Global Compensation Practices

For many companies, maintaining a domestic compensation program  that supports the strategic goals of the organization and meets the needs of  employees is a difficult challenge. This challenge is intensified when a similar  program must be designed to operate in multiple countries with different  cultures. For organizations competing in a global marketplace, managing compensation requires a through understanding of the taxation of compensation  and benefits, differing state social systems, differences in living standards and  employee values and expectations.

Global Compensation Practices

Some of the most challenging questions in  compensation practices are following:

  1. How does a company pay expatriates from difference home countries  brought together to work on a project?
  2. What about compensation packages for same country nationals sent to different  regions of the world?

Traditional compensation systems for expatriates, such as the balance  sheet approach and going  rate approach, may not be adequate for the company  or expatriate in facilitating an case of transfer. Global enterprises require global  compensation systems that allow the organization to maintain the flexibility and  ease of transfer between countries and regions while providing employees a just  wage. A compensation system must be designed to work regardless of where the  expatriate is sent on assignment. To some degree, this requires rethinking the  traditional focus on location and national culture in determining expatriate  compensation.

Traditional Systems of Global Compensation

Of the traditional global compensation schemes, the balance sheet  method is most commonly used. More than 85% of US companies  use some variation of this method to compensate their expatriates. The objective  of the balance sheet method is to keep the expatriate economically whole or to  ensure that the expatriate doesn’t financially suffer or come out ahead as a result  of the international assignment. It is intended to maintain the employees home  standard of living during the international assignment.  The base salary for parent country nationals and third country  nationals is linked to the salary structure of the relevant home country.  Additional salary is often given to cover tax differences, housing costs and the  other basic living expenses. Perquisites may also be offered such as foreign  service premiums, hardship allowance, relocation assistance and home leave  allowances to help make the assignment more attractive. There are several  versions of the balance sheet approach, such as the headquarters based system.  They each essentially are applied in the same manner with the primary  difference being that the base salary is equated with a different location.

An advantage of the balance sheet method and perhaps the reason why it  is one of the most widely used international compensation scheme is that it eases  the repatriation process because it generally maintains comparable compensation  with home country colleagues. It further provides equity between assignments  and is relatively easy for employees to understand. Multinationals using the  balance sheet approach must frequently review compensation package to ensure  that it is keeping up with any rise in cost of living.

Opposite to the balance sheet method is the host country based or  going rate approach. This approach uses comparable salary in the host country  as the base in setting compensation. It perhaps best integrates the expatriate into  the host country and host business unit more quickly because salary survey  comparisons are closely linked with host country nationals. As an alternative,  compensation may be bench-marked against expatriates of the same nationality  or of all nationalities within the local market. Advantages afforded by this  approach include better identification with the host country living standards and  host company compensation levels. This may be particularly important in  diffusing any resentment that may develop among local national employees  regarding inequities in expatriate compensation.

These traditional methods of international compensation are based on the  premise that eventually the expatriate will return to his or her home country.  However, as globalization requires a constant mobile workforce, these  traditional compensation packages are becoming less and less adequate.  Challenges develop as the need to transfer employees among international  business units increases. It becomes an expensive proposition for companies to  continue paying salaries, allowances and perquisites based on a home country  location when there are no immediate plans to repatriate the employee.

Challenges for the Traditional System

Although the balance sheet approach provides the benefits of equity for  the expatriate between assignments and better facilitates repatriation, it generally  comes at a high cost to the company. The longer the foreign assignment lasts,  the challenge to maintain a life style the expatriate may have been accustomed  to at home becomes greater. The balances sheet approach infers that the  expatriate should never have to make any adjustments to his or her host country  and company. This can result in great compensation disparities between the  expatriate and host company employees as well as third — country expatriates.  Problems arise when employees are paid different amounts for performing  essentially the same job, leaving a perception of unfairness among the lower  paid employees.  Another challenge with the balance sheet approach is the complexity in  administering the program as more expatriates from different home countries are  sent abroad. Multiple home countries complicate the administration of the base  pay and allowances required to keep the expatriates economically whole.

The going rate approach also has its disadvantages as a global  compensation program. Assignments to multiple locations likely result in  variation of pay. This is particularly evident when and employee is transferred  from an economically advanced location to perhaps a Second or Third World  country. Expatriates facing a possible loss of compensation may be reluctant to  take the pending assignment. Further more, expatriates from the same home  country performing equivalent work in different locations can have a notable  difference in pay depending on the host country compensation level. Again, this  can result in expatriates being reluctant to take the lower compensating  assignments and lead to rivalry among coworkers for the higher paying  assignments.

Toward a Global Compensation System

A global economy has emerged as companies all over the world are  joining forces through alliances, mergers, joint ventures, acquisitions and the  like. The mobility of the workforce is increasing as companies recruit employees  worldwide. Multinational corporations are looking to foster collaboration among  their foreign business units. The availability of television, the internet, e-mail,  cell phones and other means of instant communication have allowed employees  to easily obtain and exchange information about pay and other working  conditions. To be competitive in this global economy, companies must identify  those skills and competencies that they require globally and pay accordingly.

Much has been written on compensating the expatriate from a home  country perspective. The assumption is that the international assignment is  temporary and therefore an inducement should be paid to entice the expatriate to  take the assignment. However, as true globalization of business becomes more  common, the trend is drifting away from the temporary expatriate with a home  base country toward true international employees who are expected to remain  abroad throughout their careers. It is becoming more important to establish a  strategic compensation system that provides the flexibility to easily relocate  employees to meet company needs, equability among similar jobs worldwide,  cost savings and ease of manageability of the compensation program.  To create a global culture where employees located in different parts of  the world can feel a sense of equality within the organization, companies must  implement a core compensation program that is essentially similar everywhere.

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