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INTERNATIONALINTERNATIONAL

COMPENSATIONCOMPENSATION


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International Compensation

Defined as the provision ofmonetary and nonmonetary and non--monetarymonetaryrewardsrewards, including base salary, benefits, perquisites,long- and short-term incentives, valued by employees inaccordance with their relative contributions to MNCperformance

Its broad HRM purposepurpose is to attract, retain and motivatethose personnel required throughout the MNC currentlyand in the future

From the perspective of employees, in particular,compensation is one of the most visible aspectscompensation is one of the most visible aspects ofSIHRM


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International Compensation Contingency, resource-based and agency theories offer some insight tointernational compensation

Contingency approachContingency approach suggests there are variables that impact oncompensation policies and practices to make them more or less appropriate andeffective Balance sheet approach and in more recent global models ofinternational compensation to this field where there is a need to considerparticular contingencies or situations such as host country preferences, when

devising and implementing international compensation

ResourceResource--based theorybased theory analyses conditions in which organizations can gainpositions of competitive advantage through having human resources which arevaluable, rare, and difficult to imitate or replace (such as employees withknowledge gained through specific international experience and organizationalexperience)

Principal-agent relationship proposed in Agency theoryAgency theory translates as the MNCHQs-subsidiary relationship, where the HQs is the principal and the subsidiary isthe agency to which work and responsibilities are delegated given that the HQsdoes not have all the unique knowledge of subsidiaries not all decisions in theMNC can be made by HQs and it must depend on the subsidiaries as theiragents, and an agency problem arises if the goals of the HQs and subsidiarymgrs are not aligned


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Variables influencing International Compensation

Strategy


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Internal Variables influencing International

Compensation Strategy Goal orientation

UK-based foam manufacturer Zotefoam, where equality is a keyaspect of HRM in the companys mission, the only perks thatdifferentiate executives from other workers are private healthinsurance and a car allowance MD of the firm sees theinternationalizing firm as one with minimal status differencesbetween 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 orderto compete for the most competent candidates, then the levels ofcompensation might well be higher than if the competitivestrategy is based on, say, the provision of secure employment.


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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 employmentrelationship (level of TU involvement within MNCs)

will result in different international compensation

approaches


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External Variables influencing International


Nationality if the parent country In terms of culturally determined values and attitudes towards

compensation policy and practices local culture influencesinternational compensation strategy through the dominant societalvalues, norms, attitudes and beliefs concerning for eg. bases forcompensation differences (performance, family connections, gender),

degrees of compensation differences between managerial and non-managerial employees, and the propensity for using particular types ofcompensation (pay incentives and benefits)

Labour mkt chs of supply and demand

Education and skill levels, ages and experiences of those in thelabour 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


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External Variables influencing International


Industry type

Evidence from 2 global industries, scientific measuring andmedical instruments suggest that MNCs competing in a globalindustry may be more likely to allocate rewards based oncorporate and regional performance rather than on subsidiary

performance, as favoured by MNCs competing in amultidomestic industry

Different industry sectors also have different norms and practicesfor international compensation (eg. service-sector and hightechnology MNCs have been more likely than manufacturers toincorporate equity-based options in their internationalcompensation 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 ratesacross its locations, as it will risk losing valuable employees tocompetitors


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Compensation of International Staff Transfers


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Expatriate compensation comprises various allowances forinternational relocation and some common allowances are:

Foreign service premiums most common for employees on long-termassignments (over1 yr) as an incentive to take the assignment moreoften paid to PCNs than to TCNs

Hardship in consideration of isolation, crime, natural hazards, politicalviolence, based on govt data upon which rates can be provided byconsulting orgs such as International SOS, a global medical andsecurity 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 homeperiodically during the length of the assignment


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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 thesame std of living that he or she enjoyed at home

This has been most commonly achieved through applying theBalance 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 homecountry stds, and provision for tax equalization or tax protection and areserve of, say, savings, social security and investments

Costs incurred by the international assignee that exceeded equivalentcosts in the home country are met by both the MNC and the assignee

proportional to preserving the assignees home country equivalentpurchasing power

This approach preserves equity between international assignees of thesame nationality and between assignments and is easy to communicate

Also facilitates repatriation but can facilitates disparities between PCNsand TCNs and between them and HCNs and can also be expensive


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Host country and region-based expatriate compensation strategies are thebest-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 countryretirement scheme is the only compensation link with the home country

Suited to long-term assignments where comparisons with home country peersare less relevant to assignees

Some may find it difficult due to nature of taxation and social security reportingrequirements (specially to US expatriates due to strict home country tax andsocial 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 aparticular region

MNCs are beginning to view the 11 countries that have adopted the Euro, or theEurozone as a region for compensation structures

Eg., Portal Software Europe has equalized car allowances and some otherbenefits for employees in 8 of their11 Eurozone bases

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