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The multinational companies are one of the most social, economic and practical developments of the twenty first century. In addition to conducting business in one country to another, global business activities associated with them require a higher order of proficient management skills so as to coordinate the complex decision making processes. The problem of international compensations is part of the current aspects found to influence this coordination and complexity of decision making. The companies have been found to adapt to various cultural values, local laws, social traditions politics, and apparent inequalities in salary arrangements and different rates of inflation of both local and international staffs. Such issues have been apparently found to raise a lot of debates on compensation procedures among the companies.
Surprisingly, the current management and designing of compensation programs for multinational companies around the globe presents several challenges. The activities take a lot of time and energy of the human resource personnel. According to peter Drucker (1966), most of the companies will take time to harmonize the working compensation policies. In a study carried out in 1966, the American companies share the same problem with their European and Japanese counterparts. Thus there is a call for all human resource experts to reorganize, restudy and revise the compensation program policies globally (Milkovich 2004).
In the essay, we discuss the key components of international compensation programs such as base salary, foreign services inducements, allowances and other benefits. Moreover, we shall address various approaches to international compensations for instance going rate approach and the balance sheet system. In addition to that, the essay will look at the special problems facing the international compensation programs such as international cost of living data, international taxation and TCN compensation. Lastly, the essay will address the equity theory complexity of international compensation before providing advantages and disadvantages of all these approaches and conclusion remarks.
Multinational companies recognize four main key components for compensation programmes.The programmes are regularly used by the human resource personnel to service the employees and to induce them to work harder. They include;
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The most important objective of any multinational compensation plan is to adequately and equitably compensate the employees working both internally and externally (Werner 2008). The best base salary will advocate for a link between the reward and work. Base salary is simply defined as compensation provided to employees in exchange for performing certain job responsibilities. Usually most of the multinational companies will design a base salary structure that will attract, motivate and retain employees within the premises. The main steps followed include; Job analysis where the employee will be informed about the nature and level of duties performed. Secondly, we have job documentation where the company will further analyze the job content, skills and abilities required to complete the job among others. In the next stage, the companies will embrace job evaluation purposely to identify any need for creating job structure or hierarchy based on going rate and balance sheet approaches.
The base salary compensation system interacts continuously with both internal and external organization environments (Altbach 2012). Multinational companies use base salary as an expatriate allowance such as housing allowance, cost of living and foreign services premium. The compensation system is highly used in paying employees both locally and internationally however, it varies across the employees and localities. Internationally, base salary is recognized as the foundation block for international compensations such as PCN or TCN. The salary differences can be explained based on salary structure of the host country where the going rate approach is used or the balance sheet approach of home country. Note that in most cases, the companies will prefer base salary to other components of compensation programmes.
Foreign Service Inducement/Hardship premium
Most multinational companies sending staffs on international duties provide some additional based compensation so as to motivate them by reducing their living costs abroad. In same way, the assignee new compensation amount will be embedded on home country salary structure where possible adjustments are made on housing and living charges, host and home income tax protections among others. In most cases the parent country nationals (PCN) will be awarded some salary premium as a form of inducement so as to accept travel for the foreign mission. The compensation will be termed as hard ship premium for accepting transfer and it will be provided separate from the salary. Before the employee set foot for the travel mission, the hardship premium is defined, amount stated, timing of payment mentioned and the eligibility for additional amount of premium addressed.
In order for the companies to avoid conflict, the hard ship premium are set by different departments from those setting the salaries. In United States, most of the firms engages U.S department of state hardship post differentials guidelines to assist in determining the premium appropriately. The Foreign Service inducements as part of the compensation programmes induce most of the staffs to work abroad. The employees are paid in form of percentage for example 15 percent of the base salary. However, the compensation enforcement law stipulates clearly that the hardship premium should be 5-40 percent of the base salary. This form of compensations is commonly used to pay parent country nationals (PCNs) than TCNs. It sounds essential to understand the difference between the international hardship premiums from allowances. The premium are found to be an element of knowledge based approach involving corporation sponsoring expatriates to represent it in various assignments across the globe.
Multinational companies pay allowances in order to motivate the employees take international duties or even induce them to maintain and improve goods and services standard (Boyd 2004). The establishment of any compensation system will be challenging because of a wide variety of allowances such as cost of living, housing, relocation, education, home leave and hardship allowances. The cost of living allowances (COLA) is the most popular form of allowance in compensating the differences in expenditure between foreign and home country. In most cases, the companies will use it to compensate employees hit by currency inflation or facing inflation differentials.
