Jatiya Kabi Kazi Nazrul Islam University

Trishal, Mymensingh-2220

An assignment on
International Compensation System in Multinational Corporations (MNCs)

Submitted to
Sharifa Akter
Lecturer
Department of Human Resource Management
Jatiya Kabi Kazi Nazrul Islam University

Submitted By
Rakibul Islam
Roll: 17133042
Session: 2016-17
Department of Human Resource Management
Jatiya Kabi Kazi Nazrul Islam University

Date of Submission: 12-11-2020

Sl Topics Page no
No
1 Introduc
tion to
Internati
onal
Compens
ation
1
2 OBJECTIV
ES OF
INTERNA
TIONAL
COMPEN
SATION
1-3

3 Compone
nts of
Internati
onal
Compens
ation
3-7
4 Approach
es to
Internati
onal
 Compens
ation
7-9
5 Designin
g a Pay
Structure
10-
11
6 Theories
of
Internati
onal
compens
ation
12
7 Factors
Affecting
Employe
e
Compens
ation
12-
14
8 INTERNA
TIONAL
COMPEN
SATION
PROBLE
 MS 14-
17
9 Methods
of
Compens
ation
17-
20
10 20
CONCLUSION
Index
1 | Page

Introduction to International Compensation (IC)

According to Dale Yoder, “Compensation is paying people for work.” “Compensation is what
employees receive in exchange for their contribution to the organization.” – Keith Davis. In the
words of Edwin B. Flippo, “The function compensation is defining as adequate and equitable
remuneration of personnel for their contributions to the organizational objectives.”
Compensation Is the human resource management function that deals with every type of
reward individual receive in exchange for performing organizational task. International
compensation Is the provision of monetary and non-monetary rewards, including base salary,
benefits, perquisites, long- and short-term incentives, valued by employees in accordance with
their relative contributions to international corporation performance. Compensation is what
employees receive in exchange for their contribution to the organization, it is the chief reason
why most individuals seek employment, Compensation management helps the organization
obtain, maintain and retain productive workforce. Its broad human resource management
purpose is to attract, retain and motivate those personnel required throughout the
multinational companies currently and in the futureproof the perspective of employees, in
particular, compensation is one of the most visible aspects of strategic in human resource
management.

OBJECTIVES OF INTERNATIONAL COMPENSATION

It can be extremely expensive to live in some countries. Therefore, determining equitable wage
rates in many countries is not a simple matter of equality in pay. Most expatriate compensation
plans are designed to achieve four major objectives:
1. Attract employees who are qualified and interested in international assignments. Thus,
thecompensation policy works to attract and retain staff in the areas where the multinational
has the greatest needs and opportunities.
2. Facilitate the movement of expatriates from one subsidiary to another, from home
tosubsidiaries, and from subsidiaries back home. To achieve this policy must be competitive
and recognize factors such as incentives for Foreign Service, tax equalization, and
reimbursement for reasonable costs.
3. Provide a consistent and reasonable relationship between the pay levels of employees
atheadquarters, domestic affiliates, and foreign subsidiaries and
4. The policy must be made cost-effective by reducing unnecessary expenses. It must give
dueconsideration to equity and ease of administration.
Besides the above major objectives, the international employee will also have a number of
objectives that need to be achieved from the firm’s compensation policy
1. To ensure equity
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The first category is equity, and may take several forms. Equity includes income distribution
through narrowing down of inequalities, increasing the wages of the lowest paid employees,
protecting real wages, and the concept of equal pay for work of equal value. Compensation
management strives for internal and external equity. Internal equity requires that pay should
be related to the relative worth of a job such that similar pay is assured for similar jobs.

2. Efficiency:
Efficiency is often closely related to equity. These two concepts are not adverse. The objectives
of efficiency are evidenced in attempts to link a part of wages to productivity or profit, group or
individual performance, acquisition and application of skills, and so on. Preparations to achieve
efficiency are also seen as being equitable, provided they fairly reward performance. The
preparations are treated as inequitable if the reward is viewed as unfair.
3. Macro-Economic Stability:
Companies try to achieve macro-economic stability through high employment levels. Low
inflation helps to achieve macro-economic stability. For instance, an inordinately minimum
wage would have an adverse impact on the levels of employment, though at what level this
consequence would occur is a matter of debate. Although compensation and compensation
policies are two of the many factors which influence macro-economic stability, they do
contribute to or hinder balanced and sustainable economic development.
4. Efficient Allocation of Labor:
Employees consider the net gain. Efficient allocation of labor refers to the concept of
labor/employee moving out of a situation to another for a net gain. Such movement may be
from one geographical location to another, from one job to another, and within or outside an
enterprise. The provision or availability of financial incentives causes such movement.
For example, workers are likely to move from a labor surplus or low-wage area to a high-wage
area. On acquiring new skills, they may be tempted to derive benefit from moving to jobs with
higher wages. Employee attrition is more when an employer’s wages are below market rates.
Again, an employer attracts job applicants when his wages are above market rates. When
employees move from declining to growth industries, an efficient allocation of labor due to
structural changes takes place.

