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COMPENSATION PRACTICES OF MULTINATIONAL
COORPORATIONS AND STRATEGIC COMPENSATION SYSTEMS
Compensation
Compensation is the Human Resource Management functions that
deal with every type of reward that
individuals receive in return for performing organizational
task. It is basically an exchange of
relationships. Employees exchange their labor for financial and
nonfinancial rewards. Financial
compensation is both direct and indirect. From the employees
point of view, pay is a necessity of life.
The compensation received from work is one of the chief reasons
people seek employment. Pay is the
means by which people provide for their own and their families
needs. Compensation is one of the
most important HRM functions for the employer too. Compensation
often equals 50 percent of the cash
flow of an organization and for some service organization it is
even larger percentage.
STRATEGIC COMPENSATION: THE THEORY
Rationalism As noted, espoused theories of strategic
compensation are all predicated on the notion of
strategic choice. Choice in the strategic sense involves
decision-makers selecting those compensation
strategies and systems that are judged to be optimal through
rational deliberation. Weber, in his classictreatise on bureaucracy
and authority, distinguished between two forms of rationality
necessary as
preconditions of ideal type bureaucracies (Weber, 1924).
Formative rationality was achieved when the
best means to a given ends, whatever that may be, were chosen.
Referring to the ends themselves,
substantive rationality was achieved when the purpose itself was
rational (ibid). In the language of
contemporary organisational behaviour, we might equate formative
rationality with organisational
processes and substantive rationality with strategic purpose.
The notion of the ideal type bureaucracy
and optimal strategic compensation investments share a lot in
common. Both emphasise management
exercising rational choice over the ends, and the means through
which those ends are achieved as the
route to economic maximisation in any given situation. In the
context of strategic compensation,
rationality might therefore be thought of as (a) the
organisational behaviour . Managers choose
compensation strategies and dictate a path of action, whilst
removed from the process of
implementation. The parallel often drawn is that of a general
directing the course of battle from atop a
hill, but not personally taking up arms in combat. The
presumption is that managerial decree equals
corporate action. The organisation is in mission, design and
performance, because it has beenchosen to
be so by management .Key to the rationalist argument is the
assumption that causal conditions
preceding choice (for example, deterministic pressures emanating
from the environment) are not, of
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themselves, sufficient to produce that outcome (de Rond and
Thietart, 2004). There exists anarray of
potential choices within any given situation, each with merits
and disadvantages and,therefore, more or
less attractive as a result. In the language of the rationalist,
the process of differentiating between
options is one of preference ordering, and it is the ability to
discernthat which is most preferable, or
optimal, and exercise the best choice accordingly, that renders
the decision maker as rational. In the
context of compensation determination,selecting the optimal
means of supporting the achievement of
corporate goals is using compensation strategically (Lawler,
1995). The presumption of managerial
ability to choose compensation strategies and practices that
result in predicted positive outcomes is a
core belief of the prescriptive literature on strategic
compensation. Simplistically, the manager, as
decision maker, reigns supreme. 6 of 37In a related vein, de
Rond and Thietart (2007) note that the
libertarian viewpoint on choice and free will is relevant for
contemporary strategic management,
because it provides a justification for the belief that we have
choices available and that we are free to
deliberate rationally over our choices. Similarly, the
rationalist viewpoint promotes individuals'
responsibilities, and accountability for choices made and
actions pursued, precisely because ofthe ability
and freedom to choose. However, if the action determined is
beyond the control of the individual, then
individuals cannot be truly held accountable for the resultant
success or failure, and vice versa. This is
consistent with the current emphasis placed upon the
contribution of leadership and their
accountability for corporate performance
Compensation in a global contextIn order to understand
compensation within an international context it is necessary, first
of all,
to recognize the existing differences and similarities between
the various contexts in which the
company operates, and then be in a position to handle such
differences appropriately.It believe
that employee compensation design hinges on the variations
presented by four key factors
institutional, economic, organizational and individual. The
changes be they greater or smaller
that these factors impose in the different countries will be
reflected in the changes that theorganization may have to undertake
when designing different compensation systems in
the different territories in which it works.Each factor is made
up of a set of subfactors. The
institutional factors are determined in the main by political
structures and cultural traditions
along with social contracts and trade union power. Business
organizations are also of influence.
The economic factors are integrated in the existing level of
competitiveness and the degree of
market development, the differences in ownership structures of
the organizations and the
characteristics of the tax systems. The organizational factors
which may influence
compensation design are related to the degree of autonomy
enjoyed by the employees, the
level of technology and innovation, and strategic aims. Finally,
the individual factors refer to
aspects connected with employees of international firms:
demographic characteristics, level ofknowledge and skills,
attitudes, motivations and preferences. Studies on compensation
carried
out at a local level (a single country) have analyzed almost all
the factors. However, when the
analysis is extended to the international sphere some factors
assume much greater importance
and their analysis requires special attention.It consider that a
compensation analysis from a
global perspective needs to focus primarily on five of the
factors/subfactors: (1) social
contracts; (2) trade unions; (3) capital markets and ownership
structure; (4) management
