INTERNATIONAL COMPENSATION

Introduction
Human resources are an important input for an organisation and it is very essential that
various positions/jobs in the organisation are placed with suitable candidates. To be
competitive in market, it is very important for an organisation to have work force with
required technical and managerial skills, competencies and experience. The critical
success factors for a MNC is to employ people from different countries with technical
skills, cross-cultural skills and leadership skills required to perform job efficiently. All
these capabilities of employees are significantly influenced by the compensation policy
of the company. To develop a loyal and stimulated workforce, companies must form
competitive compensation and rewards policy. The ideal compensation policy ensures
the availability and preservation of best talent in the organisation while attracting new
talent and reducing turnover.
DEFINITIONS
Compensation is an exchange or a transaction which results into benefits for both
parties, i.e., employers and employees. For employers, it is a matter of affordability and
for employees it is concerned with motivation. Companies must consider their
affordability to pay to their employees and their consequences in turn in the form of
performance and turnover. Some employers also link
compensation to employee work ethics and behaviour and hence to performance.
Moreover, there are many forces like social, economic, legal and political which
influence compensation management.
Hence, compensation management has become a crucial and important part of human
resource management.

Compensation can be defined as a contract or mutually binding legal document that

depicts exactly how much should be paid to the employee and also the components of
the compensation package. Or in other words, compensation is the amount of
remuneration which is paid to an employee in return to the services provided by
him/her to the company.

1|Page
“International compensation can be defined as the provision of monetary and non-
monetary rewards, including base salary, benefits, perquisites, long- and short-term
incentives, valued by employees in accordance with their relative contributions to MNC
performance.” (Fenwick, 2003)

Objectives of International Compensation

Following are the objectives of compensation management in international context:
Recruitment and Retention of suitable employees: MNCs plan compensation
packages to attract and retain most suitable employees in terms of skills required to
perform job efficiently.

Consistency and equity: the compensation package designed by MNCs secure

consistency between pay and performance. It also se eks to bring equity among
employees from different countries, categories and subsidiaries.

Facilitate Mobility: the compensation package helps employees to move from one
country to another in the form of parent company or subsidiary.

Adaptability to foreign environment: compensation package motivates employees

and their families to adapt to the environment and cultures of the foreign countries. If
MNCs provide housing facilities, education, medical facilities, and other facilities to live
comfortably in foreign countries, will encourage employees and their family members to
adapt to foreign country cultures and also help employees to focus on their jobs.
Organisational performance: MNCs design compensation package to motivate and
to enhance employee’s job performance and hence add value to the organisational
performance.

Competitive compensation package: MNCs design compensation packages in

accordance with their competitors offering to their employees in other countries where
they operate so as to attract and retain the best employees. The package is also set to

2|Page
be competitive among various jobs within the organisation to retain the competitive
talent for the most demanding jobs.

In accordance with ability to pay: the pay package offered by MNC should be
based on its ability to pay. Pay package is determined by the ability to pay, which in
turn determines the quality of employees as well as total cost of the human resources.

Collective bargaining: collective bargaining plays dominant role in framing various

HRM policies including compensation management. Hence a sound and competitive
compensation package reduces the employees’ complaints and the need for collective
bargaining on this issue.
4. Factors affecting International Compensation Management
There are a number of variables which affect international compensation. The variables
or factors affecting international compensation can be divided into two categories:
internal environmental factors and external environmental factors of a MNC.
4.1 MNC’s Internal Environmental Factors:
The internal environmental factors of a MNC include company’s strategic management,
its resources, structures and functional areas of management. Following are the internal
factors of a MNC which influence compensation package:

4.1.1 Objectives and Goals: every organisation works for an objective and goal. The
goals of MNCs may include profit earning, expansion of markets and market share etc.
MNCs formulate their compensation policies based on their corporate goals. In
accordance with their competitive strategic objectives, MNCs form their competitive
compensation policies to attract and retain the best talent.
4.1.2 Ability to pay: MNCs ability to pay depends upon their long term profitability.
Though in short run, they can pay more than their ability to pay to survive into the
market, however, they can’t pay more than their ability to pay in long run. Hence,
ability to pay in long run is an important factor.

