INTERNATIONAL COMPENSATION
MANAGEMENT
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Objectives of Compensation
• International Compensation System is understood as provision of
monetary and nonmonetary rewards including Base Salary,
Benefits, Perquisites, long and short term incentives in accordance
with their relative contribution to performance.
• Attract Individuals who are competent and interested in Foreign
assignments.
• Facilitate movements of Expatriates from one subsidiary to another,
from one home country to subsidiaries, from subsidiaries back to
home country
• Consistent pay levels at Headquarters, Domestic affiliates, and
Foreign subsidiaries.
• Be Cost effective by minimizing unnecessary expenses.
• Be consistent with the overall strategy, structure and Business
needs.
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Compensation Philosophy
• Is set of values and beliefs that an organization has with
regards to monetary and nonmonetary benefits payable to
employees.
• Many MNCs say no formal compensation philosophy but
whatever they are practicing from a long period is their
compensation philosophy.
• Difference in Compensation philosophies in various
organizations
Some-Extensive use of Incentives
Some-Apply to a narrow group of Employees who are
believed to contribute directly to bottom line
Some-at market average, or at highest levels
Some-Generous to superWWW.PPTMART.COM
performers
Any Compensation philosophy should cover following aspects
• What are the goals of the Organization.
• What % of compensation linked to
Individual/unit performance and what
percentage linked to Base Salary
• What role of Performance Management in
distributing Compensation
• How much relative to Market
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Three categories of Variables
• Organization-What is the requirement of
organization.
• Environment-What are the Market
trends.
• Employee-what is Employee
requirements.
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COMPENSATION STRATEGY
Variables
Assessment
Employee
Employee Inputs
& Preferences
Organization
Business and
Operating Units
Environment
Industry and Labor
Market practices and trends
Design
Elements of
Compensation
Base Pay
Variable Pay
Fringe Benefits
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Compensation
Administration
Three categories of Variables
ORGANISATION
Strategic business and
Operating units
ENVIRONMENT
Industry & Labor
marketing practices and
Trends
EMPLOYEE
Employee inputs and
Preferences
Are provided from the
subsidiary business plan.
Assessment of the type of
workforce skills required
employee numbers,
nature of work, sales and
promotion targets serve
as critical inputs to kind of
Compensation system
designed
Helps assess Demandsupply relationship
prevalent in the industry.
Need careful attention in
order to hire and retain
the requisite talent pool
For individuals skills based
negotiation. Factors like
current salary, institution
fro which he/she
graduated influence salary
negotiations
After these are decided, Elements of compensation are decided
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Elements
• Base pay- are the wages or Salaries. Employee receives
90% to 100% of Cash compensation and 2/3rd of total
compensation from Base pay.
• Variable Pay-Variable pay plans are Organization
Systems for sharing the economic benefits improved
productivity, cost reductions, quality and overall
business performance.
• Fringe benefits-Highly influenced by Legal
requirements.
• Compensation administration-includes a collection of
activities required to sustain the effectiveness of a
compensation strategy. Issues like labour marketing
surveying, PM, Skill Certification, Peer review come
under this umbrella.
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Components of International
Compensation
•
•
•
•
•
•
•
BASE SALARY.
INCENTIVES.
ALLOWANCES.
FOREIGN SERVICE/HARDSHIP PREMIUM.
BENEFITS.
TAXES.
LONG TERM BENEFITS.
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Exhaustive checklist used by organizations either implicitly or explicitly
In implementing the Compensation strategy.
1
Base Pay Delivery
Methods of Delivery Job Based vs Individual based
No of Levels
Structure of Levels
Pricing strategies
Adjustment method
Weighing of individual performance
Organization performance or Variable pay
2 Role in Total Compensation strategy
Structures
Measures
Targets
Tolerance for pay at Risk
Risk reward rates
Use of Non monetary rewards
Individual Performance recognition
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Exhaustive checklist used by organizations either implicitly or explicitly
In implementing the Compensation strategy.
3 Fringe Benefits
Usually determined at Corporate levels
Tie to Business and HR objectives
Coverage
Cost
Communication(Purpose, coverage, values)
4
Compensation Administration
Stakeholder role in Compensation administration
Performance management and evaluation
Shift differentials
Attendance policies
Role of Seniority
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Exhaustive checklist used by organizations either implicitly or explicitly
In implementing the Compensation strategy.
5 Employee Inputs and Preferences
Perception of External and Internal pay equity
Pay delivery benefits
Form(cash, gainsharing, benefits)
Methods
Trust in Management
6
Business and Operating Units
Operations and manufacturing Strategy
Sales development strategy
% of Compensation costs to total product/service costs
% of Compensation costs to controllable product/service cost
Existing markets/products
Potential markets/products
Anticipated volume
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Exhaustive checklist used by organizations either implicitly or explicitly
In implementing the Compensation strategy.
