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Host country national's reactions to

expatriate pay policies: making a case
for a cultural alignment pay model
a
Ashish Mahajan
a
Odette School of Business, University of Windsor , Windsor, ON,
Canada
Published online: 27 Jan 2011.

To cite this article: Ashish Mahajan (2011) Host country national's reactions to expatriate pay
policies: making a case for a cultural alignment pay model, The International Journal of Human
Resource Management, 22:01, 121-137, DOI: 10.1080/09585192.2011.538973

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 The International Journal of Human Resource Management,
Vol. 22, No. 1, January 2011, 121137

Host country nationals reactions to expatriate pay policies: making

a case for a cultural alignment pay model
Ashish Mahajan*

Odette School of Business, University of Windsor, Windsor, ON, Canada

Limited evidence exists that explores the reactions of host country nationals (HCNs) to
ethnocentric pay policies of multinational enterprises (MNEs). However, HCNs are
important both for facilitating expatriate adjustment and also for increasing MNEs
effectiveness in the host nation. Using a social identity theory perspective, I argue that
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ascriptive identities formed on the basis of cultural values are deeply entrenched on
the cognitive make-up of HCNs. MNEs that downplay national cultural beliefs may
heighten hostility between HCNs and expatriates. I propose a cultural alignment model
as a significant step toward integrating HCNs perceptions and a way to reduce social
schism between expatriates and HCNs. Several positive outcomes resulting from
cultural alignment are also discussed.
Keywords: cultural alignment; expatriate compensation; expatriates; host country
nationals; national culture; social identity

Introduction
Although literature on international management is growing, research falls short on issues
related to international compensation (Gomez-Mejia and Welbourne 1991; Harvey 1993;
Bonache and Fernandez 1997). Even within the scant international compensation
literature, increasing attention has been given to attraction, motivation, retention, and
compensation of expatriates or parent country nationals and far less on other categories of
workers host country and third country nationals (HCNs and TCNs; Lowe, Milliman,
DeCieri, and Dowling 2002; Toh and DeNisi 2003, 2005). However, recent research
highlights the increasing importance of HCNs, both for increasing the performance of
multinational enterprises (MNEs) and for facilitating expatriates adaptation to the local
culture (Phillips and Fox 2003; Toh and DeNisi 2003, 2005).
Despite growing importance of HCNs, researchers have highlighted several problems
in the compensation programs of expatriates and HCNs (Harvey 1993; Chen, Choi and Chi
2002; Watson Wyatt Worldwide 2007/2008). Problems arise when, without reasonable
justification, expatriates compensation significantly exceeds that paid to their local
colleagues. HCNs, in response to this inequity may withhold social and technical support
to expatriates and in extreme cases may collectively display threatening and hostile
behaviors against MNEs (Florkowski and Fogel 1999). Furthermore, this may create a
social schism within the host unit and is likely to thwart any attempts made by expatriates
to adjust in the local environment.
However, global pay systems that are aligned with the values and beliefs of the local
culture render unique advantages to a firm. Such systems are perceived as fair and socially

*Email: amahajan@uwindsor.ca

ISSN 0958-5192 print/ISSN 1466-4399 online

q 2011 Taylor & Francis
DOI: 10.1080/09585192.2011.538973
http://www.informaworld.com
 122 A. Mahajan

responsive by HCNs (Graham and Trevor 2000). Research also shows that employees who
perceive fairness in social exchange processes are likely to demonstrate higher levels
of extra-role behavior, organizational commitment, interpersonal trust, moral standards,
work performance and lower levels of burnout, job stress, and employee turnover
(Konovsky and Pugh 1994; Dierendonck, Schaufeli and Buunk 1998; Moorman, Blakely
and Niehoff 1998; Masterson, Lewis, Goldman, and Taylor 2000; Cropanzano, Byrne,
Bobocel and Rupp 2001; Taris, Schreurs, Peeters, Blanc and Schaufeli 2001). At a
strategic level as well, fairness yields subsidiary managers increased acceptance of global
strategies formulated by the parent company (Kim and Mauborgne 1993a,b) and higher
commitment toward the strategic decision-making process (Kim and Mauborgne 1991;
Korsgaard, Schweiger and Sapienza 1995). This entails voluntary cooperation from local
subsidiary managers and also propels them to go beyond their call of duty.
Therefore, in this article, I turn the coin and look at the other side; i.e. highlight the
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negative impact of ethnocentric pay policies on HCNs and subsequently propose a cultural
alignment pay model as being more socially acceptable to HCNs. I argue that
organizational policies such as international pay that are aligned with the local cultural
values and norms (culturally aligned international pay; hereafter, CAIP) will be perceived
as fair and more acceptable to HCNs and thus will motivate them to demonstrate higher
order behaviors such as their voluntary cooperation and knowledge sharing with
expatriates. On the other hand, when MNEs pay policies follow an ethnocentric approach,
they are perceived to be less acceptable and unfair by HCNs and thus may only elicit
threshold behavior and compulsory cooperation from them. Based on my earlier work
(Mahajan and Benson 2005), I define CAIP as: (1) all forms of monetary and nonmonetary
rewards given to HCNs as part of their employment relationship that upholds their existing
cultural beliefs and (2) payments received by expatriates that are tied to the pay level of the
host nation.
I ground my arguments within the fabric of social identity theory (Tajfel and Turner
1979, 1986), as it is useful in understanding intergroup behavior. Furthermore, social
identity and its subsequent variant self-categorization theory (Turner 1987) provide a
useful framework for understanding how social identities are formed and why they are
important to employees. In an international setting, widely held cultural beliefs and values
play a crucial role in shaping ones identity. Therefore, social identity theory can provide a
useful basis for understanding how national identities become salient and what impact
they might have on interpersonal behavior in an organizational setting. Using social
identity theory, I argue that ethnocentric pay policies increase the salience of national
identity among HCNs and create polarization between HCNs and expatriates; whereas,
CAIP being culturally sensitive, can help HCNs identify with their organizations and
promotes cooperation between HCNs and expatriates.

