COMPENSATION IN MNC’S

• The multinational firms, successful management of compensation and benefits requires

knowledge of the employment and taxation laws, customs, environment, and employment
practices of many foreign countries.
• These needs must be fulfilled with in the context of shifting political, economic, and
social conditions.
The fallowing compensation packages in MNC’s
 Salary
 Car and driver
Benefits like:
 Medical
 Pension
 Housing
 Flights home
 Private school for children

Objective of international compensation:

Firms objectives
• The policy should be consistent with the over strategy, structure and business needs
of the MNC’s
• The policy must work to attract and retain staff in the areas where the MNC has the
greatest needs and opportunities.
• The policy must be competitive and recognize factors such as:
i. Incentive for foreign service
ii. Tax equalization
iii. Reimbursement for reasonable costs.
• The policy should facilitate the transfer of international employees in the most cost
effective manner for the firm.
• The policy must give due consideration to equity and ease of administration.
International employee’s objectives:

• The employee will expect that the policy offers financial protection in terms of
benefits, social security and living costs in the foreign location.
• The employee will expect that a foreign assignment will offer opportunities for
financial advancement through income and/or savings.
• The employee will expect that issues such as housing, education of children and
recreation will be addressed in the policy.

Key components of an MNC compensation program:

 These are broadly classified into 3 categories

1. PCN’S
2. TCN’S
3. HCN’S
 We discuss key components of international compensation, which include
1. Base salary:
The term base salary acquires a somewhat different meaning when employees go abroad
i. In a domestic context: Base salary denotes the amount of cash compensation
that serves as a benchmark for other compensation elements (eg; bonus and benefits)
ii. For expatriate: It is the primary component of a package of allowances,
many of which are directly related to base salary (eg., foreign service premium, cost of living
allowance, housing allowance) as well as the basis for in service benefits and pension
contributions.
2. Foreign service inducement/hardship premium:

• The definition of hardship signifies eligibility for the premium, and amount and
timing of payment must be addressed.
 PCN”S: Often a salary premium as an inducement to accept a foreign
assignment as compensation for any hardship caused by the transfer. (PCN’S –Parent country
nationals.)
 It is important to note that these payments are more commonly paid to PCN’S
than TCN’S.
 Such payments vary, depending upon the assignment, actual hardship, tax
consequences and length of assignment.
3. Allowances:

• The issues concerning allowances can be very challenging to a firm establishing

an overall compensation policy, partly because of the various forms of allowances.
A. Cost-of –living allowance(COLA):

• It typically receives the most attention, involves a payment to compensate for

differences in expenditures between the home country and the foreign country. E.g to
account for inflation differential.
• The COLA may also include payments for housing and utilities, personal income
tax, or discretionary items.

B. Housing Allowance:

• It implies that employees should be entitled to maintain their home country living
standards (or in some cases, receive accommodations that are equivalent to that provided for
similar foreign employees and peers)
They include—
i. Company- Provided Housing (either mandatory or optional)
ii. A fixed housing allowance (or assessment of a portion of income), out of
which actual housing costs are paid.
iii. In the banking and finance industry- offering assistance in sale or leasing,
payment of closing costs, payment of leasing management fees, rent protection, and equity
protection
C. Home Leave Allowance
• The purpose of paying for such trips is to give expatriates the opportunity to
renew family and business ties, there by helping them to avoid adjustment problems when
they are repatriated.

D. Education Allowance

• For expatriates, children are also an integral part of any international

compensation policy. Allowances for education can cover items such as tuitions, language
class tuitions, enrollment fees, books and supplies, transportation, room and board, and
uniforms.
E. Relocation Allowance

• These usually cover moving, shipping and storage charges, temporary living
expenses, subsidies regarding appliance or car purchases (or sales), and down payments or
lease-related charges. Allowances regarding perks (cars, club memberships, servants, Etc.,)
F. Spouse Assistance:

• MNC’S offer this allowance: to help guard against income lost by an expatriate
spouse as a resent of relocating abroad.
• Some MNC’s also pay for spouses lost income
• MNC’s also provide spouses with employment opportunities.

4. Benefits:
• The complexity inherent in international benefits often brings more difficulties
than when dealing with compensation.
• Person plans are very difficult to deal with country to country because national
practices vary considerably.
• Transportability of pension plans, medical coverage and social security benefits
are very difficult to normalize.

