INTERNATIONAL

COMPENSATION
 International Compensation
• Defined as the provision of monetary and non-monetary
rewards,
rewards including base salary, benefits, perquisites,
long- and short-term incentives, valued by employees in
accordance with their relative contributions to MNC
performance

• Its broad HRM purpose is to attract, retain and motivate

those personnel required throughout the MNC currently
and in the future

• From the perspective of employees, in particular,

compensation is one of the most visible aspects of
SIHRM
12/08/21 2
 International Compensation
• Contingency, resource-based and agency theories offer some insight to
international compensation

– Contingency approach suggests there are variables that impact on

compensation policies and practices to make them more or less appropriate and
effective – Balance sheet approach and in more recent global models of
international compensation to this field where there is a need to consider
particular contingencies or situations such as host country preferences, when
devising and implementing international compensation

– Resource-based theory analyses conditions in which organizations can gain

positions of competitive advantage through having human resources which are
valuable, rare, and difficult to imitate or replace (such as employees with
knowledge gained through specific international experience and organizational
experience)

– Principal-agent relationship proposed in Agency theory translates as the MNC

HQs-subsidiary relationship, where the HQs is the principal and the subsidiary is
the agency to which work and responsibilities are delegated – given that the HQs
does not have all the unique knowledge of subsidiaries not all decisions in the
MNC can be made by HQs and it must depend on the subsidiaries as their
agents, and an agency problem arises if the goals of the HQs and subsidiary mgrs
are not aligned
12/08/21 3
 Variables influencing International Compensation
Strategy

12/08/21 4
 Internal Variables influencing International
Compensation Strategy
• Goal orientation
– UK-based foam manufacturer Zotefoam, where equality is a key
aspect of HRM in the company’s mission, the only perks that
differentiate executives from other workers are private health
insurance and a car allowance – MD of the firm sees the
internationalizing firm as one with minimal status differences
between levels in the org. hierarchy

• Capacity to pay
– Cost constraints on the enterprise

• Competitive strategy
– If for eg., as part of the MNC competitive strategy, the IHRM
strategy is to be a mkt leader in employee compensation in order
to compete for the most competent candidates, then the levels of
compensation might well be higher than if the competitive
strategy is based on, say, the provision of secure employment.
12/08/21 5
 Internal Variables influencing International
Compensation Strategy

• Organization culture
– It also influences the degree to which employees are
compensated on the basis of seniority, in contrast to
personal connections or performance

• Workforce chs.
– Age, education level, qualifications and experience,
along with workforce tastes and preferences, and
labour relations factors such as nature of employment
relationship (level of TU involvement within MNCs)
will result in different international compensation
approaches
12/08/21 6
 External Variables influencing International
Compensation Strategy

• Nationality if the parent country

– In terms of culturally determined values and attitudes towards
compensation policy and practices – local culture influences
international compensation strategy through the dominant societal
values, norms, attitudes and beliefs concerning for eg. bases for
compensation differences (performance, family connections, gender),
degrees of compensation differences between managerial and non-
managerial employees, and the propensity for using particular types of
compensation (pay incentives and benefits)

• Labour mkt chs of supply and demand

• Education and skill levels, ages and experiences of those in the

labour mkt

• Role of home and host country govts in labour relations

– Affect the level of govt. regulation of the labour mkt and employment
relationship, including compensation of the workforce
12/08/21 7
 External Variables influencing International
Compensation Strategy
• Industry type

– Evidence from 2 global industries, scientific measuring and

medical instruments suggest that MNCs competing in a global
industry may be more likely to allocate rewards based on
corporate and regional performance rather than on subsidiary
performance, as favoured by MNCs competing in a
multidomestic industry
– Different industry sectors also have different norms and
practices for international compensation (eg. service-sector and
high technology MNCs have been more likely than
manufacturers to incorporate equity-based options in their
international compensation strategies

• Competitors’ strategies
– Even if the MNC is not seeking to be a mkt leader in
international compensation, it generally cannot afford to fall
behind mkt rates across its locations, as it will risk losing
12/08/21 valuable employees to competitors 8
 Compensation of International Staff Transfers

12/08/21 9
 Compensation of International Staff Transfers

• Expatriate compensation comprises various allowances for

international relocation and some common allowances are:

– Foreign service premiums – most common for employees on long-term

assignments (over 1 yr) as an incentive to take the assignment – more
often paid to PCNs than to TCNs

– Hardship – in consideration of isolation, crime, natural hazards, political

violence, based on govt data upon which rates can be provided by
consulting orgs such as International SOS, a global medical and
security assistance company

– Relocation – compensation for costs such as transport, storage,

temporary accommodation, purchases of appliances and vehicles,
associated with moving to the host country

– Education – for assignees’ children

– Home leave – provision for the assignee and family to return home
12/08/21 periodically during the length of the assignment 10
 Compensation of International Staff Transfers
• Basis for expatriate compensation is maintaining relatives with parent
country national colleagues and preserving parity of purchasing
power, viz ensuring that the expatriate maintains the same std of
living that he or she enjoyed at home

• This has been most commonly achieved through applying the

Balance Sheet Approach (BSA)

• BSA (Most common system of choice among MNCs) –

– Comprises the payment of base salary consistent with home country
rates, plus cost of living and housing allowances reflecting home country
stds, and provision for tax equalization or tax protection and a reserve of,
say, savings, social security and investments
– Costs incurred by the international assignee that exceeded equivalent
costs in the home country are met by both the MNC and the assignee
proportional to preserving the assignee’s home country equivalent
purchasing power
– This approach preserves equity between international assignees of the
same nationality and between assignments and is easy to communicate
– Also facilitates repatriation but can facilitates disparities between PCNs
and TCNs and between them and HCNs and can also be expensive
12/08/21 11
 Compensation of International Staff Transfers

• Host country and region-based expatriate compensation strategies are the

best-known alternatives to BSA (often referred to as localized approaches)

• Host country compensation

– Places higher priority on local equity than on home country equity, compensating
the assignee to host country stds, and often participation in a home country
retirement scheme is the only compensation link with the home country
– Suited to long-term assignments where comparisons with home country peers
are less relevant to assignees
– Some may find it difficult due to nature of taxation and social security reporting
requirements (specially to US expatriates due to strict home country tax and
social security reporting obligations)

• Regional approach
– Attempts to capitalize on apparent similarities in culture, compensation and
taxes, for eg. by adopting the same compensation for all countries within a
particular region
– MNCs are beginning to view the 11 countries that have adopted the Euro, or the
‘Eurozone’ as a region for compensation structures
– Eg., Portal Software Europe has equalized car allowances and some other
benefits for employees in 8 of their 11 Eurozone bases

12/08/21 12