What is Compensation management

Effective and efficient process of managing the earnings financial and non financial rewards of
the employees in an organization based on their performance towards organizational goal is
called compensation management.

Objectives of compensation

Compensation decisions are strategic decisions and play a key role in achieving performance and
sustainable competitive advantages for national as well as international firms. Therefore the key
objectives are:

Attract employees who are qualified, experienced and interested in international

assignments.
Facilitate the movement of expatriates from one subsidiary to another, from home to
subsidiary, and back from subsidiary to home.
Provide a consistent and reasonable relationship between the pay levels of employees at
headquarters, domestic affiliates and foreign subsidiaries.
Be cost effective by reducing unnecessary expenses.
Should be easily understood and easy to administer.

Objectives of Compensation
The objective of the compensation function is to create a system of rewards that is equitable to
the employer and employee alike. The desired outcome is an employee who is attracted to the
work and motivated to do a good job for the employer. Patton suggests that in compensation
policy there are seven criteria for effectiveness. Compensation should be:

1. Adequate Minimal governmental, union, and managerial levels should be met.

2. Equitable Each person should be paid fairly, in line with his or her effort, abilities, and
training.

3. Balanced Pay, benefits, and other rewards should provide a reasonable total reward
package.

4. Cost-effective Pay should not be excessive, considering what the organization can afford
to pay.

5. Secure Pay should be enough to help an employee feel secure and aid him or her in
satisfying basic needs.
 6. Incentive-providing Pay should motivate effective and productive work.

7. Acceptable to the employee The employee should understand the pay system and feel it
is a reasonable system for the enterprise and himself or herself.

Objectives of Compensation

1. The compensation should be paid to each employee on the basis of their abilities and training.
2. Compensation should be in the form of package.
3. It should motivate the employees towards increasing productivity.
4. It should be capable of taking care of employees for safety and security needs also.
5. It should be flexible and clear.
6. It should not be excessive.
7. Compensation should be decided by the management as per the norms fixed by the legislations
in consultation with the union.

Components of Compensation

Components of international compensation comprises the base salary, incentives, benefits,

allowances, foreign service inducement/ hardship premium, long term benefits and taxes etc.

Base Salary:
Base salary is the amount of money that an expatriate normally receives in the home country.
In the united states, this was around $ 175,000 for upper-middle managers in the late 1990s,
and this rate was similar to that paid to managers in both Japan and Germany. The exchange
rates, of course, also affect the real wage.
Expatriate salaries typically are set according to the base pay of the home countries.
Therefore, a German Manager working for a US MNC and assigned to Spain would have
a base salary that reflects the salary structure in Germany.
The salaries usually are paid in Home currency, local currency, or a combination of the two.
The base pay also serves as the benchmarks against which bonuses and benefits are
calculated.

Benefits:
Alternatively known as indirect compensation,
Benefits constitute a substantial portion of international compensation ( approx. one third of
compensation for regular employees is benefits).
Benefits include a suit of programmers such as:
Entertainment, Festival celebrations, Gifts, Use of club facilities, provision of
hospitality including food and beverage, employee welfare, use of health club,
 Conveyance tour and travel, Hotel Board and Lodging, vehicles, telephone and
other telecommunication facilities, Sponsorship of children.
Basically an employee tends to join and stay with an org. which guarantees an attractive
benefits programmed.
Vacation along with holidays and rest breaks help employees mitigate fatigue and enhance
productivity during the hours employees actually work.
Allowance:
It is an inevitable feature of International compensation. The most common allowance relates to
the cost of living an adjustment for different in the cost of living between the home country and
foreign country assignment. This allowance is designed to provide the expatriate with the same
standard of living that he or she enjoyed in the home country.
Spouse assistance, housing allowance, home leave allowance, relocation allowance and
educational allowance are the popular in expats.
These allowances are often contingent upon tax equalization policies and practices in both the
home and the host countries.

Incentives:
An additional payment (or other remuneration) to employees as a means of increasing
output. Increasingly, MNCs these days are designing special incentive programmes for
keeping expatriates motivated. In the process, a growing number of firms have dropped
the ongoing premium for overseas assignments and replaced it with a one time, lump-
sum premium.

The lump sum payment has at least three advantages:

First, expatriates realizes that they are paid this only once and that too when they accept an
overseas assignment. So the payment tends to retain its motivational value.
Second: costs to the company are less because there is only one payment and no future
financial commitment. This is so because incentive is a separate payment, distinguishable
from a regular pay, and it is more rapidly for saving or spending.
Third, less chances for pre mature repatriation.

