Jatiya Kabi Kazi Nazrul Islam University, Trishal, Mymensingh
Jatiya Kabi Kazi Nazrul Islam University, Trishal, Mymensingh
An Assignment
On
Course Code:HRM-401
Submitted to
Sharifa Akter
Lecturer
Trishal, Mymensingh.
Submitted by:
Zinuk Sarker
ID:17133022
Session: 2016-17
The regulations in the national context are very different from those at international level.
In the absence of legal and collective agreement regulations, multinational companies must
be able to comply with different country-specific regulations while establishing and
maintaining a consistent, strategic pattern of compensation policies and practices. HR
managers must have specialist knowledge that extends far beyond the national level.
In this assignment, the first part focuses on the importance of a compensation system and
its objectives for multinational companies. In the further course of the paper, various
compensation models are presented and examined for their strengths and weaknesses. In a
further chapter, various principles for the design of a company's compensation policy are
described. In the last point of this paper the author will give a conclusion.
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International compensation
Compensation is increasingly seen as- a mechanism to develop and reinforce a global
corporate culture. A primary source of corporate control, explicitly linking performance
outcomes with associated costs and the nexus of increasingly strident, sophisticated and
public discourses on central issues of corporate governance in an international context.
Global compensation practices have recently moved far beyond the original domain of
expatriate pay.
Many multinationals do not allow their expatriate employees to drive at all in some
developing countries and provide local drivers for both expatriate and spouse. Indeed,
expatriate compensation- long the preoccupation of global HR executives- is increasingly
seen more as a component of a more balance, labeling, practice and tradition of pay remain
significant sources of variation in the international firms. Yet these contextual sources of
complexity must be balanced with strategic intent and administrative economy. Rather than
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seeing pay as an ethnocentric extension of an essentially domestic strategy, pay systems are
increasingly becoming truly global with truly global objectives.
Increased complexities in global pay include the growing use of outsource activities and
subsequent labor pricing needs, balancing centralization and decentralization of incentives,
benefits and pensions, given the technical capabilities of Web based human resource
information systems and balancing the need for more accurate and detailed performance
metrics on international assignee with the realities of a cost sensitive environment resulting
from maturing global competitiveness. Increasingly domestic pay practices of long standing
have been questioned as firms move into the global area. These overt challenges to deeply
held national and corporate values and pay systems include challenges to the universal
applicability of incentive pay programs and what some critics view as out of control
executive compensation programs, often driven by US-based multinational pay systems.
Critiques of US-based MNE pay for executives have recently expanded to include challenges
to the effectiveness of legal and institutional forms of corporate governance and the roles,
responsibilities and pay practices of corporate boards, compensation committees and the
use of executive pay consultants.
# It is important that this model fits the company and its strategy and considers the
expatriate's performance and additional workload. In principle, the same criteria apply to an
international compensation system as to the compensation system at national level. An
important factor here is the choice of a suitable remuneration model.
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#The compensation model should provide sufficient incentives for the employee to be
willing to accept the work assignment abroad and the additional expenditure involved. For
example, insufficient remuneration of the expatriate could lead to dissatisfaction and
therefore to a drop in performance. In contrast, the compensation model should motivate
the employee to spend time abroad and prevent the employee from prematurely
terminating the assignment abroad. However, not only the employee's incentives should be
considered, but also, of course, the aspects of costs and benefits of the respective
remuneration model. Therefore, the costs of an assignment abroad must always be in
proportion to the added value for the company. If this is not the case, an assignment abroad
must be avoided. Other important factors are the transparency and fairness of the system.
# It is ensured that uniform guidelines are in place for the main areas of salary
determination. These include, for example, regulations on salary increases, bonus levels,
additional benefits, and decisions on pay grades.
# The Company has to make sure that, for example, employees of the host country are not
demotivated by the much higher salary of an expatriate in an equivalent position because
they may have noticed through an exchange among themselves that the expatriate is paid
much better for the same work than they are. The equal treatment of all employees is
therefore very important to counteract demotivate of employees and to promote, rather
than endanger, international cooperation. The company that makes transparent and
understandable regulations must expect less perceived injustice from the employee. There
should always be a certain degree of comparability, not only within the company, but also
with other companies. If there is no comparability, this can lead to a drop in performance
and dissatisfaction with the employer. Expatriates should not only be included in the
remuneration system, but also local employees. The remuneration system must be
sufficiently standardized and documented for this purpose. This involvement of employees
in the home country is particularly important in the case of international, comparable
positions.
