Subject Name: International human resource management.

Subject Code: 14MBAHR409

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 UNIT 6
INTERNATIONAL COMPENSATION

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 LEARNING OUTCOMES

• To understand the meaning of International compensation.

• To understand the key components of international compensation.

• To understand the compensation practices across countries.

•To understand the trade unions and MNE’s at global level.

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 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.
Principles of compensation
 Be legal

 Be adequate

 Be motivating

 Be equitable

 Be cost-benefit effective

 Provide security
 FORMS / COMPENSATION OF COMPENSATION

1. Financial compensation-
a) Direct methods-
i) Basic salary.
ii) Bonus.
iii) Allowances.
iv) Incentives.

b) Indirect methods.
i) Leave policy.
ii) Overtime policy.
iii) Hospitalization.
iv) Insurance.
v) Leave travel.
vi) Retirement benefits.
vii)Holiday homes.

2. Non-financial compensation-
i) Achievement.
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ii) Recognition. 18

iii) Responsibility.
 Components Of International / Global
Compensation Package
Base Salary and Allowances Taxes Retirement
Incentive Pay Benefits

• Pay/Base • Cost of Living •Exchange Rate • Gratuity

salary Protection
• Housing Allowance • Pension
• Bonus •Tax Equalization
• Educational Allowance • Social Security
• Stock-Option • International Measures
• Medical Allowance Market

• Insurance Allowance •Tax Protection

• Relocation Allowance

• Hardship Premium
 FACTORS THAT INFLUENCE COMPENSATION POLICY

1. Demand and supply.

2. Bargaining power.

3. Cost of living.

4. Condition of product market.

5. Comparative wages.

6. Ability to pay

7. Job requirements.

8. Goodwill of the company.

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Variables Influencing Compensation
Internal and external
MNC Internal relativities MNC External
Environment Environment
 Goal Orientation  Parent Nationality
 Capacity to pay  Labour market
 Competitive strategy characteristics
 Organizational culture  Local culture
 Internal workforce  Home and host country
composition government’s role
 Labour relations  Industry type
Staffing
 Subsidiary role  Competitors strategy
Orientation

International
Compensation Strategy
 KEY COMPONENTS OF INTERNATIONAL COMPENSATION

1. Base salary.
2. Incentives-

i) Foreign service premiums.

ii) Hardship premiums.
iii) Mobility premiums.

3. Allowances-

i) Cost of living allowance. (COLA)

ii) Housing allowance.
iii) Home leave allowances.
iv) Educational allowances
v) Re-location allowances.
vi) Spouse assistance.

4. Benefits

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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 ?

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 National differences in compensation

CEO HR Director Accountant Manufacturing

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
 Compensation issues

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. 14
 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
 Approaches to international compensation

• Going rate approach- When the compensation packages of the expatriates are
determined on the basis of the salary structure prevailing in the host nation, it is
called the going rate approach.

•Balance sheet approach- The basic objective is to ensure that employees can
maintain a standard of living in the country of assignment similar to that which
enjoy in their home country.

•Other approaches-

1. Citizens approach.
2. Lump sum approach

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Going Rate Approach
 Based on local market rates
 Relies on survey comparisons among
 Local nationals (HCNs)
 Expatriates of same nationality
 Expatriates of all nationalities
 Compensation based on the selected survey comparison
 Base pay and benefits may be supplemented by additional payments
for low-pay countries.

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Advantages and Disadvantages of
the Going Rate Approach
 Advantages  Disadvantages

 Equity withy local  Variation

between
nationals assignments for
 Simplicity
same employee
 Variation between
 Identification with
host country expatriates of
same nationality in
 Equity among different countries
different
 Potential re-entry
nationalities
problems
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The Balance Sheet Approach
 The basic objective is to ‘keep the expatriate whole’
through maintenance of home-country living
standard plus a financial inducement to make the
package attractive.
 Home-country pay and benefits are the foundations
of this approach
 Adjustments to home package to balance additional
expenditure in host country
 Financial incentives (e.g., expatriate/hardship
premium) added to make the package attractive
 Most common system in usage by multinationals

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Major Categories Incorporated in
the Balance Sheet Approach (cont.)
 Goods and services
 Home-country outlays for items such as food, personal
care, clothing, household furnishings, recreation,
transportation, and medical care.
 Housing
 Major costs associated with housing in the host country.
 Income taxes
 Parent-country and host-country income taxes.
 Reserve
 Contributions to savings, payments for benefits, pension
contributions, investments, education expenses, social
security taxes, etc.
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A Typical Balance Sheet Additional Costs
Paid by Company

Home- and
Host-Country Premiums and
Income
Incentives
Income Taxes Taxes
Income
Income Housing Taxes
Taxes Housing Housing
Housing
Goods and Goods and
Goods and Goods and
Services Services Services Services
Reserve Reserve Reserve Reserve
Host-Country Home-Country
Home-Country Host-Country Costs Paid by Equivalent
Salary Costs Company and Purchasing
from Salary Power
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Expatriate Compensation Worksheet
Advantages and Disadvantages of
the Balance Sheet Approach
 Advantages:  Disadvantages:
 Equity  Can result in great
 Between disparities
assignments  Between expatriates
 Between Expatriates of different
of the same nationalities
nationality  Between expatriates
 Facilitate re-entry and local nationals
 Easy to communicate to  Can be complex to
employees administer
 May entail difficulty to
attract human capital

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Taxation
 This aspect of international compensation probably causes
the most concern to HR practitioners and expatriates (both
PCNs and TCNs), as taxation generally evokes emotional
responses. No one enjoys paying taxes, and this issue can
be very time consuming for both the firm and the
expatriate.
 An assignment abroad can mean that a U.S. expatriate is
taxed both in the country of assignment and in the USA.
This dual tax cost, combined with all of the other
expatriate costs, makes some U.S. multinationals think
twice about making use of expatriates.