Foreign Service / Hardship Premium:

This is often perceived as an inducement in the form of a salary premium to accept an overseas
assignment. Generally, salary premiums vary from 540% of the base salary. Actual salaries
depend upon the assignment, actual hardship, tax consequences and length of assignment. In
addition, if the work week in the host country is longer than in the home country, the assignee
will be paid for the extra hours worked.
Certain countries are highly hostile to foreigners staying and working. Indians engaged in road
construction work in Afghanistan, for example, face constant threat lives. In fact, ten such
emigrants got killed in recent times (2006-2007). Expatriates in such environments are paid 2-3
times more than their domestic salaries.
Long term Benefits:
The most common long term benefits offered to employees of MNCs are Employee Stock
Option Schemes (ESOS). Traditionally E-SOS were used as means to reward top management or
key people of the MNCs. Some of the commonly used stock option schemes are:
- Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and
issuance to key employees. Such shares serve as incentive for employees to build long
term value for the company.
- Restricted Stock Unit (RSU) This is a plan established by a company, wherein units of stocks
are provided with restrictions on when they can be exercised. It is usually issued as partial
compensation for employees. The restrictions generally lifts in 3-5 years when the stock vests

- Employee Stock Purchase Plan (ESPP) This is a plan wherein the company sells shares to its
employees usually, at a discount. Importantly, the company deducts the purchase price of
these shares every month from the employees salary

Taxes:
The final component of the expatriates remuneration relates to taxes. MNCs generally select one
of the following approaches to handle international taxes:
1. Tax equalization: Firms withhold an amount equal to the home country tax obligation of
the expatriate, and pay all taxes in the host country.
2. Tax protection: The employee pays up to the amount of taxes he or she would pay on
remuneration 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.

Components of an International Compensation

The major focus of most international compensation programmed is to keep international
employees at a sufficient financial level during their international assignments so that they do not
lose ground economically. Components of an international compensation package, in addition to
the normal salary and benefits offered in the home country, frequently include the following.
These components are discussed below:

1. Base salary:
For expatriates, the term base salary means the primary component of a package of allowances
which are:
(a) Foreign service premium,
(b) Cost-of-living allowance,
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(c) Housing and utility allowance,
(d) Basis for in-service benefits and pension contributions.
Base salary may be paid in home or local currency or in some hard currency like pound or dollar.

2. Foreign Service inducement/hardship premium:

Parent-country nationals often receive a salary premium as an inducement to accept a foreign
assignment or as compensation for any hardship caused by the transfer. Such payments vary
depending upon the assignment, actual hardship, tax paid to foreign governments and length of
the assignment.

3. Allowances:
Various allowances are paid to expatriates depending upon the assignment. They include:

(a) The cost-of-living allowance (COLA):

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It involves a payment to compensate the differences in expenditures between the home country
and the foreign country.

(b) Housing allowance:

Implies that employees should be entitled to maintain their home-country living standards (or, in
some cases, receive accommodations)

(c) Home leaves and travel allowances:

Is given to cover the expense of trips (usually once in a year) back home. These trips allow the
expatriates the opportunity to renew family and business ties, thereby helping them to avoid
adjustment problems when they are repatriated.

4. Education Allowances for Children:

Education allowances are given towards fees for the education of expatriates children. Education
allowances include items such as tuition, language class tuition, books, transportation and
uniforms.

5. Relocation Allowances and Moving:

Relocation allowances usually cover moving, shipping; temporary living expenses, and down
payments or lease-related charges.
6. Tax Equalization Payments:
Many international compensation plans attempt to protect the expatriate from negative tax
consequences by using a tax equalization plan. Under this plan, the company adjusts an
employees base income so that the expatriates will not pay any more or less tax than if they had
stayed in the home country.

7. Spouse Assistance:
To help guard against or offset income lost by an expatriates spouse as a result of relocating
abroad. Multinationals generally pay allowances in order to encourage employees to take up
international assignments.

Factors influencing the international compensations components

Remuneration or compensation varies country to country and one MNC to another. Mainly based
on two factors:
1. External factors
2. Internal factors

External Factors Internal Factors

Domestic Factors
Labor Market Business strategy
Cost of living
Labor Union Job Evaluation and
Govt. Legislation Performance Appraisal
Society The employee
Economy

International Factors
Parent Nationality Goal orientation
Labor market Capacity to pay
characteristics Competitive Strategy
Local Culture Org. Culture

Home and Host Int. Workforce

Countries composition
Governments Roles Lab. Relations
Industry Types Subsidiary role
Competitors Strategy

However, these factors can be classified in five categories:

1. Prosperity & Spending Power Of the company (a related factor is the different Tax and
social security System in the country.
2. Cultural Difference
3. Policy & Strategies (in productivity and Performance evaluation)
4. Situations on the relevant Labor market & Labor capital ratios
5. Institutional Frameworks within which wage Bargaining takes place.