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Jatiya Kabi Kazi Nazrul Islam University, Trishal, Mymensingh

This document is an assignment on international compensation systems in multinational corporations (MNCs) submitted by Zinuk Sarker to their lecturer Sharifa Akter. The assignment introduces the topic and provides an overview of the complexities of managing compensation internationally. It discusses how MNCs must balance local details with unified strategic compensation policies across borders. The objectives of an international compensation system for MNCs are to ensure employees on foreign assignments are not disadvantaged, fit the company strategy and expatriate's performance, and provide incentives for accepting work abroad.

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0% found this document useful (0 votes)
58 views18 pages

Jatiya Kabi Kazi Nazrul Islam University, Trishal, Mymensingh

This document is an assignment on international compensation systems in multinational corporations (MNCs) submitted by Zinuk Sarker to their lecturer Sharifa Akter. The assignment introduces the topic and provides an overview of the complexities of managing compensation internationally. It discusses how MNCs must balance local details with unified strategic compensation policies across borders. The objectives of an international compensation system for MNCs are to ensure employees on foreign assignments are not disadvantaged, fit the company strategy and expatriate's performance, and provide incentives for accepting work abroad.

Uploaded by

Md. Mahin Mia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 18

Jatiya Kabi Kazi Nazrul Islam University,Trishal, Mymensingh

An Assignment

On

“International Compensation System in MNCs”

Course Title: International Human Resource Management

Course Code:HRM-401

Submitted to

Sharifa Akter

Lecturer

Department of Human Resource Management

Jatiya Kabi Kazi Nazrul Islam University,

Trishal, Mymensingh.

Submitted by:

Zinuk Sarker

ID:17133022

Session: 2016-17

Department of Human Resource Management

Submission date: 31.07.21


Introduction
For multinationals successfully to manage compensation and benefits requires knowledge of
employment and taxation law, customs, environment and employment practices of many
foreign countries, familiarity with currency fluctuations and the effect of inflation on
compensation and an understanding of why and when special allowances must be supplied
and which allowances are necessary in what countries – all within the context of shifting
political, economic and social conditions Global compensation managers that is, everyone
involved at any level in pay-related decisions increasingly deal with two areas of focus. They
must manage highly complex and turbulent local details while concurrently building and
maintaining a unified, strategic pattern of compensation policies, practices and
values.National borders have become less important in recent years in many ways.
Companies are organizing their economic activities increasingly away from national borders.
Due to this development towards a global economy, large corporations as well as more and
more medium-sized companies are forced to become active worldwide. During
globalization, it has been clearly observed in recent decades that requirements for global
compensation of employees are changing significantly. Multinational companies increasingly
must make changes in their compensation policies that initially do not match the culture and
tradition of their country. A high degree of flexibility is necessary here in order to achieve
positive development. Culture is a strong driver for the relationship between basic salary,
variable compensation, benefits, and other fringe benefits. As a result of these
developments, the tasks of personnel management in multinational companies are
becoming more and more diverse and the adjustments to internationalization more and
more important. Among the tasks of personnel management, compensation is of
importance.

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.

These complexities, challenges facing managers involved in global compensation decisions


do not change two primary areas of focus. These individuals must manage highly complex
and turbulent local details while concurrently building and maintaining a unified, strategic
pattern of compensation policies, practices and values. For multinationals to successfully
manage compensation and benefits requires knowledge of employment and taxation law,
customs, environment and employment practices of many foreign countries; familiarity with
currency fluctuations and the effect of inflation on compensation and an understanding of
why and when special allowances must be supplied and which allowances are necessary in
what countries- all within the context of shifting political, economic and social conditions.
The level of local knowledge needed in many of these areas requires specialist advice and
many multinationals retain the services of consulting firms that may offer a broad range of
services or provide highly specialized services relevant to HRM in a multinational context.
Because of its complexity and expense, much of the discussion addresses PCN
compensation. However, issues relevant to TCNs and HCNs are also described because they
are becoming more important to the success of many multinationals. For example, in most
Western countries a driver may be considered a luxury, only available to very senior
managers. In developing economies, a driver is economical in terms of cost, effectiveness
and safety. Apart from the expectation that managers use drivers, parking is frequently
chaotic in developing countries (especially in large cities) and the driver also performs the
function of a parking attendant. In some developing countries it is quite common for the
police to arrest drivers involved in traffic accidents and leave them in detention while
responsibility and damages are assessed. Such a risk is unacceptable to most firms.

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

3
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.

International compensation system and its objectives


An international remuneration system is of enormous importance for a multinational
company.If an employee of a company only works in national areas, his or her remuneration
is regulated by law and collective agreements. For employees who work at an international
level, however, these legal and collective agreement regulations do not apply. For this
reason, the company must make special arrangements for this. These regulations are
defined and implemented within the company. The system can ensure that employees who
agree to a foreign assignment, as opposed to those who continue to work at a national level,
are not disadvantaged. Therefore, special internal company regulations must be established
for employees who are deployed internationally.

