Chapter 4:-

International
Compensation
 Introduction

Objectives of international
compensation
Components of an international
compensation
Approaches to international
compensation
Factors influencing Compensation,
Global Compensation
Empirical Evidences
By: Gualdi
Miriam,
Raduan muhi
Samar, Sbarra
Stefano, Tolkacheva
Irina, Vagin Andrey

12th March 2014

 Introduction
Compensation is the amount of remuneration paid to an
employee by the employer in return to the employee’s
services to the company.

Compensation is extrinsic reward for an employee.

Extrinsic rewards include praise from a superior, salary,
employee benefits, career progression etc.

Almost all the employees accept jobs in MNC’s take-up

assignments in various countries, & take-up the risk, bear
inconveniences & discomforts in foreign assignments
mostly based on the compensation package.
In MNCs managerial compensation strategy there is a
conflicting pressures for adaptation to local norms
and institutions and for congruence with international
corporate strategy - strategic alignment

Getting a competitive
advantage
Source: Anthony Ferner and Phil Almond, Performance and reward practices in foreign multinational in the UK Human Resource
Management Journal, Vol 23, no 3, 2013, pages 241–261 2
Different Local Approaches
 Pay Incentives

Individualistic Collectivistic

•low
application • higher
application
• it should not comprise • it should not comprise
too much of the total too much of the total
pay pay

China, Indonesia, Japan, Korea,

Australia, Canada, USA
Mexico, Taiwan, Latin America

Source: Kevin B. Lowe, John Milliman, Helen De Cieri,and Peter J. Dowling, International (2002)Compensation practices: a ten country comparative
analysis; Human Resource Management, Vol. 41, No. 1, Pp. 45–66 7
 Seniority

Collectivistic countries
emphasize more seniority
in regards
to human resource
decisions

Source: Kevin B. Lowe, John Milliman, Helen De Cieri,and Peter J. Dowling, International (2002)Compensation practices: a ten country comparative
analysis; Human Resource Management, Vol. 41, No. 1, Pp. 45–66 8
 Long Term Focus in Pay

Individualistic Collectivistic

•short term results •long term results

•pay system with less •pay system with

futuristic orientation higher futuristic
orientation

Source: Kevin B. Lowe, John Milliman, Helen De Cieri,and Peter J. Dowling, International (2002)Compensation practices: a ten country comparative
analysis; Human Resource Management, Vol. 41, No. 1, Pp. 45–66 9
 Trade Unions

• trade Unions have only minor

impact on performance based
payments

• collective bargaining decreases

the influence of pay and
performance management
system

• with trade unions less support

of variable pay

Source: Anthony Ferner and Phil Almond, Performance and reward practices in foreign multinational in the UK Human Resource Management Journal, Vol
23, no 3, 2013, pages 241–261 7
 Implications

ethnocentric exportation of compensation practices

by enhancing understanding
of best practices in other countries

understanding what employees want rather than what

they have in compensation policies; it may help
motivate employees
to engage high performance behaviors that are
consistent with business direction and goals

Source: Kevin B. Lowe, John Milliman, Helen De Cieri,and Peter J. Dowling, International (2002)Compensation practices: a ten country comparative analysis;
Human Resource Management, Vol. 41, No. 1, Pp. 45–66 8
Ethnocentric Approach
13

Expatriate Compensation

wages & salaries

incentives (e.g. bonuses)

benefits (e.g. retirements)

Inequity
Source: Ashish Mahajan, Host country national’s reations to expatriate pay policies: making a case for a cultural alignment pay model; The International
Journal of Human Resource Management, Vol. 22, No. 1, January 2011, 121–137
14

Outcomes

• anger

• dissatisfaction

• absence from work

• stealing

• quitting work

Source: Ashish Mahajan, Host country national’s reations to expatriate pay policies: making a case for a cultural alignment pay model; The International
Journal of Human Resource Management, Vol. 22, No. 1, January 2011, 121–137
15