A social identity theory perspective on expatriate HCN relationship

Social identity is rooted within the dynamics of intergroup behavior and can be defined as
those aspects of individuals self-image which they derive from being part of a social
group (Tajfel and Turner 1979, 1986; Hogg and Terry 2000; Haslam 2004). Individuals
make sense of the world by segmenting it into different groups or categories. Social groups
facilitate the formation of group members social identity, promote interdependence,
and facilitate interaction between group members (Turner 1987). Several external stimuli
influence how individuals form social categories, which in turn facilitate development of
their social identity. These influences can come from an individuals affiliation with an
 The International Journal of Human Resource Management 123

organization, religion, nation, gender, race, or other social categories (Salk and Shenkar
2001). Few researchers also argue that social categories formed on the basis of widely held
cultural values and beliefs are more potent than other external influences and may limit
individuals choice of identification with other social categories (Erez and Earley 1993;
Salk 1997; Salk and Shenkar 2001). Socialization into a national culture imparts values,
norms, and assumptions that are stable over time. Individuals may want to ascribe to their
national culture for forming their social identity, as it renders high prestige and brings
power and legitimacy to them as an in-group (Salk and Shenkar 2001).
Furthermore, such choice forms the cognitive component of individuals social
identity and helps them in making distinctions between other categories or groups
(Ellemers, Kortekaas and Ouwerkirk 1999). Everyone sharing a similar cognitive make-up
is considered as an in-group and others as an out-group. Moreover, strong sentiments for
in-groups and out-groups may perpetuate feelings of ethnocentrism, and thus create
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us-versus-them mindsets among employees (Brewer 1979; Hogg 2006). In such situations,
members of ones own group become the center of everything. Each group nourishes
its own pride, exalts its superiority, and looks down on the members of the other group
(Brewer 1979; Hogg 2006). Although this might create intragroup cohesion, it could be
a potential source for intergroup competition and dysfunctional conflict. Therefore, social
comparison based on ascriptive identities such as national culture can perpetuate
ethnocentric bias and increase social distance between employees belonging to a different
culture.
In a cross-cultural context, there are several ways through which MNEs inadvertently
create social categories between expatriates and HCNs, thereby perpetuating ethnocentric
bias and increasing social distance between them. First, not much emphasis is given to
cultural sensitivity while selecting employees for an expatriate position (Dowling, Welch
and Schuler 1999). Too much emphasis on technical competence might lead to bad
selection decisions (Black, Mendenhall and Oddou 1991). Such expatriates might be
insensitive and disrespectful to local cultural values and hence perpetuate hostility
between HCNs and expatriates. Second, top positions in overseas locations are reserved
for expatriates, which limits promotion opportunities for HCNs. This may only generate
threshold or minimum acceptable behavior from HCNs and may inhibit HCNs support
for expatriates.
Finally, a long-standing bone of contention between expatriates and HCNs has been the
level of compensation expatriates receive in comparison to HCNs (Toh and DeNisi 2005).
Most MNEs pay expatriates according to the balance sheet approach (Shelton 2008). The
idea is to keep expatriates economically whole, thereby minimizing any disadvantages
expatriates face due to relocation into a different country. The base pay of the expatriates is
linked to the home country and other allowances are adjusted in order to compensate for the
differences in living conditions between the home and the host country. Recent trends also
indicate MNEs using variants of the balance sheet approach (Dwyer 1999; Wentland 2003).
For example, a split-pay approach, in which expatriates can choose to be paid in the currency
of their choice; a flexible pay approach, in which expatriates are paid a lump sum amount
and can choose to allocate this amount between the expense accounts of their choice (Burns
2003; Shelton 2008). Although this may be advantageous for expatriates, it creates serious
problems in the host location. HCNs might perceive inequity between the compensation
they receive and that given to expatriates especially, when there is no reasonable
justification for giving higher compensation to expatriates.
With the changing nature of globalization, relative superiority of expatriates over
HCNs is diminishing (Toh and DeNisi 2005). Among a few factors that have contributed
 124 A. Mahajan