From the standpoint of human resource management, a well-designed compensation package

helps an organization to achieve additional objectives which are the secondary objectives of
compensation. The secondary objectives include acquiring competent personnel, complying
with regulations, controlling costs, enhancing administrative efficiency, facilitating
understanding, retaining employees, and rewarding desired behaviors.
1. Acquiring competent personnel – Good compensation helps an organization
attractcompetent applicants. As everyone has become aware of their value in the market, it is
only wise for the management to provide suitable compensation packages to the employees
for their retention.
3 | Page

2. Complying with regulations – A sound wage and salary system considers the legal
challengesimposed by the government and ensures the employers compliance.
3. Controlling costs – A rational compensation system helps the organization obtain and
retain workers at a reasonable cost. Without effective compensation management, workers
might be over-paid (when product costs go up) or under-paid (which reduces employee
motivation).
4. Enhancing administrative efficiency – Any organization desires and attempts to
optimally usethe human resource information systems (HRIS). A well-designed sound wage and
salary programmed helps to manage HRIS efficiently.
5. Facilitating understanding – The compensation management system should have a high
levelof clarity. In addition to the human resource specialists and operating managers, the
employees also should understand the compensation management system easily.
6. Retaining employees – Attrition may increase when compensation levels do not
fulfilemployees’ expectations. They quite due to the feeling that compensation is not
competitive. vii. Rewarding desired behaviors – Companies expect certain types of behaviors
from the employees. Pay is likely to reinforce desired behaviours and acts as an incentive for
the behavioral modification, and for the behavior to occur in the future. Effective compensation
plans reward performance, loyalty, experience, responsibility, and other behaviours.

Components of International Compensation

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. Compensation for employees of
organizations operating in an international environment consists of four components: base
salary, indirect monetary compensation (benefits), equalization benefits, and incentives.
1. Base Salary: The term base salary acquires a somewhat different meaning when
employees go abroad. 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) as well as the basis for in-service benefits and pension contributions. It may
be paid in home or local country currency or a combination of both. 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. Indirect Monetary Compensation (Benefits): The benefits package for expatriates is
generally the same as the one provided in the home country. However, an organization must
be aware that specific countries require benefits that may not be offered in the home country.
For example, in France employers are required by law to provide every employee with 25 days
of vacation. Although an American working for an American company in France is not legally
4 | Page

entitled to such a vacation, the organization may want to follow this practice to avoid morale
problems with expatriates. Other countries have retirement, disability, and termination that
are different from the U.S.
3. Equalization Benefits: These benefits are intended to keep expatriates in the same
financial condition they were in before accepting an overseas assignment and to reduce any
negative aspects of living in a foreign country. The complexity inherent in international benefits
often brings more difficulties than when dealing with compensation. Expatriate ‘benefits’
includes health care, pension plans/social security, life insurance, child allowances and profit
sharing/stock option plans. Pension plans are very difficult to deal with country-to-country as
national practices vary considerably. Transportability of pension plans/social security and
medical coverage benefits are very difficult to normalize. Therefore, MNEs need to address
many issues when considering benefits, including: 1. Whether or not to maintain expatriates in
home-country programs, particularly if the multinational does not receive a tax deduction for it.
2. Whether MNEs have the option of enrolling expatriates in host-country benefit programs
and/or making up any difference in coverage. 3. Whether expatriates should receive
homecountry or are eligible to receive host country social security benefit.
4.Foreign service inducement premium: Parent-country nationals often receive a salary
premium as an inducement to accept a foreign assignment, as well as a hardship premium to
compensate for challenging locations. Under such circumstances, the definition of hardship,
eligibility for the premium, and amount and timing of payment must be addressed. For
example, where a host country’s work week may be longer than that of the home country, a
differential payment may be made in lieu of overtime, which is not normally paid to PCNs or
TCNs. 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. As
a number of researchers in this field have noted over many dec-ades18 making international
comparisons of the cost of living is problematic. It is important to note, though, that 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 to 40 per cent of base pay, but
are also sometimes offered as a lump-sum incentive (i.e. as a one-off payment made at some
point during an assignment). Such payments vary, depending upon the assignment location, tax
consequences, and length of assignment.
5. Allowances: Various allowances are paid to expatriates depending upon the assignment. They
include:
(a) The cost-of-living allowance (COLA): 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. COLA payments are intended to
compensate for cost differentials between an expatriate’s home and host country, for example,
the costs of transportation, furniture and appliances, medical, alcohol and tobacco, automobile
maintenance and domestic help. Family size is the predominant method for determining COLA
payments, with increments provided for each child. Often this allowance is difficult to
5 | Page

