OBJECTIVES OF INTERNATIONAL COMPENSATION Most expatriate compensation plans are designed to achieve the following objectives:
Attract and retain employees who are qualified and interested in international assignments. Facilitate the movement of expatriates from one subsidiary to another, from home to subsidiaries, and from subsidiaries back home. Provide a consistent and reasonable relationship between the pay levels of employees at headquarters, domestic affiliates, and foreign subsidiaries. Align compensation administration with the strategy of the firm. Increase and maintain employee motivation. Compensation must motivate employees to join the firm, be productive while members of the firm and stay with the firm. Must be perceived as fair by the employees. Fairness of equity are powerfull motivator of human behaviour and it may be the most important objective of an international compensation policy. Secure consistency between pay and performance & equity among employees of different nationalities and categories. Assist the employee and family adapt to the host country culture. Reduce employee grievances and simplify collective bargaining procedures. To ensure that the package is both competitive and comparable. It must always better the package available comparable. Factors that affect Global Compensation MNC’s Internal Environment Competitive strategy Organisational Culture Human Resource Structure Employee-Employer Relations Subsidiary role Level of Technology MNC’S External Environment Labour Market Characteristics Local conditions Home & Host Country govt. roles Industry type Competitor’s Strategies Founder’s Philosophy MNC’s Compensation Package
Theories of compensation Contingency theory: Expats compensation should be based on particular contingencies or situation prevailing in a host country. In every organization is normally decentralized and allows units to localize the compensation structure.
Resources based theory: Human resource is the greatest asset of every organisation in its competitive advantage needs good pay and st. salary band for cont. motivation. The organizations follow this theory, remain market – sensitive and are constantly reviewing compensation to retain their position in the hiring and retaining the talents The Agency Theory: This theory focused on the divergent interests and goals of organisation’s stakeholders and the way that employee’s compensation can be used to align these interests and goals. According to this theory, there exists a principle – agency relationship between the organisation’s HQ and its Subsidiaries for Experts Compensation. Equity Theory: Equity theory suggests that there should be a fair balance between an expatriate’s contribution to an organisation 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” . Complexities of Compensation Management in IHRM Exchange Rate Fluctuations Varying Cost of Living Varying Inflation Rate Varying Requirements for Facilities Employee Expectations Country Perspectives Varying Local Conditions Varying Tax Rates Consistency Equity Complexities of Global Compensation Fluctuations in foreign exchange rates. CHALLENGES OF COMPENSATING EXPATRIATES Expatriate are of three type host country nationals (HCNs), parent country nationals (PCNs) and third country nationals (TCNs). Difficulty of developing globally consistent approach Ensuring Experts are not disadvantaged Ensuring smooth transition at end of assignment Developing policies and plans for new countries The need to balance providing remuneration packages competitive enough to attract the
right people to meet company objectives with keeping costs down, particularly in the current economic climate There is a consequence of fast economic growth and generally higher inflation. A 'one size fits all' approach is unlikely to help the company succeed in attracting talent comprehensively. The large pay differences between seniority levels Compensation is highly influenced by the national culture, national patterns of compensation, legislation and employment relationship context or climate .
Complex taxation issues and currency rate risks, social security and pension issues, as
well as spouse-related issues. COMPONENTS OF INTERNATIONAL HRM Cross Cultural Management Nations differ in their values, cultures and attitudes. We all believe in some or the other sort of stereotypes even though it may not be true. At the same time, plenty of research has found that since different nations have different values, there is a difference in how their organizational behaviour is. It is, therefore, essential that an International HR manager is aware of such differences.
This is because all HR activities like recruitment, appraisals, performance and rewards are affected by the cultural orientation of an employee. As an International HR manager, while taking policy or process decisions, it is essential that one keeps in mind the cultural aspect. Comparative HRM Comparative HRM (CHRM) explores the extent to which HRM differs between different countries or even sometimes between different regions of a coun try.
We know that they may have different labour markets and education systems, different employment laws and trade unions, and the different cultural expectations that we have already noted. The CHRM field concentrates on aspects like differences in HR policies across nations influenced by their culture, government policy and education system. Or how is HRM structured in a particular country. Difference in management practices across nations is also a matter of discussion in CHRM. International HRM IHRM has traditionally examined the way in which international organisations manage their human resources across these different national contexts. IHRM practitioners have to be aware of what is allowed in different nations and regions of the world and also what makes cost – effective management practices.
This area is also concerned about ensuring how a company manages its people in a cost effective way across countries while being sensitive to individual country differences as well. IHRM has the same dimensions as HRM in a national context, but it operates on a larger scale, more complex scenarios and coordination. IHRM has its own issues and pressures, those of more personal insight into the employee’s life and family situations and a greater need for div ersity management.