# 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.

# It is also important for companies to be an attractive point of contact for performance-


oriented specialists and managers. In times of increasing cost optimization, the focus is on
profitability.

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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.

#The content of an international compensation system should also be flexible enough to be


adapted as easily as possible to the rules of the country of assignment. It should therefore
be adaptable to technological and organizational changes. The individual company decides
on the choice of the compensation system in accordance with its corporate philosophy and
the corresponding compensation policy. The aim of personnel management should be to
take account of the corporate structure of the country in question when developing,
implementing, and administering the programs.

#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

5
individual compensation models are explained in more detail in Chapter 3 below and
examined for their strengths and weaknesses.

Key components of an international compensation program


The area of international compensation is complex primarily because multinationals must
cater to three categories of employees: PCNs, TCNs and HCNs.

Key components of international compensation are as follows:

1.Basic salary 2.Allowances 3.the benefits

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.

(b)The provision of a housing allowance implies that employees should be entitled to


maintain their home-country living standards (or, in some cases, receive accommodation
that is equivalent to that provided for similar foreign employees and peers).Other
alternatives include company-provided housing, either mandatory or optional, a fixed
housing allowance or assessment of a portion of income, out of which actual housing costs
are paid. As a firm internationalizes, formal policies become more necessary and efficient.

(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
7
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.

Firms need to address many issues when considering benefits, including:

Whether or not to maintain expatriates in home-country programs, particularly if the firm


does not receive a tax deduction for it.

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.

Approaches to international compensation


There are two main approaches in the area of international compensation

#The Going Rate Approach (also referred to as the Market Rate Approach)
8
#The Balance Sheet Approach (also known as the Build-up Approach).

The Going Rate 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 Balance Sheet Approach

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
and waiting to assist with any writing project you may have. From simple essay plans,
through to full dissertations, you can guarantee we have a service perfectly matched to your
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.

Advantage and disadvantage of going rate approach and balance rate


approach of international compensation

1. Going Rate 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.

9
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.

The advantages of Going Rate Approach are

• Equality with local nationals


• Simplicity
• Identification with the host country
• Equity among different nationalities

The disadvantages of Going Rate Approach are,

• Variation between assignments for the same employees


• Rivalry between expatriates of the same nationality in getting assignments to some
countries
• Potential re-entry problems in the home country

2. Balance Sheet Approach:

The Balance Sheet Approach to international compensation is a system designed to equalize


the purchasing power of employees at comparable position levels living abroad and in the
home country and to provide incentives to offset qualitative differences between
assignment locations..

The advantages of the Balance Sheet Approach are:

• Equality between assignments and between expatriates of the same nationality.


• Facilitates expatriate re entry
• Easy to communicate to the employees

The disadvantages of the Balance Sheet Approach are:

• It can result in considerable disparities between the expatriates of different


nationalities and between expatriates and local nationals.
• It can be quite complex to administer due to changing economic conditions, taxation
etc.

Design a pay scale of an Expatriate Compensation Plan

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
10
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.

In practice, the most widespread compensation approach is the home-based approach,


which is used by most companies. The home-based approach is characterized by an
ethnocentric basic attitude, i.e. remuneration policy is largely determined by the home
country. Specifications are developed and set by the parent company. The company orients
its remuneration to the home country. For example, the basic salary of an employee who is
sent abroad corresponds to the salary of an employee in a comparable position in the home
country.

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

11
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.

Global Market Approach

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.

Premiums, Allowances, and Benefits

To further incentive employees to accept a relocation package, many organizations provide


temporary additional benefits. These might include:

• 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.

• Hardship/danger pay — This might be allocated to employees relocating to a


dangerous or challenging location.
• Housing assistance
• Home leave — This funds travel for the employee and their family to visit their home
country.
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Compensation management or system
The type and amount of compensation necessary to attract technically and culturally
qualified international managers and technical professionals to the three nationals or
country categories involved international human resource management activities from
which employees are selected whether the people are:

PCNs (parent country nationals)

TCNs (third country nationals)

HCNs (host country nationals)

PCNs (Parent Country Nationals)

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.

TCNs (Third Country Nationals)

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.

HCNs (Host Country Nationals)

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
13
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.

Factors of Influencing Compensation System


These can be categorized into (i) Internal and (ii)External factors.

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.

14
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

Job evaluation establishes a consistent and systematic relationship among base


compensation rates for all jobs. In other words, it establishes the satisfactory wage
differentials.

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

Laws and regulations impact the remuneration of employees in many areas such as:

Work hours and compulsory time-off

Minimum wage, Overtime, Compulsory bonuses.

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.

Product and labor market

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

15
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.

Management challenges concerning international benefits & compensation


Compensation is one of the most complex areas of international human resource
management HR managers focus on their strategic objectives to develop a comprehensive
compensation plan, in terms of considering base pay, short and long-term incentives,
benefits and growth opportunities

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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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