determine, so companies may use the services of organizations such as Mercer (a US-based
firm) or ECA International (based in Britain).20 These firms specialize in providing COLA
information on a global basis, regularly updated, to their clients. The COLA may also include
payments for housing and utilities, and discretionary items.21 Various COLA indices exist,
which, for example, allow an American to live like an American in Paris or which presume that
the American will adapt to the assignment location by adjusting to the local life style and
international living costs.
(b) Housing allowance: Implies that employees should be entitled to maintain their
homecountry living standards (or, in some cases, receive accommodation that is equivalent to
that provided for similar foreign employees and peers). The amount of housing allowance is
determined predominantly by family size, and to some extent job level. Other alternatives
include company-provided housing (either mandatory or optional); a fixed housing allowance
across a particular job level, with the expatriate ‘topping up’ according to personal preferences;
or assessment of a portion of income, out of which actual housing costs are paid. Housing
issues are often addressed on a case-by-case basis, but as a firm international size, formal
policies become more necessary and efficient. Financial assistance and/or protection in
connection with the leasing of an expatriate’s former residence is offered by many MNEs, but
less so for selling a house as many MNEs encourage their employees to retain a presence in
their home country real estate market. Those in the banking and finance industry tend to be
the most generous, offering assistance in sale and leasing, payment of closing costs, payment of
leasing management fees, rent protection and equity protection. Generally, TCNs tend to
receive these benefits less frequently than PCNs.
(c) Home leaves and travel allowances: It Is given to cover the expense of trips (usually
once in a year) back home. These trips allow the expatriates the opportunity to renew family
and business ties, thereby helping them to avoid adjustment problems when they are
repatriated. Many MNEs also have a provision for home leave allowances where employers
cover the expense of one or more trips back to the home country each year. The primary
purpose of paying for such trips is to give expatriates the opportunity to renew family and
business ties, thereby helping them to minimize adjustment problems when they are
repatriated. Although firms traditionally have restricted the use of leave allowances to travel
home, some firms give expatriates the option of applying home leave to foreign travel rather
than returning home. 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. Without the benefit of
returning home to mix with employees and friends it is possible to idealize what they
remember of their experience at work and home and fail to come to a measured judgment of
what is good and bad in both their host and home environments. Overall, it would seem
prudent for MNEs to take the view that home leave allowances should normally be used for the
purpose they are provided to give employees and their families the opportunity to renew
6 | Page

family and business ties, thereby increasing the probability of reduced adjustment problems
when they are repatriated.
6. Education Allowances for Children: Education allowances are given towards fees for the
education of expatriates’ children. Education allowances include items such as tuition, language
class tuition, books, transportation and uniforms. The provision of education allowances for the
children of expatriates is frequently an integral part of an international compensation policy.
Allowances for education can cover items such as tuition (including language classes),
application and enrolment fees, books and supplies, meals, transportation, excursions and
extra-curricular activities, parent association fees, school uniforms and, if applicable, room and
board. Although school uniforms are not common in the USA, it is common practice (and in
many countries compulsory) for school children to wear uniforms, particularly in international
schools. PCNs and TCNs usually receive similar treatment concerning educational expenses, but
the level of education provided for and the adequacy of local public schools versus
international schools may present problems for multinationals. International schools (e.g.
United World College of South East Asia, British International School Shanghai) are far more
expensive than local public schools but are pre-ferried by many expatriates because these
schools follow the home-country curriculum and cater to a globally diverse student body more
capable of supporting ‘third culture kids. The cost of local and international schools for
dependent children from kindergarten through to high school are typically covered by the
employer ORC reports that 95 per cent of MNEs contribute to the educational expenses of
expatriate children.22 However, there may be restrictions depending on the age of children
(preschool, day care and university are typically not covered), availability of school places, and
their fees. In a number of countries attendance at schools in the host location may be seen as
unsuitable and the MNE may cover (or contribute towards) the costs of children attending a
private boarding school elsewhere (e.g. the costs of room and board as well as other
transportation costs to cover parental visits and school holiday travel). The costs of attendance
at a university may also be provided for by multinationals, when deemed necessary, but this is
rare.
7. Relocation Allowances and Moving: Items typically covered by include 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 perique-sites
(cars, drivers, club memberships, servants 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. For example, in most Western countries a driver is considered a luxury, only available
to very senior managers. In developing economies, a driver is economical in terms of cost,
effectiveness and safety. Apart from the expectation that managers use drivers, parking is
frequently chaotic in developing countries (especially in large cities) and the driver also
performs the function of a parking attendant. In some developing countries it is quite common
for the police to Arrest drivers involved in traffic accidents and leave them in detention while
responsibility and damages are assessed. Such a risk is unacceptable to many MNEs which do
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not allow their expatriate employees to drive at all in specific developing countries and provide
local drivers for both the expatriate and spouse.
8. Tax Equalization Payments: Many international compensation plans attempt to protect
the expatriate from negative tax consequences by using a tax equalization plan. Under this
plan, the company adjusts an employee’s base income so that the expatriates will not pay any
more or less tax than if they had stayed in the home country.
9. Spouse Assistance: To help guard against or offset income lost by an expatriate’s spouse
as a result of relocating abroad. Multinationals generally pay allowances in order to encourage
employees to take up international assignments.

Approaches to International Compensation

(1) Going Rate Approach – When the compensation packages of the expatriates are
determined on the basis of the salary structure prevailing in the host nation, it is called the
going rate approach or market rate approach. Typically, the salary in this method is decided on
the basis of the survey undertaken in the host country where the business is located. However,
international companies usually grant additional pay and benefits to expatriates if they happen
to work in nations where their pay is low.

