Globalization is impacting more and more institutions ranging from small companies to multinational corporations. The shrinkage of international boundaries among enterprises and their markets has made it necessary for institutions to come up with necessary strategies for dealing with the demands of such diversification. The element of globalization has necessitated an increase in awareness of the development of proper compensation systems in most enterprises across the globe. Due to the complexities associated with international compensation, it is imperative that definite attention be given to payment options particularly in firms with bases in a number of countries. In this regard, it important for institutions to properly understand the kinds of individuals working for multi-national firms, the components of an international compensation structure and the particular challenges that are linked with employees returning from overseas missions to the parent institution. Modern day multinational enterprises have to contend with far more challenging mobility difficulties in comparison with how things were in the past. Some companies have been forced to work around policies in order to ensure that the needs of individuals from tens of nationalities relocating on various types of assignments are well accommodated. The process of settling on given compensation policies, as well as how to make relevant communications and administration decisions has been regarded as one of the prime and logistical and strategic challenges for most corporations. This is because the type of strategy that may be appropriate for the compensation of individuals coming from one country may not be ideal for employees coming from other nationalities. This essay seeks to analyze the various pay options available to multinational companies, particularly for the employees who fall in the category of expatriates. To this end various key issues will be dealt with using information gathered from various publications, as well as basic exemplification from the implementation of the approaches in various countries across the continents.
All the compensation strategies are influenced by two primary cultural issues. These are the institutional culture of the enterprise and the local culture of the location in which the company is operating (Caves 2001). A compensation plan that is regarded as extremely effective in Ireland will not work properly if ends up violating the traditional values of the work environment in which the expatriates find themselves in. corporations which use individual rewards and performance-based payment as both elements of motivation and uniform compensation for their employees all around the world can easily have the strategy backfiring on them (Aliber 1996).
The efficacy of rewards as a motivator stems from cultural frameworks regarding motivation (Caves 2001). In group-oriented communities the individual pay differences does not generally influence the hierarchy of basic human requirements. The most highly appreciated motivations are based on the attainment of group desires and potential. Trying to use such incentive strategies as awarding expatriates employee of the year awards will most likely end up in creating of embarrassing situations for the target employee (Swedenborg 1999). It is advisable for the developers of these motivational programs to come up with strategies that appreciate the strengths of the group rather than those that recognize the individual.
Components of International Compensation
There are two primary elements that comprise the compensation for individuals working in international environments. These are briefly explained below:
There are two methods for establishing the base salary for an individual working for a company in its overseas branch. First, is sticking to pre-determined rules, regulations and procedures of the home company, including proper evaluation of work done (Aliber 1996). The second method is to follow the policies and procedures of the state in which this overseas employee works. Because most international assignments are four short amounts of time, it is advisable for companies to use the first option. By keeping the base salaries of overseas employees in tandem with salaries in the parent country, the complications associated with the transition back home are lessened as the greater compensation changes have already been dealt with (Caves 2001).
Base salaries form the foundation of the compensation systems adopted by companies for their overseas employees (Swedenborg 1999). As a matter of fact, they are the mandatory minimum that employees working for a company are accorded and they are normally never considered for reduction. The importance of base salaries are further emphasized by the fact that other earnings such as target bonuses and pay deductions such as pension contributions are determined as factors of this element of the compensation (Aliber 1996).
These benefits are awarded to employees on overseas missions in order to retain them in the same financial position that they were in their parent country (Caruth and Handlogten 2001). Some of these benefits include housing allowances, emergency leave and club memberships. The United States appreciates the importance of these benefits and most of their expatriates in countries across the globe live in almost the same levels of comfort as they were in their home country.
Expatriate compensation strategies
Indirect Monetary Compensation (Benefits)
Indirect monetary compensation is primarily made up of components of monetary value that a company gives to its employees on top of their normal salary or wage (Caves 2001). Most of this payment is given in the form of protections or services but there are some forms of the compensation that can result in direct cash remittances to employees. Indirect monetary compensation is one of the most challenging strategies especially when it comes to managing payments to overseas employees. This is particularly because of the legal challenges that come with tax considerations and which to be carefully assessed before any recommendations are made.
