International HRM compensation types

1. HRM –
Compensation
Presentation by
Sredharran
Sampath

2. International HRM Differences
• Greater Number of
Services
• Special Services to
Unique Group
• Compensation Complexity
• Foreign Exchange Rate
Attention
• Language and Cultural
Differences

3. International
Mergers and
Acquisitions
Global
Competition
Importance of
Global Human
Resources
Management
Foreign Human
Resources
Market Access
Opportunities
Increasing Importance of Global Human
Resources Understanding

4. Composition of the Cultural Environment of
International Business
Religion
sacred objects
philosophical
systems
beliefs & norms
prayer
taboos
holidays
rituals
Technology and Material
Culture
transportation
energy systems
tools & objects
communications
urbanization
science
invention
Values and Attitudes
Toward:
time
achievement
work
wealth
change
scientific method
risk-taking
Education
formal education
vocational training
primary education
secondary education
higher education
literacy level
human resources
planning
Social Organization
kinship
social institutions
authority structures
interest groups
social mobility
social stratification
status systems
Language
spoken
written language
official language
linguistic pluralism
language hierarchy
international languages
mass media
Law
common law
code law
foreign law
home country law
antitrust policy
international law
regulation
Politics
nationalism
sovereignty
imperialism
power
national interests
ideologies
political risk

5. Key Issues in International HRM
1. Worldwide Human Resources
Planning
– Recruiting and Selection
– Expatriate orientation and training
– Repatriation
– Performance appraisal
2. Compensation
– Dealing with inflation and unexpected
changes in exchange rates
– Providing sufficient pay to keep
individuals
– Should company pay hardship
allowance?
– Dissatisfaction with cost of living
allowances
3. Housing (Complex problems at
home and overseas)

6. Key Issues in International HRM
4. Benefits Planning
– Developing equity among employees
– Several plans necessary for different
categories of personnel
5. Taxation (Proliferation of new laws)
6. Communication of HR Policies and
Programs Worldwide
– Treat communication as a continuous
process
– Face-to-Face contact frequently
– Make policy manuals brief and simple
– Be sensitive to needs of receiver
– Send regular written explanations of
policy changes
– Periodic rotation of overseas HR
managers desirable
– Security

7. Global Manufacturing

8. International Corporation
Domestic firm that uses
its existing capabilities to
move into overseas
markets.

9. Multinational Corporation (MNC)
Firm which independent
business units operating
in multiple countries.

10. Global Corporation
Firm that had integrated
worldwide operations
through a centralized
home office.

11. Transnational Corporation
Firm that attempts to
balance local
responsiveness and
global scale via a network
of specialized operating
units.

12. Types of Organizations
Global
Efficiency
High
Global
Views the world as a single
market; operations are
controlled centrally from the
corporate office.
Transnational
Specialized facilities permit
local responsiveness;
complex coordination
mechanisms provide global
integration.
Low
International
Uses existing capabilities to
expand into foreign markets.
Multinational
Several subsidiaries
operating as stand-alone
business units in multiple
countries.
Low High
Local Responsiveness

13. The Multi-National Corporation
(MNC)
• Home Country
Employment
• External Country
Employment

14. Managing in a Foreign
Environment
• Attitudes Vary
• Motivational Tools
are Distinctly
Different

15. Cultural Environment
of International Business

16. Clustering Nations Approach
• Geography
• Languages
• Religion
• Job Attitudes
• Work Goals
• Values
• Needs

17. Managerial Values
• Role of Competition
• Role of Blame
• Role of Shame
• Role of Participation:
Japan (hi)
• Role of Autocratic: Europe
(hi) and South America
(hi)

18. Sources of Managerial Talent
• Home Country Nationals
(Expatriates)
• Host Country Nationals
(Natives)
• Third Country Nationals
(Non-Home/Host)

19. Advantages of Different Sources
for Overseas Managers
Host Country Home Country Third Country
•Less cost
•Preference of
host country
government
•Knowledge of
environment
•Language
facility
•Talent available
within company
•Greater control
•Company
experience
•Mobility
•Experience
provided to
corporate
executives
•Broad
experience
•International
outlook
•Multi-lingualism

20. SOME OF THE LARGEST U.S.
MULTINATIONALS
AT&T General Electric Microsoft
Cisco General Motors Procter and Gamble
Citicorp. Hewlett-Packard RJR Nabisco
Coca-Cola IBM Texaco
DuPont Intel United Technologies
Exxon/Mobil Oil J.P. Morgan Wal-mart
Ford Motor Johnson & Johnson Xerox
Motorola

21. 6 Major Reasons for American Expatriate
Failures in Foreign Environment
• Inability of the manager’s spouse to
adjust to a different cultural
environment.
• The manager’s inability to adapt to a
different physical or cultural
environment. Other family-related
problems.
• The manager’s personality or
emotional immaturity.
• The manager’s inability to cope with
the responsibilities posed by the
overseas work.
• The manager’s lack of technical
competence.
• The manager’s lack of motivation to
work overseas.