Advantages and disadvantages of the Going Rate Approach

Advantages

• Equality with local nationals

• Simplicity

• Identification with host Country

• Equity amongst different nationalities

Disadvantages

• Variation between assignments for same employee

• Variation between expatriates of same nationality in different countries

• Potential re-entry problems

(2) Balance Sheet Approach – It is also known as the build-up approach. The balance sheet
approach is arguably the dominant compensation system used in multinational companies. The
approach has been used for more than 20 years, yet nearly two of every three companies still
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use a form of this approach to compensation. The basic objective of the balance sheet
approach is to ensure that employees can maintain a standard of living in the country of
assignment similar to that which they enjoy in their home country. This keeps the shock from
changes in standard of living relatively small. The basic premise of the balance sheet approach
is that companies use a set of allowances or differentials to maintain employees’ purchasing
power while on international assignments. Fundamentally, assignees should neither benefit nor
be hurt economically as a result of relocating.

Advantages and disadvantages of the Balance Sheet Approach

Advantages:
• Equity between assignments and between Expatriates of the same nationality
• Facilitate re-entry
• Easy to communicate to employees Disadvantages:
• Can result in great disparities between expatriates of different nationalities and
between expatriates and local nationals
• Can be complex to administer
• May entail difficulty to attract human capital
(3) Citizen’s Approach – In this approach, an international basket of goods is used for all
expatriates, regardless of country of origin. The basket of goods includes food, clothing,
housing, and so forth. However, expatriates are not provided salary adjustments that would
allow them to purchase exactly the same items in the host country as in the home country.
Rather, they receive adjustments that would allow them to purchase a comparable local
product of the same nature; e.g., rather than a Mercedes (which they had in the home
country), they would buy a local luxury car.
Alternatively called the global salary systems, the international citizen’s approach is appropriate
when an MNC has a team of dedicated international managers Europeans, Americans or Asians
– who are ready to move to any part of the globe easily and effectively. Global salary systems
seek to provide worldwide equity in rewards and allow managers to move between countries
with minimal effects on lifestyle.

(4) Lump Sum Approach – This involves giving the expatriate a predetermined salary and
letting the individual decide about how to spend it. Finally, there is the regional system, under
which the MNC sets a compensation system for all expatriates who are assigned to a particular
region. Thus, everyone going to Europe falls under one particular system and those going to
South Africa come under a different system.
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(5) The Global Approach - The global approach to remuneration involves devising a pay
system that applies specifically to mobile personnel, and, as such, they maintain equity with
other expatriates rather than with home- or host-country peers. This approach is typically
applied to cadres of senior managers who are continually internationally mobile and do not
return to a home country. Such a system is also sometimes used for graduates on development
programmers who are asked to spend two or three years on the move, typically spending six
months in a series of host countries, perhaps with very different standards of living or economic
wealth. The global approach requires an international pay scale to be devised and implemented
in such a way that it can be applied to all leaders regardless of the home/host-country pairings.
This can be complex to design, set up and administer, and can prove problematic in terms of
exchange-rate fluctuations. Pension provision will normally be offshore, and this also requires
additional administration.

(6) Strategic Choice - Strategy is about choices and the consequences that flow from them.
There is no doubt that, as AIRINC noted, more thought is going into the process of designing
and implementing international assignment compensation systems today. As speakers from
Mercer and Atkins pointed out, any choice must reflect the strategic direction of the
organization and its culture. Talent management objectives must also be examined, as these
should drive the approach taken. Rationales for including particular elements in the package
(such as hardship payments) should be considered. The pros and cons of different approaches
to remuneration also need to be matched to assignment types. For example, short-term and
commuter-style assignments are typically remunerated on a home-country basis, but the
packages are modified to suit assignment lengths and patterns. Different pay approaches can
be used for skills-driven assignments versus developmental assignments – the former
potentially requiring a ‘richer’ package than the latter. However, it is critical to preserve equity
among assignees undertaking expatriation for similar reasons. The days of the traditional view
that one policy suits all, with repatriation as the norm and job guarantees on arriving home, are
long gone. Today, remuneration approaches need to embrace an expanding global mix of
sending and receiving countries, diversity in the assignee population, and the requirement to
manage talent globally. While cost control remains important, today’s emphasis is not about
trimming and demotivating staff as a result. Instead, the emphasis lies on cost efficiency and
effectiveness by using sensible tax planning and policy segmentation to achieve organizational
objectives embracing global talent management while recognizing multigenerational and
diverse workforces with differing needs and expectations.
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Designing a Pay Structure

