Question 1: What should be the objectives for a multinational with regards to its

compensation policies?
Global compensation practices have recently moved far beyond the original domain of
expatriate pay. The international employees have a number of objectives that need to be
achieved from the firm’s compensation policy. Such as, the employee will expect the policy
to offer financial protection in terms of benefits, social security and living costs in the foreign
location. The employee will expect a foreign assignment to offer opportunities for financial
advancement through income and/or savings.

Likewise, when developing international compensation policies, a firm seeks to satisfy

several objectives. Some of them are listed below:

• The policy should be consistent with the overall strategy, structure and business needs of
the multinational.

• The policy must work to attract and retain staff in the areas where the multinational has
the greatest needs and opportunities. Hence the policy must be competitive and recognize
factors such as incentive for Foreign Service, tax equalization and reimbursement for
reasonable costs.

• The policy should facilitate the transfer of international employees in the most cost-
effective manner for the firm.

• The policy must give due consideration to equity and ease of administration.

Question 2: Describe the main differences in the Going Rate and Balance Sheet

Approaches to international Compensation.

On top of the home-country salary, host- country cost of living adjustments are usually
made as these names suggest, the core of this approach lies in linking the expatriate
compensation to the salary structure of the host country, taking into account local market
employees.

Thus, the two approaches have different foci and hence also different advantages and
disadvantages.

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 Going Rate Approach Balance sheet Approach

1. Equality with local’s nationals. 1. Enquiry between different assignments

2. Simplicity and between assignees of the same

3. Identification with boost country nationality

4. Equity among different nationalities 2. Facilitates assignee re-entry

5. Variation between assignments for 3. Easy to communicate to employees

same employee 4. Can lead to disparities between

6. Variation between assignees of same assignees of different nationalities in the

nationality in different countries same host country, and between

7. potential re-entry problems assignees and local nationals

5. Administration can be complex

Salary levels, despite these advantages, the balance sheet approach continues to be the
most widely used method. This suggests that attraction/motivation of potential candidates
for assignments is clearly more important than cost saving.

However, no matter which compensation approach is used, the certain basic needs of
expatriates should be still met. Organizations should not forget about the daily life
challenges faced by employees in a foreign country, and hence there is a need for extra
attention to security, matters and home trips.

In the end, it is important to consider the concept of wholeness with regard to the goals of
compensation packages. The concept refers to the organization’s desire to ensure that the
expatriate does not experience an overt gain or loss when all elements of the compensation
package are combined while finding a balance between the organization’s and expatriates
perceptions of wholeness can sometimes be difficult, the intentions of keeping the employee
as a whole by not letting expatriates experience drastic lifestyle changes are paramount.

Question 3: Main differences in salary compensation for PCNs and TCNs?

The main difference occurs in the employee’s package depend ending on whether or not the
base salary is linked to the home country of the PCN or TCN or whether an international rate
is being paid. Multinationals

1. nature of business.

2. kind and level of knowledge and skills

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3.size of the business

4. capital versus labor intensity

The main difference occurs in the employee’s package depend ending on whether or not the
base salary is linked to the home country of the PCN or TCN or whether an international rate
is being paid. Multinationals tend to pay PCNs and TCN s differently according to their home
country base salary.

The difference in compensation could lead to international assigners being paid differently
for performing the same job in the host location based on their different home base salary.

Question 4: Describe Local plus compensation and explain the major challenges
MNEs face when using the approach.
A local plus compensation approach is usually defined as an approach whereby companies
pay their foreign employees according to the local (host country) salary structure plus
additional compensation elements that are not typically provided to local nationals (such as
transportation, housing, dependents' education, etc.

Major challenges:

Although the benefits of Local Plus compensation are numerous, there are also some
disadvantages for firms that use the approach. In a recent study of expatriates’ views about
international assignments across five regions, McNulty and colleagues found that Local Plus
compensation tends to shift the power balance in the employment relationship in
expatriates’ favor. This is because, by its nature, Local Plus compensation has a more
normalizing effect on how expatriates live in a host-country in comparison to expatriates’ on
more generous salary packages. It means that the lifestyle of expatriates on Local Plus
compensation is generally more closely aligned with the lifestyle and socio-economic habits
of locals in the host-country, i.e., the disparity in purchasing power between themselves and
HCNs is marginal given that the choices they make about their standard of living (where to
live, which schools to attend) are determined less by the MNE. As a result of their greater
sacrifice and being forced to rely less on the organization to support some of their
fundamental employment needs, which is often not compensated for in other non-financial
ways (e.g. through improved career management support), Local Plus compensation can
impact on expatriates’ job embeddedness in terms of commitment and loyalty. In sum, Local
Plus compensation tends to decrease the ties that bind expatriates to their firm.