#Basic models of international compensation policy can provide initial orientation for the
design of an international compensation system. Which of the methods represents the most
suitable compensation variant for the company must be carefully examined. Some of the
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individual compensation models are explained in more detail in Chapter 3 below and
examined for their strengths and weaknesses.
1. Base Salary
The base salary is the foundation block for international compensation whether the
employee is a PCN or TCN. Major differences can occur in the employee’s package
depending on whether the base salary is linked to the home country of the PCN or TCN, or
whether an international rate is paid. 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.
In a domestic context, base salary denotes the amount of cash compensation serving as a
benchmark for other compensation elements (such as bonuses and benefits).For
expatriates, it is the primary component of a package of allowances, many of which are
directly related to base salary (e.g. Foreign Service premium, cost-of-living allowance,
housing allowance) and also the basis for in-service benefits and pension contributions. It
may be paid in home or local-country currency.
The definition of hardship, eligibility for the premium and amount and timing of payment
must be addressed. In cases in which hardship is determined, US firms often refer to the US
Department of State’s Hardship Post Differentials Guidelines to determine an appropriate
level of payment. Making international comparisons of the cost of living is problematic.
These payments are more commonly paid to PCNs than TCNs. Foreign service inducements,
if used, are usually made in the form of a percentage of salary, usually 5-40 per cent of base
pay. Such payments vary, depending upon the assignment, actual hardship, tax
consequences and length of assignment.
2. Allowances
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Issues concerning allowances can be very challenging to a firm establishing an overall
compensation policy, partly because of the various forms of allowances that exist.
(a)The cost-of-living allowance (COLA), which typically receives the most attention, involves
a payment to compensate for differences in expenditures between the home country and
the foreign country (to account for inflation differentials, for example). The COLA may also
include payments for housing and utilities, personal income tax or discretionary items.
(c)There is also a provision for home leave allowances. Many employers cover the expense
of one or more trips back to the home country each year. Firms allowing use of home leave
allowances for foreign travel need to be aware that expatriate employees with limited
international experience who opt for foreign travel rather than returning home may become
more homesick than other expatriates who return home for a ‘reality check’ with fellow
employees and friends.
(d)Education allowances for expatriates’ children are also an integral part of any
international compensation policy. Allowances for education can cover items such as tuition,
language class tuition, enrolment fees, books and supplies, transportation, room and board
and uniforms. PCNs and TCNs usually receive the same treatment concerning educational
expenses.
(e)Relocation allowances usually cover moving, shipping and storage charges, temporary
living expenses, subsidies regarding appliance or car purchases (or sales) and down
payments or lease-related charges. Allowances regarding perquisites (cars, club
memberships, servants10 and so on) may also need to be considered (usually for more
senior positions, but this varies according to location). These allowances are often
contingent upon tax-equalization policies and practices in both the home and the host
countries.
(f)Spouse assistance to help guard against or offset income lost by an expatriate’s spouse as
a result of relocating abroad. Although some firms may pay an allowance to make up for a
spouse’s lost income, US firms are beginning to focus on providing spouses with
employment opportunities abroad, either by offering job-search assistance or employment
in the firm’s foreign office (subject to a work visa being available).
(g)Multinationals generally pay allowances in order to encourage employees to take
international assignments and to keep employees ‘whole’ relative to home standards. In
terms of housing, companies usually pay a tax-equalized housing allowance in order to
discourage the purchase of housing and/or to compensate for higher housing costs. This
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allowance is adjusted periodically based on estimates of both local and foreign housing
costs.
3. Benefits
The complexity inherent in international benefits often brings more difficulties than when
dealing with compensation.
Pension plans are very difficult to deal with country-to-country, as national practices vary
considerably.
Trans-portability of pension plans, medical coverage and social security benefits are very
difficult to normalize.
Whether firms have the option of enrolling expatriates in host-country benefit programs
and/or making up any difference in coverage. Whether expatriates should receive home-
country or host-country social security benefits. In some countries, expatriates cannot opt
out of local social security programs. In such circumstances, the firm normally pays for these
additional costs.
Laws governing private benefit practices differ from country to country, and firm practices
also vary. Multinationals have generally done a good job of planning for the retirement
needs of their PCN employees, but this is generally less the case for TCNs. TCNs may have
little or no home-country social security coverage.