Feedback from HCNs Managers

refuse social and technical support towards

expatriate

perceive belonging to a low-status group hold back

local knowledge

show lack of cooperation with expatriate

make adjustment of expatriate in local environment

difficult
Source: Ashish Mahajan, Host country national’s reations to expatriate pay policies: making a case for a cultural alignment pay model; The International
Journal of Human Resource Management, Vol. 22, No. 1, January 2011, 121–137
16

HCNs Managers

more motivated to be cooperative and share

knowledge with expatriates

do not perceive status differentials and perceives

more similarities between local managers and
expatriates

are psychologically more healthy

Source: Ashish Mahajan, Host country national’s reations to expatriate pay policies: making a case for a cultural alignment pay model; The International
Journal of Human Resource Management, Vol. 22, No. 1, January 2011, 121–137
17

Implications

Ethnocentric Geocentric
compensation compensation

Short-term Long-term
orientation orientation

Source: Ashish Mahajan, Host country national’s reations to expatriate pay policies: making a case for a cultural alignment pay model; The International
Journal of Human Resource Management, Vol. 22, No. 1, January 2011, 121–137
Balancing between Localization
and Strategic Alignment
19

The Logic of Compensation

Localization Strategic alignment
large differences in salaries across
small differences across subsidiaries
subsidiaries
supports a local business strategy, operates supports a global business strategy, operates
unique local context global context
consider local cultural norms and labor may violate local cultural norms or labor
market conditions market conditions

good fit between organization compensation good fit between organization compensation
systems and host countries’ local contexts systems and business strategy leads to
leads to improved organization performance improved organization performance

local labor market, national institutions

(employment and labor laws, global strategy, internal labour market
tax laws), national culture

Source: Yoshio Yanadori, Paying both globally and locally: an examination of the compensation management of a US multinational finance firm in the
Asia Pacific Region; The international Journal of Human Resource Management, Vol. 22, No 18, November 2011, 3867-3887
20

Compensation in Subsidiaries
pay level differs systematically across subsidiaries

•differences in pay mix across subsidiaries varies

•cash bonus: different across subsidiaries

•stock bonus: highly consistent across subsidiaries

greater differences in pay level than in pay mix

Source: Yoshio Yanadori, Paying both globally and locally: an examination of the compensation management of a US multinational finance firm in the
Asia Pacific Region; The international Journal of Human Resource Management, Vol. 22, No 18, November 2011, 3867-3887
21

Implications

optimal balance between localization or

alignment

managerial positions strategic

alignment

non-managerial positions localization

HR manager consider cultural

and institutional peculiarities
Source: Yoshio Yanadori, Paying both globally and locally: an examination of the compensation management of a US multinational finance firm in the
Asia Pacific Region; The international Journal of Human Resource Management, Vol. 22, No 18, November 2011, 3867-3887
Principles of compensation
• Be legal

• Be adequate

• Be motivating

• Be equitable

• Be cost-benefit effective

• Provide security
Base Salary and Incentive Pay
 Base Salary and Incentive Pay
Base Salary

• Base salary is a fixed amount of money paid to an

employee by an employer in return for work performed.
Base salary does not include benefits, bonuses or any
other potential compensation from an employer

• The base salary is either paid in the expatriate’s home or

parent country currency, or in the currency of the
expatriate’s host country
Foreign Service Inducements

•Form of a percentage of salary, usually 5 to 20% of base pay

•Sometimes lump sum incentives (one time payment made at
some point during an assignment)
•Payment are vary, depending upon assignment location, tax
consequences and length of assignment

Hardship premium
•Compensate for challenging locations
•Eligibility for the premium, amount and timing of payment
•E.g: host country work week may be longer from the home
country, differential payment may be made lieu to the overtime,
which it is not being paid for PCN and TCN.
 Incentives/Variable Pay

• A growing number of MNCs have dropped the ongoing

premium for overseas assignments and replaces it with a one
time, lump- sum premium

• Even in domestic MNCs are preferring one- time premiums to

periodic salaries.
Allowances
Housing Allowance –

•Payment made to the expatriate with a view to ensuring that he

or she can maintain their home-country living standard in the
host country.

•Alternatively, an organization may provide housing facilities on

a mandatory or optional basis.