Benefits include:

• Whether to maintain expatriates in home country programs, particularly if the

firm does not receive a tax deduction for it.
• Whether firms have the option of enrolling expatriates in host country benefits
programs and or making up any difference in coverage.
• Whether expatriates should receive home country or host country social security
benefits.
• MNC’s provide home country’s benefits plan for social security programs.
• Retirement benefits, vacations and other special leave, annual home leave, rest
and rehabilitation leave and emergency provisions in cause of death or illness.
 Approaches to International Compensation

Going Rate Approach or market rate approach:

With this approach the base salary for international transfer is linked to the salary
structure in the host country. The multinational usually obtains information from local
compensation surveys and must decide whether local nationals (HCVN’S), expatriates of the
same nationality or expatriates of all nationalities will be the reference point of
benchmarking.
For example, a Japanese bank operating in New York would need to decide whether its
reference point would be local U.S. salaries, other Japanese competitors in New York, or all
foreign banks operating in New York. With the Going Rate Approach, if the location is in a
low-pay country, the multinational usually supplements base pay with additional benefits and
payments.

Characteristics of GRA:

• Based on local market rates. Local national (HCN’s)

• Relies on survey comparisons.
• Expatriates of same nationality
• Expatriates of all nationalities
• Compensation based on the selected survey compensation.
• Base pay and benefits may be supplemented by additional payments for low pay
countries.

Advantages:
• Equality with local nationals.
• Simplicity
• Identification with host country.
• Equality amongst different nationalities

Disadvantages:

• Variation between assignment for same employee –one assignment in developed

and the other is in developing country.
• Variation between expatriates of some nationality in different locations.
• Potential re-entry problems. When the employee salary reverts to host country
level that is below that of the host country.
 • This is not only a problem for firms in developing countries, but also for firms fro
many countries where local managerial salaries are well below that of the United
States, which is the world market leader in managerial salaries.

Balance-sheet Approach (BSA):

The basic objective is to “keep the expatriate whole” through maintenance of home-
country living standard, plus a financial inducement to make the package attractive. The
approach links the base salary for PCN’S and TCN’S to the salary structure of the relevant
home country.
For example, a U.S executive taking up an international position would have his or her
compensation package built on the U.S base-salary level rather than that applicable to the
host country.
Characteristics of BSA:
• Basic objectives are maintenance of home-country living standard, plus financial
inducement.
• Home-country pay and benefits are the foundations of this approach.
• Adjustments to home package to balance additional expenditure in host country.
• Financial incentives (expatriate/hardship premium) added to make the package
attractive.
• Most common system in usage by MNC’s.
• The BSA to international compensation is a system designed to equalize the
purchasing power of employees at comparable position levels living abroad and in the home
country and to provide incentives to off-set qualitative differences between assignment
locations.
There are 4 major categories of outlays incurred by expatriates that are incorporated in the
BSA.
1. Goods and services:
• Home country outlays for items such as food, personal care, clothing, household
furnishings, recreation, transportation, and medical care.
2. Housing
• Major costs associated with housing in the host country,
3. Income taxes:
• Parent country and host country income taxes.
4. Reserve
• Contributions to savings, payment for benefits, pension contributions,
investments, education expenses, social security taxes, and so on.
Advantages of BSA:
• Equity: The balance sheet approach provides equity between foreign assignments
and between expatriates of the same nationality.
• Facilitates expatriates re-entry
• Easy to communicate to employees.

Disadvantages:

This approach can result in considerable disparities both between expatriates of

different nationalities and between PCN’S and HCN’s
A second problem with the balance sheet approach is that while this approach is simple
as a concept, it can become quit complex to administer.

Complexities arise in the fallowing areas:

Taxation:
• Taxation probably causes the most concern to HR practitioners and expatriates
(both PCN’S and TCN’S) since it generally evokes emotional responses. To illustrate the
potential problems, for the U.S expatriate an assignment abroad can mean being double –
taxed – both in the country of assignment and in the United States. MNC’S select one of the
following approaches to handle international taxation.
Tax equalization:
• Firms withhold an amount equal to the home-country tax obligation of the PCN,
and pay all taxes in the host country.
Tax protection:
• The employee pays up to the amount of taxes he or she would pay on
compensation in the home country. In such a situation, the employee is entitled to any
windfall received if total taxes are less in the foreign country than in the home country.
International Living costs Data:
• Obtaining up-to-date information on international living costs is a constant issue
for multinationals. There are also considerable disparities in purchasing power around the
world.
• A recent survey of living costs in selected cities ranked the ten most expensive
cities as Tokyo leads the table.
• MNCs also are able to respond to unexpected events like currency and stock
market crash that suddenly unfolded in a number of Asian countries in late 1997.
• There are also considerable disparities in purchasing power around the world. For
example U.S. workers do not have the highest hourly earnings. Australia stood first in this
aspect
• It is also possible to take a wider view and focus on business costs rather than
living costs for expatriates, because the multinational firm is interested in the overall cost of
doing business in a particular country as well as the more micro issue of expatriate living
costs.
• A recent study indicates the top ten most expansive countries in terms of business.
Germany is the most expensive country overall because of its very high basic wages, while
the second most expensive rank for the United States is in large part because of high
executive salaries.
• In general, developed countries rank as more expensive than developing countries
because their wage costs are higher.

