International Compensation Meaning, Objectives, Components of International Compensation Program

Compensation is the remuneration received by an employee in returns of their contribution to the organization. Compensation is extrinsic reward for an employee. Extrinsic rewards include praise from a superior, salary, employee benefits, career progression etc.

International compensation refers to all forms of financial returns and tangible benefits that employees of an international organization receive from their employer in exchange for providing their labor and commitment.

Almost all the employees accept jobs in MNC’s take-up assignments in various countries, & take-up the risk, bear inconveniences & discomforts in foreign assignments mostly based on the compensation package.

Objectives:

• Recruit & Retain Competent Employees
• Consistency & Equity in Pay
• Employability in a Cost Effective
• Financial Protection to Employees
• Organizational Ability to Pay
• Comparative & Comparable
• Benefit Management
• Improve Organizational Performance

Internal Variables Affecting 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 market 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 characteristics: Age, education level, qualifications and experience, along with workforce tastes and preferences, and labor relations factors such as nature of employment relationship (level of TU involvement within MNCs) will result in different international compensation approaches.

External Variables Affecting International Compensation Strategy

Nationality of 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).

Labor market characteristics of supply and demand: Education and skill levels, ages and experiences of those in the labor market.

Role of home and host country government in labor relations affect the level of govt. regulation of the labor market and employment relationship, including compensation of the workforce.

Industry type

• Evidence from two 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 favored by MNCs competing in a multi-domestic 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 market leader in international compensation, it generally cannot afford to fall behind market rates across its locations, as it will risk losing valuable employees to competitors.

Objectives

The objectives of compensation package of MNCs are presented in Figure below MNCs manage the compensation and benefits with the following objectives.

• Consistency and Equity: MNCs design the salary and benefits package to secure consistency between pay and performance and equity among employees of different nationalities and categories, and employees of subsidiaries and parent company.
• Recruitment and Retention of suitable Employees: MNCs design and practice compensation and benefits in order to attract, and retain suitable employees in terms of job efficiency and cultural adaptability.
• Facilitate Mobility: MNCs design pay package in order to enable the employees to move from the parent company to foreign subsidiaries and from one foreign subsidiary to another foreign subsidiary.
• Organisational performance: MNCs pay package should work as motivator to enhance employee job performance, learning latest skills and contribute to the enhancement of organisational performance. In fact, performance-based pay package enhances organisational performance.
• Adaptability to Foreign Cultures and Environment: MNCs design pay package that motivates employees and his/her family members to willingly adapt to the cultures and environment of the foreign countries. For example, providing comfortable housing, highly reliable medical facilities, security facilities against odds and international standards schooling facilities encourage employee’s family members to adapt to the foreign country cultures and environment and allow the employee to concentrate on the job.

Importance of International Compensations

• Optimizing Cost of Compensation: It is to facilitate the transfer of International employees in the most cost-effective manner for the firm. Compensation management aims at optimizing the cost of compensation by establishing some kind of linkage with performance and compensation. It is not necessary that a higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries.
• Attracting and Retaining Personnel: Most to attract and retain staff in the areas where the multinational has the greatest needs and opportunities, hence must be competitive and recognize factors such as the incentive for Foreign Services, tax equalization, and reimbursement for reasonable costs.
• Consistency in Compensation: It means to be consistent with the overall strategy, structure and business needs of the multinational. Compensation management tries to achieve consistency-both internal and external in compensating employees. Internal consistency involves payment of the basis of criticality of jobs and employees’ performance on jobs. Thus, higher compensation is attached to higher-level jobs. Similarly, higher compensation attached to higher performers in the same job. External consistency involves similar compensation for a job in all organizations. Though there are many factors involved in the determination of wage and salary structure for a job in an organization which may result into some kind of disparity in the compensation of a particular job as compared to other organization, compensation management tries to reduce this disparity.
• Motivating Personnel: Compensation management aims at motivating personnel for higher productivity. Monetary compensation has its own limitations in motivating people for superior performance.

Components of International Compensation Program

Base salary:

For expatriates, the term base salary means the primary component of a package of allowances which are:

(a) Foreign service premium

(b) Cost-of-living allowance

(c) Housing and utility allowance

(d) Basis for in-service benefits and pension contributions.

Base salary may be paid in home or local currency or in some hard currency like pound or dollar.

Foreign Service inducement/hardship premium:

Parent-country nationals often receive a salary premium as an inducement to accept a foreign assignment or as compensation for any hardship caused by the transfer. Such payments vary depending upon the assignment, actual hardship, tax paid to foreign governments and length of the assignment.

Education Allowances for Children:

Education allowances are given towards fees for the education of expatriates’ children. Education allowances include items such as tuition, language class tuition, books, transportation and uniforms.

Relocation Allowances and Moving:

Relocation allowances usually cover moving, shipping; temporary living expenses, and down payments or lease-related charges.

Tax Equalisation Payments:

Many international compensation plans attempt to protect the expatriate from negative tax consequences by using a tax equalisation plan. Under this plan, the company adjusts an employee’s base income so that the expatriates will not pay any more or less tax than if they had stayed in the home country.

Allowances:

Various allowances are paid to expatriates depending upon the assignment. They include:

(a) The cost-of-living allowance (COLA):

It involves a payment to compensate the differences in expenditures between the home country and the foreign country.

(b) Housing allowance:

Implies that employees should be entitled to maintain their home-country living standards (or, in some cases, receive accommodations)

(c) Home leaves and travel allowances:

Is given to cover the expense of trips (usually once in a year) back home. These trips allow the expatriates the opportunity to renew family and business ties, thereby helping them to avoid adjustment problems when they are repatriated.

Spouse Assistance:

To help guard against or offset income lost by an expatriate’s spouse as a result of relocating abroad. Multinationals generally pay allowances in order to encourage employees to take up international assignments.