Compensation is a critical area of human resource (HR) management, and one that can greatly
affect employee behavior. To be effective, compensation must be perceived by employees as
fair, competitive in the market, accurately based, motivating and easy to understand. HR
professionals might create the pay structure for their organization, or they might work with an
external compensation consultant. There are several steps to designing a pay structure: job
analysis; job evaluation; pay survey analysis; pay policy development; and pay structure
formation. Each step is briefly explained below. For a more extensive discussion, please review
Milkovich & Newman (2008).
Step 1: Job Analysis
Job analysis is the process of studying jobs in an organization. The outcome of this process is a
job description that includes the job title, a summary of the job tasks, a list of the essential tasks
and responsibilities, and a description of the work context. Also included are the knowledge,
skills and abilities needed to perform the job.
Step 2: Job Evaluation
Job evaluation is the process of judging the relative worth of jobs in an organization. The
outcome of job evaluation is the development of an internal structure or hierarchical ranking of
jobs. Job-based evaluation is used more often than person-based evaluation, and so the former
will be the focus in this case. There are three methods of job-based evaluation: the point
method (which is the most commonly used); ranking; and classification. Job evaluation helps to
ensure that pay is internally aligned and perceived to be fair by employees.
Step 3: Pay Policy Identification
Pay policy identification is the process of determining whether the organization wants to lead,
lag or meet the market in compensation. The pay policy or strategy will likely influence
employee attraction and retention. Pay policies can vary across job families (i.e., groups of
similar jobs) and job levels if the top management feels that different strategies can be effective
in different areas of the organization.
Step 4: Pay Survey Analysis
Pay survey analysis is the process of analyzing compensation data gathered from other
employers in a survey of the relevant labor market. Gathering external pay data (e.g., base pay,
bonuses, stock options and benefits) is essential to keep the organization’s compensation
externally competitive within its industry. Employee attraction and retention can be improved
by maintaining externally aligned pay structures.

Step 5: Pay Structure Creation

Pay structure creation is the final step, in which the internal structure (Step 2) is merged with
the external market pay rates (Step 4) in a simple regression to develop a market pay line.
Depending on whether the organization wants to lead, lag or meet the market, the market pay
line can be adjusted up or down. To complete the pay structure, pay grades and pay ranges are
developed.
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Theories of International compensation

There are (generally) 4 theories in the context of international compensation:1. Contingency
theory. 2. Resource – based theory. 3. The Agency theory and 4. Equity theory
1.Contingency theory (most popular): Expats compensation should be based on particular
contingencies or situation prevailing in a host country. The compensation Phil. In every
organization is normally de centralized and allows units to localize the compensation structure
2. Resources based theory: Human resource is the greatest asset of the MNCs 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
3.The Agency Theory: This theory focused on the divergent interests and goals of org.’s
stakeholders and the way that employee’s compensation can be used to align these interests &
goals. According to this theory, there exists a principle – agency relationship between the MNCs
HQ and its Subsidiaries for Expats Compensation.
4.Equity Theory: Equity theory suggests that there should be a fair balance between an
expatriate’s contribution to an MNC 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”.
Factors Affecting Employee Compensation

The factors affecting employee compensation can be categorized into: -

1. Internal Factors and 2. External Factors.
Some of the external factors affecting employee compensation are:

1. Demand and Supply of Labor 2. Cost of Living 3. Economic Conditions 4. Prevailing Wage
Level
5. Society 6. Government Control 7. Labor Unions 8. Legislation 9. Globalization 10. Cross Sector
Mobility and 11. Compensation Survey.

Some of the internal factors affecting employee compensation are:

1. Compensation Policy of the Organization 2. Employer’s Affordability 3. Worth of a Job 4.

Employee’s Worth 5. The Organizational Ability to Pay 6. Job Analysis and Job Description and 7.
Employee Related Factors.
The compensation awarded to the employee is dependent on the volume of effort exerted, the
nature of job and his skill. Besides, there are several other internal and external factors
affecting the compensation.
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I. External Determinants of Compensation:

1. Labor Market Conditions:
The forces of demand and supply of human resources, no doubt, play a role in compensation
decision. Employees with rare skill sets and expertise gained through experience command
higher wage and salary than the ones with ordinary skills abundantly available in the job
market. But the higher supply of human resources for certain jobs may not lead to reduction of
wages beyond a floor level due to Government’s prescription of minimum wage levels and
employee union’s bargaining strength.
Similarly, this factor by itself does not result in lower pay if the vast majority of available
resources are unemployable due to poor skill and low talent. Thus, it is clear that law of
demand and supply applies to labor market only to a limited extent.
2. Economic Conditions:
Organizations having state-of-the-art technology in place, excellent productivity records, higher
operational efficiency, a pool of skilled manpower, etc., can be better pay masters. Thus,
compensation is the consequence of the level of competitiveness. prevailing in a given industry.
3. Prevailing Wage Level:
Most of the organizations fix their pay in keeping with the level for similar jobs in the industry.
They frequently conduct wage survey and accordingly seek to keep their wage level for
different jobs. If a particular firm keeps its pay level higher than those of others in the industry,
its employee cost becomes heavier which may escalate the end cost of the products. This will
affect the competitiveness of the firm. On the other hand, if a firm keeps its pay level lower
than the prevailing rates, it may not recruit the skilled and competent manpower.
4. Government Control:
Government through various legislative enactments such as Minimum Wages Act, 1948,
Payment of Wage Act, 1936, Equal Remuneration Act, 1976, Payment of Bonus Act, 1965,
dealing with Provident Funds, Gratuity, Companies Act, etc., have a bearing on compensation
decisions. Therefore, firms have to decide on salaries and wages in the light of the relevant
Acts. 5. Cost of Living:
Increase in the cost of living, raise the cost of goods and services. It varies from area to area
within a country and from country to country. The changes in compensation are based on
consumer price index which measures the average change in the price of basic necessities like
food, clothing, fuel, medical service, etc., over a period of time. Allowances like Dearness
Allowance. City compensatory allowances are paid to meet the increasing cost of living and
parity among employees posted at different geographies.