to this parity are the economic development of countries that are popular host destinations
for western expatriates such as India, China, Malaysia, and Singapore. Furthermore,
HCNs from these countries are trained in the western world and are similarly educated like
their expatriate co-workers. Given the lack of superiority of expatriates over HCNs, over-
payments to expatriates will appear grossly unjustified to HCNs. MNEs that adopt such
policies may create status differentials between expatriates and HCNs. Furthermore, such
differentials allude to the cultural superiority of expatriates over HCNs and thus perpetuate
us-versus-them mindsets (Toh and DeNisi 2003, 2005). Therefore, ethnocentric pay policies
increase the salience of national culture and increase polarization between expatriates and
HCNs. Also, they can threaten the positive social identity of HCNs as they might perceive
belonging to a low status group. A natural response of HCNs will be to restore their positive
identity by capitalizing on those factors that might help them in creating positive distinctions
from expatriates. Such factors may be in the form of HCNs hoarding local knowledge,
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showing lack of cooperation to expatriates, and displaying only minimum acceptable

behaviors. This will not only negatively impact adjustment of expatriates, but also will prevent
MNEs from hiring well-trained and qualified HCNs. Above all, such policies show a lack of
respect of MNEs to the cultural differences of the host nation.
With the changing nature of globalization, MNEs can attain competitive advantage
only if they can promote and sustain a high degree of interdependence between expatriates
and HCNs. As discussed above, ethnocentric pay policies can only polarize the two
groups. However, pay policies that respect cultural differences such as CAIP can reduce
polarization of HCNs and expatriates, and result in several positive behavioral outcomes.

Making a case for a cultural alignment pay model

A common theme emerging from the cross-cultural group of researchers (Hofstede
1980a,b; Newman and Nollen 1996; Schuler and Rogovsky 1998; Javidan, House and
Dorfman 2004; Javidan, Dorfman, Sully de Luque and House 2006) is the salience
of national culture as an enduring set of beliefs that influence employees behavior.
These beliefs shape the attitudes of HCNs and are reflected in their daily work and social
behavior. The enduring nature of these beliefs makes them resistant to change. Therefore, it
becomes extremely important for MNEs to understand cultural differences and formulate
management practices that are locally responsive. Several studies have also suggested that
acknowledging cultural differences and aligning management practices with the cultural
values of the host nation can help in building the competitive advantage of MNEs (Punnett
2004). Such alignment is crucial for successful negotiations with foreign firms, mergers
and acquisitions, overall integration of the subsidiary with the parent firm and, above all,
eliciting structural and emotional support from HCNs (Punnett 2004).
The question then is, how can MNEs align their pay practices with the underlying
values of the host nation and what positive outcomes might result from such an alignment.
In line with the cross-cultural group of researchers (Hofstede 1980a,b; Newman and
Nollen 1996; Schuler and Rogovsky 1998; Javidan et al. 2004; Javidan et al. 2006),
I propose that CAIP upholds the cultural values of HCNs and will help in eliciting desired
behaviors from them. Furthermore, localizing expatriate compensation will help in
removing inequities from the pay system and thus prevent any attenuation of positive
identity on the part of HCNs.
Several positive behavioral outcomes might result from such an alignment.
Specifically, I propose that CAIP will have a positive effect on the justice perceptions
of HCNs and will help in eliciting higher-order work outcomes like voluntary cooperation
 The International Journal of Human Resource Management 125

and knowledge sharing apart from their increased job performance. The thesis of my
argument is that CAIP will be more acceptable to HCNs, as it will reflect MNEs concern
and respect for their cultural values. This will help in reducing intergroup hostility
between expatriates and HCNs. CAIP will also reflect pay parity between expatriates and
HCNs, thus signaling perceived status similarity between the two groups. This will also
reduce salience of expatriates as an out-group and will increase HCNs motivation to
cooperate with expatriates (Leung, Su and Morris 2001). This, in turn, can direct primary
attention of HCNs toward the organization, thereby subsuming their group identity
(Worchel 1979).
So far, I have underscored the salience of national culture in shaping the identities of
HCNs. From a social identity theory perspective, I have argued that ascriptive identities
formed on the basis of national cultural beliefs are deeply entrenched within the cognitive
make-up of HCNs. MNEs which downplay national cultural beliefs may heighten
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intergroup hostility and work against expatriate adjustment. Subsequently, this can have a
negative impact on MNEs performance. On the other hand, culturally aligned policies,
such as CAIP, will minimize salience of expatriates as an out-group and increase
intergroup harmony. Such practices will also produce favorable justice perceptions and
increase associability and trust between HCNs and expatriates (Thomas and Ravlin 1995;
Leung et al. 2001). This, in turn, will have a positive effect on the psychological well-
being (PWB) of HCNs and will result in several favorable behavioral outcomes. Figure 1
shows the proposed relationships. It is then followed by a discussion of those relationships
and propositions emerging from the model.