They may have spent many years in countries that do not permit currency transfers of
accrued benefit payments or they may spend their final year or two of employment in a
country where final average salary is in a currency that relates unfavorably to their home-
country currency. In addition to the already discussed benefits, multinationals also provide
vacations and special leave. Included as part of the employee’s regular vacation, annual
home leave usually provides airfares for families to return to their home countries. Rest and
rehabilitation leave, based on the conditions of the host country, also provides the
employee’s family with free airfares to a more comfortable location near the host country.
Emergency provisions are available in case of a death or illness in the family. Employees in
hardship locations often receive additional leave expense payments and rest and
rehabilitation periods.
#The Going Rate Approach (also referred to as the Market Rate Approach)
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#The Balance Sheet Approach (also known as the Build-up Approach).
With this approach, the base salary for international transfer is linked to the salary structure
in the host country. The multinational usually obtains information from local compensation
surveys and must decide whether local nationals (HCNs), expatriates of the same nationality
or expatriates of all nationalities will be the reference point in terms of benchmarking. For
example, a Japanese bank operating in New York would need to decide whether its
reference point would be local US salaries, other Japanese competitors in New York or all
foreign banks operating in New York with the Going Rate Approach, if the location is in a
low-pay county, the multinational usually supplements base pay with additional benefits
and payments.
The basic objective is to ‘keep the expatriate whole’ (that is, maintaining relativity to PCN
colleagues and compensating for the costs of an international assignment) through
maintenance of home-country living standard plus a financial inducement to make the
package attractive. The approach links the base salary for PCNs and TCNs to the salary
structure of the relevant home country. For example, a US executive taking up an
international position would have his or her compensation package built upon the US base
salary level rather than that applicable to the host country. Our academic experts are ready
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needs. The key assumption of this approach is that foreign assignees should not suffer a
material loss due to their transfer, and this is accomplished through the utilization of what is
generally referred to as the Balance-sheet Approach.
This is based on the local market rates. It relies on comparisons of survey of the local
nationals, expatriates of same nationality and expatriates of all nationalities’ pay packages.
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In this approach, the compensation is based on the selected survey comparison. The base
pay and benefits may be supplemented by additional payments for low pay countries.
Home-Based-Approach
The salary is developed on the basis of the salary in the home country by creating a so-called
net comparative calculation, In practice, this means that regardless of whether the
employee is posted to a country whose salary level is lower or higher than the salary level in
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the home country, he is paid on the basis of his salary in the home country in such a way
that his purchasing power is maintained. The approach is designed to protect expatriates
from cost differences between home and host countries. There may be additional
allowances for higher costs of living. The allowance is intended to enable the expatriate to
consume the same goods and services as in the home country. Location supplements are
also possible to compensate the employee for any adjustments to other standards of living.
However, the supplements always depend on the country to which the employee is posted
and the distance to the home country. For example, if an employee is sent from Stuttgart to
Milan, a bonus is not necessary in this case because the cost of living is similar. However, if
the employee is sent from a European country to Asia or South America, bonuses are
common.
The home-based approach is particularly suitable for assignments of senior managers who
demand an appropriate and attractive salary based on their experience. The advantage for
the expatriate is that he/she can maintain the salary that he/she would receive for his/her
work and area of responsibility in the home country, including salary increases. The
advantage of the home-based approach is that the employee is paid the same salary
regardless of where he or she works. This means that the employee has no financial
disadvantages from working abroad and can maintain his or her standard of living. A further
advantage of the approach is that the expatriate's salary is still linked to the remuneration
system in the home country, allowing for comparison with employees in comparable
positions in the home country. This in turn simplifies the employee's reintegration upon his
or her return to the home country, as the basic salary is updated in its amount. A
disadvantage of the model may be that the expatriate's salary may be considerably higher
than that of a Host Country National (HCN). This difference in salary can lead to
demotivation of the local HCNs and thus endanger the cooperation of the employees.
Host-Based-Approach
Another common method in the area of compensation models is the host country- oriented
approach or "host-based approach". With this method, the compensation policy is based on
the compensation guidelines of the country to which the expatriate is posted. The
compensation policy of the parent company has little or no impact on the compensation of
the expatriate. Therefore, country-specific features dominate and there is no coordination
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between the head office and the foreign branch. Therefore, the basic salary of the
expatriate is generally based on the salaries of employees in the host country, as the
benchmark is the local market value.20 In countries with a large expatriate population, the
salary can also be determined according to guidelines that have been specially established
for expatriates. This approach is most often used when the expatriate assignment is
intended to further the employee's career or, for example, when an employee is being
permanently transferred abroad. The model is also applicable when several expatriates from
different countries are working in similar positions at the same location.