The COLA may also include other forms of payments such as personal income taxes, utilities, housing or discretionary items. According to the housing allowance provisions, all employees are entitled to maintain their home country level of living standard such as good accommodations services equivalent to those awarded to foreign staffs. However, the international allowance comparisons can be difficult and challenging given that the company cannot adequately evaluate the cost of living for different states and individuals.
Secondly, relocation allowances are usually awarded to the shipping and storage charges, moving items, temporary living expenses, subsidies lease payments and sale of cars. These allowances vary according to positions for instance relocation allowances to senior staffs will be different from those of lower ranked employees. However, it’s well known that these allowances are contingent to tax equalization, policies and revenue practices in both host and home countries.
The multinational national companies provide education allowances on some occasion to both PCNs and TCNs. The Company recognizes the children of the international staffs as an integral part of the society by educating them through these allowances. The allowances cover items such as language class tuition, transportation, tuition, book and food supplies, uniforms and enrolment fees. Lastly, the company can decide to fix alternative allowances which involves mandatory or optional house, fixed housing income among other services. The compensation policies are being harmonized across the globe to ensure efficiency in compensation process.
In addition to the above mentioned compensations, multinational companies recognize the efforts of its international employees by providing other benefits. Some of these benefits include; annual home leave of air fares to the expatriates and their families to go back to home countries, rest and rehabilitation leave whereby the employees are awarded airfare to travel with their families across the host country. Moreover, in case of any illness or death of the members of family, emergency leaves and other provisions will be availed. On some occasions, employees working in hardship locations often receive some additional form of leave expenses or rest and rehabilitation days. However, the companies face challenges in dealing with issues relating to benefits across the countries. The benefits differ considerably from one country to another due to medical coverage, social security benefits and transportation systems of pension plans. The firms must first address the challenges such as whether to maintain expatriates in the home country or employees locals. The decision made will generally depend on tax deductions on these benefits.
Secondly, the company will consider the social security benefits demanded by the expatriate to stay in the host or home country. The firm has an option to enroll them in host country compensation programs or meet all differences in benefit coverage. The multinational companies have done commendable work in harmonizing the retirement benefits for PCNs compared to TCNs. However, in European states, PCNs and TCNs enjoy social security benefits from the European Union. All the firms operating in European market must meet the expatriate benefits through the local and international benefit programs.
Approaches to International Compensations
Usually there are two main options for international compensations. First we have going rate approach popularly known as market rate approach and secondly, the balance sheet approach also called builds up approach.
Going Rate Approach
In most cases, the going rate approach bases the compensation modes on local market rates. The approach relies heavily on survey comparisons of various local nationals in different states, expatriates working for the same company in different states but born from same nationality or expatriates from different nationalities and working for different companies. After comparison, the compensation process will be based on the selected survey suitable for the company and all the employees. In low paying countries, the employees can enjoy supplementary base salaries and benefits for motivational purposes.
The going rate approach has several advantages over other forms of compensation approaches. First, the approach advocates for equity for all local nationals by ensuring that in lowly paid countries, supplementary benefits are awarded to employees (Pinkse 2009). Secondly, it’s simple to understand and implements. The approach involves comparison of various sample survey before drawing up conclusion about the matter to apply. Moreover, the approach recognizes the expatriates within host countries by compensating additional charges and providing home leave allowances. Lastly, the approach advocates consistency and equity among different nationalities. The nationalities end up receiving same amount of benefits and hence equality.
However, the approach suffers from several disadvantages such as variations in assignments for the same employees yet they receive same amount of compensations. Secondly, a lot of variations are observed along different employees from the same nationality. They are awarded different compensation packages yet they work for the same company but in different locations. This disparity can lead to poor performances. Lastly, the approach experience re-entry problems.
The Balance Sheet Approach
The main objective of the approach is to keep the expatriate package whole by maintaining home country living standard plus other financial employees’ inducement (Briscoe 2004). These attractive packages contain adjustment to home packages so as to balance the additional expenditure from the host country. Secondly, the approach assumes that home country salary package and benefits form the foundation of all employees’ motivation. Third, the financial incentives such as expatriate and hardship premium add value to the compensation package. Lastly, most of these packages are commonly used in multinational companies.