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The shift in power in the employment relationship in favor of expatriates can have
significant implications for MNEs. The most significant problem is expatriate retention. For
instance, if Local Plus compensation is ideally suited to expatriates’ willing to accept a
reduced salary package in exchange for the opportunity to acquire valuable international
skills, it is necessary to also consider that once these skills have been acquired, employee’s
marketability on the international labor market will likely increase. As Local Plus expatriates
are less reliant on firms to fund their expatriate lifestyle, and because they are living a
largely ‘local’ lifestyle to begin with, their willingness to consider other job offers that may
afford them even an incremental increase in their current salary is higher. This may be
because they feel ‘pushed’ to find better employment opportunities, or because they have
(or are developing) a self-initiated career orientation that prompted them to initially accept a
local-plus package. Either way, there is an increased risk of losing expatriates to
competitors, particularly during an international assignment, which can have a devastating
effort on MNEs broader global staffing objectives.

Question 5: What are the main points that MNEs must consider when deciding
how to provide benefits?
The area of international compensation is complex primarily because multinationals must
cater to three categories of employees: PCNs, TCNs and HCNs. In this section, we discuss
key components of international compensation as follows.

1. Base Salary

In a domestic context, base salary denotes the amount of cash compensation serving as a
benchmark for other compensation elements (such as bonuses and benefits). For
expatriates, it is the primary component of a package of allowances, many of which are
directly related to base salary (e.g. Foreign Service premium, cost-of-living allowance,
housing allowance) and also the basis for in-service benefits and pension contributions. It
may be paid in home or local-country currency.

The base salary is the foundation block for international compensation whether the
employee is a PCN or TCN. Major differences can occur in the employee’s package
depending on whether the base salary is linked to the home country of the PCN or TCN, or
whether an international rate is paid.

2. Foreign Service inducement/hardship premium

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Parent-country nationals often receive a salary premium as an inducement to accept a
foreign assignment or as compensation for any hardship caused by the transfer.

The definition of hardship, eligibility for the premium and amount and timing of payment
must be addressed. In cases in which hardship is determined, US firms often refer to the US
Department of State’s Hardship Post Differentials Guidelines to determine an appropriate
level of payment.

Making international comparisons of the cost of living is problematic. These payments are
more commonly paid to PCNs than TCNs. Foreign service inducements, if used, are usually
made in the form of a percentage of salary, usually 5-40 per cent of base pay. Such
payments vary, depending upon the assignment, actual hardship, tax consequences and
length of assignment.

3. Allowances

Issues concerning allowances can be very challenging to a firm establishing an overall

compensation policy, partly because of the various forms of allowances that exist.

(a)The cost-of-living allowance (COLA), which typically receives the most attention, involves
a payment to compensate for differences in expenditures between the home country and
the foreign country (to account for inflation differentials, for example). The COLA may also
include payments for housing and utilities, personal income tax or discretionary items.

(b)The provision of a housing allowance implies that employees should be entitled to

maintain their home-country living standards (or, in some cases, receive accommodation
that is equivalent to that provided for similar foreign employees and peers).

Other alternatives include company-provided housing, either mandatory or optional, a fixed

housing allowance or assessment of a portion of income, out of which actual housing costs
are paid. As a firm internationalizes, formal policies become more necessary and efficient.

(c)There is also a provision for home leave allowances. Many employers cover the expense
of one or more trips back to the home country each year. Firms allowing use of home leave
allowances for foreign travel need to be aware that expatriate employees with limited
international experience who opt for foreign travel rather than returning home may become
more homesick than other expatriates who return home for a ‘reality check’ with fellow
employees and friends.