Differentiating between PCN’S&TCN’S:

• Many TCN’S have a great deal of international experience because they often
move from country to country in the employ of one MNC (or several) headquartered in a
country other than their own (eg: in India banker may work in the Singapore branch of a U.S
bank)
• As Reynolds has observed, there is no doubt that paying TCNs according to their
home country base salary can be less expansive than paying all expatriates on a PCN scale,
particularly if the MNC is head quartered in U.S.A. or Germany.
• The MNC’S need to match compensation policies with their staffing policies and
general HR philosophy.

Standardized or customized performance appraisal form:

• Domestic companies design performance appraisal forms for each job category,
particularly those using a traditional performance appraisal approach rather than performance
management.

• Such standards assist in collecting accurate data on which personnel decision can
be made and allows for cross-employee comparisons.

Frequency of evaluation:

• Evaluation is commonly performed on a yearly basis and this appears to extend to

international performance systems, even though the domestic oriented literature on this topic
recommends more frequent performance evaluation and feed back.

Performance feed back:

• Timely feedback is an important aspect of an effective performance management

system.
• In the annual appraisal system, the employees do not receive consistent frequent
feedback in order to maintain or improve their performance. Thus regular feed back is
important to meet targets and revising goals as well as assisting in motivation of work effort.
 PERFORMANCE APPRAISAL SYSTEM IN MNC’S

• One of the most challenging aspects for a firm operating internationally is

managing the performance of its various international facilities.
• MNC’S require an effective system for managing the performance of its global
operations that assists strategic cohesion and competitiveness.

MNC performance management:

• A MNC makes strategic choices based on economic and political imperatives.
• Thus the MNC’S have specific expectations for its foreign affiliates in terms of
market performance and contribution to total profits and competitiveness.
• While evaluating the performance it is important to various constraints that may
effect goal attainment. such as,
Whole versus part:
• It means that a MNC as a single entity faces a international environment and
simultaneously confronts differing national environment.
• The good of the whole is more important than one subsidiary short-term
profitability.
Non-comparable data:
• Physical measures of performance may be even to interpret, but difficulties may
still arise.
• The data obtained from subsidiaries may be neither interpretable nor reliable.
• For instance, nations of what constitutes adequate quality control checks can vary
widely from one country to another.
• These factors can make an objective appraisal of subsidiary performance
problematic and may complicate the evaluation of individual subsidiary managers.
Volatility of the international environment:
• Long-term goals must be flexible in order to respond to potential market
contingencies. Inflexible approaches would not fit the new environment.
• Problems arise when subsidiary managers perceive goals and deadline set by a
distant headquarters strategy team as unrealistic and inflexible failing to take into account
local conditions that change as a result of a volatility environment.
• Obviously involving regional and subsidiary managers in strategic planning
assists in overcoming this perception.

Separation by time and distance:

• Judgments concerning the congruence between the MNC and local subsidiary
activities are further complicated by the physical distances, time zone differences, and the
infrequence of contact between the corporate head-office staff and subsidiary management
and the cost of the reporting system.
• Meeting personally is often necessary to fully understand each person’s situation.
Variable levels of maturity:
• More time may be needed to achieve results than and customary in a domestic
market since the established brand can support new products and new business areas can be
cross subsidiaries by other divisions which may not be possible without the supporting
infrastructure of the parent market development in foreign subsidiaries
• Future variation in customs and work practices between the parent country and
the foreign subsidiary must be recognized.
Factors associated with individual performance and appraisal:
• Individual performance management pertains to 3 categories of employees.
PCN
HCN at various management and operative levels
TCN
Expatriate performance management:
• Performance is the combination several variables such as motivation, ability,
working conditions, and expectations.
Variables for assessment of expatriate performance:
• Compensation package
• The task (assessment task variables and role of the expatriate)
• Headquarters support
• The environment in which performance occurs.
• Cultural adjustment of the individual and the accompanying family members
VARIABLE EFFECTING EXPATRIATE PERFORMANCE
Compensation package:
• Perceived financial benefits, along with the career progression potentially
associated with an international assignment are often important motives for accepting the
posting. If these expectations are not realized during the assignment, the level of motivation
and commitment is likely to decreases, thus affecting performance.
Task:
• Expatriates are assigned to foreign operations to fulfill specific tasks may
identifies 4 tasks roles
a. The chief executive officer or subsidiary manager directs the entire foreign
operations.
b. The structure reproducer carries the assignment of building in a foreign subsidiary
a structure similar to that which he or she knows from another part of the country.
c. The troubleshooter is the individual sent to a foreign subsidiary to analyze and
solve a particular operational problem.
d. The operative performs functional jobs tasks in an existing operational structure,
in generally lower-level. Supervisory positions.
• Task variables are generally considered to be more under a multinational control
than are environment factors.
• But the difficulty for the expatriate managers is that the role is defined in one
country but performed in another, i.e. the cultural norms regarding the set behaviours that
define a manager in one nation may not be the same as those considered appropriate for
managers in another nation.
Headquarters support:
Accepting the assignment may be
• Career oriented
• Financial oriented
• Mixed with a genuine feeling of loyalty and
• Commitment to the sending organization.
• The levels of headquarters support provided to the individual and the family is an
important performance variable that involves more than the tangible, monetary support
contained in the compensation on package.
• The element of the employment contract comprise 2 components

