General Overview of Global Compensation

General Overview of Global Compensation

Introduction

Compensation is an essential reward system from the employer to the employee. Employees are the core of almost every organization. In order to attract the best talents, a compensation plan is one of the most important factors that an organization should pay attention to.  As organizations head to the global market, the labor relationship is not only between employer and employee, but also goes beyond that to include many other factors (Milkovich & Newman, 2008).  Establishing a global compensation plan is not easy because of the differences between the home-country and the host country.  The differences are introduced due to many factors, such as cultural differences and political systems.  These factors could sometimes cause ethical or legal issues due to the differences in the legal systems.  Dealing with these issues is the Human Resources professionals’ responsibility; they go over these obstacles, in order to achieve the organization’s goals.

Definition of Compensation

Compensation is an essential reward system from the employer to the employee.  Employees are rewarded through the organization’s compensation system.  Compensation usually includes two major elements: pay and benefits.  The pay also has many forms such as base pay, incentives, and differentials (Heneman, 2009).

Compensation is a very important factor in the employing and retaining operations.  Most of the employees are concerned about compensation.  They accept or refuse the job mostly depending on the compensation plan.  In order to attract and retain best-qualified employees, organizations should have a strong competitive compensation plan; as result, successful organizations invest in their employees.

Companies need professional employees who are qualified to lead the companies’ production line abroad. Competition is a major risk that organizations have to be ready for; they need to have to compensate strategy to service major competitions.  Every organization looks for the most qualified employee who could perform the job tasks and achieve the organization goals.  This competition makes it difficult to attract candidates to work with the organization.  Establishing a good market-competitive pay plan would help in bringing the highly talented employees.  The globalization and open market give organizations no choice but heading to international branches and competing against other organizations in the same field.

Variety among international compensation

Figure 1 International Labor Compensations ─ Image retrieved from U.S. Bureau of Labor Statistics.

The figure above shows the significant differences among hourly compensation costs in manufacturing in 34 countries. The differences include also the benefits percentage of total compensation. According to the U.S. Bureau of Labor Statistics, some countries spend higher percentages of social insurance expenditures more than direct-paid benefits such as Sweden, Belgium, and France. Other countries, on the other hand, such as New Zealand, Denmark, and the Philippines, spend more on Direct-paid benefits, which includes paying for leave time and bonuses.

Complexities of global compensation

There are some points that affect the compensation system of organizations internationally. In order to understand the global compensation more attention should occur to these points.  Rao (2009) concluded nine points that could cause changes in compensation systems from country to another and affect global compensation.  These points are varying the cost of living, employees’ expectations, consistency and equity, country perspectives, the exchange rate of fluctuation, varying tax rate, varying inflation rate, varying local condition, and varying requirements for facilities (Rao, 2009).

Milkovich and Newman concluded that there are four main factors that influence organizations’ and their compensation system.  These factors are institutional, economic, organizational, and individual.  Each one of these four factors consists of a group of sub-factors.  The institutional factor is influenced by cultural traditions, social contracts, political structures, union power, and business organizations.  The economic factor is influenced by market development, competitiveness, tax system, and ownership structures.  The organizational factor is influenced by strategic aims, level of autonomy, technology, and innovation.  Finally, the individual factor refers to employees and is influenced by their characteristics, knowledge, skills, attitudes, motivations, and preferences (Milkovich& Newman, 2008).

Milkovich and Newman explain that some of factors and sub-factors are affecting the global compensation systems more than the others.  They established five effective factors: social contracts, trade unions, capital markets and ownership structure, management autonomy, and institutional and cultural framework.  These factors help in explaining the variations in international compensation practices (Milkovich & Newman, 2008).

Marin gives many examples to clarify these factors (Marin, 2008). The social contract, from the global perspectives, does not consist of employee-employer relationship; it goes beyond that to include all employees and their unions, the owners of the other companies, and the government.  This social contract changes from country to another because of differences among people, different union and governmental regulations, and different organizational rules.  The social contract appears in the level of centralization in the compensation system in the country.  Some countries like the United Kingdom and Canada have low level of centralized compensation systems. In Denmark and Belgium, on the other hand, they have high level of government involvement in the compensation system (Marin, 2008).

Organizations in some countries need collective agreement with employees to establish the system (Marin, 2008).  Marin refers to the existence of trade unions as another element of the social contract that impacts the international compensation design.  Some countries such as Denmark and Sweden have high union membership, while other countries such as United Kingdom and the USA have low union membership.  Union presence affects the organizations, when it comes to employees’ compensation systems.

The financial and ownership structures affect the international compensation systems.  For example, the economic structure in some countries such as South Korea depends on limited numbers of corporations.  Also, Germany has high ownership concentrations by limited numbers of large banks.  Marin illustrates the ownership structures impact on the international compensation systems by using China as an example.  China has various forms of ownership as a result of the social and political confusions. China has wholly foreign companies, private companies with foreign shareholders, and state-owned companies.  The employers and employees’ expectations in the new private companies differ from the old public companies.  The compensation system in the private companies tends to be linked more to performance than in the public companies (Marin, 2008).

