Montreal Managing Goods

Information about Montreal Managing Goods

Published on April 3, 2008

Author: Calvin1

Source: authorstream.com

Content

CERC Eastern Region:  CERC Eastern Region Breakfast Meeting June 7, 2006 Slide2:  MANAGING THE EFFECTIVENESS OF GOODS & SERVICES AND PAY DELIVERY METHODS Lynne Molnar ORC Worldwide Copyright © 2005 by ORC Worldwide Agenda:  Agenda Workshop Objectives/Results 2. Key Expatriate Policy Components – Overview 3. Compensation Approaches 4. Calculating Goods and Services – pricings and FX Pay Delivery Options Communicating with Expatriates Review of Seminar Objectives/Questions Workshop Objectives/Results:  Workshop Objectives/Results Explore complex issues associated with goods and services allowances: foreign exchange rate fluctuations; home and host country pricings; employee communications Provide a broad understanding and a practical framework for delivering expatriate pay Key Policy Components:  Key Policy Components Compensation Elements During Assignment Base salary Goods and services differential Housing differential Income tax policies Foreign service premium Hardship allowance/danger pay Methods of payment Pre-assignment Policies International assignment authorization Location evaluation Shipment and storage of household goods Home-country housing Temporary living expenses prior to departure Travel expenses Pets Language and cross-cultural courses Physical examination/medical expenses Key Policy Components (cont.):  Key Policy Components (cont.) General Policies During Assignment Temporary living expenses upon arrival Relocation allowances Education allowances Benefit plans Working hours and holidays Home leave Automobile policies Club membership Business conduct Emergencies Security and emergency evacuation Personal loss Replacement of household articles Marital separation and divorce Overseas home ownership Rest and relaxation leave Repatriation Repatriation and reassignment Pre-repatriation trip Temporary living expenses upon return Settlement allowance Return travel expenses Return shipment of household goods Letter of understanding Letter of understanding Compensation Approaches:  Compensation Approaches Balance Sheet Headquarters Home Better of home or host Short-term assignments Localization with intent to repatriate Permanent localization Hybrid approaches Balance Sheet:  Balance Sheet Expatriates kept on same base salary structure as peers at home Series of allowances and differentials to ensure that expatriates neither gain nor lose financially while assigned abroad. Typically covered are: Goods & Services Housing Income Taxes Incentives Premiums Hardship The Balance Sheet:  The Balance Sheet Income Taxes Goods & Services Housing Goods & Services Goods & Services Goods & Services Housing Housing Housing Income Taxes Income Taxes Income Taxes Premiums Home-Country Salary Assignment-Location Cost Assignment-Location Costs Paid by Company and From Salary Home-Country Equivalent Purchasing Power Reserve Reserve Reserve Reserve Goods & Services: Frequently Asked Questions:  Goods & Services: Frequently Asked Questions How is the home-country spendable calculated? Do the market basket pricings consider exchange rates? What is a goods and services index? How do exchange rate fluctuations affect the goods & services allowance? How does a split-pay system work? Why should the goods and services allowance be paid in local currency? Goods and Services Spendable Income:  Goods and Services Spendable Income Home-country spendable income The amount that a typical individual or family spends on goods & services at home It varies by Salary level or income Family size Derivation of spendable Government consumer income and expenditures data (i.e., Statistics Canada) Montreal Income and Expenditures (Annual Salary C$79,500; Family 3):  Expenditure Percent of Amount Income Reserve (savings, 