6. Union’s Influence:
The collective bargaining strength of the trade unions also influence the wage levels. Trade
unions enjoy an upper hand in certain industries like banking, insurance, transport and other
public utilities. Therefore, wage structure in such industries and in such Union-active regions,
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salary and wage need to be fixed and revised in consultation with the unions for ensuring
smooth industrial relation.
7. Globalization:
It has ushered in an era of higher compensation level in many sectors of the economy. The
entry of multinational corporations and big corporates have triggered a massive change in the
compensation structure of companies across sectors. There is a salary boom in sectors like
information technology, hospitality, biotechnology, electronics, financial services and so on.
8. Cross Sector Mobility:
Contemporary companies find it difficult to benchmark the salaries of their staff with others in
the industry thanks to mobility of talent across the sectors. For example, hospitality sector
employees are hired by airlines, BPOs, healthcare companies and telecom companies.

II. Internal Determinants of Compensation:

1. Compensation Policy of the Organization:
Firm’s policy regarding pay i.e., attitude to be an industry leader in pay or desire to pay the
market rate determines its pay structure. The former can attract better talent and achieve
lower cost per unit of labour than the ones that pay competitive pay.
2. Employer’s Affordability:
Those organizations which earn high profit and have a larger market share, a large business
conglomerate and multinational companies can afford to pay higher pay than others. Besides,
company’s ability to pay higher pay is impaired by sector- specific economic recession and
acute competition. 3. Worth of a Job:
Organizations base their pay level on the worth of a job. The wages and salaries tend to be
higher for jobs involving exercise of brain power, responsibility laden jobs, creativity-oriented
jobs, technical jobs.

4. Employee’s Worth: In some organizations, time rates are granted to all employees
irrespective of performance. In such cases, employees are rewarded for their mere physical
presence on the job rather than for their performance. However, many private sector
organizations follow performance-linked pay system. They conduct performance appraisal
more often than not which provides input for determining pay levels. It distinguishes the
highperformer from the low-performer and the non-performer.

INTERNATIONAL COMPENSATION PROBLEMS

Problems to be discussed in this final section arise when one or more of the following principles
are not followed:

(1) the compensation program does not provide for equitable treatment of expatriates, host
and third-country nationals; (2) the program in not sufficiently competitive to attract, motivate,
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and retain qualified personnel; (3) no unusual gains or losses are associated with assignments
overseas; and (4) the costs of the program are not reasonable.

Going abroad may mean that executives will be out of the career mainstream for some time.
These executives may miss opportunities for promotion and development at home. On the
other hand, the experience acquired in the overseas assignment might not be relevant to their
careers in the long run. When they return from their overseas assignment, they may be given a
lower ranked job or they may be asked to go through a retraining program or change career
objectives. Therefore, an employer has to determine what compensation package has to be
offered to offset the risks to the preservation of the executive's career. A major consideration is
the nature and size of the total remuneration package. A salary level has to be set which, on
one hand, is in line with salary scales for similar posts in the foreign country and, on the other
hand, can be reconciled with the salary structure within the employing organization. Unless a
proper balance is reached between these two aspects, the executive appointed could end up
earning less than peers or even subordinates in the foreign country. Alternatively, the executive
could end up earning far more than would be likely at home, resulting in reluctance to return at
the end of the overseas assignment.

Therefore, it is not easy to find out what the contents of a benefits package should include for a
job in a foreign country. In a developing country, for example, the problems of arriving at the
right benefits package are even greater, since there may be no existing pattern of salary scales
that can be used as a reference. It may be necessary to carry out a special survey for
determining the market rate.

Also, the various constraints of a very different environment may mean adding financial
inducements to fill the appointment satisfactorily. The executive to be assigned to an overseas
operation is being remunerated not only to perform a given function but to adjust to many
changes in living and working patterns.

Difficulties with the base salary

One of the complications in the balance sheet approach lies in exactly defining the base salary
upon which to add allowances and other benefits. Some companies use the parent-country
salaries as a starting point. Others use an international standard approach, while some like the
international standard idea but prefer to have regional standards such as the European
Community and Latin American Standards. Finally, some companies prefer to use host-country
salaries as the base salary. For extended overseas assignments of long duration (three to five
years), the best approach is to use the international standard approach. However, the base
salary should follow the company base salary of the parent company if it is located in a
highwage developed country. On the other hand, if the assignment is of short duration (less
than 3 years), then a home-country base makes more sense. Truly global companies like Coca-
Cola, prefer a regional base salary. Today, most companies compensate their expatriates based
on either a home or a host country philosophy. 17
15 | Page

Local competitiveness

The base salary must be competitive in local terms. If the base salary is wrong, everything else is
wrong, because bonuses and benefit plans usually are related to base salary. This means that
there must be a process to measure the competitiveness or benchmark positions in the local
market. Local competitiveness can be established periodically on the basis of a total comparison
of all elements of compensation, including: (a) a representative sample of important local,
United States, and other foreign-controlled companies operating in similar or related industries;
(b) any other locally dominant pattern-setting groups. Comparison surveys should establish
both the historical patterns and the recent trends to provide the background for proper total
compensation decisions. For local employees, the competitive levels of company cash
compensation programs should be compared with the historical practice of other employers in
the local environment and be competitively positioned at, say, the 60th percentile level to
ensure the attraction and retention of personnel from within the local market.