3|Page
4.1.3 Organisational culture: organisational culture is determined by the quality of work
life provided by the organisation. If the MNCs provide high quality of work life by
providing various facilities and benefits like medical facilities, car allowance, stock
options etc. they will design compensation packages accordingly.

4.1.4 Competitive strategies: In order to have competitive advantage over the

competitors, MNCs design their compensation packages more competitive and
comparable to attract and retain more competent employees as against their
competitors. Like Coca cola design their competitive pay packages over Pepsi.

4.1.5 Employer-Employee relations: employer-employee relations also influence most of

human resource policies including compensation packages. The existence of trade
unions influences the HR policies and strategies. Some trade unions also strike for
demanding higher pay packages from the companies.

Human resource structure: the structure of human resources which includes age,
gender, educational qualifications, experience, skills and competencies of employees
also influence compensation package. MNCs having more women employees provide
security to women employees, and establishment of child care centres, medical
allowances etc. MNCs with more middle age employees with school going children pay
educational allowances, etc. Thus, Human resource structure also affects compensation
package.

4.1.7 Role of subsidiaries: subsidiaries’ requirements in terms of job skills, their policies
regarding pay equality or differentials between expatriates and nationals also influence
compensation package significantly.

4.2 External Environmental Factors

4|Page
External environmental factors which include parent country factors, labour market
factors, local conditions, host country factors etc. also influence the compensation
packages of MNCs.

4.2.1 Parent Country Factors: MNC headquarters’ country, its culture, values, attitudes,
cost of living influence the compensation package. Like Coca Cola, US based MNC
design its salary package for its subsidiaries based on its US salary package.

4.2.2 Labour Market Conditions: Labour market conditions include demand and supply
of different categories of employees and their skills and knowledge. If a particular
category of employees has more supply than its demand, then it will result into lower
salary levels as compared to other categories whose demand is more than its supply.
For example, the salaries of host country nationals for computer engineers are lower in
Malaysia as their supply is more than their demand however, the expatriate software
engineers whose supply is less than their demand, get more salaries. Other labour
market conditions include training facilities, location of competing organisations etc.

4.2.3 Government Rules and Regulations: Government policies regarding labour welfare
and pay packages also influence the compensation packages determined by the
company. Some MNCs frame their compensation and benefits policies based on their
policies in parent country for parent country nationals. Though, some MNCs follow host
county government regulations regarding human resources while some MNCs frame the
policies which are beneficial to them.

4.2.4 Local Conditions: local conditions of the country where MNC operates include
availability of housing, medical, educational, telecom, transport, hospitality, recreational
facilities etc. also determine the cost of living in that country. Cost of living influence
compensation package significantly. The expatriates have to face many hardships in
foreign countries, hence these conditions also influence the compensation package.

5|Page
4.2.5 Industry: the type of industry also influences compensation packages. For
example, the software industry, pharmaceutical, health services, mobiles telecom
industries offer higher salary levels than the industries like cement, automobile, steel
etc. during current scenario. Presently, service and high technology industries provide
higher salary packages than most of manufacturing industries.

COMPONENTS OF INTERNATIONAL COMPENSATION PROGRAMME

The MNCs have to design their compensation packages in order to meet the monetary
and non- monetary requirements of employees for having various facilities, and
compensating the inconveniencies, hardships and risks faced by the employees in host
country. Following are the components of the compensation packages mostly designed
by the MNCs, though the list is not exhaustive and conclusive. MNCs can add or remove
any component as per their requirements.