Management autonomy is defined as the amount of freedom that the manager has while dealing with compensation system.  Countries that have high level of centralization of the compensation system have less amount of autonomy such as in EU countries and Japan.  Contrariwise, in the USA and United Kingdom, most of the companies have more autonomy in designing or changing the compensation system (Marin, 2008).

Culture is a set of values and beliefs that are shared by a group of people and very difficult to change (Mejia & Werner, 2008).  Countries’ cultures are the product of history, climate, geography and other factors of these countries. Cultural values impact everything in the organizations. These values affect organization’s philosophy, management’s style and motivation techniques (Mejia & Werner, 2008). Understanding the national culture helps in understanding the compensation system in these organizations. For example, cultures high in individualism prefer a pay for performance method (Marin, 2008).

Planning, Establishing and Maintaining Global Compensation.

Krupp determines 7 points that human resource professionals need to understand prior to creating a competitive compensation plan.  The 7 points are payroll tax and legal requirements, benefit norms, compensation information about benchmark jobs, staffing issues, payroll provisions, employment practices, and incentive opportunities (Krupp, 2002).

Building an international compensation plan has three stages: philosophy, design, and implementation.  In the philosophy stage, the human resources professional should understand the organization’s global and regional goals. Also, he/she should address the global compensation plan and consider program alternatives.  Furthermore, he/she should try to combine global strategies with cultural practices (Krupp, 2002).

The second stage in Krupp’s compensation plan is designing.  In this stage, the HR professional determines the employment and work conditions, labor laws, and employment contracts in that targeted country.  The professional should monitor the local workforce mobility and the existing talent pool.  Also, he/she should observe the competitive hiring practices in order to design a competitive plan; furthermore, there are some points that should be discussed such as economic trends, employment costs, payroll options, and legal requirements (Krupp, 2002).

The last stage to design a compensation plan is implementation.  Based on the collected information, the HR professional establishes processes such as making surveys about the competitive companies.  With the surveys’ results, the HR professional makes concerns and recommendations about the overall compensation plan (Krupp, 2002).

While designing an international compensation plan, Organizations should pay attention to employment legislation for each country such as discrimination laws, immigration issues and work visas.  Also, countries’ tax laws differ from one country to another; therefore, organizations should offer benefits that consistent with the county’s tax laws (Krupp, 2002).

Expatriate compensation

International companies bring professional employees from their home-country, expatriates, to benefit their experiences in establishing and leading the new branch outside the country. Global organizations need to establish a strong compensation plan for these expatriates that motivate them to travel abroad.  At the same time, this plan should be equitable otherwise local employees would feel unfairness towards the organization.  According to (KPMG), Internet-based International Human Resources Survey, 35% of companies surveyed choose to send employees from the home country to fill an international position.  The survey stated that the average of employee’s mission length is greater than three years (Dwyer, 1999).

Salimaki and Heneman divide the expatriate compensation system into three approaches: host-country approach, global approach, and home-country approach.  The host-country approach is used when the organization replaces a local hire with an expatriate. This method is less expensive and treat expatriate equally to local hire; however, it does not motivate international mobility.  The global, or the full balance sheet, approach works with an international scale. Organizations adopt this method usually when the expatriate moves among many foreign countries and loses the direct connection with home country compensation policy. This method costs the most among the three approaches. Finally, the home-country approach is common and it helps expatriates to live like home country life style; however, this approach creates a feel of unfairness among expatriates and local hires (Salimaki & Heneman, 2008).  Usually this system pays expatriates home country base salary, housing allowance, and cost-of-living.  With this approach, the company attracts employees to move to overseas locations.

Incentives and allowances help organizations to attract employees traveling to the undesirable destinations such as war-torn countries.  Organizations that adopt outsourcing tend to use variety of incentives, such as foreign service premiums, hardship/danger pay, mobility premiums, and relocation allowances (Dwyer, 1999).

Conclusion

Organizations need strong compensation system in order to attract qualified talents and to overcome the competitions from competed organizations. Compensation philosophy and practices should follow the organization’s goals and objectives.  Global competitive creates a pressure on organizations to build a stronger compensation plan.  Human resources management plays essential role in the success of international organizations and in adopting a global strategy.  Human resources practices study the new country’s culture and what organizations should concern about when establishing multinational enterprises.

There are many factors that could affect global compensation, such as individuals, policies, cultures, and economy.  International organizations, in order to reach their goals, should study and understand the local culture and labor law systems in the targeted country to design a compensation plan that fits with this country.  Another issue that international organizations should concern about is deciding whether choosing local employees or expatriates would benefit them the most.

 

 

References:

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Rao, S. (2009). International Human Resource Management, (pp. 14,330). Mumbai: Himalaya Publishing House.

Salimaki, A.& Heneman, R. (2008). Pay for performance for global employees. In: L. Mejia & S. Werner (Eds.), Global Compensation: Foundations and Perspectives (p. 248). Routledge.