INTERNATIONAL COMPENSATION MANAGEMENT
compensation administration administration in Introduction: One of the key components of IHRM is the compensation MNCs. Today, Today, compensation and employee emplo yee benefits bene fits contribute co ntribute to 4!"# of the total costs. Compensation is strate$ically reported and monitored at the broad % le&els and 'ith the in&estor in&estorss to assess assess the health of the or$ani(at or$ani(ation. ion. )hat )hat is compensa compensation tion mana$em mana$ement* ent* +ffecti&e and efficient process of mana$in$ the earnin$s financial and non!financial re'ards of the employees employees in an or$ani(ation or$ani(ation based on their performance to'ards or$ani(ational or$ani(ational $oal is called compensation mana$ement. International Compensation is an internal rate of return monetary or non! monetary re'ards - packa$e includin$ base salary, benefits, per/uisites and lon$ term 0 short term incenti&es that &alued by employee1s in accordance 'ith their relati&e contributions to performance to'ards achie&in$ the desired $oal of an or$ani(ation. It influences2 influences 2 3Or$ani(ational culture 3Recruitment and selection of competent employees 3Moti&ation and performance
Objectives of compenstion: compenstion:
Compensation Compensation decisions decisions are strate$ic strate$ic decisions and play a key performance and sustainable competiti&e ad&anta$es for international firms. Therefore the key obecti&es are2
role in achie&in$ achie&in$ national as 'ell as
3 Attract e m p l o y e e s w h o a r e / u a l i f i e d , e 5 p e r i e n c e d a n d i n t e r e s t e d i n international assi$nments. 3 Facilitate the movement of expatriate’s expatriate’s from one subsidiary to another, from home to subsidiary, and back from subsidiary to home. 3 Provide a consistent and reasonable relationship bet'een the pay le&els of employees at head/uarters, domestic affiliates and forei$n subsidiaries. 3 Be cost effective by reducin$ unnecessary unnecess ary e5penses. 36hould be easily understood and easy to administer .
Components of Compenstion: Compenstion:
components of international compensation comprises the base salary, incenti&es, benefits, allo'ances, forei$n ser&ice inducement- hardship premium, lon$ term benefits and ta5es etc.
!se S"r#:
7ase salary is the amount of money that an e5patriate normally recei&es in the home country. In the united states, this 'as around 8 9:", for upper!middle mana$ers in the late 9;;s, and this rate 'as similar to that paid to mana$ers in both
6 MNC and assi$ned to 6pain 'ould ha&e a base salary that reflects the salary structure in =ermany. 3The salaries usually are paid in Home currency, local currency, or a combination of the t'o. The base pay also ser&es as the benchmarks a$ainst 'hich bonuses and benefits are calculated. !enefits:
3 ?lternati&ely kno'n as indirect compensation, 3 7enefits c o n s t i t u t e a substantial portion of international compensation appro5. one third of compensation for re$ular employees is benefits. 3 7enefits include a suit of pro$rams such as2 % +ntertainment, @esti&al celebrations, =ifts, >se of club facilities, pro&ision of hospitality includin$ food and be&era$e, employee 'elfare, use of health club, Con&eyance tour and tra&el, Hotel 7oard and Aod$in$, &ehicles, telephone and other telecommunication facilities, 6ponsorship of children. 37asically an employee tends to oin and stay 'ith an or$. 'hich $uarantees an attracti&e benefits pro$ram. 3Bacation alon$ 'ith holidays and rest breaks help employees miti$ate fati$ue and enhance producti&ity durin$ the hours employees actually 'ork. A""o$nce:
It is an ine&itable feature of International compensation. The most common allo'ance relates to the cost of li&in$ % an adustment for different in the cost of li&in$ bet'een the home country and forei$n country assi$nment. This allo'ance i s desi$ned to pro&ide the e5patriate 'ith the same standard of li&in$ that he or she enoyed in the home country. 6pouse assistance, housin$ allo'ance, home lea&e allo'ance, relocation allo'ance and educational allo'ance are the popular in e5pats. These allo'ances are often contin$ent upon ta5 % e/uali(ation policies and practices in both the home and the host countries.
Incentives: 3?n additional payment or other remuneration to employees as a means of increasin$ output. Increasin$ly, MNCs these days are desi$nin$ special incenti&e pro$rammes for keepin$ e5patriates moti&ated. In the process, a $ro'in$ number of firms ha&e dropped the on$oin$ premium for o&erseas assi$nments and replaced it 'ith a one % time, lump!sum premium.