Regardless of which country the assignee is assigned, the main benefits are provided. Unlike
the balance-sheet approach, a global market approach to expatriate compensation requires
the international assignment be viewed as continuous, even though the assignment may be
for various periods of time and the employee may be in various countries. All assignee are
on the equivalent compensation scale, regardless of their home country. This approach is
much more inclusive.
There are benefits and drawbacks to each approach. The objectives of each assignment,
among other issues, should be measured before choosing the right compensation approach.
Variations in laws, living costs, tax policies, and other factors all must be considered in
establishing the compensation for expatriates. You want to maintain equity and consistency
among the expatriate group. Many organizations look for a company specialized in this
practice, as it is clear that international compensation is very complex.
• Healthcare —This could mean covering employees under a U.S. healthcare plan or
one in the host country.
• Retirement plans
• Language and/or cross-cultural training
• Spouse/partner support — commonly, an employee’s partner or spouse will be
unable to work in the host country. Many organizations take this into account and
compensate accordingly.
Those personnel who are of the same nationality as the contracting government or
personnel from headquarters. They come from the home country of the operation. The
policy of using PCNs is usually employed when one or more of the following situations exist:
(1) the host country cannot readily supply desired managerial personnel, (2) efficient
communication with headquarters is required, and (3) the company adopts a centralized
approach to globalization.
Those personnel of a separate nationality to both the contracting government and the area
of operations i.e. whose nation of residence is neither the host country nor the home
country. Such an employee normally is recruited from outside the host country and
relocated from the point of recruitment to the host country.
These are Indigo (Indigenous Personnel) / Nationals / Locals – those personnel who are
indigenous to the area of operations whose basic residence or home is the host nation. Local
colleagues of the expatriate, they are valuable socializing agents, sources of social support,
assistance, and friendship to expatriates. Expatriates are more likely to adjust when HCNs
engage in this behavior.HR managers focus on their strategic objectives to develop a
comprehensive compensation plan, in terms of considering base pay, short and long-term
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incentives, benefits and growth opportunities. The objective of this kind of strategy is to
ensure that both TNC/MNCs’ long and short-term objectives coexist in the compensation
system without overlap, which would duplicate a single pay plan for the same objectives.
The purpose of the planning is also designed to ensure that the compensation system
attracts and retains the desired employees and that it motivates them to do those things
that support the business plan.
Internal factors
Ability to pay
This is one of the most significant factor influencing employee compensation. Generally, a
firm, which is prosperous and successful, has the ability to pay more than the
competitive rate. This way it can attract a superior caliber of personnel. Often the labor
unions also demand an increase in compensation on the grounds that the organization is
prosperous and is able to pay more.
Employee
Numerous employees related factors also influence his or her compensation. These include
the following -
(i) Performance: It is always rewarded with pay increase and as a result it motivates the
workers to do better in future. (ii) Experience: This makes a person perfect by providing
valuable insights and thus rewarded also. Today companies are demanding for 10 to 20
years’ experience candidates especially for the executive positions. The companies presume
that experience candidate possess leadership skills which influence the other behavior and
performance. Generally, experience candidate perform the job without need of training
which is time consuming and deals with matter of cost to company. Hence the experience
candidates demand more pay than an inexperienced candidate. (iii) Seniority: In today’s
environment seniority of employee making difference in payment of compensation
compared to junior employees. Naturally, senior employees demand for more salary than
fresher because of their hold on related job and its function. Today many companies are
demanding senior employees for key positions by offering fat pay and even sometimes
retired employees are offered with handsome salary for key positions which deals with
multi-tasking in organization. Trade unions always prefer this objective criterion for pay
rises. (iv) Potential: Firms also pay their employees, especially young ones on the basis of
their potential. Software companies are very good example for this, IT(information
technology) graduate just who completed his/her education having potential in the subject
can gain a good job with high payment anywhere in the world.
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Job requirements
Wages are also influenced by the requirements of a job such as physical and mental
requirement. Jobs, which demand more skill, responsibility, efforts and are of hazardous in
nature, will carry high wage tag with them.
Job evaluation
Organization’s strategy
The organization’s strategy regarding wages also influences employee compensation. For
example, an organization, which wants rapid growth, will set higher wages than
competitors. On the other hand, organizations that want smooth going and just maintain
the current earning will pay average or below average.
