International Compensation Management

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.
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.
Compensation management can be defined as the art and science of
determining the right compensation so as to satisfy the employees. In
international context, the compensation should be arrived at after
examining all the factors like economic, political, social and legal factors
prevailing in the host country. In MNCs, the employees accepts foreign
assignments in different countries, take up the risk, bear inconveniences
and discomforts mostly because of compensation package paid or
expected to be paid in future. Some employees also leave their families
behind in the home country and agree to foreign assignments in order to
make good money in a short time. Hence, compensation management
plays a significant role in international human resource management as
the employees agree to accept the challenges in foreign countries to
earn more and for better future prospects.
Objectives of International Compensation Management 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
seeks 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 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.
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.

● 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:

● 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.

● 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.

● 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.

● 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.
● 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.

● 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.

● External Environmental Factors External environmental factors

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

● 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.

● 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.

● 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.

● 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.

● 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 Package The MNCs
have to design their compensation packages in order to meet the
monetary and nonmonetary 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 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 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.
● 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.
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: 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: 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.
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 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.