3 The lump % sum payment has at least three ad&anta$es2 3@irst, e5patriates reali(es that they are paid this only once and that too 'hen they accept an o&erseas assi$nment. 6o the payment tends to retain its moti&ational &alue. 36econd2 costs to the company are less because there is only one payment and no future financial commitment. This is so because incenti&e is a separate payment, distin$uishable from a re$ular pay, and it is more rapidly for sa&in$ or spendin$. 3 Third, less chances for pre mature repatriation.
%orei&n Service ' (rds)ip Premium:
This is often percei&ed as an inducement in the form of a salary premium to accept an o&erseas assi$nment. =enerally, salary premiums &ary from "4# of the base salary. ?ctual salaries depend upon the assi$nment, actual hardship, ta5 conse/uences and len$th of assi$nment. In addition, if the 'ork % 'eek in the host country is lon$er than in the home country , the assi$nee 'ill be paid for the e5tra hours 'orked. Certain countries are hi$hly hostile to forei$ners stayin$ and 'orkin$. 7an$ladeshis en$a$ed in road construction 'ork in ?f$hanistan, for e5ample, face constant threat li&es. In fact, ten such emi$rants $ot killed in recent times DE!D:. +5patriates in such en&ironments are paid D!F times more than their domestic salaries. Lon& term !enefits:
The most common lon$ term benefits offered to employees of MNCs are +mployee 6tock Option 6chemes +6O6. Traditionally +!6O6 'ere used as means to re'ard top mana$ement or key people of the MNCs. 6ome of the commonly used stock option schemes are2 !+mployee 6tock Option Glan +6OG! a certain nos. of shares are reser&ed for purchase and issuance to key employees. 6uch shares ser&e as incenti&e for employees to build lon$ term &alue for the company. ! Restricted 6tock >nit R6> % This is a plan established by a company, 'herein units of stocks are pro&ided 'ith restrictions on 'hen they can be e5ercised. It is usually issued as partial compensation for employees. The restrictions $enerally lifts in F!" years 'hen the stock &ests
! +mployee 6tock Gurchase Glan +6GG % This is a plan 'herein the company sells shares to its employees usually, at a discount. Importantly, the company deducts the purchase price of these shares e&ery month from the employee1s salary Hence, the primary obecti&e for pro&idin$ stock options is to re'ard and impro&e employee1s performance and -or attract - retain critical talent in the Or$ani(ation T*es:
The final component of the e5patriate1s remuneration relates to ta5es. MNCs $enerally select one of the follo'in$ approaches to handle international ta5es2 9. Ta5 e/uali(ation2 @irms 'ithhold an amount e/ual to the home country ta5 obli$ation of the e5patriate, and pay all ta5es in the host country. D. Ta5 protection2 The employee pays up to the amount of ta5es he or she 'ould pay on remuneration in the home country. In such a situation, the employee is entitled to any 'indfall recei&ed if total ta5es are less in the forei$n country than in the home country.
Ta5es
6alary
International Compensation Incenti&es
?llo'ances
Aon$ term 7enefits
@i$. components of International compensation
7enefits
%ctors inf"uencin& t)ese components :
Remuneration or compensation &aries country to country and one MNC to another. Mainly based on t'o factors2 +5ternal and Internal.
Domestic
Remunertion' Compenstion
International
E*tern" %ctors
Intern" %ctors
!Aabour Market !Cost of li&in$ !Aabour >nion !=o&t. Ae$islation !6ociety !+conomy
!7usiness strate$y
!Garent Nationality
!=oal orientation
!Aabour market characteristics !Aocal Culture !Home and Host Countries =o&ernment1s Roles !Industry Types !Competitors
!Capacity to pay !Competiti&e 6trate$y !Or$. Culture ! Int. )orkforce composition !Aab. Relations !6ubsidiary role
!