7
Industry and Labor market Practices and trends
Availability of Quality of Workforce
Industry Practices, Retention of workforce
Retention of Key contributors
Wage/Sal levels and movements
Wage/Sal delivery charges
8
Compensation Philosophy and Objectives
How much emphasis should be placed on rewards to drive organization
What issues are to be driven by compensation as opposed to mgmt practices
Market definition
Method of Delivery
Target position in labor market
Relationship within the company to selection and retention
% of Workforce eligible for Bonus
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Components of International Compensation
Taxes
Salary
Incentives
Int. Comp
Allowances
Benefits
Long term
benefits
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Base salary
 Base on which other elements are
built.
 Foundation block for International
Compensation, whether the is
Employee is a PCN or HCN
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Incentives
• MNCs are designing special incentive program for keeping
Expatriates motivated.
• Many MNCs have dropped-Ongoing premium for foreign
assignments and replaced it by One time lump sum
premium. Ex In 1990- 60% MNCs used ongoing premiums
for foreign assignments and now 50%.
• MNCs are preferring One time premiums to Periodic
Salaries. Ex-Yahoo. Com dropped CEO salary to 1million
dollars but he is made entitled to Bonus in the form of fully
vested stock option up to I million shares/year
• Two types of Bonus. Referral bonus and Retention Bonus
• Referral Bonus- Popular way of bringing in new talent by
employee(popular in Technical jobs, Least likely in sales
Representatives)
• Retention Bonus-To retain employees in IT, BPO, Service
Industry
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The Primary Goal of Retention Bonus
Building Long term Organizational Continuity
Retain Employees during difficult times
Retain employees during Organisational structuring
Others
Retain employees during Mand A
11%
33%
17%
18%
21%
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Calculation of Retention Bonus
2%
8%
Flat Dollar Amount
Percent of Baase
Pay
30%
Others
60%
Formula based on
Time
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Allowances
Allowance is an inevitable feature of International Compensation.
 Cost of living Allowance.
 Spouse Allowance.
 Housing Allowance.
 Home leave Allowance.
 Education Allowance.
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Cost of
living
Allowance
Spouse
Allowance
Housing
allowance
Home
Leave
Allowance
Education
allowance
Relocation
allowance
An
adjustment
for
differences
in the cost
of living
between
Home
country and
Foreign
assignment
country
Help guard
against
income lost
by
Expatriate’s
trailing
spouse
Either on an
assessed or
an actual
basis. These
are often
discussed
on an case
to case
basis, but
formal
policies
should be
there
Facilitate an
expatriate
to visit his
or her home
country at
least once a
year
Expatriates
children.
The item
covered are
tuition,
language
tuition,
enrollment
fees, books,
transportati
on,
uniforms
Some time
also given
to wife for
further
studies to
establish
herself
Moving,
Shipping
and storage
charges,
temporary
living
expenses,
Subsidiaries
regarding
appliance,
car
purchase,
Lease
related
charges
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Foreign service/ Hardship premium
 Inducement in the form of salary premium
to accept an overseas assignment depends
on type of assignment, actual Hardship and
length of Hardship.
 Certain countries- hostile, sometimes killed
(paid 2to 3 times)
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Benefits
•
•
•
•
•
•
•
•
•
•
•
Also k/a Indirect Compensation, Hidden Salary roll,
fringes or Service Programs
Entertainment
Festival celebrations
Gifts
Sponsorship of children
Employee welfare
Conference attendance
Conveyance, tour and lodging
Hotel board and lodging
Vehicles
Telephones
Health and Life insurance
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Benefits that have a prominence place in any Compensation strategy
1. Health and Life Insurance- Purchased by employees at group rates which are
typically lower than individual rates
2 .Vocation/Holidays/ Rest Breaks- Release fatigue, improve productivity when
they actually work.
3. Retirement/ Health Care/ Disability Benefits- allows workers to be more
productive by freeing them of concerns about medical and retirement cost
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Key issues related with Benefit program in
International Compensation
• Whether Expatriates in the Home country
benefit program or Host Country benefit
program.
• Whether Host country legislations or Home
country with regards to termination.
• Which country should pay for the Benefits.
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International Taxation
(MNCs select following approaches)
• Tax Equalization- Organizations withhold an amt
equal to Home Country tax obligation of the PCN,
and pay all taxes in the host country. Tax protectionemployees pays up to the amt of taxes he or she
would pay on remuneration in the home country.
• Adhoc Approach- Each Expatriate is handled
differently.
• Laisses Faire- Left on their own to solve their taxation
problems
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Factors affecting
Int Compensation
MNCs External Envi
MNCs Internal Envi
•Goal Orientation
•Parent nationality
•Capacity to Pay
•Labor market char.
•Competitive strategies
•Organization Culture
Staffing
Orientation
•Workforce Demographics
•Industry type
•Government role
(Home and Host)
•Labor relations
•Strategic role
(Subsidiary role)
•Local culture
International
Compensation
strategy
•Competitors strategies
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MNC Internal Environment
MNC External environment
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Going rate approach-Expatriates are paid
according to Host Salary structures.
Balance Sheet Approach-Equate or balance
Expatriate’s purchasing power in Host
country with purchasing power in Home
country
Regional System-Everyone going to one area
falls under one category.
International Citizen’s approach-International
basket of goods is used for all
expatriates(food, clothing, housing)
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