22. Selection Methods
• Interviews (executives
and psychologists)
• Assessment Centers
(exercises)
• Tests (language and
special tests)
• Role of Family

23. Flowchart of the Selection-Decision Process
Start the Selection Process
Can the position be filled by a local national?
Identify degree of interaction required with local
community – using a 7- or 9- point scale, ranging from
low to high, indicate the degree of interaction with local
community required for successful performance on the
job.
Select local national and subject him/her to training
basically aimed at improving technical and managerial
skills.
Emphasis* on tasks variables.
Second but by no means unimportant question is to ask
whether the individual is willing to serve abroad.
Is candidate willing?
Probably not suitable for position
Emphasis* on task variables
Identify degree of similarity /
dissimilarity between cultures – using a
7- or 9-point scale, ranging from similar
to highly diverse, indicate the magnitude
of differences between the two
cultures,
Emphasis* on “relational abilities”
factor.
“Family situation” factor must also be
taken into consideration.
Start orientation (most rigorous)
Start orientation
(moderate to high rigor)
Start orientation
(moderate to high rigor)
Probably not suitable for position
YES
NO
YES
YES NO
NO
HIGH
LOW
HIGHLY DIVERSE
VERY SIMILAR

24. Preparing for an International
Assignment
Study the following subjects:
• Social and business etiquette.
• History and folklore.
• Current affairs, including relations between
the country and the United States.
• The culture’s values and priorities.
• Geography, especially the cities.
• Sources of pride: artists, musicians, novelists,
sports, great achievements of the culture,
including things to see and do.
• Religion and the role of religion in daily life.
• Political structure and current players.
• Practical matters such as currency,
transportation, time zones, hours of business.
• The language.

25. Cultural Shock
• "A Disorientation that
Causes Perpetual Stress"
– Disorienting Incidents
– Impossible Communication
– Telephone Difficulties
– Family Frustrations

26. Special Considerations
• Career Development
Risks
• Reentry Problems
• Managing Family Life
• Terrorism

27. Recruitment
• Government Regulations
• Work Permits Universally
Required
• Recruitment of Locals
Varies
• Guest Workers
• Role of Church, Family,
Politics

28. Selection
• Merit Versus Best Family
• Family Ties
• Social Standing
• Origin
• Industrialized versus Less
Developed

29. Training Issues
• Local Resources
• Less Technical
Capabilities
• Apprenticeship Strengths
in Europe
• Management
Development (US Leader)
• Language (English Need)

30. Compensation
• Host Country Employees
– Production Standard or
Time or Combination
– Benefits (often higher than
U.S.)
– Profit Sharing (may be
Required)
• Managers
– Narrowing of Salary Gap
with USA

31. Expatriate Compensation
• Base Pay
• Differentials
• Incentives
• Company Assistance
• Cost: 3-4 times USA Rate

32. Compensation Approaches in various
Countries
• In USA - Compensation package includes:
base salary, bonus, long term incentives &
other benefits and peaks. The base salary is
the small part of the total package.
• In Europe – Paid less compensation than that
of American executives, but benefits and
Employee perks are much better in Europe
than America.
• In Japan – The compensation levels of CEO’s
of large companies are just one-third of those
of American CEO’s. Japanese compensation
is based on seniority of employees.

33. Expatriate Compensation
• Expatriate Compensation – A good
compensation package is one that is
considered fair by an expatriate, but it must
also be cost-effective for the organization.
It should be planned to achieve the mobility
and staffing goals of the organization.
• There are a few methods commonly used to
determine global expatriate compensation.
These include: home-based approach (also
known as the balance sheet approach), the
host-based approach, and the global market
approach. And one of the greatest
challenges is determining which method is
best for your organization.

34. Negotiation / Bargaining Approach
• Some employees as well as MNC’s
prefer to determine the compensation
package through mutual negotiations
between the employee & the employer.
• It would be possible when –
✓The number of expatriates is relatively
less
✓The company & prospective
employee have full
knowledge of on-going salary levels,
✓The skills of the prospective employee
are in short supply.

35. The Lump sum Approach
• Under this, MNC determines the total
package in money value that covers the
base salary, all kinds of allowances and
benefits.
• The employee is provided with the
freedom of allocating the money &
deciding up on the type and quality of
housing, medical, conveyance, education
for self & family members, air travel,
recreational facilities, taxation,
repatriation of savings, seting-in, setting-
out, exchange rate production etc.