Effect of CAIP on justice perceptions, perceived status similarity, and behavioral

intentions of HCNs
Previous research suggests that cultural differences in values and attitudes have an
important influence in shaping employees justice perceptions (McFarlin and Sweeney
1993; Morris and Leung 2000; Huo and Tyler 2001). Culturally aligned policies are also
likely to increase perceived similarity between expatriates and HCNs. In this section,
I highlight the need for acknowledging those differences and aligning MNEs policies to
accommodate the cultural beliefs of HCNs. Primarily, I argue that CAIP will favorably
impact distributive justice perceptions of HCNs and increase perceived status similarity
between HCNs and expatriates.

Shared
Perceptions of
Procedural Justice

Voluntary
Cooperation
Culturally
Perceived Behavioral Psychological
Aligned
Status Intentions of Well-Being of
International Knowledge
Similarity HCNs HCNs
Pay Sharing

Job
Perceived Performance
Distributive
Justice

Figure 1. Cultural alignment pay model: integrating perceptions of HCNs.

 126 A. Mahajan

CAIP and distributive justice perceptions of HCNs

Distributive justice refers to the perceived fairness in the distribution of outcomes and
rewards (Homans 1961). Previous research suggests that employees tend to lower their job
performance (Pfeffer and Langton 1993), reduce work quality (Cowherd and Levine
1992), and steal (Greenberg 1990) if they perceive distributive injustice. A few researchers
also argue that feelings of fairness are perceptual and that individuals seldom use an
objective standard of righteousness when they make distributive justice judgments
(Sheppard, Lewicki and Milton 1992; Folger and Cropanzano 1998). Such standards are
usually defined by an individuals value systems. Deutsch (1975) identified three values on
which individuals base their distributive justice judgments equity, equality, or need.
Equity principles are invoked when the goal is primarily economic in nature; whereas,
equality principles are invoked when individuals want to maintain enjoyable social
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relations. On the other hand, when individuals want to foster personal development or
welfare as a common goal, they invoke need-based principles to make distributive justice
judgments (Deutsch 1975).
Several cross-cultural studies have found that HCNs are guided by their cultural beliefs
when they make distributive justice judgments and therefore can invoke equity, equality,
or need-based principles. For example, studies done in the USA are largely supportive
of the equity principle (Cropanzano and Greenberg 1997). On the other hand, Miles and
Greenberg (1993) argue that whereas USA and Great Britain value the equity norm, other
European countries prefer the equality norm. In some other studies, which compared India
and the USA, need and caste emerged as a preferred norm for Indian subjects (Murphy-
Berman, Berman, Singh, Pachauri and Kumar 1984; Pandey and Singh 1997). Other cross-
cultural studies have also generally supported that individualistic cultures are more likely
to follow equity-based principles; whereas, collectivistic cultures are more likely to
embrace the equality norm (Kim, Park and Suzuki 1990; McFarlin and Sweeney 1993;
Leung 1997).
These studies suggest a pattern based on cultural differences and caution MNEs
against blatant espousal of home-country norms. MNEs that ignore cultural differences as
a causal factor, when in fact, cultural differences seem to be the most probable explanation
for the observed behavior, fall into the trap of increasing universalistic attribution bias
(Leung et al. 2001, p. 165). In other words, MNEs that do not give due importance
to cultural differences and evaluate HCNs behavior using home country standards,
risk misattributing cultural factors as probable causes of HCNs inappropriate behavior.
However, universalistic attribution bias can be substantially reduced if MNEs adopt
HR practices, such as CAIP, that demonstrate their respect for local cultural values.
Furthermore, when MNEs follow ethnocentric compensation practices, it accentuates
feelings of perceived injustice among HCNs and is likely to negatively impact their ability
to adjust to and work with expatriates (Black and Gregersen 1999).
Proposition 1: CAIP will be positively related to distributive justice perceptions
of HCNs.