Some problems affecting the benefits component

Companies in all countries provide a combination of cash and benefits. In developing countries,
benefits tend to be simple, limited to legally required termination indemnity payments and
medical payment supplements. In developed countries, benefits may be more elaborate,
providing security and income replacement on death, illness, termination of employment and
retirement.

With regards to this matter, the company should make sure that all its foreign subsidiaries have
a broad and balanced benefit package for its executives. Are benefits competitive locally?
Benefit and special remuneration programs should at least match the average historical
practice of other employers in the local environment. Benefit and special remuneration
programs that exceed the current and anticipated local trends and the introduction of
innovative benefit programs should be considered only when a local operation is very profitable
and the market position is secure. In all locations, benefits for local personnel should apply
equally to all employees. Whenever this is not feasible because of collective agreements, labor
requirements, or established business tradition, benefits should apply uniformly within defined
groups. A crucial equity problem arises when expatriates - even in democratic countries- do not
have a democratic view of eligibility for employee benefits. In their estimation, as long as the
top managers have them, that suffices. One of the authors worked in Brazil for a multinational
managed by executives who were unwilling to extend to lower-ranked managers the benefits
they themselves enjoyed. Most countries abroad have no legislation prohibiting discrimination
of this kind.

Family problems

It behaves us to note that more than half of all early expatriates' returns can be attributed to
family problems.18 The inability or unwillingness of the expatriate's spouse and children to
adapt to life in another country surfaces as one of the most important causes of failure.
16 | Page

Consider sending an American male executive to a site in the Middle East. Posted to a semi-
desert location, with no established township nearby, with the most rudimentary amenities,
and with no chance of pursuing a Western lifestyle, this individual and his family will likely
experience a dramatic cultural shock. There may be no suitable educational facilities for the
children. Life can be intolerably difficult for the wife, cut off from friends, not allowed to travel
unescorted, and discouraged by local customs from accompanying her husband to business
social functions. Climate, custom, and law may impose different time scales and work patterns.

There may be problems with language and other unexpected difficulties. One of the authors
remembers working in the Amazon jungle with its super humid climate, the abundant rain
falling at the same time every day; the elevated temperatures; the exotic foods, certainly
delicious but not for all tastes; and the strange but nevertheless practical customs of that vast
land. He does not easily forget the day when a young American manager and his wife found a
snake in their house. They called the landlord and the explanation given was that the snake, like
the furniture and equipment, was part of the property. The function of the house snake rested
on catching rats and mice. It took some time for this couple to adjust to living with the slithering
co-inhabitant instead of having the house infested by rats. Given inevitable unexpected
adjustments, the American executive's expectations of recompense could make that
appointment an extremely expensive matter. If, in addition to the stress of operating in
unfamiliar surroundings, the executive confronts trouble at headquarters, this added burden
can become the straw that breaks the camel's back.

Lack of respect for acquired international experience

Most of the firms in the United States still are heavily oriented toward the domestic market.
This fact is evidenced even in those companies that have a long international operation
tradition. As a result, international experience has yet to be sufficiently valued. According to a
study, only 12 percent of expatriates feel that their overseas assignments had enhanced their
career development. In this cohort, almost two-thirds reported that their company did not take
advantage of what they had learned overseas.

Methods of Compensation
Methods of compensation are being adopted by various organizations:

1. Increased Emphasis on Merit or Performance Related Pay (PRP):

Under this method the individual’s increase in compensation is solely dependent on his/her
performance appraisal or merit rating. This rating not only take into consideration to output on
the job but also other indicators such as – quality, flexibility, job behaviors, contribution to
team working and ability to achieve the goals.
17 | Page

This method is primarily used for managerial levels, although attempts are being made to
introduce it at lower levels also but so far, it has not been very successful.
This method helps –

i. To increase the attractiveness of salaries in order to improve recruitment and retention

as itsends the right message in rewarding those whom the organization wants to keep and not
those whom organizations would prefer to lose.

ii. To facilitate change in organization culture to encourage desired qualities among