•Also, support services may be provided to the expatriate, for

example, by helping sell or rent the expatriate’s house in the
home country
Home Leave Allowance –

•Payment made to the expatriate with a view to facilitating their visit back to the
home country, once or twice a year. Home leave enables the expatriate to renew
business, family and social ties, and thus avoid adjustment problems subsequent
to repatriation

Relocation Allowance –

•Payment made with a view to enable the relocation of the

expatriate to the assignment location. Includes moving, shipping,
storage costs, subsidies for purchase of appliances and (possibly) an
automobile
Education Allowance –

•Payment made with a view to supporting the education of the

expatriate’s children, i.e. tuition, language class, school enrollment
fees, books and supplies, transportation to educational
establishment, room and boarding, school uniforms etc.

•Problems regarding the level of education required and adequacy of

schools in the host country, and transportation to other localities may
pose significant problems for organizations
• Miscellaneous Allowances –

• Depending on the level of seniority of the expatriate,

payments to him or her for club memberships, sport
associations, maintenance of household staff etc. may be
rendered

• In addition, the organization may render financial

assistance to the spouse for her or his loss of income as a
result of the transfer of the expatriate
Taxes
 Taxation
• Problems , Issues and Challenges

– Dual tax cost : Expatriates paying taxes in both home and

host country.

– Need to consider personal and corporate taxes in addition

to income tax

– Modifying compensation packages to provide the most tax-

effective, appropriate rewards within the overall
compensation framework
 Taxation
• Issues while considering benefits

– Whether or not to maintain expatriates in home country programs,

particularly if the company does not receive tax deduction for it.

– Whether companies have the option of enrolling expatriates in host-

country benefit programs and /or making up any difference in coverage

– Whether host-country legislation regarding termination affects benefit

entitlement
– Whether expatriates should receive home country or host country social
security benefits
– Whether benefits should be maintained on home country or host country
basis, who is responsible for the cost, whether other benefits should be
used to offset any shortfall and whether home country benefit programs
should be exported to local nationals in foreign countries
 TAX EQUALISATION

• Organizations withhold an amount equal to the home country

tax obligation of the PCN and pay all taxes in the host country.
• Firms withhold an amount equal to home country tax obligation,
and pay all taxes in the host country
• By far the more common taxation policy used by multinationals
• Tax payments equal to liability of home country tax payer with
same income and family status are imposed on employee’s
salary and bonus
• Additional premiums or allowances are paid tax free
 TAX PROTECTION
 The employee pays up to the amount of taxes he or she would pay on remuneration in the home country.

 In such a situation, the employee is entitled to any windfall received if the total taxes are less in the foreign
country than in the home country.

 Employee pays up to the amount of taxes he or she would pay on compensation in the home country

 Employee is entitled to any windfall received if total taxes are less in the host country than in the home country
 Benefits
• Support rendered to an expatriate in addition to the
allowances provided. There are several types of benefits,
more prominent examples being:
• Social Security Benefits (home country or host country?)
• Paid Vacations for expatriate and family
• Rest and Rehabilitation leave (especially for expatriates based
in “hardship” assignment locations)
• Emergency Cases (severe illness, death)
 Use of Long Term benefits

• Employee Stock Option Plan (ESOP)

This is plan established by a company wherein a certain no. of

shares are reserved for purchase and issuance to key
employees. Such shares usually vest over a certain period to
serve as an incentive for employees to build long-term value
for the company.
 Use of Long Term benefits contd.
Restricted Stock Unit ( RSU)

• This is a plan established by a company, wherein units of

stocks are provided with restrictions on when they can be
exercised.

• It is usually issued as partial compensation for employees.

• The restriction generally lifts in 3-5 years when the stock

vests.

• IT companies are increasingly using RSUs as incentives since

they afford a lot more flexibility.
 Use of Long Term benefits contd

Employee Stock Purchase Plan ( ESPP)

–This is a plan wherein a company sells shares to its

employees usually, at a discount.

– The company deducts the purchase price of these shares

every month from employees salary.
 Compensation Approach in various
countries
• In USA - Compensation package includes: base salary, bonus,
long term incentives & other benefits and peaks. The base
salary is the small part of the total package.

