International Compensation

&

Compensation in MNC

Complexity of International Compensation Policies / Challenges in international Compensation

• Management of more activities from a broader perspective

• Greater involvement in the lives of employees and families

• Balance the needs of PCNs, HCNs and TCNs

• Control exposure to financial and political risks

• Increased awareness of and responsiveness to host country and regional influences

• Growing use of outsourced activities and subsequent labour pricing needs

• Balancing centralization and decentralization of incentives, benefits and pensions

• Balancing the need for more accurate and detailed performance metrics

• Manage highly complex local details

• Building a unified, strategic pattern of compensation policies, practices, and values

Design of international compensation / global compensation program

Requires knowledge of

• Employment and taxation law

• Customs, environment, and employment practices

• Currency fluctuations and the effect of inflation

• Special allowances

Facilitate and manage

• global expansion efforts

• labour costs

• internal equity

• effective governance

Key areas

• pay in relation to the market

• short and long-term incentive policies

• consistent processes of job grading and leveling

Objectives of International Compensation

Organizational

• consistent with the overall strategy, structure, and business needs

• attract and retain staff; competitive, incentives for foreign service, tax equalization

• facilitate the cost-effective transfer of international employees

• equitable and easy to administer

Individual

• financial protection in terms of benefits, social security and living costs

• Opportunities for financial advancement through income and/or savings

• housing, education of children and recreation issues

International Compensation Program Components

• base salary

• foreign service inducement/hardship premium

• allowances

• benefits

base salary

primary component of a package of allowances, many of which are directly related to base salary, as well as the basis for in-service benefits and pension contributions

Foreign Service Inducement/ Hardship Premium

Salary premium ( 5-40% of base pay)

• to accept a foreign assignment

• compensation for hardship caused by the transfer

• vary depending on type and length of assignment, hardship, tax consequences, differentials

Must address

• the definition of hardship

• eligibility for the premium

• amount and timing of payment

Allowances

• encourage employees to take international assignments

• to keep employees ‘whole’ relative to home standards

Cost-Of-Living Allowance (COLA)

• payment to compensate for differences in expenditures between the home country and the foreign country (inflation differentials)

• may include payments for housing and utilities, personal income tax, or discretionary items

Housing Allowances

• maintain home-country living standards

• often paid on either an assessed or an actual basis

• financial assistance and/or protection in connection with the sale or leasing of an expatriate's former residence

• other alternatives include company-provided housing, a fixed housing allowance; or an assessment of a portion of income

Home Leave Allowances

• expense of trips back to the home country each year

• purpose is to give expatriates the opportunity to renew family and business ties

Education Allowances

• tuition

• language class tuition

• enrolment fees

• books and supplies

• transportation

• room and board

• uniforms

• local/boarding school or university

Relocation Allowances

Contingent upon tax-equalization policies and practices in both the home and the host countries, include:

• moving, shipping, and storage charges

• temporary living expenses

• subsidies regarding appliance or car purchases

• down payments or lease-related charges.

Spouse Assistance

• offset income lost by an expatriate's spouse as a result of relocating abroad

Tax-Equalized Housing Allowance

• to discourage the purchase of housing and/or to compensate for higher housing costs

Benefits

• national practices vary considerably

• transportability of pension plans, medical coverage, and social security benefits are very difficult to normalize

Issues When Considering Benefits

Whether

• to maintain expatriates in home-country programs, particularly if the firm does not receive a tax deduction for it

• firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage

• expatriates should receive home-country or host-country social security benefits

Approaches to International Compensation

Two main options

Going Rate Approach (Market Rate Approach)

• linked to host country salary structure

Balance Sheet Approach (Build-up Approach)

• linked the home-country the salary structure

Going Rate Approach

Based on local market rates

Relies on survey comparisons among:

• local nationals (HCNs)

• expatriates of same nationality

• expatriates of all nationalities

Compensation based on the selected survey comparison

Base pay and benefits may be supplemented by additional payments for low-pay countries

Advantages and Disadvantages of the Going Rate Approach

Advantages

• equality with local nationals

• simplicity

• identification with host country

• equity amongst different nationalities

Disadvantages

• variation between assignments for same employee

• variation between expatriates of same nationality in different countries

potential re-entry problems

The Balance Sheet Approach

• Basic objective is maintenance of home-country living standard plus financial inducement