6% C$4,770 education, insurance contributions, investments) Tax and national 30% C$23,850 insurance Housing 16% C$12,720 Goods and Services 48% C$38,160 Total 100% C$79,500 Source: Canada National Expenditure Profile 2006 Montreal Income and Expenditures (Annual Salary C$79,500; Family 3) The Composition of Goods & Services:  The Composition of Goods & Services Food at Home (meat, fish, dairy, groceries, fruits & vegetables) Tobacco and Alcohol Personal Care Furnishings & Household Operations Clothing Medical Recreation Transportation (excluding auto purchase) Domestic Service Food Away from Home Income Taxes Goods & Services Housing Reserve DEFINITION OF “WEIGHTS”:  DEFINITION OF “WEIGHTS” A weighting (or “weight”) is the percentage of income spent on an item It reflects its relative importance within its category. Comparison of Weights:  Category Canada UK US Japan Food at home meat, fish, dairy 8.5 5.9 6.7 13.1 groceries 7.5 4.9 8.0 12.9 fruit & vegetables 4.2 3.5 3.0 7.2 Tobacco & alcohol 5.9 7.9 2.9 2.5 Personal care 4.3 3.6 4.8 4.3 Furnishings & household 14.1 16.6 10.5 10.6 Clothing 9.7 9.7 10.1 8.5 Medical care 5.6 2.4 6.2 4.5 Recreation 14.4 20.0 13.2 15.8 Private transportation 15.0 12.5 19.1 8.1 Public transportation 2.6 3.1 2.4 4.4 Domestic service 1.6 1.3 2.7 0.8 Food away from home 6.6 8.6 10.4 7.3 Total 100.0 100.0 100.0 100.0 Comparison of Weights Makeup of Categories Canada Item Weightings:  Makeup of Categories Canada Item Weightings Category: Fruits & Vegetables Weight (4.2%) Item Market Basket:  Market Basket Measures costs of goods & services in the home country and the marketplace of the host city More than 700 prices for over 120 items Selection criteria Representativeness Availability Usefulness for expatriates Prices collected at two retail outlets Multiple brands priced ORC Tables – Update Schedule:  ORC Tables – Update Schedule Standard updates – 4 times a year 2x pricing (includes currency update) 2x interim – FX updates Currency fluctuations +/- 6% over two consecutive weeks +/- 3% over four consecutive weeks Extraordinary economic conditions, i.e., Zimbabwe Sample Index Calculation Montreal to Mexico City Exchange Rate: C$1.00=6.4645 Mexican Pesos:  1 liter Milk 25 1.79 10.02 1.55 .86 22 1 liter Gasoline 20 2.32 21.95 3.39 1.46 29 300 grams Toothpaste 20 1.44 19.98 3.09 2.15 43 Man’s Shirt 15 55.91 589.00 91.03 1.63 25 Tennis Balls 20 4.76 43.02 6.65 1.40 28 A Weight B Canada Price C$ C Mexico Price Mex$ C/FX*=D Mexico Price in C$ D/B=E Price Ratio AxE Index Component Total Index = 147 Sample Index Calculation Montreal to Mexico City Exchange Rate: C$1.00=6.4645 Mexican Pesos Computing Goods and Services Differentials:  Computing Goods and Services Differentials Formula Goods and Services Index -100 x Spendable = G&S Differential 100 Assumption Monthly income C$10,000 Family size 4 Spendable C$4,204 Index 147 Calculation 147-100 x C$4,204 = C$1,976 G&S Differential 100 Goods and Services:  Goods and Services Goods & Services Income Taxes Goods & Services Housing Home-Country Salary Expatriate Compensation Goods & Services Differential Host- Location Spendable Goods & Services } = Additional Costs Paid by Company Reserve Host-Country Spendable:  Host-Country Spendable (Home-Country Spendable + Differential) x Exchange Rate = Total Assignment Location Spendable Income C$ 4,204 + C$1,976 = C$ 6,180 x 6.4645 = 39,951 Mexican Pesos PAY DELIVERY :  PAY DELIVERY How should these be paid? Base Salary Bonus Premiums (international/mobility; hardship; danger) Home Property Management Home Housing Norm Host Rent and Utilities Home Income Taxes Host Income Taxes Goods & Services Allowance Automobile Allowance Educational Assistance Home Leave Transportation Rest & Relaxation Leave Pay Delivery-All Compensation Three Alternatives:  Pay Delivery-All Compensation Three Alternatives Pay total amount in home-country currency