Basic Salary: basic salary differs from country to country as well as from company to
company as a part of international compensation. Base salary is the minimum fixed
salary to be paid to all categories of employees like parent country nationals, host
country nationals and other country nationals. It represents the compensation paid to
employees for their skills, knowledge and the job requirements. Most of MNCs pay basic
salaries to expatriates as earned by the parent country nationals and pay additional
allowances to meet the costs of hardships, inconveniences and risks borne by them.
Some MNCs provide base salary in accordance with cost of living index of the host
country.

Cost of Living Allowance: cost of living differs from city to city within same country
and from country to country. Also it varies from time to time in the same city and
country. Like in 2005, Tokyo in Japan was the most costly city in the world while in
2006, Moscow in Russia was the most costly city in the world. MNCs fix cost of living
allowance on the basis of cost of living index of the city where employee is placed. Cost

6|Page
of living allowance is paid to employees to enable the purchasing power of employee at
a comparable level with that of his/her home city.

Housing Allowance: house rents in some cities or countries are exorbitantly high that
employees are not able to pay them. In such situations, employees feel difficult to
accept foreign assignments with high house rents. In some cases, MNCs provide house
rent allowances to meet the cost of house rents in the place of employment. While
some MNCs totally exempt employees from paying rent rather they provide free rent
accommodation to their employees. Thus, housing allowance is an important part of
compensation package to help expatriates to live in foreign countries at par with home
countries or previous employment places and to maintain their standards of living.

Educational Allowance: educational allowance includes the cost of providing

language training to employees and his/her family members, training cost for
employee’s development and continuous learning and education cost of employees’
school or college going children. Educational allowance is given as the cost of school or
college fees is very high in some countries like US, UK or Australia. Hence, MNCs give
educational allowance to enable employee to give his/her children quality education in
host country.

Relocation Allowance: employee’s movement from home country to a foreign

country involves various expenses like visa expenses, travelling expenses, transfer of
children from home country school or college to foreign school or college, payment of
advance rents and taxes etc. MNCs compensate employees for meeting additional
financial expenses in the form of relocation allowance.

Tax Equalisation Allowance: personal income tax rates differ in different countries
making wide variations in salaries of employees. The tax rates in UAE, Oman are the
minimum, hence attract most jobs. The tax rates are high in countries like Sweden,
Japan, and Australia. Tax rate in India is also encouraging for expatriates as minimum

7|Page
tax rate is 10 percent while maximum is 30 percent. Thus, MNCs provide tax
equalisation allowance to employees to offset the loss of after tax salary due to
variations in tax rates of different countries.

Insurance allowance: MNCs provide insurance allowance to employees to protect

them from all kinds of health issues, risks against life. Some MNCs instead of giving
insurance allowance, buy insurance policies for their employees to give them security.
Different kinds of insurance facilities are provided to employees.

Hardship Premium: it is very hard for employees to live in certain countries where
war like situations prevail like Afghanistan, Iraq, Syria etc. In certain areas, threats from
locals also make foreign employees difficult to live. Further, the presence of diseases, or
poor or inadequate medical facilities in some developing countries create hardships for
expatriates to live and work in such countries. Hence, MNCs offer hardship allowance to
attract and retain employees for hard jobs as well as jobs in countries with hardships.

Stock Options: some MNCs offer stock options to their employees. With stock options,
employees can buy the shares of MNCs at fixed or reduced prices. With this scheme,
employees are encouraged to work and feel ownership of the MNC.

Bonus: MNCs provide individual or group bonus to employees based on their

performance in terms of sales, output, productivity, savings and minimisation of costs.

Gratuity: Gratuity is retirement benefit which encourages the employees to work with
same MNC till the completion of contract or up to retirement.

Pension: some MNCs pay pension to employees serving for relatively long. Though
MNCs determine pension payment by considering different legal requirements of
different countries, fluctuations in exchange rates etc.

8|Page
Social security Benefits: MNCs provide various social security measures like for
employment security, leave travel pay, overtime pay, leave for grievance, call pay back
etc., for health protection, accident insurance, disability insurance, health insurance,
sick leave etc., various retirement benefits in the form of pension, provident fund, old
age counselling etc. and for personal identification and participation, MNCs provide
measures like birthday and anniversary gifts, recreational programmes, stress
counselling, safety measures etc.