• Home-country pay and benefits are the foundations of this approach

• Adjustments to home package to balance additional expenditure in host country

• Financial incentives (expatriate/hardship premium) added to make the package attractive

• Most common system in usage by multinational firms

International Human Resource Management

Three Approaches to IHRM

Cross-cultural management

Examine human behavior within organizations from an international perspective

Comparative HRM and Industrial Relations

Seeks to describe, compare and analyze HRM systems and IR in different countries

HRM in multinational firms

Explore how HRM is practiced in multinationals

The General Field of HR

Major Functions and Activities

o Human resource planning

o Staffing

Recruitment

Selection

Placement

o Performance management

o Training and development

o Compensation (remuneration) and benefits

o Industrial relations

Differences between Domestic HRM and IHRM

More HR activities

The need for a broader perspective

More involvement in employees’ personal lives

Changes in emphasis as the workforce mix of expatriates and locals varies

Risk exposure

Broader external influences

Laurent’s steps to truly international HRM for effective management

1. Recognize that one’s own HRM reflects home cultureassumptions and values.

2. Recognize that one’s own peculiar ways are neither universally better nor worse than others - just different and likely to exhibit strengths and weaknesses, particularly abroad.

3. Recognize that organization’s foreign subsidiaries may prefer other ways to manage people – ways that are neither intrinsically better nor worse, but possibly more effective locally.

4. Headquarters willingness to acknowledge cultural differences and steps to make them discussable and therefore usable.

5. Build shared genuine belief that cross-cultural learning will result in more creative and effective ways of managing people.

International HRM

Staffing/ Recruitment

Multinational corporations (MNC’s) use several types of international managers:

– Locals

– Expatriates

Global Staffing/ recruitment Pressures:

– Candidate selections

– Assignment terms

– Relocation

– Immigration

– Culture and language

– Compensation

– Tax administration

– Handling spouse and dependent matters

Performance Appraisal of International Mangers

Five suggestions for improving the expatriate appraisal process:

Stipulate the assignment’s difficulty level. For example, being an expatriate

manager in China is generally considered more difficult than working in

England, and the appraisal should take such difficulty-level differences into

account.

2. Weight the evaluation more toward the on-site manager’s appraisal than

toward the home-site manager’s distant perceptions of the employee’s

performance.

3. If however (as is usually the case), the home-site manager does the actual

written appraisal, have him or her use a former expatriate from the same

overseas location to provide background advice during the appraisal process.

4. Modify the normal performance criteria used for that particular position to

fit the overseas position and characteristics of that particular locale.

5. Attempt to give the expatriate manager credit for his or her insights into

the functioning of the operation and specifically the interdependencies

of the domestic and foreign operations.

Recruitment and Selection For International Assignment

Recruitment Sources for MNCs / Types of Expatriate

• Home-country nationals

Recruiting manager from the country where is the headquarter of the company

• Host-Country Nationals

– Local managers who are hired by the MNC

• Third-Country Nationals (TCNs)

– Citizens of countries other than the one in which the MNC is headquartered or the one in which the managers are assigned to work by the MNC

– Found in MNCs that have progressed through the initial and middle stages of

internationalization – Advantages of using TCNs

• Require less compensation

• Good working knowledge of the region

• Given home office experience, often can achieve objectives better than other types of managers.

• Offer different perspectives

Selecting International Managers

• Test for traits that predict success in adapting to new environments

• Job knowledge and motivation

• Relational skills

• Flexibility and adaptability

• Extra-cultural openness

• Family situation

Characteristics of global leaders according to the GLOBE Study

• Charismatic/Value Based: captures ability of leaders to inspire, motivate, encourage high performance outcomes from others based on foundation of core values

• Team-oriented: emphasis on effective team building and implementation of common goal among team members

• Participative: extent to which leaders involve others in decisions and decision implementation

• Humane-oriented: comprises supportive and considerate leadership

• Autonomous: independent and individualistic leadership behaviors

• Self-protective: ensures safety and security of individual and group through status enhancement and face-saving