International Compensation Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Compensation is a critical tool to an organization’s strategic planning, given its importance to both employees and employers. Research has shown that compensation is a key factor to employee attitudes and behaviors, and can be a determinant in retention of talented employees. Employers have to pay close attention to the compensation program, given the costs that are associated with it. Total compensation, which includes actual pay plus benefits, can be 23 percent or more of a company’s revenue. The percentage can vary by industry and geographic location.

Pay decisions can be broken down into two categories: pay structure and individual pay. Pay structures focus on pay level and job structure, whereas individual pay highlights incentives and rewards that are of interest to the employee. Pay level is the average pay (i.e., wages, salaries, and bonuses) of jobs in an organization, and job structure refers to the relative pay of jobs in the organization.

Pay Structure

One of the most popular theories addressing the compensation field is equity theory. Equity theory implies that individuals evaluate whether or not they are being treated fairly by comparing their situation to others. In this scenario, it is common for an employee to compare his/her pay to the pay of other employees, especially those coworkers performing the same duties. Many researchers and practitioners in the field strongly believe that work attitudes and perceptions are based on whether or not an employee believes he/she is being fairly compensated in comparison to the perception of what other employees are being paid. This theory applies to both internal and external structures.

Organizations tend to address these concerns via market pay surveys (external equity) and job evaluations (internal equity). In order to ensure that external equity and internal equity issues are addressed, human resource professionals should consider the following tools when preparing an international compensation package: (1) an international compensation management grading system that is comparable to the domestic grading system; (2) a base salary delivery process that is integrated into the home country’s base pay system as well as taking local country laws into consideration; (3) an incentive and reward system that motivates employees worldwide; and (4) a performance management system that rewards employees regardless of their geographic location.

Pay levels are influenced by two factors: product market competition and labor market competition. Product market competition creates a threshold on labor costs and compensation. The threshold can be constrictive when the labor costs are a larger share of total costs and when demand for the product is tied to the price. Labor market competition highlights the fact that the organizations must research and determine what is a competitive salary for positions, especially compared to what competitors are paying for similar positions. In order to compete for talent, many organizations will benchmark against product market and labor market competitions.

Job evaluations are used to measure a position’s internal worth. An effective evaluation system is based on compensable factors and the weighing scheme for each factor (based on the factor’s importance to the organization). These factors include working conditions, education, experience, and job complexity. Once scores have been assigned to each of these factors, a point factor system is developed.

Market pay structures can differ across borders in terms of their level and relative worth for the job. Some markets may offer lower levels of pay overall and require lower payoff for skills, education, and advancement. In most cases, expatriate pay and benefits will be closely in sync with the compensation structure of the home country. However, this practice is slowly being replaced with alternative practices as more companies begin to implement policies that have pay differentials that are based on geographic location. The pay differentials are used to address inequities that may arise if an employee wants to consider a position in another country that may have a higher cost of living than the home country. Unfortunately, there is a drawback to this practice. It may be difficult to adjust an employee’s salary downward if the cost of living decreases and/or the employee relocates to a lower-cost area.

Components Of International Compensation

When creating a compensation system for international employees, one must take four basic components into consideration: base salary, indirect monetary compensation (benefits), equalization benefits, and incentives.

The base salary is the foundation of an international compensation system because it represents the minimum rate at which a candidate will work for your company. Some organizations have elected to develop an international compensation system based on the policies and procedures of the parent company’s country, whereas others have created an international compensation program based on the host country. Regardless of which practice is utilized, it is important for the compensation professional to consider what happens to the employee’s pay once they leave that assignment. On average, the typical international assignment usually lasts from three to five years.

Although most benefits (indirect monetary compensation) packages are the same as offered in the home country, organizations must consider how to address situations where a host country may require certain benefits that are not offered in the home country. It may be in the organization’s best interest to consider offering such benefits in order to keep employees motivated and maintain positive attitudes.

Equalization benefits are offered in an effort to minimize any financial hardships that an employee may experience as a result of considering an international assignment. Some of these benefits include housing allowances, educational allowances, language and culture training, employment opportunities for spouses, and emergency leave. Some organizations have found that it is beneficial to offer incentives to expatriates. Some of these incentives include an assignment completion bonus, cash bonuses, stock options, and performance-based bonuses.

Bibliography:

Jaepil Choi and Chao C. Chen, “The Relationships of Distributive Justice and Compensation System Fairness to Employee Attitudes in International Joint Ventures,” Journal of Organizational Behavior (v.28/6, 2007);
Rui Cui, “International Compensation: The Importance of Acting Globally,” Worldatwork Journal (v.15/4, 2006);
Luis R. Gomez-Mejia and Steve Werner, Global Compensation: Foundations and Perspectives (Routledge, 2008);
Roger Herod, Expatriate Compensation: A Balance Sheet Approach (Society for Human Resource Management, 2008);
Roger Herod, Global Compensation and Benefits: Developing Policies for Local Nationals (Society for Human Resource Management, 2008);
Rezaul Kabir, “International Perspectives on Executive Compensation,” Journal of Multinational Financial Management (v.18/1, 2008);
Kevin B. Lowe, John Milliman, Helen De Cieri and Peter J. Dowling, “International Compensation Practices: A Ten-Country Comparative Analysis,” Human Resources Abstracts (v.38/1, 2003);
Stedham, “International Compensation,” in S. Cartwright, ed., The Blackwell Encyclopedic Dictionary of Human Resource Management (Blackwell, 2004);

“Tax Aspects of International Compensation,” Journal of Compensation & Benefits (v.22/2, 2006).

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