TAXATION IN IHRM Taxation is a challenge in IHRM. Dual tax cost is a major challenge in IHRM. Expatriates paying taxes in both home and host country. Modifying compensation packages to provide the most tax-effective, appropriate rewards within the overall compensation framework.
Issues while considering taxation of benefits in IHRM Whether or not to maintain expatriates in home country programs, particularly if the company does not receive tax deduction for it. Whether companies have the option of enrolling expatriates in host-country benefit programs and /or making up any difference in coverage Whether host-country legislation regarding termination affects benefit entitlement Whether expatriates should receive home country or host country social security benefits Whether benefits should be maintained on home country or host country basis, who is responsible for the cost, Whether other benefits should be used to offset any shortfall and Whether home country benefit programs should be exported to local nationals in foreign countries
Companies generally take one of four approaches to handling taxation issues in IHRM
Laissez-faire. In this approach, the company is not actively involved in managing taxes. Essentially, the employee is responsible for any taxes incurred. However, often the employer increases the expatriate's compensation to cover the additional tax expense. Ad hoc. In an ad hoc approach, the employer determines tax reimbursement on a case by-case basis. Essentially, each expatriate employee negotiates his or her own deal with the company. This approach may work when a company's international workforce is small, but as the international program grows, the negotiation process can become cumbersome. 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 the total taxes are less in the foreign country than in the home country. Employee pays up to the amount of taxes he or she would pay on compensation in the home country. Employee is entitled to any windfall received if total taxes are less in the host country than in the home country. Tax Equalisation: Organizations withhold an amount equal to the home country tax obligation of the PCN and pay all taxes in the host country. • Firms withhold an amount equal to home country tax obligation, and pay all taxes in the host country • By far the more common taxation policy used by multinationals • Tax payments equal to liability of home country tax payer with same income and family status are imposed on employee’s salary and bonus • Additional premiums or allowances are paid tax free.
Approaches to managing diversity Legal approach Anti-discrimination regulations making work- place prejudice and discrimination on the basis of sex, age, race, color, religion and national origin illegal. Equal Employment Opportunities policies, in order to ensure the fair and equal treatment
of all employees, irrespective of their racial, ethnical, religious etc. background. Affirmative Action, known also as Positive Discrimination. According to Affirmative
Action policies, the employment force of an organization should mirror the rel- evant labor market. Such policies are part of a punitive system aiming at preventing discrimination and promoting equality of treatment for all employees within a work environment. Diversity Training approach Diversity management (DM) bears a wide range of connotations, but it predominantly refers to voluntary organizational actions designed to generate a process of inclusion of employees from different backgrounds to the formal and informal organizational structures through particular policies, events and initiatives
Diversity training is instruction aimed at helping participants to gain cultural awareness in order to benefit the organization or company. Diversity training is the reality that is facing many human resource management teams – one of the pressing reasons is the growing ethnic and racial diversity in the workplace. Business Case Approach to Diversity Management Diversity management is most commonly justified on the grounds of business arguments, linking diversity to business performance business case recognizes a business advantage in taking equality action and the emphasis is placed on pragmatic business imperatives (such as: meeting the demands of a diversified customer base, enhancing labor relations, responding to the needs of global markets, securing an increased market share, as well as improved skills of workforce, already discussed in the previous chapter). QUALITIES OF AN INTERNATIONAL MANAGER Some of the best known qualities of a global manager in IHRM include; Overseas Experience Deep Self-Awareness Sensitivity to Cultural Diversity Humility Lifelong Curiosity Cautious Honesty Global Strategic Thinking Patiently Impatient Well-Spoken Good Negotiator Presence Inquisitiveness Ability to deal with multiple perspectives and ambiguity
Family in IHRM The family plays a very big role in IHRM. It’s the main reason for expert failure. Family issues in IHRM include; Legal issues concerning travelling with a member the opposite sex Work for spouse Work and residential permits for spouse or dependants Exposure to foreign culture Distance from relatives, friends Childcare system Vacation time Standard of living disparities Level of marital stability Responsibilities for aging parents Emotional stability of family members Strength of family ties to the community or to other family members not going overseas Strength of children's attachment to extracurricular activities Family cohesiveness Thus the need to consider Inclusion of family in decision-making process Coping with new living quarters Differences in clothing necessities Family safety issues Children’s education Language barriers Ways to minimize expatriate failure Provide support services Select the right person Conduct pre-departure training programs Opt for Short-term assignments Assess individual and his/her family’s ability to adapt Cultural awareness programs Spousal career assistance Career counseling and support Finding suitable schools Additional orientation programs Language training
What makes IHRM Complex?
Variables that moderate IHRM Cultural environment The industry (industries) involved Extent of reliance of the multinational on its home country domestic market Attitudes if senior management
