical conditions Thomas E. Murphy 35 Some issues - 12/21/10

35. In Japan where there is a European style national health care plan: 50% of the hospitals are bankrupt because of inadequate revenue from the government to cover the burgeoning number of patient services. The average elapsed time for a patient to see a primary physician is 3 minutes. Thomas E. Murphy 36 For example . . . 12/21/10

36. Some good, mandated programs in large cities typically applied to employees among state and collective enterprises or government owned facilities. But, 50% of its urban, and 90% of its rural population (total of 66%) are not covered. About 75% of the population pays for its own health care. In many cases, the cost of services equals one year’s pay. Thomas E. Murphy 37 What about China? 12/21/10

37. The China system is plagued with evidence of corruption (bribes are often paid to get services), long waits, and poor service. New initiatives are under way to reform the system – in some cases using HSA-type accounts. Financing of the existing system is made through employer payroll taxes that are inadequate (7%). Thomas E. Murphy 38 What about China? 12/21/10

38. With respect to financing, in China 66% of the population pay 90% of the total health care costs. Efficacy is below standards: life expectancy, infant mortality are especially a problem Thomas E. Murphy 39 What about China? 12/21/10

39. No mandated health care for private employers. There is no substantial health care insurance industry in China. There is considerable waste in the system, and hospitals, for example, are expected to generate 70% of the operating revenue. Thomas E. Murphy 40 What about China? 12/21/10

40. Thomas E. Murphy 41 Social Security and Retirement 12/21/10

41. Social Security related to work Periods of non-work, however, can be counted for eligibility and benefit amount. All systems (few exceptions) are PAYGO Formula is based on final pay, years of contributions, and age. Employer and employee make contributions Thomas E. Murphy 42 Europe – Social Security 12/21/10

42. Thomas E. Murphy 43 Europe – Social Security-general principles and characteristics 12/21/10

43. There are often several funds that pay retirement – a minimum plan that is paid to everyone who qualifies and the amount is the same. They may also receive a supplemental plan that is calculated based upon his average earnings. (France) The person’s employer may also have contributed to a private plan that will provide benefits. This is not as common as in the U.S. Thomas E. Murphy 44 Europe – Social Security-general principles and characteristics 12/21/10

44. Many Social Security plans are segmented and differentiated by industry. Many countries do have a flat retirement amount that will be paid regardless of earnings. In many European countries, the three pillar concept is applicable: government, employer, and employee are expected to finance retirement. Thomas E. Murphy 45 Europe – Social Security-general principles and characteristics 12/21/10

45. Most plans are PAYGO, but some countries are beginning to invest portion of the revenue in capital markets. Several Eastern European countries have introduced private accounts where part of the payroll tax can be invested by the participant in capital markets. Some European countries have mandate additional, employer sponsored plans with specific design features. Thomas E. Murphy 46 Europe – Social Security-general principles and characteristics 12/21/10

46. Some countries have mandated employer sponsored defined contribution plans as well. Thomas E. Murphy 47 Europe – Social Security-general principles and characteristics 12/21/10

47. People retiring earlier People living longer The Social Security systems are running out of money. Reform: reduce benefits, increase retirement age, increase work years requirement, increase payroll taxes, reduce benefit, make fewer inflation adjustments. Coordination among EU countries. Thomas E. Murphy 48 Europe: so what’s the problem? 12/21/10

48. The current program is in response to the new market economy. There is mandated coverage for about 2% of the population (urban, employed); rural population has no coverage. It is a PAYGO system financed by 28% payroll tax (20% from employer, 8% from employee) There are large numbers of “legacy” employees covered and there are no contributions for many of their service years. Thomas E. Murphy 49 China and retirement? 12/21/10

49. There are some “personal accounts” included in the design. It is a supplement to the pension and grows with added service. The plan is underfunded because of legacy costs. Retirement age is 60 for males and 55 for females. Minimum service requirement: 15 years Base pension pays on average about 20% of final pay. Thomas E. Murphy 50 China and retirement? 12/21/10

