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organization’s compensation system


Unit 2

What is compensation

An organization’s compensation system is the usual means by which employee rewards are planned and administered

International compensation can be defined as the provision of monetary and non-monetary rewards, including base salary, benefits, perquisites, long and short term incentives, valued by employees in accordance with their relative contributions to the MNC Performance

International compensation theories

There has been relatively little theory applied to explanations of international compensation. However, contingency, resource-based and agency theories offer some insight. An influential management theory, the contingency approach, suggests there are variables that impact on compensation policies and practices to make them more or less appropriate and effective (for a review in relation to compensation, see Balkin and Gomez-Mejia, 1987).

Its contribution to international compensation strategy is implicit in the rationale for enduring expatriate compensation practices such as the Balance Sheet approach, and in more recent, global models of international compensation such as that proposed by Milkovich and Bloom (1998)

International compensation theories

Contingency theory (most popular) Expats compensation should be based on particular contingencies or situation prevailing in a host country. The compensation function in every organization is normally decentralized and allows units to localize the compensation structure

Resources based theory: Human resource is the greatest asset of the MNCs in its competitive advantage and needs good pay and salary for continued motivation. The organizations following this theory, remain market – sensitive and are constantly reviewing compensation to retain their position in the hiring and retaining the talents


International compensation theories

The Agency Theory – This theory focuses on the divergent interests and goals of org.’s stakeholders and the way that employees’ compensation can be used to align these interests & goals. According to this theory, there exists a principle – agency relationship between the MNCs HQ and its Subsidiaries for Expats Compensation.

Equity Theory: Equity theory suggests that there should be a fair balance between an expatriate’s contribution to an MNC and what he / she receives as compensation. Of late, the equity principle is sought to be compromised with a new approach to compensation – “ Person based rather job centric” .


International compensation approaches

The going rate Approach


Compensation based on the selected survey comparison. Base pay and benefits may be supplemented by additional payments for low-pay countries.

This is based on local market rates.

Relies on survey comparisons.

Local nationals

Expatriates of some nationalities

Expatriates of all nationalities

Balance Sheet Approach

Basic objective of global compensation is maintained based on home-country living standard plus financial incentives

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 multinational firms


The four Balance Sheet Approach categories:

Goods and services – home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation and medical care.

Housing – the major costs associated with housing in the host country.

Income taxes – parent-country and host-country income taxes.

Reserve – contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc.


Global Approach

Under this approach, MNCs determine the uniform pay scales for such jobs throughout all the countries where they operate.

Further, these pay scales are applicable uniformly for all categories of employees including the host country nationals

This approach is based on the concept of national pay scales with in a country

Performance Based Approach

This approach provides the opportunity for best performers to earn high salary irrespective of nationality including host country nationals.

This approach provides a minimum guaranteed base salary irrespective of performance that would be enough to meet the basic needs of employees.

This approach is organisation friendly as it enhances organisation performance & increases value & productivity

Salary Level in Host Country Approach/ Localization Approach

Global compensation is based on salary levels for similar jobs in comparable organizations in the host country. For example, HSBS in India pays salaries to Indians(host country nationals), Chinese(parent country nationals) & Americans(third country nationals)based on: salary levels of Indian banks like ICICI,IDBI,HDFC or salary levels of foreign banks operating in India like Citi bank or salary levels of other Chinese financial institutions operating in India.

Negotiation/Bargaining Approach

Some employees as well as MNC’s prefer to determine the compensation package through mutual negotiations between the employee & the employer.

It would be possible when –

The number of expatriates is relatively less

The company & prospective employee have full knowledge of on-going salary levels

The skills of the prospective employee are in short supply.