Other benefits: MNCs provide various facilities and benefits to employees which
include canteen facility, travel fares, recreational facilities, facilities for physical and
mental fitness, conveyance benefits, maternity and paternity leave and benefits, legal
help, credit facilities, family support facilities, social programmes etc.

6. Theories or Approaches of International Compensation

Different MNCs adopt different approaches for determining compensation. Following are
the approaches to international compensation management:

Localisation Approach:
Under Localisation approach, MNC determines compensation on the basis of salary
levels for similar jobs in comparable organisations in the host country. For example, Citi
Bank in India pays salaries to Indians (HCNs), Americans (PCNs) and Chinese (TCNs)
based on either salary levels of Indian banks like ICICI Bank, HDFC Bank or salary
levels provided by other foreign banks operating in India like HSBC etc.
This approach is beneficial for those employees moving from developing countries to
advance countries, however, may not be encouraged by those moving from advanced
to developing countries.

Negotiation or Bargaining Approach:

9|Page
Under this approach, MNCs determine compensation packages through mutual
negotiations between the employee and employer. However, this approach will be
successful when the number of expatriates is less and employee and employer both
have full knowledge about on-going salary levels and cost of living in the country of
placement. This approach may produce dissatisfaction or feel of inequality among host
country nationals.

Lump sum Approach:

Under this approach, MNC determine the compensation as a lump sum amount which
include basic salary and all kinds of allowances and monetary value of all benefits.
Under this approach, employees have freedom to allocate the money for various kinds
of expenditure.

Buffet Approach:
Under buffet approach, MNCs provide less cash and more benefits in compensation
package. Sometimes expatriates also prefer this method to reduce tax liability and save
more so as to repatriate the savings. Employees are given option to decide the cash
and benefits component of the compensation package. This approach, however,
increases the administration cost of the company as each employee will prefer different
choices.

Cluster Systems Approach:

MNCs categorise countries or cities into clusters based on common factors like cost of
living or hardship or danger levels. Company determines more or less same
compensation for the jobs within same cluster of cities or countries. This approach
reduces the administration costs and also enhances the feeling of equality among
employees of different countries.

Global Approach:

10 | P a g e
Some jobs have same requirements with regard to skills, knowledge and competencies
throughout the world. Under global approach, MNCs determine uniform pay scales for
such jobs throughout all countries of operation. Further, these are payable uniformly for
all categories of employees including host country nationals. This approach creates
feeling of equality among all expatriates and host country nationals.

Performance based compensation approach:

Most recently, MNCs are framing compensation packages based on employees’
performance. Under this approach, a minimum base salary is guaranteed to meet basic
needs of employees, over and above base salary, employees get the opportunity to
earn high salaries as per their performance irrespective of the nationality. This approach
helps in increasing the organisation performance and productivity.

Balance Sheet Approach:

Under this approach, MNCs try to balance the home country salary and inconveniences
and hardships faced by the expatriates in the host country by providing high salary and
other benefits and allowances etc. MNCs offer higher salaries than that of home country
and give benefits and allowances like tax equalisation allowance, exchange rate
protection allowance, relocation allowance, educational allowance, house rent allowance
etc.

8 Summary
International Compensation management is an important part of international human
resource
management. To attract and retain competent talent, companies offer lucrative and
competitive
compensation packages to the employees particularly expatriates who are placed in
international
locations. There are various factors, internal and external, which affect compensation
packages

11 | P a g e
offered by different countries like, the strategic goals and objectives, organisational
culture,
competitors’ policies, economic, cultural, social conditions in host country. MNCs also
determine
their compensation packages on the basis of various approaches available to them like,
localisation approach, bargaining approach, buffet approach, lump sum approach,
global
approach, cluster approach, performance based approach, and balance sheet approach.
MNCs of
various countries follow different approaches for managing international compensation.

12 | P a g e