External factors
Laws and regulations impact the remuneration of employees in many areas such as:
The government influences pay both directly through laws and regulations and indirectly
through its socioeconomic policies. For example, government’s monetary policies directly
affect demand for goods and services and subsequently the employers demand for
employees. These actions create economic forces that affect pay. The government more
directly affects compensation through wage controls and guidelines, which limit increases in
compensation for a certain worker at a certain time and law as that regulate wage rates,
hours of work, prevent discrimination and require a certain benefit.
During times of expanding demand for products and services, job opportunities expand and
employers are more willing and able to increase pay to attract and retain employees with
the needed skills and experiences. Increased wages translate into increased cost of
production. Organizations may try to pass increased costs on to consumers in the form of
higher prices. This is easier to do during periods of strong demand for products or services.
Even public sector employers, such as states or university, pass on increased labor as tax
increases or tuition hikes. Increase competition also affects pay decision. Managers faced
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with increased competition from foreign producers or surplus inventories which must
control costs to stay in efficiency and effectiveness of business. Labor market conditions
affect pay, during periods of shortages of qualified employees, pay tend to increase to
attract and retain needed workers. In recessions or when surpluses of qualified employees
are available, rates of pay increases are slowed: pay may even decrease.
Economy
The state of economy also influences the wage and salary fixation. Wage rates will be
different in a stable economy than in a depressed economy. In case of depressed economy,
there may be increase in supply of labor and this result in the fixation of lower wage rates.
Inflation
Increase in the prices of commodities and decrease in value of the money is called as
inflation. The causes of inflation are many. Some of the causes which are raising costs, fall in
the currency value in international markets, raising taxes by government and stagnation in
the development of economy, etc.
Technological changes
Technological changes also influence the fixation of wage levels. Due to the advancements in
the technology, there may be shortage of skilled manpower in that area.
So, the organization will provide high wages for skilled personnel. For example, Information
Technology (IT) industry in India and abroad is suffering from the shortage of IT experts.
Academic institutions
Having good an academic qualification from Reputed and standard educational institution
influence the compensation of the potential candidate in their recruitment in companies.
For example, Indian Top Business schools like Indian Institute of Management and IIT(Indian
Institute of Technology) graduates demands higher pay packages compared to other normal
institutions. Candidates seeking admission into this institution requires to qualify tests
conducted on domain knowledge. Candidates those who admit in these institutions are
determined, having competence and good domain knowledge which companies require.
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Pay systems must conform to local laws and customs for employee compensation while also
fitting into global MNC policies.
Managers face diverse political systems, laws & regulations; confront different economic
climates, economic development, tax policies, diverse culture, customs, the role of labor
unions, standard of living.
It is also important for MNCs to consider carefully the motivational use of incentives and
rewards among the employees drawn from three national or country categories
The traditional function of pay to attract, retain and motivate employees has not changed –
The emphasis has shifted from the attraction and retention functions to the motivation
function.
TNC/MNCs must ensure that those skilled employees are compensated for achieving goals
that make the international business operations succeed.
The objective of this kind of strategy is to ensure that both TNC/MNCs’ long and short-term
objectives coexist in the compensation system without overlap, which would duplicate a
single pay plan for the same objectives.
The purpose of the planning is also designed to ensure that the compensation system
attracts and retains the desired employees and that it motivates them to do those things
that support the business plan. The compensation costs of a family with children are shifted
to hardship allowance for schooling, childcare, increased residence cost and all fringe
benefits associated with supporting a family life cycle. It may be that international
compensation administration is more complex than its domestic counterpart, but not
radically different in pattern or form.
Conclusion
International compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction. An ideal compensation management system will help you
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significantly boost the performance of your employees and create a more engaged
workforce that’s willing to go to the extra mile for your organization. Such a system should
be well – defined and uniform and should apply to all levels of the organization as a general
system.International Compensation in MNCs is a systematic approach to providing monetary
value to employees in exchange for work performed in Multinational Corporation
worldwide. Moreover, you’ll enjoy clearer visibility into individual employee performance
when it comes time to make critical compensation planning decisions. With effective
compensation management you’ll also enjoy clearer visibility into individual employee
performance when it comes time to make critical compensation planning decisions. With
effective compensation management you’ll also enjoy clearer visibility into individual
employee performance when it comes time to make critical compensation planning
decisions. These performance appraisals assist in determining compensation and benefits,
but they are also instrumental in identifying ways to help individuals improve their current
positions and prepare for future opportunities. Human resource is the most vital resource
for any organization. It is responsible for each and every decision taken, each and every
work done and each and every result.The lucrative compensation will also serve the need
for attracting and retaining the best employees. Employees should be managed properly
and motivated by providing best remuneration and compensation as per the industry
standards.
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