Pay total amount abroad in local currency Split pay between home and assignment-country currency Option #1 -Total Payment at Home:  Option #1 -Total Payment at Home Advantages: Ease of administration Payment in home-country currency to employee’s home bank account Centralized payroll control Expatriate decides amount and timing of remittances Centralized income reporting for tax purposes Option #1 - Total Payment at Home:  Option #1 - Total Payment at Home Disadvantages: Differing local currency amount that can be purchased at the time of remittance Exchange rate fluctuations Burden of money transfer Option #2 - Total Payment Abroad in Local Currency:  Option #2 - Total Payment Abroad in Local Currency Advantages: Consolidated income and expenditures Centralization for tax reporting purposes Local currency remains constant Employee’s cash flow management Option #2 - Total Payment Abroad in Local Currency:  Option #2 - Total Payment Abroad in Local Currency Disadvantages: Guarantee required for transfer of some portion of expatriate pay to home country May encounter heightened employee resistance Employee’s ongoing home-currency obligations Currency fluctuations Split-Pay Method:  Goods & Services Housing Income Taxes Goods & Services Housing Paid in Assignment Location Currency Elements of Expatriate Compensation Paid at Home in Home-Country Currency Paid by Company to Tax Authorities Premiums & Incentives Premiums & Incentives Split-Pay Method = Additional Costs Paid by Company A. Via wire transfer B. Via local payroll Reserve Reserve Option #3 - Split-Pay Method:  Option #3 - Split-Pay Method Advantages: Stable number of local currency units (equal to assignment-location spendable) Stable number of home-country currency units (reserve and incentives) Neutralized effect of foreign currency fluctuation Adjustment only when new pricing study is released Option #3 - Split-Pay Method:  Option #3 - Split-Pay Method Disadvantages: Collection of income for tax reporting purposes is decentralized Employee must manage cash flow more carefully SPLIT-PAY EXAMPLE :  SPLIT-PAY EXAMPLE How does your company typically deliver expatriate remuneration?:  N= 432 North America 46% Pays entirely in home currency 7 Pays entirely in host-country currency 1 Pays in third-country currency 38 Splits pay between home- and host- country currencies 14 Handles on a case-by-case basis Source: ORC’s Worldwide Survey of International Assignment Policies and Practices How does your company typically deliver expatriate remuneration? How does your company determine split pay?:  N= 140 North America 51% Splits according to expatriate’s wishes 15 Splits based on consultants’ recommendations 21 Splits according to company policy 11 Splits based on tax considerations Source: ORC’s Worldwide Survey of International Assignment Policies and Practices How does your company determine split pay? Importance of Effective Expatriate Communication:  Importance of Effective Expatriate Communication Complete understanding of overall corporate compensation policy Mechanism to ensure dialog between expatriates and international HR management Complete understanding of differences due to international assignments Practical application to answer FAQs Frequently Asked Questions Example: Goods & Services :  Frequently Asked Questions Example: Goods & Services How do foreign exchange rate changes affect my goods and services differential (COLA)? Slide37:  1.A. If the local currency weakens against the home currency, the index will…? a. Go up to reflect the increase in value of the home currency b. Go down, because the expatriate’s home currency goes further in the host location c. Remain unchanged, because we are only concerned with prices in host-location currency Local Currency Weakening:  Current Situation: Exchange Rate S$5:C$1.00 Index: 120 Monthly Spendable Income: C$5,000 C$ S$ Spendable