There are six key roles that indirect monetary compensation plays in an institution. This are detailed below:
To help the corporation attract enough numbers of well-qualified workers
More often than not, it is the tangible elements of compensation that attract individuals to a given organization. If these attributes do not appear to be competitive with the labor market, the institution will not be in a position to have a substantial database of applicants from which to isolate the ones with the greatest qualifications (Caruth and Handlogten 2001). As long as the package of benefits appears acceptable, an organizations human resource department will have enough candidates for both local and overseas assignments.
To help the company retain the employees already in its pay-roll
Indirect monetary compensation helps institutions retain members of the workforce that they hire (Caruth and Handlogten 2001). Such benefits help give the employees a sense of security which has the added advantage of increasing the workers’ positivity and feelings of satisfaction towards the company. In addition to this, because most of the benefits are categorically designed to favor employees with longer times of service, indirect monetary compensation tends to have the advantage of encouraging workers to stay with an institution for longer periods(McManus 1972). For instance, retirement benefits increase with the number of years that an individual has been with a company. Employees would therefore shy away from moving to other companies since such a transfer would essentially cancel all the advantages or privileges that have been garnered through extended lengths of service (Caves 2001).
In order for the institution to comply with state regulation
Federal law demands that all employers develop systems for contribution to social security funding on behalf of both their local employees and expatriates (Caruth and Handlogten 2001). Aside from this, employers have to allow some leave period to their employees or to allow for a system of health insurance once an employee retires from employment.
To make the institution comply with labor agreements
The National Labour Relations Acts of most countries demand that employers provide genuine terms and conditions during the recruitment of employees (Caruth and Handlogten 2001). These acts touch on such items as retirement and various other benefits. Once the types of benefits to be provided, including indirect monetary compensations, the company is expected to provide them to the workers during the entire period that the employee is with the company (Aliber 1996).
As part of the company’s social responsibility to its members of staff and their dependants
Over time, employers have come to realize that they have a role to play in the well-being of their members of staff and their dependants (Caruth and Handlogten 2001). This is just a manifestation of genuine concern on the part of the senior management and proprietorship of the company to employees. Employees on their part also appreciate the importance of this aspect of compensation and are demanding it more and more.
The benefits enjoyed by employees of corporations while on international missions are usually similar to those enjoyed in the parent country (Aliber 1996). However, institutions should know that there are some countries which demand that benefits be provided only in the specific place where the employee is based. For instance, in France companies are required to ensure that there workers are given a minimum of 25 days vacation per year. Therefore, even though a Briton on overseas assignment for an British corporation in France is not legally guaranteed the 25 days vacation, the company may find itself pushed to provide this allowance in order to avoid a decrease in staff member morale (Caruth and Handlogten 2001). Most countries have benefits that are different from those in other nations.
Incentive compensation plan
There are various incentives that can be awarded to employees in order to boost their morale especially when working in overseas nations. These include cash bonuses and monetary compensations related to their performance (Herod 2009). The process of drafting a workable international compensation strategy demands that consideration of the various compensation plans alongside the specific details of the role of the employee in his/her assignment (McManus 1972). This plan has been well utilized in the East African country Kenya in order to ensure that its expatriates in various countries are comfortable enough to adequately fulfill their duties.
Development of an incentive compensation plan
When it comes to the development of an incentive program, there is no approach that can be used to meet the needs of companies across the board. All establishments, particularly those in the corporate world, are different in one way or another depending on the market, the organizational culture or the uniqueness of the workforce (Herod 2009). Therefore, there is no way that bonus plans for two different companies can be identical. However, there are a number of premises on which the development of an incentive compensation programme is grounded. These are explained below:
First, is the fact that it should equitably and consistently appreciate the efforts of individuals towards great performance. If this is ignored, the members of staff and particularly those based oversees may end up regarding bonuses as their primary right, which in turn leads them to not putting in their level best (Herod 2009). In this case the members of staff simply expect their bonuses to be remitted for just showing up at work everyday and staying there for the stipulated number of days. If the company’s main aim was to use bonuses as methods of increasing employee motivation, then giving workers with different performance equal treatment ends up severely compromising this strategy (Caves 2001). Providing awards and other forms of recognition to great performers has the added advantage of creating role models for other workers. Consequently, the levels of performance are raised and the general morale of the company is boosted (Herod 2009).
The second premise in the development of a proper incentive program is that it must encourage individuals to behave in ways that would be beneficial to the achievement of company goals. Most individuals regard money as the primary motivator (Aliber 1996). However, there are a few individuals who would be content with a simple recognition for work well done. Irrespective of the compensation preferences, incentives should be used to encourage positive behavior towards the attainment of organizational objectives.
