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NUANCES IN INTERNATIONAL

COMPENSATION

Akshay Nambiar
Roll No – 10
Exec-PGDM (13-14)
Objectives of Compensation
• International Compensation System is understood
as provision of monetary and nonmonetary rewards
including Base Salary, Benefits, Perquisites, long
and short term incentives in accordance with their
relative contribution to performance.

• Attract Individuals who are competent and


interested in Foreign assignments.

• Facilitate movements of Expatriates from one


subsidiary to another, from one home country to
subsidiaries, from subsidiaries back to home country
• Consistent pay levels at Headquarters, Domestic
affiliates, and Foreign subsidiaries.

• Be Cost effective by minimizing unnecessary


expenses.

• Be consistent with the overall strategy, structure


and Business needs.
Compensation Philosophy
• Is set of values and beliefs that an organization has with
regards to monetary and nonmonetary benefits payable
to employees.

• Many MNCs say no formal compensation philosophy but


whatever they are practicing from a long period is their
compensation philosophy.

• Difference in Compensation philosophies in various


organizations
Some-Extensive use of Incentives
Some-Apply to a narrow group of Employees who are
believed to contribute directly to bottom line
Some-at market average, or at highest levels
Some-Generous to super performers
Any Compensation philosophy should cover
following aspects:
• What are the goals of the Organization.

• What % of compensation linked to


Individual/unit performance and what
percentage linked to Base Salary

• What role of Performance Management in


distributing Compensation

• How much relative to Market


International Compensation
• Contingency, and resource-based 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)
Variables influencing International
Compensation Strategy
Internal Variables influencing International
Compensation Strategy:
• Goal orientation
▫ UK-based foam manufacturer Zotefoam, where equality is a key
aspect of HRM in the company’s 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.
• 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
▫ 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
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
• 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
Elements
• Base pay- are the wages or Salaries. Employee receives 90%
to 100% of Cash compensation and 2/3rd of total
compensation from Base pay.

• Variable Pay-Variable pay plans are Organization Systems


for sharing the economic benefits improved productivity, cost
reductions, quality and overall business performance.

• Fringe benefits-Highly influenced by Legal requirements.

• Compensation administration-includes a collection of


activities required to sustain the effectiveness of a
compensation strategy. Issues like labour marketing
surveying, PM, Skill Certification, Peer review come under
this umbrella.
Components of International
Compensation
• BASE SALARY.
• INCENTIVES.
• ALLOWANCES.
• FOREIGN SERVICE/HARDSHIP PREMIUM.
• BENEFITS.
• TAXES.
• LONG TERM BENEFITS.
• Exhaustive checklist used by organizations
either implicitly or explicitly in implementing
the Compensation strategy.

1 Base Pay Delivery


Methods of Delivery Job Based vs Individual based

No of Levels
Structure of Levels
Pricing strategies
Adjustment method
Weighing of individual performance
Organization performance or Variable pay
2 Role in Total Compensation strategy

Structures
Measures
Targets
Tolerance for pay at Risk
Risk reward rates
Use of Non monetary rewards
Individual Performance recognition

3 Fringe Benefits

Usually determined at Corporate levels

Tie to Business and HR objectives

Coverage

Cost

Communication(Purpose, coverage, values)


4 Compensation Administration

Stakeholder role in Compensation administration

Performance management and evaluation

Shift differentials

Attendance policies

Role of Seniority
5 Employee Inputs and Preferences

Perception of External and Internal pay equity

Pay delivery benefits

Form(cash, gainsharing, benefits)

Methods

Trust in Management
6 Business and Operating Units
Operations and manufacturing Strategy
Sales development strategy
% of Compensation costs to total
product/service costs
% of Compensation costs to controllable
product/service cost
Existing markets/products
Potential markets/products
Anticipated volume

7 Industry and Labor market Practices and trends


Availability of Quality of Workforce
Industry Practices, Retention of workforce
Retention of Key contributors
Wage/Sal levels and movements
Wage/Sal delivery charges
8 Compensation Philosophy and Objectives
How much emphasis should be placed on rewards to drive organization
What issues are to be driven by compensation as opposed to mgmt
practices
Market definition
Method of Delivery
Target position in labor market
Relationship within the company to selection and retention
% of Workforce eligible for Bonus
Components of International
Compensation

Taxes
Salary

Incentives Int.
Benefits
Comp.