C$5,000 S$25,000 G&S Differential 1,000 5,000 Total C$6,000 S$30,000 Local Currency Weakening Local Currency Weakening (cont.):  Current Situation: Exchange Rate S$5:C$1.00 Index: 120 Monthly Spendable Income: C$5,000 C$ S$ Spendable C$5,000 S$25,000 G&S Differential 1,000 5,000 Total C$6,000 S$30,000 Rate Changes to: S$6:C$1.00 Calculation of new index: Old FX x Old Index = New Index New FX 5/6 X 120 = 100 Local Currency Weakening (cont.) Local Currency Weakening (cont.):  Former Situation: Exchange Rate S$5:C$1.00 Index: 120 Monthly Spendable Income: C$5,000 C$ S$ Spendable C$5,000 S$25,000 G&S Differential 1,000 5,000 Total C$6,000 S$30,000 Rate Changes to: S$6:C$1.00 Calculation of new index: 5/6 x120 = 100 New Situation: Spendable C$5,000 S$30,000 G&S Differential -0- -0- Total C$5,000 S$30,000 Local Currency Weakening (cont.) Slide41:  1.B. If the local currency strengthens against the home currency, the index will…? a. Go down to reflect the decrease in value of the home currency b. Go up, because the expatriate’s home currency needs to go further in the host location c. Remain unchanged, because we are only concerned with prices in host-location currency Local Currency Strengthening:  Current Situation: Exchange Rate S$5:C$1.00 Index: 120 Monthly Spendable Income: C$5,000 C$ S$ Spendable C$5,000 S$25,000 G&S Differential 1,000 5,000 Total C$6,000 S$30,000 Local Currency Strengthening Local Currency Strengthening:  Current Situation: Exchange Rate S$5:C$1.00 Index: 120 Monthly Spendable Income: C$5,000 C$ S$ Spendable C$5,000 S$25,000 G&S Differential 1,000 5,000 Total C$6,000 S$30,000 Rate Changes to: S$4:C$1.00 Calculation of new index: Old FX x Old Index = New Index New FX 5/4 X 120 = 150 Local Currency Strengthening Local Currency Strengthening (cont.):  Former Situation: Exchange Rate S$5:C$1.00 Index: 120 Monthly Spendable Income: C$5,000 C$ S$ Spendable C$5,000 S$25,000 G&S Differential 1,000 5,000 Total C$6,000 S$30,000 Rate Changes to: S$4:C$1.00 Calculation of new index: 5/4 x120 = 150 Spendable C$5,000 S$20,000 G&S Differential 2,500 10,000 Total C$7,500 S$30,000 Local Currency Strengthening (cont.) Impact of Exchange Rate Fluctuations:  Home Currency Appreciates: C$ buys more S$ = lower index = lower differential = same host total Home Currency Depreciates: C$ buys less S$ = higher index = higher differential = same host total Impact of Exchange Rate Fluctuations Currency updates will affect the differential, but not the host total The value of the home currency changes How much host currency will my dollar buy? Frequently Asked Questions (cont.):  Frequently Asked Questions (cont.) 2. How can my differential go down when inflation here is going up? Reason 1: Home inflation is increasing faster than host inflation. Reason 2: Devaluation Effects of Devaluation and Inflation:  Effects of Devaluation and Inflation Effects of Devaluation and Inflation:  Effects of Devaluation and Inflation Effects of Devaluation and Inflation:  Effects of Devaluation and Inflation FX Rate Index Start - up S$4:C$1 125 Currency Update S$5:C$1 100 Pricing Update Formula for New Index Old FX Rate x New FX Rate Old = Index New 4 x 125 = 100 Index 5 Spendable C$ Differential C$2,000 500 C$2,000 - 0 - C$2,50 0 @4 C$2,000 @5 Total Assignment Spendable S$10,000 S$10,000 Effects of Devaluation and Inflation:  Effects of Devaluation and Inflation FX Rate Index Start - up S$4: C $1 125 Currency Update S$5: C $1 100 Pricing Update S$5: C $1 115 Formula for New Index Old FX Rate x New FX Rate Old = Index New 4 x 125 = 100 Index 5 Spendable C $ Differential C $2,000 500 C $2 ,000 - 0 - C $2,000 300 C $2,500 @4 C $2,000 @5 C $2,300 @5 Total Assignment Spendable S$10,000 S$10,000 S$11,500 Review of Workshop Objectives and Discussion Questions:  Review of Workshop Objectives and Discussion Questions

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