CAIP and perceived status similarity among HCNs

Ethnocentric pay practices that require higher and oftentimes unjustified payments to
expatriates allude to cultural superiority of expatriates. Such pay practices create status
differentials between expatriates and HCNs and increase the salience of national identity
(Toh and DeNisi 2003, 2005). This in turn perpetuates identification with the sub-group
 The International Journal of Human Resource Management 127

(expatriates versus HCNs) rather than creating conditions where employees could identify
with the organization. Therefore, ethnocentric pay policies are likely to increase inter-
group hostility between HCNs and expatriates and can undermine joint accomplishment of
organizational goals. On the other hand, CAIP is likely to remove status differentials as
expatriates pay will be localized; thus, increasing perceived status similarity between
HCNs and expatriates.
Proposition 2: CAIP will reduce status differentials and increase perceived status
similarity between HCNs and expatriates.

Perceived status similarity and behavioral intentions of HCNs

Perceived status similarity between expatriates and HCNs is also likely to have favorable
impact on HCNs behavioral intentions; such as, associating with and trusting expatriates.
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Based on the similarity attraction paradigm (Byrne 1961), it is likely that HCNs are more
likely to associate with expatriates if they perceive them to be at their level. Localization
of expatriate pay also signals expatriates long-term commitment of working in the host
nation. It is likely that HCNs will gradually start trusting expatriates and accept them as
members of their in-group.
Empirical studies have also confirmed that culturally adaptive behavior of expatriates
increases their perceived similarity to HCNs. Further, perceived similarity was positively
related to HCNs intentions to associate with and trust expatriates (Thomas and Ravlin
1995). These researchers also found that HCNs who derived their self-concept from
identifying with their national culture perceived less similarity with expatriates and
were less likely to associate with and trust expatriates. Because CAIP reduces social
categorization between expatriates and HCNs and increases perceived status similarity
between them, it is likely that HCNs will be more comfortable in associating with
expatriates and gradually trusting them.
Proposition 3: Perceived status similarity between expatriates and HCNs will be
positively related to HCNs behavioral intentions to associate with and
trust expatriates.

Role of shared procedural justice as a moderator

Furthermore, the relationship between perceived status similarity and behavioral
intentions of HCNs will be strengthened if HCNs and MNEs (through their top
management) perceive high level of agreement over procedures used to determine
outcomes and those used to resolve conflicts (i.e. shared procedural justice perceptions).
Luo (2005), in a study of cooperative alliances found that high levels of shared procedural
justice perceptions between senior representatives of an alliance had a stronger link with
alliance profitability than unilateral perceptions of an individual party. Similarly, MNEs
risk increasing dysfunctional conflict and dissatisfaction among HCNs if they ignore
cultural beliefs of HCNs, which shape their procedural justice perceptions.
Several studies have also found cultural differences to account for significant variance
in HCNs procedural preferences for conflict resolution. For example, in an experimental
study, Leung and Lind (1986) found that Americans and Chinese differ on their procedural
preference for conflict resolution. Similarly, Leung (1987) also found that collectivists
like the Chinese preferred bargaining type procedures (i.e. non-adversarial), because they
were less formal, nonbinding, and resulted in animosity reduction; whereas, individualists
like the Americans favored adjudication (i.e. adversarial), because it was more formal and
 128 A. Mahajan

offered more process control. In another study, which compared the effects of masculinity
and femininity on process control, Leung, Bond, Carment, Krishnan and Liebrand (1990)
found that Dutch who scored high on femininity preferred a more cooperative style like
negotiation or mediation to resolve conflict; whereas, Canadians who scored high on
masculinity preferred a more confrontational style as a fair way to resolve conflict.
The above evidence highlights the importance of cultural differences that shape
procedural justice perceptions of HCNs. It is likely that HCNs who perceive high levels of
shared procedural justice will respond more positively.
Proposition 4: High levels of shared procedural justice perceptions between HCNs and
MNE (through its top management) will moderate the relationship
of perceived status similarity and behavioral intentions of HCNs.
Specifically, at high levels of shared procedural justice, relationship
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between perceived status similarity and behavioral intentions of HCNs

will be stronger than at low levels.

Psychological well-being of HCNs

Distributive justice perceptions of HCNs and their behavioral intentions to associate
with and trust expatriates will also affect their PWB. PWB is defined as the overall
effectiveness of psychological functioning of an individual (Wright and Cropanzano 2000,
2004). Various scholars have used it interchangeably with subjective well-being (e.g.
Diener, Suh, Lucas and Smith 1999) or emotional well-being (Wright and Cropanzano
2004). It comprises individuals emotional responses such as feelings of elation sadness,
pride anger and global judgments about satisfaction with ones life (Diener et al. 1999).
Aryee and Stone (1996) have proposed several work-related factors to affect the PWB of
an expatriate. Likewise, several work factors might influence PWB of HCNs. Specifically,
I propose that justice perception of HCNs as well as their intentions to associate with and
trust expatriates will influence their PWB.