There are four main categories incorporated in balance sheet approach. First, we have goods and services and it involves the home country providing various items such as food, personal care, clothing, recreational facilities, transportation and medical services. Secondly, the approach contains the housing category where companies meet major costs of housing for the expatriates in the host countries (Forbes 2011). Moreover, the approach addresses the income taxes policies and regulations found in both parent and host countries. The inevitable result of this is to ensure no conflict in compensation process or disparity among the expatriates. Lastly, the approach contains reserves compensation categories. These include; payment to benefits, pension contributions, investments, contributions to saving education expenses and social security taxes.
There are several advantages and disadvantages for the balance sheet approach. The advantages include; equity among all assignments and expatriates of the same nationalities. The expatriates undertake same tasks and receive same amount of compensations. Secondly, it helps in facilitating re-entry of employees to the organization and thus improves employees’ communication process.
Secondly, there are several disadvantages that can affect multinational companies. The approach entails difficulty in attracting human capital. Secondly, the approach seems to be complex in administering hence not preferred in some companies. Lastly, it can lead to great disparities among different nationalities expatriates.
Special Problem Areas
There are several problems facing the multinational companies in international compensation programs. The problems are found to influence the human resource activities leading to confusion and inconsistency. Some of the areas found to complicate the matter include;
In most cases, expatriates and other local nationals will avoid or evade taxes. This aspect is found to complicate the international compensation process as the human resource practitioners are required by law to deduct pay as you earns taxes. The PCNs and TCNs engage in conflict with the company and government leading to emotional disagreement and responses found to contribute time wastage for both the expatriate and the firm. Assignment to an expatriate to United Kingdom from United States means that the US expatriate will be taxed in both countries (Berger 2000). This dual taxation system combined with other expatriate costs make the U.S multinational Company think twice about hiring or employing an expatriate.
There are several approaches of solving the international taxation problem. The multinational companies can apply tax equalization system where firms are allowed to withhold an equal amount of tax of the PCN subject to home country tax obligations before paying to the host country. Secondly, the firms can decide to employ the expatriate and embrace tax protection system where the employees pay amount of taxes they believe to be suitable in home country. The employees are required to receive any windfall from the total taxes in the foreign country as an incentive.
Multinational companies continue to expand across the globe amid of the income tax discrepancies. However, continuous focus on income tax alone can lead to confusion because the companies focus on corporate taxes instead of personal taxes found to increase in OECD countries. The firms need to get advice from the international accounting firms about expatriates before hiring.
Multinational companies need to consider the extent of international taxations and the implications they have to both expatriate and the firm. They must understand the need to outsource staffs versus employing the local one. Only few countries such as Japan, United States of America and few European states have harmonized the taxation policies hence very dangerous to operate in un-harmonized tax state (Herod 2008). The main problem is that most of the countries and particularly less developed countries do feel like harmonizing the taxation policies.
International Cost of Living Data
Currently, the multinational companies use balance sheet approach in constantly updating compensation packages with new data on various expatriates cost of livings. This is required buy the ongoing administrative reforms about expatriates and companies. The companies are required to ensure that the expatriates are paid adequately to respond to unexpected events such as stock and currency crashes and uncertainties. The companies must consider issue such as inflation and other expenses found to influence the cost of living. The companies have been totally confused about the amount of cash to service the expatriates after hiring hence a problem. The problem requires a specialist advice otherwise the compensation process will always face challenges.
Equity Theory Complexity of International Compensation
At all business cultural levels, hot debates are going on to address the problems cited above. Advocate of the normal pay system states that competitive individualism and taxation policies must be addressed to solve the problem of inequality (Reynolds 2000). To meet the expatriate compensation system the governments of various home and host countries must harmonize the taxation policies found to double tax the employees on assignment missions. The human resource managers and advocate of pay based system call for cooperative collectivism in solving the salary differentials among the employees by embracing equality in all aspects such as job allocation, assignments, and allowances among others.
In the essay we have addressed the complexities arising from firms adopting global compensation system on international context. From the study, it is evident that compensation policies are difficult to implement because of taxation disparities and cost of living from different countries. The human resource experts call for harmonization of the taxation policies inoder for the companies to meet the expatriate objectives. Moreover, the essay has addressed the various compensation systems such as salaries, benefits, allowance and hardship premiums. Moreover, the study has addressed the two main approaches of international compensations before looking at their advantages and disadvantages. Lastly various problems found to bedevil the compensation process were discussed and various solutions addressed.
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