International Compensation Management

. 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.

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.

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.

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.

 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