Justice perceptions of HCNs and their PWB

Justice perceptions of HCNs will strongly influence their PWB. Given that HCNs consider
expatriates as a referent out-group, they will feel relatively deprived if MNEs pay
significantly more compensation to expatriates for doing similar jobs (Toh and DeNisi
2003). Perceptions of injustice are likely to create unpleasant effects among HCNs such as
increasing their job insecurity, anxiety about future growth, and anger against expatriates as
well as the policies of MNEs in general. Such symptoms are reflective of HCNs poor well-
being. Moreover, underpaid workers like HCNs may show their anger by being absent from
work, stealing, or quitting their organization (Lind and Tyler 1988; Greenberg 1990). This
may increase the stress level of HCNs and consequently negatively affect their PWB.
However, research shows that distributive justice is a strong predictor of employees
pay satisfaction (Folger and Konovsky 1989). As argued earlier, CAIP will increase
HCNs perceptions of distributive justice as expatriates pay will be tied to the local
practices of the host nation. It is likely that HCNs will derive more pay satisfaction
from CAIP as compared to the ethnocentric approach of compensating expatriates. Also,
employees who are satisfied with their pay are likely to cooperate with their coworkers
(Pfeffer and Langton 1993). Furthermore, if HCNs receive fair treatment from MNEs,
it builds their sense of identity and self-worth (Tyler and DeGoey 1996). It also
symbolically conveys that MNEs care about them and value their membership.
 The International Journal of Human Resource Management 129

Proposition 5: Higher levels of perceived distributive justice among HCNs will be

positively related to their increased PWB.

Behavioral intentions of HCNs and their PWB

Ruehlman and Wolchik (1988) argued that social hindrance beliefs measured in terms of
the frequency of unpleasant interactions and perceived rejection are likely to have a
negative effect on an individuals PWB. Also, according to the discrepancy theory (Diener
et al. 1999), an upward social comparison that results when employees compare
themselves with a higher standard referent other is likely to lower their PWB. In a cross-
cultural context, factors that may accentuate expatriates as an out-group and subsequently
negatively influence HCNs well-being primarily result from MNEs ethnocentric reward
practices that reinforce distinctiveness of expatriates as an out-group (Toh and DeNisi
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2003). Such factors tend to increase the frequency of unpleasant interactions between
expatriates and HCNs and perpetuate HCNs social hindrance beliefs. Therefore,
organizational policies that alleviate social hindrance beliefs of HCNs are likely to
increase their PWB. Furthermore, this is likely to reduce anxiety and stress during
interpersonal encounters between HCNs and expatriates which, in turn, will positively
influence HCNs well-being.
Another factor that may influence HCNs well-being is their intentions to trust
expatriates. According to Mishra (1996), trust indicates ones willingness to be vulnerable
to others actions. Degree of vulnerability is based on several cognitive and emotional
factors (McAllister 1995). Whereas cognitive factors such as competence and reliability
provide rational justification for trusting each other, emotional factors such as genuine care
and concern take interpersonal relationships to a deeper level. MNEs that uphold cultural
values and norms through their pay practices convey genuine care and concern for their
local employees. Therefore, HCNs are likely to reciprocate such acts of concern by being
warm and friendly to expatriates and forming positive relations with them. Such actions
are likely to increase the overall well-being of HCNs.
Proposition 6: HCNs intentions to associate with and trust expatriates will be
positively related to their PWB.

Behavioral outcomes
Finally, I explore the affect of HCNs well-being on their higher order work outcomes.
Previous research has found a significant positive relation between perceived injustice and
psychological distress (Dierendonck et al. 1998; Tepper 2001). Employees experiencing
psychological distress are also likely to experience lower morale, emotional exhaustion,
interpersonal conflict, and reduced job performance (Wright and Bonett 1997; Cropanzano
and Wright 1998). Therefore, it is reasonable to argue that employees who are
psychologically healthy may be more willing to cooperate with each other, share
important resources like knowledge, and overall exhibit higher levels of job performance.
Extending this line of argument to a cross-cultural context, I believe that if HCNs are
psychologically healthy, they will be more willing to voluntarily cooperate with
expatriates and share their local knowledge with them. Not only will this increase the job
performance of HCNs, but will also increase the overall effectiveness of expatriates.
Voluntary cooperation of HCNs is critical for the success of expatriates and MNEs.
For expatriates, HCNs are crucial elements of social support. During their initial period of
adjustment, expatriates may have to exclusively rely on the friendly advice and support
 130 A. Mahajan