Ho'e&er, these factors can be classified in fi&e cate$ories2 9. Grosperity 0 6pendin$ Go'er Of the company a related factor is the different Ta5 and social security 6ystem in the country. D. Cultural ifference F. Golicy 0 6trate$ies in producti&ity and Gerformance e&aluation 4. 6ituations on the rele&ant Aabor market 0 labor capital ratios ". Institutional @rame'orks 'ithin 'hich 'a$e 7ar$ainin$ takes place
Compensation Ghilosophy2 6ince compensation is a crucial factor, ha&in$ its bearin$ on performance and satisfaction, it is ad&isable that international business should ha&e a clear cut compensation philosophy
No' the /uestion comes 'hat is Compensation Ghilosophy* Compensation philosophy is the set of values and beliefs that an or$ani(ation has 'ith re$ard to monetary and non!monetary benefits payable to employees. ?ny compensation philosophy should co&er the follo'in$ aspects2 3=oals of the or$ani(ational compensation system 3Gercenta$e of compensation linked to indi&idual performance and base salary. 3Role of performance appraisal in disbursin$ compensation 3The p o s i t i o n i n $ o f c o m p e n s a t i o n o f e m p l o y e e s r e l a t i & e t o m arket
Therefore, Compensation philosophy or the set of values and beliefs combined 'ith a set of $uidelines that further assist in compensation administration of MNCs. Theories of compensation2 There are $enerally 4 theories in the conte5t of international compensation2 9. Contin$ency theory. D. Resource % based theory. F. The ?$ency theory and 4. +/uity theory 9. Contin$ency theory most popular 2 +5pats compensation should be based on particular contin$encies or situation pre&ailin$ in a host country. The compensation Ghil, in e&ery or$ani(ation is normally de centrali(ed and allo's units to locali(e the compensation structure D. Resources based theory2 Human resource is the $reatest asset of the MNCs in its competiti&e ad&anta$e needs $ood pay and st. salary band for cont. moti&ation. The or$ani(ations follo' this theory, remain market % sensiti&e and are constantly re&ie'in$ compensation to retain their position in the hirin$ and retainin$ the talents F. The ?$ency Theory2 This theory focused on the di&er$ent interests and $oals of or$.1s stakeholders and the 'ay that employees compensation can be used to ali$n these interests 0 $oals. ?ccordin$ to this theory, there e5ists a principle % a$ency relationship bet'een the MNCs H and its 6ubsidiaries for +5pats Compensation. 4. +/uity Theory2 +/uity theory su$$ests that there should be a fair balance bet'een an e5patriate1s contribution to an MNC and 'hat he - she recei&es as compensation. Of late, the e/uity principle is sou$ht to be compromised 'ith a ne' approach to compensation % JGerson based rather ob centricK.
Compensation practices in different countries2 The o&erall compensation packa$e often &aries from country to country due to le$ally mandated benefits, ta5es, cost of li&in$, cultures and employee e5pectations. +)t is Cost of "ivin&,
?n inflationary indicator that measures the chan$e in the cost of a fi5ed basket of products and ser&ices, includin$ housin$, electricity, food, and transportation. The cost!of! li&in$ inde5 is published monthly, also called cost!of!li&in$ inde5, also called Consumer Grice Inde5 CGI. (our"# +&es in -ifferent Countries. COUNTRY
$/HOUR
Nor'ay =ermany former )est 6'it(erland 7el$ium 6'eden >nited 6tates @rance 7ritain
F9." F9.D" D:.L: D:.:F D".9L D9.;: D9.9F D.F: D.; D." 9;.DL 9L.F" 94.;E 99.:F 9.DL E.DF ".L4 D.E: D.4L .EF .4;
Ho'e&er, as 'e obser&ed, there are, some common elements in compensation packa$e includin$ b as e salary, benefits, allo'ances, incenti&es and ta5es let see the compensation systems in the different countries2 Criterion Americ /pn Russi Midd"e Est
Orienttion
Gerformance ! oriented
6eniority ! based
Nationality $roup and ob le&el 76, H?,??, @?, ?@-BT, 6@, B7 Incenti&es. Moderate Ainka$e
Components
76,B7,ATI, C7C, B7C
M) 7?OT, B7
76, @7, NM7
Lin0 $it) performnce !sis of
+5cellent linka$e
Moderate linka$e
Goor linka$e
?nnual merit increase
6eniority and a$e, performance
Increse Inf"uencin& Cu"tur" vrib"es
?chie&ement %
ratin$s, sprin$ Hierarchy Gatience
6eniority in
Material Gossessions
Gossessions
6tatus seniority
76! 7asic 6alary, B7 % Bariable bonus, ATI % Aon$ tern incenti&es, C7C % Compulsory benefit contributions, B7C!Boluntary benefit contribution, M) % Monthly 'a$e, 7? % 7asic ?llo'ance, OT % O&ertime, @7 % @i5ed 7onus, NM7 % Non monetary benefits
Approc)es to e*ptrite re compenstion:
)orkin$ 'ithin the components described abo&e, MNCs seek to tailor remuneration packa$es to fit 'ith the specific siuation. @or e5ample, senior le&el mana$ers, in 6, 'here the $ap is much hi$her. Many senior % le&el mana$ers in +urope are paid much less than their >6 counterparts. In desi$nin$ an e5patriate1s remuneration, firms $enerally follo' a number of approaches. The most common are t'o2 9. The 7alance!sheet or Home % net system D. The local =oin$ rate system or locali(ation system !"nce1S)eet Approc):
)hich in&ol&es ensurin$ that the e5patriate1s is Pmade 'hole1 and does not lose money by takin$ the forei$n assi$nment. The basic obecti&e is to maintain the home % country li&in$ standard, plus offer some financial inducement Thus, it links the salary of e5patriates and TCNs to home country salary structure. The key assumption is that forei$n assi$nees should not suffer financially due to transfers. The salary packa$e is di&ided into four parts2 3 =OO6 ?N 6+RBIC+6 % @OO, G+R6ON?A C?R+, CAOTHIN=, HO>6+HOA @>RNI6HIN=, R+CR+?TION 3 HO>6IN=2 Maor cost associated 'ith host country 3 INCOM+ T?Q+6 % Garent country and Host country income ta5es 3R+6+RB+ % CONTRI7>TION6 TO 6?BIN=6, G?M+NT6 @OR 7+N+@IT6, G+N6ION CONTRI7>TION6, INB+6TM+NT6, +>C?TION +QG+N6+6, 6OCI?A 6+C>RIT T?Q+6S )hen costs associated 'ith the host country assi$nment e5ceed e/ui&alent costs in the parent country, the firm and e5patriates, to$ether meet these costs to ensure that parent country e/ui&alent purchasin$ po'er is achie&ed. @or e5ample, if >6 national is posted in 7an$ladesh and suppose the dollar e5chan$e rate is 8 9 Tk. "-! and COA? Inde5 is ", then the breakup of the annual pay 'ill be 2
Item
Amount in 2 per #er in 3S
Pid in 2 in !-
Pid in T04 In !-
7ase pay
9,,
E,
D,,
Cost of li&in$ allo'ance O&erseas allo'ance Hardship allo'ance Housin$ deduction Income ta5 deduction Total pay
9,
Nil
",,
D,
D,
Nil Nil Nil Nil Rs. D",,
",
",
Advnt&es: 3+5patriate is $uaranteed his home country spendin$ po'er. 3+asy to communicate to employees
isad&anta$es2 Three problems faced in applyin$ this system are2 9. Recalculatin$ the salary from $ross to net and &ice &ersa. D. In $rossin$ up the net income in the host country, there should be strictly identical items same car and housin$. This is the difficulty. F. Can result in disparities bet'een e5patriates of different countries 54 Goin& Rte Approc):
In this, e5patriates are paid accordin$ to the host country salary structures. 37ased on local market rates % the base salary is linked to the salary structure in the host country. 37ase pay and benefits may be supplemented by additional payments for lo'! pay countries. ?d&anta$es 3+/uality 'ith local nationals 36implicity 3Identification 'ith the host country 3+/uity amon$ different nationalities
-isdvnt&es: 3Bariation bet'een assi$nments for same employees 3Bariation bet'een e5pats of same nationality in different locations 7an$ladeshi e5patriated to the >6 may be compensated better than those assi$ned to a de&elopin$ countryGotential re!entry problems on return to home country, the e5pats. finds that his or her compensation is lo'er than that of the host country. T)e Stndrd Po"ic# of Compenstion mn&ement re6uired:
? The kno'led$e of employment and ta5ation la's2 customs, cost of li&in$ inde5, en&ironment, employment practices of &arious countries. 7 The kno'led$e of labor markets and industry norms re$ardin$ benefits and compensations. C The kno'led$e of forei$n e5chan$e rate fluctuations and monitorin$ inflation or cost of li&in$ Inde5 in different countries.
rate of
The kno'led$e and clear conception about the &ision and mission of the company, its corporate philosophy re$ardin$ mana$in$ human resources, its corporate strate$y of $ro'th or stability and strate$y of its business units re$ardin$ cost, leadership, differentiation and inno&ation Conc"usion:
3Hi$her basic salary 'ith lo'er benefits and incenti&es or 3Ao'er salary 'ith hi$her le&el of benefits and incenti&es , may not moti&ated the e5patriates and therefore, re/uired hi$h de$ree of e5pertise - standard policies for MNCs specially in the field of compensation mana$ement. 3The policy decisions should be consistent 'ith the o&erall strate$y structure and business needs of the multinationals. 3The policy should be attract and retain the best staff in those areas 'here the firm has $reatest needs and opportunities and 'here its core competencies. 3The policy must facilitate the transfer of international employees in a cost effecti&e manner. 3The policy should $i&e due consideration to e/uity case of administration.