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(d)Education allowances for expatriates’ children are also an integral part of any
international compensation policy. Allowances for education can cover items such as tuition,
language class tuition, enrolment fees, books and supplies, transportation, room and board
and uniforms. PCNs and TCNs usually receive the same treatment concerning educational
expenses.

(e)Relocation allowances usually cover moving, shipping and storage charges, temporary
living expenses, subsidies regarding appliance or car purchases (or sales) and down
payments or lease-related charges. Allowances regarding perquisites (cars, club
memberships, servants10 and so on) may also need to be considered (usually for more
senior positions, but this varies according to location). These allowances are often
contingent upon tax-equalization policies and practices in both the home and the host
countries.

(f)Spouse assistance to help guard against or offset income lost by an expatriate’s spouse as
a result of relocating abroad. Although some firms may pay an allowance to make up for a
spouse’s lost income, US firms are beginning to focus on providing spouses with
employment opportunities abroad, either by offering job-search assistance or employment in
the firm’s foreign office (subject to a work visa being available).

(g)Multinationals generally pay allowances in order to encourage employees to take

international assignments and to keep employees ‘whole’ relative to home standards. In
terms of housing, companies usually pay a tax-equalized housing allowance in order to
discourage the purchase of housing and/or to compensate for higher housing costs. This
allowance is adjusted periodically based on estimates of both local and foreign housing
costs.

4. Benefits

The complexity inherent in international benefits often brings more difficulties than when
dealing with compensation. Pension plans are very difficult to deal with country-to-country;
as national practices vary considerably. Transportability of pension plans, medical coverage
and social security benefits are very difficult to normalize. Firms need to address many
issues when considering benefits, including:

Whether or not to maintain expatriates in home-country programs, particularly if the firm

does not receive a tax deduction for it.

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Whether firms have the option of enrolling expatriates in host-country benefit programs
and/or making up any difference in coverage.

Whether expatriates should receive home-country or host-country social security benefits.

In some countries, expatriates cannot opt out of local social security programs. In such
circumstances, the firm normally pays for these additional costs.

Laws governing private benefit practices differ from country to country, and firm practices
also vary. Multinationals have generally done a good job of planning for the retirement
needs of their PCN employees, but this is generally less the case for TCNs.

TCNs may have little or no home-country social security coverage; They may have spent
many years in countries that do not permit currency transfers of accrued benefit payments;
Or they may spend their final year or two of employment in a country where final average
salary is in a currency that relates unfavorably to their home-country currency.

In addition to the already discussed benefits, multinationals also provide vacations and
special leave. Included as part of the employee’s regular vacation, annual home leave
usually provides airfares for families to return to their home countries. Rest and
rehabilitation leave, based on the conditions of the host country, also provides the
employee’s family with free airfares to a more comfortable location near the host country.
Emergency provisions are available in case of a death or illness in the family. Employees in
hardship locations often receive additional leave expense payments and rest and
rehabilitation periods.

Question 6: Why it is important for MNEs to understand the compensation

practices of other countries?
Multinational Enterprise (MNE): A multinational corporation or enterprise is a corporate
organization which owns or controls production of goods or services in at least one country
other than its home country. 

Example: Nestle, Adidas etc.

Multinational companies may be operated in more countries having single parent company,
more countries mean company have to face different type of people and culture and
community, all diversity, but the company have to make unity. So companies have to
understand the compensation practices of other countries.

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Learning the compensation practices of other countries provides the following -

 Knowledge of employment and taxation law, customs, environment and employment

practices of many foreign countries. These practices differ from one country to
another.

 Familiarity with currency fluctuations and the effect of inflation on compensation.

 A good understanding of why and when special allowances must be supplied and
which allowances are necessary in what countries within the context of political,
social, economic condition.

Question 7: Explain how balancing the interests of global and local, occupational
and functional perspectives might play out in a compensation decision scenario?
When considering compensation for expatriates, there are two main approaches to the
matter: The Going Rate Approach, and the Balance Sheet Approach. With the Going Rate
Approach, the base salary for the international transfer is linked to the salary structure in
the host country. With the Balance Sheet Approach, which is the more commonly used
approach in situations of international compensation, the base salary is linked to the salary
structure of the relevant home country. The objective of the Balance Sheet Approach is to
maintain the home countries living standard, plus a financial package to make the deal
attractive.