of HCNs. Social support of HCNs may extend well beyond the office boundaries to
activities such as helping expatriates to open a bank account, finding accommodation,
and assisting them in finding schools for their children. HCNs are likely to show such
behaviors only if MNEs create a cooperative environment. Higher levels of interpersonal
trust, reduced status differentials, and emphasis on superordinate goals are important
elements of such an environment. Studies have shown that employees report higher levels
of job satisfaction and satisfaction with supervision in such a cooperative environment
(Tjosvold, Andrews and Jones 1983). It is likely that employees will be willing to exert
extra energy and effort beyond the call of their duty if they feel satisfied with their work.
Therefore, it is reasonable to believe that employees who perceive their organizations to
be fair are likely to feel good about their work and develop a positive state of mind.
Increasingly, higher order behaviors such as voluntary cooperation may result from such a
state of well-being.
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Another factor that is critical for expatriates success is the degree of local knowledge
they have of their host location. Bhagat, Kedia, Harveston and Triandis (2002) argue that
knowledge can exist in variety of forms human knowledge, that manifests in the form
of skills and competencies of an individual, social knowledge that exists in the form of
acceptable norms of behavior resulting from interpersonal relations, and structured
knowledge that exists as organizational routines, rules, and procedures. Although
expatriates may develop structured knowledge through continuous years of working in an
MNE, they will have to exclusively rely on HCNs for developing social knowledge and
human knowledge required to effectively transact MNEs business in the host nation.
Furthermore, expatriates need multiple mentors to assist in their adjustment and
development stages of an international assignment (Mezias and Scandura 2005). Previous
research has also found that on-site mentoring was positively related to expatriate
socialization, which in turn was a strong predictor of expatriates job satisfaction, their
intent to finish the assignment, and their increased understanding of international business
issues (Feldman and Bolino 1999). Although both senior expatriates and HCNs can take
the role of an on-site mentor, HCNs will be more suited for such a role as they possess tacit
knowledge about their own culture. However, HCNs will be effective in this role only if
they feel less stressed and more comfortable in associating with expatriates.
Furthermore, well-being of HCNs will also improve their job performance. Wright and
Cropanzano (2000) found that PWB was a significant predictor of job performance. Their
results are important not only because they found a significant relationship between PWB
and job performance, but also because PWB significantly accounted for variance in job
performance above and beyond that accounted for by job satisfaction. This clearly
demonstrates that in-role performance of employees is dependent on their overall wellness
and not only on their satisfaction with their job.
Proposition 7: PWB of HCNs will be positively related with their willingness to
voluntarily cooperate and share knowledge with expatriates as well as
their increased job performance.

Contributions to the literature

This article makes several contributions to the growing body of literature on international
compensation. First, there exists a considerable body of research relating to expatriate
compensation (Hodgets and Luthans 1993; Bonache and Fernandez 1997; Reynolds 1997;
Dwyer 1999; Latta 1999; Suutari and Tornikoski 2001) and overall adjustment and PWB
of expatriates (Black et al. 1991; Aryee and Stone 1996; Black and Gregersen 1999;
 The International Journal of Human Resource Management 131

Feldman and Bolino 1999). However, very few researchers (Vance and Paderon 1993;
Solomon 1995; Hailey 1996; Toh and DeNisi 2003, 2005; Volkumar 2003) have
highlighted the importance and need for including HCNs perspective. In this article, I
have advanced this argument by making a case for a cultural alignment pay model.
Cultural alignment policies, such as CAIP, are more acceptable to HCNs than ethnocentric
pay policies as it increases perceived status similarity and reduces intergroup conflict
between expatriates and HCNs. Furthermore, I have argued that not only will such policies
be beneficial for HCNs, but will also facilitate adjustment of expatriates and favorably
impact overall effectiveness of MNEs.
Second, previous researchers (Toh and DeNisi 2003, 2005) have accentuated the
negative effects of MNEs ethnocentric HR policies on HCNs such as effect of pay inequity
on relative deprivation of HCNs (Toh and DeNisi 2003). Although important, such line of
research ignores the importance of positive psychology. Several researchers have cautioned
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against over-indulgence in the aspects of negative behavior (Wright and Cropanzano 2004)
and have highlighted the importance of positive organizational scholarship (Cameron,
Dutton and Quinn 2003). In line with their argument, I have highlighted the positive
behavioral outcomes of culturally aligned policies such as international pay. Therefore, this
article adds to and furthers the movement of positive organizational scholarship.
Third, using an interdisciplinary framework, the theoretical model presented in this
article integrates research from human resource management, social psychology, and
organizational behavior. In doing so, I have demonstrated that pay can not only have a
positive impact on job performance, but also can significantly impact higher order
behaviors such as voluntary cooperation and knowledge sharing. Reward systems of
MNEs make a strong statement about its values and beliefs. As such, the proposed model
suggests that a fit between organizational desired values and that possessed by HCNs is
likely to bring favorable results.
Finally, several researchers have argued for consistency in global rewards (Watson and
Singh 2005; White 2005) and transnational HRM, which integrates local responsiveness
with the global vision of MNE (Adler and Bartholomew 1992; Phillips and Fox 2003).
Although this is a reasonable line of inquiry, there is lack of evidence regarding the success
of such system. Especially with regard to compensation, by far, the most popular approach
to compensate expatriates is the traditional balance sheet approach (Toh and DeNisi 2005).
Therefore, from a managerial standpoint, cultural alignment of pay or local responsiveness
will be the determining factor for an effective rewards program. By following a cultural
alignment pay model, MNEs show their desire to make a long-term investment in the
development of HCNs and therefore create enduring value for maximum number of
stakeholders (i.e. HCNs, expatriates and the host nation; Vance and Paderon 1993).

