OBJECTIVES OF INTERNATIONAL COMPENSATION

Most expatriate compensation plans are designed to achieve the following objectives:

Attract and retain employees who are qualified and interested in international assignments.

Facilitate the movement of expatriates from one subsidiary to another, from home to
subsidiaries, and from subsidiaries back home.

Provide a consistent and reasonable relationship between the pay levels of employees at
headquarters, domestic affiliates, and foreign subsidiaries.

Align compensation administration with the strategy of the firm.

Increase and maintain employee motivation. Compensation must motivate employees to join the
firm, be productive while members of the firm and stay with the firm.

Must be perceived as fair by the employees. Fairness of equity are powerfull motivator of human
behaviour and it may be the most important objective of an international compensation policy.

Secure consistency between pay and performance & equity among employees of different
nationalities and categories.

Assist the employee and family adapt to the host country culture.

Reduce employee grievances and simplify collective bargaining procedures.

To ensure that the package is both competitive and comparable. It must always better the
package available comparable.

Factors that affect Global Compensation MNC’s Internal Environment

 Competitive strategy
 Organisational Culture
 Human Resource Structure
 Employee-Employer Relations
 Subsidiary role
 Level of Technology MNC’S External Environment
 Labour Market Characteristics
 Local conditions
 Home & Host Country govt. roles
 Industry type
 Competitor’s Strategies Founder’s Philosophy MNC’s Compensation Package

Theories of compensation
Contingency theory: Expats compensation should be based on particular contingencies or
situation prevailing in a host country. In every organization is normally decentralized and allows
units to localize the compensation structure.
Resources based theory: Human resource is the greatest asset of every organisation in its
competitive advantage needs good pay and st. salary band for cont. motivation. The
organizations follow this theory, remain market – sensitive and are constantly reviewing
compensation to retain their position in the hiring and retaining the talents

The Agency Theory: This theory focused on the divergent interests and goals of organisation’s
stakeholders and the way that employee’s compensation can be used to align these interests and
goals. According to this theory, there exists a principle – agency relationship between the
organisation’s HQ and its Subsidiaries for Experts Compensation.

Equity Theory: Equity theory suggests that there should be a fair balance between an
expatriate’s contribution to an organisation and what he / she receives as compensation. Of late,
the equity principle is sought to be compromised with a new approach to compensation “Person
based rather job centric” .

Complexities of Compensation Management in IHRM

 Exchange Rate Fluctuations
 Varying Cost of Living
 Varying Inflation Rate
 Varying Requirements for Facilities
 Employee Expectations
 Country Perspectives
 Varying Local Conditions
 Varying Tax Rates Consistency
 Equity Complexities of Global Compensation
 Fluctuations in foreign exchange rates.

CHALLENGES OF COMPENSATING EXPATRIATES

Expatriate are of three type host country nationals (HCNs), parent country nationals (PCNs) and
third country nationals (TCNs).

 Difficulty of developing globally consistent approach

 Ensuring Experts are not disadvantaged
 Ensuring smooth transition at end of assignment
 Developing policies and plans for new countries
 The need to balance providing remuneration packages competitive enough to attract the
right people to meet company objectives with keeping costs down, particularly in the
current economic climate
 There is a consequence of fast economic growth and generally higher inflation.
 A 'one size fits all' approach is unlikely to help the company succeed in attracting talent
comprehensively.
 The large pay differences between seniority levels
 Compensation is highly influenced by the national culture, national patterns of
compensation, legislation and employment relationship context or climate.
  Complex taxation issues and currency rate risks, social security and pension issues, as
well as spouse-related issues.

COMPONENTS OF INTERNATIONAL HRM

Cross Cultural Management
Nations differ in their values, cultures and attitudes. We all believe in some or the other sort of
stereotypes even though it may not be true. At the same time, plenty of research has found that
since different nations have different values, there is a difference in how their organizational
behaviour is. It is, therefore, essential that an International HR manager is aware of such
differences.

This is because all HR activities like recruitment, appraisals, performance and rewards are
affected by the cultural orientation of an employee. As an International HR manager, while
taking policy or process decisions, it is essential that one keeps in mind the cultural aspect.

Comparative HRM
Comparative HRM (CHRM) explores the extent to which HRM differs between different
countries or even sometimes between different regions of a country.

We know that they may have different labour markets and education systems, different
employment laws and trade unions, and the different cultural expectations that we have already
noted. The CHRM field concentrates on aspects like differences in HR policies across nations
influenced by their culture, government policy and education system. Or how is HRM structured
in a particular country. Difference in management practices across nations is also a matter of
discussion in CHRM.