• In Europe – Paid less compensation than that of American

executives, but benefits and Employee perks are much better
in Europe than America.

• In Japan – The compensation levels of CEO’s of large

companies are just one-third of those of American CEO’s.
Japanese compensation is based on seniority of employees.
 Compensation- Two issues:

– Pay executives in different countries according

to the standards in each country?
or
Equalize pay on a global basis?

– What should be the Method of payment ?

43
 Compensation issue

Type of Company Payment

How much home-country

Ethnocentric
expatriates should be paid.

Pay can and should be

Polycentric country-specific.

May have to pay its

Geocentric/Transnational international cadre of
managers the same.
44
 Employee Expectations and International
Organization’s Compensation Policy

– Financial protection in terms of benefits,

social security and cost of living in the
foreign location

– Foreign assignment offers opportunities for

advancement through income and/or
savings

– Issues such as housing, education of the

children and recreation are addressed

Note -: that the expectations of the employees often do not

coincide with the interests of the organization
 Complexities of Global
Compensation
Varying Exchange Rate
Requirements Varying Tax
Fluctuations
for Facilities Rates

Varying Cost of
Living Complexities of Varying
Compensation Inflation Rate
Management

Employee Varying Local

Expectations Conditions

Consistency & Country

Equity Perspectives
 Objectives Of Global
Compensation
Improve Recruit & Retain
Organizational Consistency &
Competent Employees
Performance Equity in pay

Objectives of Employee
Benefit
Compensation mobility in a
management
Management Cost-effective

Competitive & Financial

Comparable protection to
Organization
employee
Ability to pay
 Factors that affect Global
Compensation
Founder’s
Philosophy
MNC’s Internal
MNC’S External
Environment
Environment
• Goal Orientation &
• Parent Country
compensation objectives

• Competitive strategy • Labour Market

Characteristics
• Organisational Culture
• Local conditions
• Human Resource Structure
• Home & Host Country govt.
• Employee-Employer roles
Relations
• Industry type
• Subsidiary role
• Competitor’s Strategies
• Level of Technology MNC’s Compensation
Package
Global Compensation Management Approach
 Some Facts about
compensation…
• A Chinese manager with 15 years experience costs less than USD
70,000 per annum, A US expatriate manager with corresponding
expertise would cost his or her organization USD 300,000 per year

• Average wage of Chinese worker is only about 3-5% of that of the

U.S. worker.

• Vacation time is not important in benefit to Japanese worker, they

take off 3- 4 days off in a Year. However Vacation and holidays are
important in AFRICA, AMERICA and Asian countries.

• In European countries , efforts are progressing to establish EUROPAY,

by which member nations would develop common policies regarding
compensation practices.
Criterion America Japan Russia Middle East

Orientation Performance Seniority - based Job – level Nationality group

-oriented based and job level

Components BS- Basic Salary, VB MW – Monthly BS- Basic Salary BS- Basic Salary, VB
– Variable bonus, LTI wage, BA – Basic FB – Fixed – Variable bonus,
– Long tern Allowance, OT – Bonus, NMB – Compulsory
incentives, CBC – Overtime, VB – Non monetary benefit
Compulsory benefit Variable bonus benefits) contributions, VBC-
contributions, VBC- Voluntary benefit
Voluntary benefit contribution
contribution
Link with Excellent linkage Moderate linkage Poor linkage Moderate Linkage
performance

Basis of Annual merit Seniority and Seniority in Job Job Level

Increase increase age, performance level
ratings, spring
wage negotiation
Influencing Achievement – Hierarchy; Material Material
Cultural orientation Patience Possessions Possessions
variables Material possession Status seniority
 National differences in compensation
CEO HR Director Accountant Manufacturin
g Employee
Argentina $860,704 $326,874 $63, 948 $17, 884

Canada 742,228 188, 070 44,866 36,289

Germany 421,622 189,785 61,375 36,934

Taiwan 179,486 102,491 30,652 11,924

United 719,665 268,302 107,839 28,874

Kingdom
United States 1,403,899 306,181 66,377 44,680