Managerial implications
MNEs need to carefully think through and plan before implementing CAIP. The
underlying message of CAIP is to develop a global talent pool of expatriates that enjoy
working abroad and do not need to be bribed with hefty foreign assignment premiums.
According to Zingheim and Schuster (2001), tying expatriates compensation to home
country standards should only be done for temporary talent injection and not for long-term
expatriate assignment. Paying according to the home standards is often counterproductive
for the MNEs as expatriates compensation is not linked to their performance in the host
country. Therefore, expatriates are rewarded even when they fail to achieve local business
goals (Zingheim and Schuster 2001).
 132 A. Mahajan

On the other hand, CAIP removes such drawbacks and compensates expatriates
according to their performance in the host country. According to the jointly produced
report by Watson Wyatt Worldwide and WorldatWork (2006/2007), some MNEs are
rewarding their nonexecutive expatriates according to the local practices. AT&T has also
saved few million dollars in expatriate compensation by aligning its pay policy to local
norms (Myers 1995). Xerox, IBM, and Gillette have also embarked on similar programs to
reduce expatriate compensation costs by localizing some portion of their expatriate
compensation (see Myers 1995; Zingheim and Schuster 2001 for more details). Although
this is encouraging, a change from a purely balance sheet-based approach to CAIP cannot
be achieved overnight. Several things need to be considered before implementing CAIP.
One of the basic considerations is the type of mindset MNEs want to create for
expatriate assignment. If the idea is to sweeten the pot for accepting overseas assignment,
then temporary injections of hefty overseas premiums might be the answer. However, if
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the idea is to develop a mindset where expatriate assignment is considered an important

step in career advancement, then expatriate assignments with CAIP will be helpful.
Second consideration is the time factor. If the assignment is of short-term duration,
then balance sheet approach will be better in order to smooth the transition back to the
home country. However, if the duration of assignment is long term, CAIP will be better as
it will ensure alignment of pay with the achievement of local business goals. Long-term
expatriate assignments are preferable over short term, as they provide more time for
expatriates to understand local business culture and also show willingness of MNEs to
develop local talent. Further as information asymmetry problems are reduced over time, in
the long-run MNEs will not gain much by employing expatriates in the host location
(Gong 2003) or paying them according to the home country standards.
Third, CAIP may not be appropriate for all types of subsidiaries (Bonache and
Fernandez 1997). For those types of subsidiaries that are constantly interdependent on
each other for developing and transferring new knowledge, CAIP may not be appropriate.
This is so because in such subsidiaries, a high premium is placed on expatriates ability to
transfer knowledge from one subsidiary to another. Therefore, a centralized compensation
system may be more appropriate to keep expatriate highly mobile. However, in
subsidiaries that either apply knowledge developed in headquarters or are less dependent
on transfer of knowledge from other subsidiaries, CAIP may be more appropriate.
Fourth, MNEs will also have to deal with the legacy problems before implementing
CAIP. Given that current expatriates are paid according to the balance sheet approach,
companies may have to devise a two-tiered program to pay current and new expatriates1.
Current expatriates may continue to be paid according to the balance sheet approach until
the end of their overseas assignment; whereas, new expatriates can be paid according to
the CAIP approach.
Finally, CAIP may not be appropriate for host countries that are facing economic
and political hardships. Attraction of well-qualified expatriates might be problematic,
especially when pay rates in the host location are highly volatile. Therefore, implementing
CAIP might be limited by the economic and political situation in the host location.

Conclusion
Compensation can have different meanings for different individuals. Satisfaction from
compensation can result only if it meets those subjective definitions. Moreover, national
culture plays a significant role in shaping these subjective definitions. I posited that MNEs
should respect these cultural differences and respond by aligning their pay policies to
 The International Journal of Human Resource Management 133

match local needs. From a social identity theory perspective (Tajfel and Turner 1979,
1986), I argued that CAIP will reduce the salience of expatriates as an out-group which in
turn will reduce the hostility HCNs might show toward expatriates. Using the similarity
attraction paradigm (Byrne 1961; Thomas and Ravlin 1995), I also demonstrated that
perceived status similarity influences HCNs likelihood of associating with and trusting
expatriates. In doing so, I highlighted that MNEs adopting the alignment model will
increase the well-being of HCNs and thereby increase the likelihood of eliciting favorable
behavioral outcomes from them such as HCNs voluntary cooperation and knowledge
sharing with expatriates and their increased job performance.

Note
1. I thank one of the reviewers for this suggestion.
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