International HRM
IHRM has traditionally examined the way in which international organisations manage their
human resources across these different national contexts. IHRM practitioners have to be aware of
what is allowed in different nations and regions of the world and also what makes cost –effective
management practices.

This area is also concerned about ensuring how a company manages its people in a cost effective
way across countries while being sensitive to individual country differences as well.

IHRM has the same dimensions as HRM in a national context, but it operates on a larger scale,
more complex scenarios and coordination.

IHRM has its own issues and pressures, those of more personal insight into the employee’s life
and family situations and a greater need for diversity management.

TAXATION IN IHRM
Taxation is a challenge in IHRM. Dual tax cost is a major challenge in IHRM. Expatriates
paying taxes in both home and host country. Modifying compensation packages to provide the
most tax-effective, appropriate rewards within the overall compensation framework.
Issues while considering taxation of benefits in IHRM
 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

Companies generally take one of four approaches to handling taxation issues in IHRM

 Laissez-faire. In this approach, the company is not actively involved in managing taxes.
Essentially, the employee is responsible for any taxes incurred. However, often the
employer increases the expatriate's compensation to cover the additional tax expense.

 Ad hoc. In an ad hoc approach, the employer determines tax reimbursement on a case-

by-case basis. Essentially, each expatriate employee negotiates his or her own deal with
the company. This approach may work when a company's international workforce is
small, but as the international program grows, the negotiation process can become
cumbersome.

 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.

 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.

Approaches to managing diversity

Legal approach
 Anti-discrimination regulations making work- place prejudice and discrimination on the
basis of sex, age, race, color, religion and national origin illegal.

 Equal Employment Opportunities policies, in order to ensure the fair and equal treatment
 of all employees, irrespective of their racial, ethnical, religious etc. background.

 Affirmative Action, known also as Positive Discrimination. According to Affirmative

Action policies, the employment force of an organization should mirror the rel- evant
labor market.

Such policies are part of a punitive system aiming at preventing discrimination and promoting
equality of treatment for all employees within a work environment.

Diversity Training approach

Diversity management (DM) bears a wide range of connotations, but it predominantly refers
to voluntary organizational actions designed to generate a process of inclusion of employees
from different backgrounds to the formal and informal organizational structures through
particular policies, events and initiatives

Diversity training is instruction aimed at helping participants to gain cultural awareness in order
to benefit the organization or company. Diversity training is the reality that is facing many
human resource management teams – one of the pressing reasons is the growing ethnic and racial
diversity in the workplace.

Business Case Approach to Diversity Management

Diversity management is most commonly justified on the grounds of business arguments,
linking diversity to business performance business case recognizes a business advantage in
taking equality action and the emphasis is placed on pragmatic business imperatives (such as:
meeting the demands of a diversified customer base, enhancing labor relations, responding to
the needs of global markets, securing an increased market share, as well as improved skills of
workforce, already discussed in the previous chapter).

QUALITIES OF AN INTERNATIONAL MANAGER

Some of the best known qualities of a global manager in IHRM include;
 Overseas Experience
 Deep Self-Awareness
 Sensitivity to Cultural Diversity
 Humility
 Lifelong Curiosity
 Cautious Honesty
 Global Strategic Thinking
 Patiently Impatient
 Well-Spoken
 Good Negotiator
 Presence
 Inquisitiveness
 Ability to deal with multiple perspectives and ambiguity
Family in IHRM
The family plays a very big role in IHRM. It’s the main reason for expert failure. Family issues
in IHRM include;
 Legal issues concerning travelling with a member the opposite sex
 Work for spouse
 Work and residential permits for spouse or dependants
 Exposure to foreign culture
 Distance from relatives, friends
 Childcare system
 Vacation time
 Standard of living disparities
 Level of marital stability
 Responsibilities for aging parents
 Emotional stability of family members
 Strength of family ties to the community or to other family members not going overseas
 Strength of children's attachment to extracurricular activities
 Family cohesiveness

Thus the need to consider

 Inclusion of family in decision-making process
 Coping with new living quarters
 Differences in clothing necessities
 Family safety issues
 Children’s education
 Language barriers

Ways to minimize expatriate failure

 Provide support services
 Select the right person
 Conduct pre-departure training programs
 Opt for Short-term assignments
 Assess individual and his/her family’s ability to adapt
 Cultural awareness programs
 Spousal career assistance
 Career counseling and support
 Finding suitable schools
 Additional orientation programs
 Language training

What makes IHRM Complex?

Variables that moderate IHRM

 Cultural environment
 The industry (industries) involved
 Extent of reliance of the multinational on its home country domestic market
 Attitudes if senior management