A third premise of a proper incentive system is that it should be implemented in such a way that it affects the desired change within the corporation. This particularly affects workers dispatched on international missions and who have to contend with sporadic periods of change (Herod 2009). It is a human characteristic to always fear and develop resistance when it comes to change. Incentives can be used as a motivational factor to encourage workers to embrace changes that are beneficial to the company.
The fourth premise of a properly functioning incentive system is that it should provide for a decent amount of the compensation to take the form of a variable cost (Herod 2009). The plan should basically be geared at rewarding positive results as opposed to the behavior of the employees. This basically means that a worker who stays in the office for eight hours daily should not be simply rewarded for having proper work ethic. Instead, the reward should be provided only if the individual attains noticeable results such as beating deadlines or making proper sales (Herod 2009). Consequently if a certain percentage of a person’s compensation is linked to their performance, then the company automatically becomes more successful in the attainment of its specific goals. In this regard, what some schools of thought may regard as a fixed salary is in essence divided into a company expense that has both variable and fixed elements. This definitely means that for overseas members of staff, the fixed and variable elements of a worker’s compensation will vary depending on the type of employee. For instance, if the variable component is high, such that the employee stands to make even more money in the form of bonus, then it is most likely that the position will attract individuals who regard risks as a challenge to be dealt with. Such individuals appreciate the fact that there is a greater reward for more risks taken (Aliber 1996). On the other hand, if the compensation plan offers a high fixed element (salary) the job will draw the attention of the more conservative individuals who are mainly interested in the security of their job positions. Luckily, each and every establishment needs to have an amalgamation of both of these workers. For instance, for a company to run well, the manager should be a sensible risk taker while the controllers should lean more towards the conservative side. The general compensation plan of an institution should equitably regard the efforts of all the employees, both local and international.
Finally, the incentive compensation plan should have some amount of flexibility if it has to attend to general needs of both the institution and its employees. It is definite that the programme should recognize the role played by the different types of workers (Herod 2009). For instance, the efforts of the company’s director and sales manager may be equally relevant to the success of the company. However, the bonus plan should be designed in such a way that rewards them depending on the unique roles they play in their individual capacities. The director might be rewarded based the effectiveness in the day to day running of the company manifested by the recognition the company gets amongst rival enterprises. The sales manager on the other hand might be rewarded based on the financial performance of the company, illustrated by increased sales. In addition to this, the performance of employees in a given job category may vary depending on their relative impact to the corporation’s goals. This means that the compensation plan should be designed in such a way that it provides for individuals in similar positions to be rewarded in direct proportion to the amount of work they put in (Herod 2009).
In modern day business, more and more countries are establishing bases in various countries across the globe. The growth of corporations from humble enterprises in studio offices to multinational companies turning over millions of sterling pounds is a feat that only a well rounded business-minded team can achieve. This report has analyzed the input of expatriates in the growth of a company while taking into consideration the strategies that are commonly used in compensating such employees. It has been well established that the transformational leadership style used in most multinationals advocates for the use of indirect monetary transfers and incentive compensation plans on top of the base salary in order to ensure conformity with the legislation of the region in which the expatriates are working in. This strategy should therefore be maintained even when paradigm shifts are facing a company. The report has elaborated on the various components of the two compensation plans using extensive literature drawing from the works of various scholars. In conclusion, it is important to note that these strategies work for most multinational companies and should therefore be reinforced by various other strategies, whose discussion was outside the scope of this report. It would be unwise for enterprises to completely ignore proven-to-work compensation strategies due to transformational changes facing companies, for other plans that have not been tried and tested for the same market.
Aliber, R. Z., 1996. The multinational enterprise in a multiple currency world. London: George Allen & Unwin.
Caruth, D.L. & Handlogten, G.D. (2001). Managing compensation (and understanding it too): A handbook for the perplexed. Connecticut: Greenwood Publishing Group
Caves, R. E., 2001. International corporations: The industrial economics of foreign investment. Economica, 38(149), pp. 1–27.
Herod, R. (2009). Expatriate compensation strategies: Applying alternative approaches. Virginia: Society for Human Resource Management.
McManus, J. C., 1972. The theory of the multinational firm. Toronto: Collier Macmillan.
Swedenborg, B., 1999. Multinational operations of Swedish firms. Stockholm: Almquist & Wiskell.