36. Cluster System Approach
• .
• MNC’s segment the countries and/or cities
into clusters based on the cost of living &
other factors like hardships & danger
issues that affect the compensation
package.
• They determine more or less same
compensation package for each job
within the same cluster of cities.
• This approach reduces the cost of
complexities in the compensation
administration.

37. Home Based Compensation Approach
The home-based, or balance sheet approach,
is the most popular of these approaches and
used by more than 85% of U.S.
multinational companies.
The balance sheet approach provides
international employees with an expatriate
compensation package that equalizes cost
differences between the international
assignment and the same assignment in the
home country of the individual or the
organization. This approach is based on
some key assumptions and is designed to
protect expatriations from cost differences
between their home and host countries.

38. Host Based Approach – Localization
Approach
The host-based approach means the assignee
transfers to the host country payroll and receives
base and incentive pay based on host country
compensation practices and regulations. There are
limited, if any, assignment related allowances. The
host payroll typically delivers base pay and
incentive pay and above-base allowances.
With organizations looking for cost-cutting
opportunities, they have looked to localize
assignees. The host-based approach may be a cost-
effective option to the traditional home-based
approach, including local plus policy components.
Difficulties can occur in repatriating assignees, if
applying this approach, because it integrates
employees into the local host salary structure. It
can make it very difficult to move the assignees to
another destination or back to their home country.

39. Global Market Approach
• Unlike the balance-sheet approach, a
global market approach to expatriate
compensation requires the international
assignment be viewed as continuous,
even though the assignment may be for
various periods of time and the
employee may be in various countries.
• All assignees are on the equivalent
compensation scale, regardless of their
home country. This approach is much
more inclusive. Regardless of which
country the assignee is assigned, the
main benefits are provided.

40. Advantages and Disadvantages of each
Approach
• There are benefits and drawbacks to
each approach. The objectives of each
assignment, among other issues, should
be measured before choosing the right
compensation approach. Variations in
laws, living costs, tax policies, and
other factors all must be considered in
establishing the compensation for
expatriates. Idea should be to maintain
equity and consistency among the
expatriate group. Many organizations
look for a company specialized in this
practice, as it is clear that international
compensation is very complex.

41. Different Country Approaches
Criterion America Japan Russia Middle East
Orientation Performance Seniority - based Job – level Nationality group
-oriented based and job level
Components BS- Basic Salary, VB MW – Monthly BS- Basic Salary BS- Basic Salary, VB
– Variable bonus, LTI wage, BA – Basic FB – Fixed – Variable bonus,
– Long tern Allowance, OT – Bonus, NMB – Compulsory
incentives, CBC – Overtime, VB – Non monetary benefit
Compulsory benefit Variable bonus benefits) contributions, VBC-
contributions, VBC- Voluntary benefit
Voluntary benefit contribution
contribution
Link with Excellent linkage Moderate linkage Poor linkage Moderate Linkage
performance
Basis of Annual merit Seniority and Seniority in Job Job Level
Increase increase age, performance level
ratings, spring
wage negotiation
Influencing Achievement – Hierarchy; Material Material
Cultural orientation Patience Possessions Possessions

42. Compensation of Expatriate Managers
1. Provide an incentive to leave the
united states.
2. Maintain an American standard
of living.
3. Facilitate reentry into the united
states.
4. Provide for the education of
children.
5. Maintain relationships with
family, friends, and business
associates.
To be effective, a compensation
program must:

43. Compensation Elements of an Expatriate
• Programs used by most U.S. Based
MNCs have four elements:
• Base pay – equal to pay of domestic
counterparts in comparably evaluated
jobs.
• Differentials – to offset the higher
costs of overseas goods, services,
and housing.
• Incentives – to compensate the
person for separation from family,
friends, and domestic support
systems.
• Company assistance programs – to
cover added costs such as moving
and storage costs, automobile, and
education expenses.

44. The Price of an Expatriate
An employer’s typical first-year expenses
of sending a U.S. executive abroad.
Direct Compensation Costs
Base Salary 100%
Foreign-service premium 15%
Goods and services differential 20%
Housing costs 20-40%
Transfer Costs
Relocation allowance 5%
Air fare 2%
Moving household goods 25%
Other Costs
Company Car 15%
Schooling (two children) 20%
Annual home leave (four people) 5%
Personal income tax abroad 50%
Total = Salary plus 187-207%
Note: Additional costs
often incurred aren’t
listed above, including
language and cross-
cultural training for
employee and family,
and costs of selling
home and cars in the
U.S. before moving.
*Figures take into
account payments by
employee to company
based on hypothetical
U.S. income tax and
housing costs.
*It is not unusual to
triple costs compared
to USA earnings.