50. Benefits are indexed. Plan is available, but not mandated, for foreign, private, and other enterprises in urban areas. The plan does not apply to former workers who are not currently in the system. There are huge differences between pension amounts of government workers and those of other enterprises – gov’t as much as 8 times. Thomas E. Murphy 51 China and retirement? 12/21/10

51. China’s rapid economic rise, and transitioning transition from producer to consumer market. However, it does not have social security (retirement or health care) infrastructure to support its market role and the inherent volatility it brings to the business and labor market. Thomas E. Murphy 52 China and retirement? 12/21/10

52. Transitioned from PAYGO to private accounts in 1981. Financed by payroll contributions and investments in capital markets Each participant has private account representing payroll tax contributions by employer and employee. Each worker contributes 10% of earnings; there is a cap. Thomas E. Murphy 53 Chile and Private Accounts 12/21/10

53. There is a guaranteed floor plan that is paid if the participant’s investments fail. Employer is not obligated but can contribute; there is tax-favored treatment. There are 12 funds to choose from as well as age-based investment guides. Participants at retirement can elect pre-determined withdrawals or an annuity. Thomas E. Murphy 54 Chile and Private Accounts 12/21/10

54. The Chilean plan has high administrative costs. It has generally been regarded as a success. New investment made in the Chilean capital markets. It places investment risks on participants. The system is financially sound. Sweden, 7 eastern European countries, the U.K. and Germany have introduced some form of private accounts. Thomas E. Murphy 55 Chile and Private Accounts 12/21/10

55. What impact do Social Security and Health Care systems have on overall labor costs? Higher labor costs in Western European countries than in the U.S. Direct relationship to higher payroll taxes used to finance such benefits. China is well below western levels. See Table 13.4 Thomas E. Murphy 56 How do labor costs compare? 12/21/10

56. Expatriates What is their pay? What are their benefits?

57. Technology transfer Lack of talent in country Consistent application of company policies Succession plan/Diversity management Direct learning about the country Thomas E. Murphy 58 Expatriates – The Issues 12/21/10

58. The Palestinians (and Israelis) Economic incentives (QIZ) Madaba tour Abe Lincoln essay Career – shirt, tie, government Brainstorming 12/21/10 Thomas E. Murphy 59 Jordan, France, and Italy

59. No meetings outside of the plant No delegation No agenda IBM No accounting or knowledge of costs Auto Accident No addresses Ramadan and off-days. Hugs for Hesham Excuses – Ottomans Conspiracies and mistrust of government – Egypt Air 12/21/10 Thomas E. Murphy 60 More . . .

60. WASTA Egypt Air In the “black.” The Notary and the Germans Driving exam Bulgarian and contract to buy Memorization 12/21/10 Thomas E. Murphy 61 Jordan, France, Italy

61. Jordan, France, and Italy All is in the “Black!’ Family is very important Work, Life Balance Don’t let them wear hats! Women – put your picture on your CV! House builder’s pride Slow food Bi-lingual Entrepreneurial Residency process 12/21/10 Thomas E. Murphy 62

62. Lessons Learned Face is important! Some great values . . . Business is often based upon building relationships – be patient and respectful. Cultural differences often are based upon enmity between ethnic groups. They can torpedo typical business incentives. Bureaucracy is overwhelming – enforcement is not. Tax avoidance is rampant – and one is encouraged to avoid tax compliance. Family takes precedence over government. 12/21/10 Thomas E. Murphy 63

63. Passport Technical Expertise Cultural sensitivity Required experience for promotion - part of the succession plan Thomas E. Murphy 64 Expatriates – Selection 12/21/10

64. Cultural protocols Religion Language Country economics Host country politics Very little done before the assignment Thomas E. Murphy 65 Expatriates - Training 12/21/10

