INTERNATIONAL COMPENSATION

1
INTERNATIONAL COMPENSATION
2
International Compensation

• Defined as the provision of monetary and
  non-monetary rewards, including base salary,
  benefits, perquisites, long- and short-term
  incentives, valued by employees in accordance
  with their relative contributions to MNC
  performance
• Its broad HRM purpose is to attract, retain and
  motivate those personnel required throughout the
  MNC currently and in the future
• From the perspective of employees, in particular,
  compensation is one of the most visible aspects
  of SIHRM

3
International Compensation

• Contingency, resource-based and agency theories
  offer some insight to international compensation
• Contingency approach suggests there are variables
  that impact on compensation policies and
  practices to make them more or less appropriate
  and effective Balance sheet approach and in
  more recent global models of international
  compensation to this field where there is a need
  to consider particular contingencies or
  situations such as host country preferences, when
  devising and implementing international
  compensation
• Resource-based theory analyses conditions in
  which organizations can gain positions of
  competitive advantage through having human
  resources which are valuable, rare, and difficult
  to imitate or replace (such as employees with
  knowledge gained through specific international
  experience and organizational experience)
• Principal-agent relationship proposed in Agency
  theory translates as the MNC HQs-subsidiary
  relationship, where the HQs is the principal and
  the subsidiary is the agency to which work and
  responsibilities are delegated given that the
  HQs does not have all the unique knowledge of
  subsidiaries not all decisions in the MNC can be
  made by HQs and it must depend on the
  subsidiaries as their agents, and an agency
  problem arises if the goals of the HQs and
  subsidiary mgrs are not aligned

4
Variables influencing International Compensation
Strategy
5
Internal Variables influencing International
Compensation Strategy

• Goal orientation
• UK-based foam manufacturer Zotefoam, where
  equality is a key aspect of HRM in the companys
  mission, the only perks that differentiate
  executives from other workers are private health
  insurance and a car allowance MD of the firm
  sees the internationalizing firm as one with
  minimal status differences between levels in the
  org. hierarchy
• Capacity to pay
• Cost constraints on the enterprise
• Competitive strategy
• If for eg., as part of the MNC competitive
  strategy, the IHRM strategy is to be a mkt leader
  in employee compensation in order to compete for
  the most competent candidates, then the levels of
  compensation might well be higher than if the
  competitive strategy is based on, say, the
  provision of secure employment.

6
Internal Variables influencing International
Compensation Strategy

• Organization culture
• It also influences the degree to which employees
  are compensated on the basis of seniority, in
  contrast to personal connections or performance
• Workforce chs.
• Age, education level, qualifications and
  experience, along with workforce tastes and
  preferences, and labour relations factors such as
  nature of employment relationship (level of TU
  involvement within MNCs) will result in different
  international compensation approaches

7
External Variables influencing International
Compensation Strategy

• Nationality if the parent country
• In terms of culturally determined values and
  attitudes towards compensation policy and
  practices local culture influences
  international compensation strategy through the
  dominant societal values, norms, attitudes and
  beliefs concerning for eg. bases for compensation
  differences (performance, family connections,
  gender), degrees of compensation differences
  between managerial and non-managerial employees,
  and the propensity for using particular types of
  compensation (pay incentives and benefits)
• Labour mkt chs of supply and demand
• Education and skill levels, ages and experiences
  of those in the labour mkt
• Role of home and host country govts in labour
  relations
• Affect the level of govt. regulation of the
  labour mkt and employment relationship, including
  compensation of the workforce

8
External Variables influencing International
Compensation Strategy

• Industry type
• Evidence from 2 global industries, scientific
  measuring and medical instruments suggest that
  MNCs competing in a global industry may be more
  likely to allocate rewards based on corporate and
  regional performance rather than on subsidiary
  performance, as favoured by MNCs competing in a
  multidomestic industry
• Different industry sectors also have different
  norms and practices for international
  compensation (eg. service-sector and high
  technology MNCs have been more likely than
  manufacturers to incorporate equity-based options
  in their international compensation strategies
• Competitors strategies
• Even if the MNC is not seeking to be a mkt leader
  in international compensation, it generally
  cannot afford to fall behind mkt rates across its
  locations, as it will risk losing valuable
  employees to competitors

9
Compensation of International Staff Transfers
10
Compensation of International Staff Transfers

• Expatriate compensation comprises various
  allowances for international relocation and some
  common allowances are
• Foreign service premiums most common for
  employees on long-term assignments (over 1 yr) as
  an incentive to take the assignment more often
  paid to PCNs than to TCNs
• Hardship in consideration of isolation, crime,
  natural hazards, political violence, based on
  govt data upon which rates can be provided by
  consulting orgs such as International SOS, a
  global medical and security assistance company
• Relocation compensation for costs such as
  transport, storage, temporary accommodation,
  purchases of appliances and vehicles, associated
  with moving to the host country
• Education for assignees children
• Home leave provision for the assignee and
  family to return home periodically during the
  length of the assignment

11
Compensation of International Staff Transfers

• Basis for expatriate compensation is maintaining
  relatives with parent country national colleagues
  and preserving parity of purchasing power, viz
  ensuring that the expatriate maintains the same
  std of living that he or she enjoyed at home
• This has been most commonly achieved through
  applying the Balance Sheet Approach (BSA)
• BSA (Most common system of choice among MNCs)
• Comprises the payment of base salary consistent
  with home country rates, plus cost of living and
  housing allowances reflecting home country stds,
  and provision for tax equalization or tax
  protection and a reserve of, say, savings, social
  security and investments
• Costs incurred by the international assignee that
  exceeded equivalent costs in the home country are
  met by both the MNC and the assignee proportional
  to preserving the assignees home country
  equivalent purchasing power
• This approach preserves equity between
  international assignees of the same nationality
  and between assignments and is easy to
  communicate
• Also facilitates repatriation but can facilitates
  disparities between PCNs and TCNs and between
  them and HCNs and can also be expensive

12
Compensation of International Staff Transfers

• Host country and region-based expatriate
  compensation strategies are the best-known
  alternatives to BSA (often referred to as
  localized approaches)
• Host country compensation
• Places higher priority on local equity than on
  home country equity, compensating the assignee to
  host country stds, and often participation in a
  home country retirement scheme is the only
  compensation link with the home country
• Suited to long-term assignments where comparisons
  with home country peers are less relevant to
  assignees
• Some may find it difficult due to nature of
  taxation and social security reporting
  requirements (specially to US expatriates due to
  strict home country tax and social security
  reporting obligations)
• Regional approach
• Attempts to capitalize on apparent similarities
  in culture, compensation and taxes, for eg. by
  adopting the same compensation for all countries
  within a particular region
• MNCs are beginning to view the 11 countries that
  have adopted the Euro, or the Eurozone as a
  region for compensation structures
• Eg., Portal Software Europe has equalized car
  allowances and some other benefits for employees
  in 8 of their 11 Eurozone bases