employees,like flexibility, dynamism, entrepreneurial spirit, etc.
iii. To weaken trade unions; since the compensation would be performance based rather
thanthrough collective bargaining or negotiations with the management. This may also lead to
the removal of grievances of the employees as most of the grievances are due to compensation
issues and thus a consequential reduction in support for the trade unions.
iv. To increase the role of the line managers, the managers would be required to pay
moreattention to evaluating the performance of their subordinates and discussing with them
the methods to improve their performance.
v. To improve the performance and advancement in their career through development –
sincethe employees will be getting constant feedback on their performance, they would
develop desire to improve themselves for better compensation.
2. Flexible Compensation Schemes-Cafeteria Benefits:
The organizations are facing the problem of adjusting the salaries of new comers at all levels in
the existing compensation structure as they come from different organizations and enjoying
different benefits – both monetary and non-monetary.
Such organizations may use this flexible compensation scheme called Cafeteria Benefits which is
recommended, especially for the managerial employees. Under this scheme, the overall price is
fixed for each level with a menu of benefits. Each employee is allowed to pick the benefits
within the overall limit. Thus, the employees are able to decide which benefits they prefer and
how to balance the amount of compensations they are to get. This scheme also provides
enough flexibility to the employees to plan their income tax apart from helping them increase
their motivation. However, this scheme has not been adopted on large scale by companies, as
the employees tend to compare the benefits different employees are enjoying and they want
all those benefits which any other employee is enjoying without realizing that they had
exercised their option in favor of other benefits the principle of equity is raised in support of
their argument. 3. Harmonization:
Traditionally, at least two methods of payment of wages and salaries have been in operation -
one for blue collared and the other for white collared-or one for workers and the other for
supervisory and managerial employees. The workers are paid for their work and the supervisory
and managerial employees are paid for not only the work but also for their qualifications,
experience and personal characteristics.
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This differentiation problems in the organization, in the sense that the employees who are not
enjoying the benefits which others are, feel de-motivated and feel divided into two separate
classes. Harmonization is a process of bringing different conditions of service into some sort of
alignment. The purpose is to have a single status for all employees in the organization by having
same salary structure. This could be achieved by –
(i) Gradual elimination of differences between different categories of employees’ conditions
ofemployment, like holidays, working hours, use of punch cards, deductions for late
coming, separate canteens,
(ii) Single status, which means all employees are treated equally in all aspects of
employmentexcept pay.
(iii) Extending staff status to certain non – staff employees,
(iv) Providing similar fringe benefits including transport, catering, medical care,
educationfacilities for children of all employees, etc.
The advantages of this system are that it seeks to bring in a measure of equity and fair play and
contribute to the improvements in employee attitudes and performance apart from
simplification of payroll procedures and fringe benefit administration.
4. Decentralization of Payment Systems:
With the organizations becoming multi-technology, multi-location, multinational, there seems
to be increasing interest in the decentralization of compensation determination with a view to
take the local financial performance and labor market conditions into consideration.
The disadvantage of this method in India is that the employees tend to compare and ask for
those benefits which could benefit them, irrespective of their location. Although in the Public
Sector and the Government Departments, the quantum of allowances vary but by and large the
allowances, head-wise, remain the same.
Although, this system is the need of the hour, but it should be introduced very carefully so that
it does not cause any dissatisfaction among employees at various locations or units.
5. Contingency Theory:
After going through the different systems, it may be concluded that there is no best way to
design a compensation system which would be suitable for the organizations under all
conditions. The management must take into account factors such as – the type of product it
manufactures, the technology it uses, the characteristics of the labor force available and the
market conditions of the labor. The organizations must keep on designing and inventing newer
and innovative schemes and benefits to remain ahead of the competitors, market demands and
practices, to attract, the employees to the fold of the organization. The schemes should also
encourage employees to go for training in multiple skills, accept redeployment and relocation.
According to Lupton and Bowey, “Essentially a contingency approach” is one in which it is
argued that in some industries and in some environment one kind of managerial practice will
contribute to some desired objectives, but in other industries and circumstances entirely
different results may occur. Therefore, in order to be sure of the outcome of a scheme the
manager needs to consider the particular circumstances of his/her firm.
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The compensation systems do not operate within a vacuum-remuneration strategy. Both

affects, and are affected by all aspects of the employment relationship. Thus, the design of
compensation systems should not only be integrated with other human resource management
policies but also reflect and perpetuate the overall objectives of the organization.

Moreover, companies must be aware that the differences in individual motives will determine
how they, either as individual or on a collective basis, will respond to certain compensation
methods. No single method of compensation could be considered as suitable for all
organizations under all conditions; therefore, this approach suggests use of any method which
would meet the requirements of the organization at a point of time. The current approach
towards the adoption of schemes as PRP and Profit sharing, harmonization, decentralization of
pay determination, and the contingency theory do reflect some change in the emphasis on
compensation management as a tool to achieve the objectives. But this is not the end, nor it
should be treated as such, rather continuous efforts should be made to come up with
innovative ideas so that the present day as well as the problems which are likely to come up in
near future, are taken care.

CONCLUSION
There is a natural tendency for employers to be myopic to the constraints of the real world and
seek an idealized executive who quite probably does not exist. It is important that executives at
headquarters understand alternatives to solving problems other than those employed at home.
The paper has highlighted some of the dangers of making what appears to be a straightforward
decision to send an executive overseas. A long list of costly items emerges: children's education,
local accommodations, various benefits in accordance with the conditions such as pension
payments, terminal gratuity, life insurance, bonus, travel costs including regular leave periods,
and an abnormally high salary. Perhaps in no other area of executive compensation is an
outside independent and knowledgeable view more needed than in the international scene.
Without expert knowledge and advice to cope with executive recruitment, an employer might
naively proceed to dispatch an executive to the new job overseas. If the wrong individual is
appointed, he/she might stay the course for a few months and give up shortly thereafter,
leaving the employer to start afresh in finding a successor for what is likely to be a worsened
and more costly predicament.