65. What is the goal? What about cost of living? Make-whole policy? (“Balance Sheet”) The host-country policy? (“Market Rate”) Thomas E. Murphy 66 Expatriate Compensation 12/21/10

66. Thomas E. Murphy 67 Ma, dove e come abiterremo? 12/21/10

67. Thomas E. Murphy 68 12/21/10

68. Factors that Affect Design Tax Laws (U.S. and Host Country) Employment and Social Insurance Laws Currency Fluctuations Cost of goods, services, transportation Culture and traditions What about the Benefits Model? Thomas E. Murphy 69 Expatriate Pay 12/21/10

69. Estimated to be 2-to-3 times salary at parent location. Includes COL adjustments, home leave, transportation, housing, education. Must be attractive to entice move. Compensation consistent with company policy. Thomas E. Murphy 70 Expatriate Pay Cost 12/21/10

70. How, and from where, will pay be delivered? In what currency? Evacuation – emergency (political or medical). Working hours and public holidays. International Compensation! Thomas E. Murphy 71 Compensation Details 12/21/10

71. Health Care Temporary living quarters. Rent or buy? Travel expenses. Shipment and storage. Driver’s License, insurance Work Visa Thomas E. Murphy 72 Foreign Assignment Issues 12/21/10

72. Spouse and family accommodations, schools, careers, volunteering, leisure time. Should expatriate continue to participate in parent company benefit plans? Which ones? Thomas E. Murphy 73 Foreign Assignment Issues 12/21/10

73. What do you do about rewards that are U.S. based and results are determined by U.S. operations? What are the advantages and disadvantages of balance sheet vs. host country approaches? Remember: the U.S. considers income of its citizens and residents to be taxable no matter where it is earned! Thomas E. Murphy 74 Expatriates 12/21/10

74. Thomas E. Murphy 75 Approaches to Expatriates 12/21/10 We will make You whole! You will get What they get! Well. . .

75. Advantages Equity between assignments and other expatriates in same country. Facilitates expatriate reentry. Easy to communicate. Disadvantages Disparities among TCNs and HCNs. Can be complex to administer. Very Expensive Thomas E. Murphy 76 Balance Sheet . . . 12/21/10

76. Advantages Equality with HCNs. Simplicity Identify with host country. Equity among different nationalities. Disadvantages Variation between assignments. Variation between expatriates of same nationality in different countries. Thomas E. Murphy 77 Market Rate . . . 12/21/10

77. See: The Milan case (443-447) Let’s analyze the adjustments that would be required. Your apartment is ready : 12/21/10 Thomas E. Murphy 78 Remedy – a series of adjustments!

78. Assignment could result in double taxation by U.S. and host country. Most companies have Tax Equalization Policy –withhold an amount equal to home country of expatriate and company pays the rest. §911 of the IRC = $91,400 (FEI Deduction) What about Social Security taxes? What about Value Added taxes in host country? Thomas E. Murphy 79 Tax Issues 12/21/10

79. Career blockage Essential for promotion Burnout Family issues Technical vs. leadership talent BIG Difficulties on return 12/21/10 Thomas E. Murphy 80 Expatriates - Other Issues

80. Length of assignment Defining “success and failure” Trailing spouses How to establish MBOs or other Performance Management factors, e.g., different accounting, long-term goals, manager’s role, who conducts review? Thomas E. Murphy 81 Other Issues 12/21/10

81. Thomas E. Murphy 82 ExpatriateApproaches Select the best based upon careful research of cross-cultural sensitivity issues. There is no “universal” management style, but there are generic competencies to consider. Provide resources for housing location, spouse “development,” kids education. 12/21/10

82. Some ideas . . . I miss Italy, but I’m . . . Am glad to be back! Provide significant cultural orientation. Make sure expatriates are prepared for trade union issues in the new country. Make a pre-assignment trip. Plan for reentry – avoid the typical problems 12/21/10 Thomas E. Murphy 83