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Approaches to international
taxation
 Tax Equalisation:
 Companies withhold an amount equal to
home country tax obligation of the PCN and
pay all the taxes

 Tax Protection:

IBUS 618 Dr. Yang 26

 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 &
compensation objectives • Parent Country

• 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
Internal Variables influencing International
Compensation Strategy

 Goal orientation
 UK-based foam manufacturer Zotefoam, where equality is a key
aspect of HRM in the company’s mission, the only perks that
differentiate executives from other workers are private health
insurance and a car allowance – MD of the firm sees the
internationalizing firm as one with minimal status differences between
levels in the org. hierarchy

 Capacity to pay
 Cost constraints on the enterprise

 Competitive strategy
 If for eg., as part of the MNC competitive strategy, the IHRM strategy
is to be a market leader in employee compensation in order to
compete for the most competent candidates, then the levels of
compensation might well be higher than if the competitive strategy is
based on, say, the provision of secure employment.
 Cont….
 Organization culture

 It also influences the degree to which employees are

compensated on the basis of seniority, in contrast to personal
connections or performance

 Workforce characteristics
 Age, education level, qualifications and experience, along with
workforce tastes and preferences, and labor relations factors
such as nature of employment relationship (level of TU
involvement within MNCs) will result in different international
compensation approaches
 External Variables influencing International
Compensation Strategy

 Nationality of the parent country

 In terms of culturally determined values and attitudes towards
compensation policy and practices – local culture influences
international compensation strategy through the dominant societal
values, norms, attitudes and beliefs concerning for eg. bases for
compensation differences (performance, family connections, gender),
degrees of compensation differences between managerial and non-
managerial employees, and the propensity for using particular types of
compensation (pay incentives and benefits)

 Labor market characteristics of supply and demand

 Education and skill levels, ages and experiences of those in the

labor market

 Role of home and host country government in labor relations

 Affect the level of govt. regulation of the labor market and employment
relationship, including compensation of the workforce
 Cont..

 Industry type

 Evidence from 2 global industries, scientific measuring and medical

instruments suggest that MNCs competing in a global industry may be more
likely to allocate rewards based on corporate and regional performance rather
than on subsidiary performance, as favored by MNCs competing in a multi-
domestic industry
 Different industry sectors also have different norms and practices for
international compensation (eg. service-sector and high technology MNCs
have been more likely than manufacturers to incorporate equity-based options
in their international compensation strategies

 Competitors’ strategies
 Even if the MNC is not seeking to be a market leader in international
compensation, it generally cannot afford to fall behind market rates across its
locations, as it will risk losing valuable employees to competitors
 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
 INTERNATIONAL LABOUR RELATIONS

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 LEARNING OUTCOMES

• To understand the meaning of International labour relations.

• To understand the key issues in International labour relations.

•To understand the key issues in industrial relations and the policies and
practices of multinationals.

•To Examine the potential constraints that trade unions may have on
multinationals.

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 INTRODUCTION

•Cross-cultural difference in industrial relations (IR) and collective bargaining

The concept
Level of negotiations
Objectives
Rules and regulations

•Cross-cultural differences also emerge as to the enforceability of disputes.

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 Union Structures

•Union structures differ considerably among countries, e.g.

Industrial unions – Represent all grades of employees in an industry;

Craft unions – Based on skilled occupational groupings across industries;

Conglomerate unions – Represent members in more than one industry;

General unions – open to almost all employees in a given country.

•IR policies must be flexible enough in order to adapt to local requirements.

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 Trade Union Structures in Leading Western Industrial Societies

Australia General, craft, industrial, white-collar

Belgium Industrial, professional, religious, public sector
Canada Industrial, craft, conglomerate
Denmark General, craft, white-collar
Finland General, white-collar, professional and technical enterprise
Japan Enterprise
Norway Industrial, craft
Sweden Industrial, craft, white-collar and professional
Switzerland Industrial, craft, religious, white-collar
The Netherlands Religious, conglomerate, white-collar
UK General, craft, industrial, white-collar, public sector
US Industrial, craft, conglomerate, white-collar
West Germany Industrial, white-collar
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 Key Issues in International Industrial Relations

•National differences in economic, political and legal systems produce markedly

different IR systems across countries

•Multinationals generally delegate the management of IR to their foreign

subsidiaries.

•Generally, corporate headquarters will become involved in or oversee labor

agreements made by foreign subsidiaries because these agreements may affect
the international plans of the firm and/or create precedents for negotiations in other
countries.

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 FACTORS INFLUENCING INTERNATIONAL INDUSTRIAL RELATIONS

• IHR management approach.

•MNE prior experience in industrial relations.

•Management attitudes towards unions

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 Management Attitudes towards Unions

•Knowledge of management attitudes or ideology concerning unions provides a

more complete explanation of multinational industrial relations behavior than relying
solely on a rational economic model.
Competitive/confrontational versus cooperative
Works council

•Union density in western industrial societies

Denmark has the highest level of union membership
U.S. has the second lowest
France has the lowest in the western world.

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 SELF CHECK EXERCISES

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 SELF CHECK EXERCISES

1. What do you mean by international compensation?

2. Explain the approaches to international compensation.

3. What are the forms of compensation.

4. Name some of the issues in international compensation.

5. What do you mean by international labour relations?
6. What are the key issues in international compensation?
7. What are the factors that influence international industrial relations.

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