Allowances Long term


benefits
Base salary
• Base on which other elements are built.

• Foundation block for International Compensation, whether


the is Employee is a PCN or HCN
Incentives
• MNCs are designing special incentive program for keeping
Expatriates motivated.

• Many MNCs have dropped-Ongoing premium for foreign


assignments and replaced it by One time lump sum premium. Ex In
1990- 60% MNCs used ongoing premiums for foreign assignments
and now 50%.

• MNCs are preferring One time premiums to Periodic Salaries. Ex-


Yahoo. Com dropped CEO salary to 1million dollars but he is made
entitled to Bonus in the form of fully vested stock option up to I
million shares/year

• Two types of Bonus. Referral bonus and Retention Bonus


• Referral Bonus- Popular way of bringing in new talent by
employee(popular in Technical jobs, Least likely in sales
Representatives)
• Retention Bonus-To retain employees in IT, BPO, Service
Industry
The Primary Goal of Retention Bonus

Building Long term Organizational Continuity


Retain Employees during difficult times
Retain employees during Organisational structuring
Others
Retain employees during Mand A

11%
33%
17%

18%
21%
Calculation of Retention Bonus

2%

8%
Flat Dollar
Amount
Percent of Baase
Pay
30%
Others
60%
Formula based
on Time
Allowances
Allowance is an inevitable feature of International
Compensation.

• Cost of living Allowance.


• Spouse Allowance.
• Housing Allowance.
• Home leave Allowance.
• Education Allowance.
Cost of Spouse Housing Home Education Relocatio
living Allowanc allowance Leave allowance n
Allowanc e Allowanc allowance
e e
An Help guard Either on Facilitate Expatriates Moving,
adjustment against an assessed an children. Shipping
for income lost or an actual expatriate The item and storage
differences by basis. to visit his covered are charges,
in the cost Expatriate’s These are or her tuition, temporary
of living trailing often home language living
between spouse discussed country at tuition, expenses,
Home on an case least once a enrollment Subsidiarie
country to case year fees, books, s regarding
and basis, but transportat appliance,
Foreign formal ion, car
assignment policies uniforms purchase,
country should be Some time Lease
there also given related
to wife for charges
further
studies to
establish
herself
Foreign service/ Hardship premium
• Inducement in the form of salary premium to
accept an overseas assignment depends on type
of assignment, actual Hardship and length of
Hardship.

• Certain countries- hostile, sometimes killed


(paid 2to 3 times)
Benefits
• Entertainment
• Festival celebrations
• Gifts
• Sponsorship of children
• Employee welfare
• Conference attendance
• Conveyance, tour and lodging
• Hotel board and lodging
• Vehicles
• Telephones
• Health and Life insurance
• Benefits that have a prominence place in any
Compensation strategy

1. Health and Life Insurance- Purchased by employees at group rates


which are
typically lower than individual rates

2 .Vocation/Holidays/ Rest Breaks- Release fatigue, improve


productivity when
they actually work.

3. Retirement/ Health Care/ Disability Benefits- allows workers to be


more productive by freeing them of concerns about medical and
retirement cost
Key issues related with Benefit
program in International Compensation
• Whether Expatriates in the Home country
benefit program or Host Country benefit
program.

• Whether Host country legislations or Home


country with regards to termination.

• Which country should pay for the Benefits.


International Taxation
• Tax Equalization- Organizations withhold an
amt equal to Home Country tax obligation of the
PCN, and pay all taxes in the host country. Tax
protection- employees pays up to the amt of
taxes he or she would pay on remuneration in
the home country.

• Adhoc Approach- Each Expatriate is handled


differently.
• Laisses Faire- Left on their own to solve their
taxation problems
Compensation packages design
• Going rate approach-Expatriates are paid according
to Host Salary structures.

• Balance Sheet Approach-Equate or balance


Expatriate’s purchasing power in Host country with
purchasing power in Home country

• Regional System-Everyone going to one area falls


under one category.

• International Citizen’s approach-International


basket of goods is used for all expatriates(food,
clothing, housing)

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