 Transactional contract “comprises of the specific, short-term, “monetizable

obligations”.
 The relational contract “is characterized by broad, open-ended, long-term
obligations based on both exchanges around monetizable elements (e.g. Pay for service) and
socioemotional elements (e.g. Loyalty support)”.
Host environment:
• The environment has an impact on any job and in the international context, with
its differing societal, legal, economic, technical and physical demands can be a major
determinant of expatriate performance.
• Thus the expatriate performance should be placed within its international as well
as its organizational context.
Importance should be given to
 The type of operation
 See there are to conflicting goals between the parent and the subsidiary
 The stage of international business as its influences the success of the expatriate.

Cultural adjustment:
• It is a critical determinate as it covers the process of adjustment. The dilemma is
that adjustment to a foreign culture is multifaceted and individuals vary in terms of their
reaction and coping behavior.
The phases of cultural adjustment
Phase 1:
• Begins with reactions prior to the assignment. The upswing of mood upon arrival
referred as the “honeymoon” or “tourist” phase
Pahse2:
• Soon as the novelty wearer off, and when everyday realities in the foreign
location begin to intrudes, homesickness sets in and a downswing may commence a feeling
that “the party is over”- a negative appraisal leading to crisis.
Phase3:
• This is a critical time as its all about coping and psychological adjustment which
has an outcome in terms of success/failure.
Phase4:
• If successful at this point of crisis then the expatriate comes to terms with the
demands of the new environment and adjustment to new environment.
• This level off over time to what has been called as “healthy recovery”.
 Not all expatriates experience this u-curve.
 Time period involved various and there is no conclusive statistical support for the
various phases.
 There may be other critical points beyond the 4th phase.
 After assignment return home may require some psychological adjustment
• Personally factors appear to play a role in explaining an international manager’s
ability to adapt to a foreign environment thus increasing the probability of successful
performance.
Criteria used for performance appraisal of international employees:

Performance criteria:

• Goals tend to be translated into performance appraisal criteria so specifically and

measurability issues are important aspects and we need to recognize that hard, soft and
contextual goals are often used as the basis for performance criteria.
Hard goals:
• These goals are objective, quantifiable and can be directly measured such as
return on investment, market share and so on.
Soft goals:
• Tend to be relationship or trait based, such as leadership style or interpersonal
skills.
Contextual Goals:
• Attempt to take into consideration factors that result from the situation in which
performance occurs.
• The financial results recorded for any particular subsidiary do not always reflects
accurately its contribution to the achievements of the corporation as whole.
Who conducts the performance appraisal:
• This is another issue. Typically, employees are appraised by their immediate
superiors and this can pose problems for subsidiary managers.
• As they work in different countries but are evaluated by superiors at headquarters
who are not in a position to see on a day to day basis how the expatriate performs in a
particular situation.
• Appraisal of other expatriate employees is likely to be conducted by the
subsidiaries CEO, the immediate host country supervisor or the individual home country
manager, depending on the nature and level of the position concerned.
• Host country managers may consider contextual criteria but may have culturally
bound basis (about role behaviuors) and lake an appreciation of the impact of the expatriates’
performance in the organizational context.
• Some expatriates may prefer to have parent company evaluations as their future
career progress may depend on how the evaluation data is utilized back at headquarters’ this
may be especially so in cases where foreign operations are relatively less important than
domestic operations.

Standardized or customized performance appraisal form:

• Domestic companies design performance appraisal forms for each job category,
particularly those using a traditional performance appraisal approach rather than performance
management.
• Such standards assist in collecting accurate data on which personnel decisions
can be made and allows for cross-employee comparisons.
Frequency of evaluation:
• Evaluation is commonly performed on a yearly basis and this appears to extend to
international performance systems, even though the domestic oriented literature on this topic
recommends more frequent performance evaluation and feedback.
Performance feedback:
• Timely feedback is an important aspect of effective performance management
systems.
• In the annual appraisal system the employees do not receive consistence frequent
feed back in order to maintain or improve their performance.
• Thus regular feedback is important to meet targets and revising goals as well as
assisting in motivation of work effort.
• While the difficulty for the expatriate is that due to a geographically distant
appraisal timely feedback is only viable against hard criteria.