Compensation in Multinational Companies. Models and Objectives

Table of Contents

List of Abbreviations

1. Introduction

2. Principles of work
2.1 International compensation
2.2 International compensation system and its objectives

3. Types of international compensation models
3.1 Home-Based-Approach
3.2 Host-Based-Approach
3.3 Balance-Sheet-Approach

4. Principles for the development of international compensation

5. Conclusion

Bibliography

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

National borders have become less important in recent years in many ways. Companies are organizing their economic activities increasingly away from national borders. Due to this development towards a global economy, large corporations as well as more and more medium-sized companies are forced to become active worldwide. During globalization, it has been clearly observed in recent decades that requirements for global compensation of employees are changing significantly. Multinational companies increasingly must make changes in their compensation policies that initially do not match the culture and tradition of their country. A high degree of flexibility is necessary here in order to achieve positive development. Culture is a strong driver for the relationship between basic salary, variable compensation, benefits, and other fringe benefits. As a result of these developments, the tasks of personnel management in multinational companies are becoming more and more diverse and the adjustments to internationalization more and more important. Among the tasks of personnel management, compensation is of importance.¹ The regulations in the national context are very different from those at international level. In the absence of legal and collective agreement regulations, multinational companies must be able to comply with different country-specific regulations while establishing and maintaining a consistent, strategic pattern of compensation policies and practices. HR managers must have specialist knowledge that extends far beyond the national level.²

In this paper, the first part focuses on the importance of a compensation system and its objectives for multinational companies. In the further course of the paper, various compensation models are presented and examined for their strengths and weaknesses. In a further chapter, various principles for the design of a company's compensation policy are described. In the last point of this paper the author will give a conclusion.

2. Principles of work

2.1 International compensation

Equivalent positions are often remunerated very differently worldwide. The reasons for this are very different. Some reasons may be different tax systems, different social security systems or different remuneration cultures. For example, when filling a position in the subsidiary abroad, it must first be decided whether the position is to be filled by a local employee or by an expatriate. An expatriate is an employee who works in a country other than his/her country of origin. If the company chooses an expatriate from the head office and wants him or her to take over the job abroad, the company faces several challenges. In particular, the remuneration of employees must be given special consideration in multinational companies.³ International assignments are different from local staffing in particular in that, at the international level, it is very important to keep abreast of the latest secondment-specific regulations in the home country and the other countries concerned so that all assignments abroad can be planned, prepared and implemented correctly. Both global and international companies need to develop timely concepts and long-term compensation strategies and adapt to current conditions in order to be able to successfully deploy the company's employees worldwide.⁴ Multinational companies can get assistance from appropriate management consultancies in determining their compensation. However, this only makes sense if only a few employees are posted abroad each year or if the assignment is an exception for the company. Within companies that are increasingly active on an international level, it is therefore recommended to develop a suitable international compensation system.⁵

In the following section, the function of the compensation system and its objectives are explained in more detail.

2.2 International compensation system and its objectives

If an employee of a company only works in national areas, his or her remuneration is regulated by law and collective agreements. For employees who work at an international level, however, these legal and collective agreement regulations do not apply. For this reason, the company must make special arrangements for this. These regulations are defined and implemented within the company. An international remuneration system is of enormous importance for a multinational company. The system can ensure that employees who agree to a foreign assignment, as opposed to those who continue to work at a national level, are not disadvantaged. Therefore, special internal company regulations must be established for employees who are deployed internationally.⁶ An important factor here is the choice of a suitable remuneration model. It is important that this model fits the company and its strategy and considers the expatriate's performance and additional workload. In principle, the same criteria apply to an international compensation system as to the compensation system at national level.⁷ In times of increasing cost optimization, the focus is on profitability. It is also important for companies to be an attractive point of contact for performance- oriented specialists and managers.⁸ Throughout the company, it is ensured that uniform guidelines are in place for the main areas of salary determination. These include, for example, regulations on salary increases, bonus levels, additional benefits, and decisions on pay grades.⁹ The compensation model should provide sufficient incentives for the employee to be willing to accept the work assignment abroad and the additional expenditure involved. For example, insufficient remuneration of the expatriate could lead to dissatisfaction and therefore to a drop in performance. In contrast, the compensation model should motivate the employee to spend time abroad and prevent the employee from prematurely terminating the assignment abroad. However, not only the employee's incentives should be considered, but also, of course, the aspects of costs and benefits of the respective remuneration model. Therefore, the costs of an assignment abroad must always be in proportion to the added value for the company. If this is not the case, an assignment abroad must be avoided. Other important factors are the transparency and fairness of the system.¹⁰ The company has to make sure that, for example, employees of the host country are not demotivated by the much higher salary of an expatriate in an equivalent position because they may have noticed through an exchange among themselves that the expatriate is paid much better for the same work than they are. The equal treatment of all employees is therefore very important to counteract demotivation of employees and to promote, rather than endanger, international cooperation. The company that makes transparent and understandable regulations must expect less perceived injustice from the employee. There should always be a certain degree of comparability, not only within the company, but also with other companies. If there is no comparability, this can lead to a drop in performance and dissatisfaction with the employer. Expatriates should not only be included in the remuneration system, but also local employees. The remuneration system must be sufficiently standardized and documented for this purpose. This involvement of employees in the home country is particularly important in the case of international, comparable positions.¹¹ The content of an international compensation system should also be flexible enough to be adapted as easily as possible to the rules of the country of assignment. It should therefore be adaptable to technological and organizational changes. The individual company decides on the choice of the compensation system in accordance with its corporate philosophy and the corresponding compensation policy. The aim of personnel management should be to take account of the corporate structure of the country in question when developing, implementing, and administering the programs.¹² Basic models of international compensation policy can provide initial orientation for the design of an international compensation system. Which of the methods represents the most suitable compensation variant for the company must be carefully examined. Some of the individual compensation models are explained in more detail in Chapter 3 below and examined for their strengths and weaknesses.¹³

3. Types of international compensation models

3.1 Home-Based-Approach

In practice, the most widespread compensation approach is the home-based approach, which is used by most companies. The home-based approach is characterized by an ethnocentric basic attitude, i.e. remuneration policy is largely determined by the home country. Specifications are developed and set by the parent company. The company orients its remuneration to the home country. For example, the basic salary of an employee who is sent abroad corresponds to the salary of an employee in a comparable position in the home country.¹⁴ The salary is developed on the basis of the salary in the home country by creating a so-called net comparative calculation, i.e. a balance sheet. In practice, this means that regardless of whether the employee is posted to a country whose salary level is lower or higher than the salary level in the home country, he is paid on the basis of his salary in the home country in such a way that his purchasing power is maintained.¹⁵ The approach is designed to protect expatriates from cost differences between home and host countries. There may be additional allowances for higher costs of living. The allowance is intended to enable the expatriate to consume the same goods and services as in the home country. Location supplements are also possible to compensate the employee for any adjustments to other standards of living. However, the supplements always depend on the country to which the employee is posted and the distance to the home country. For example, if an employee is sent from Stuttgart to Milan, a bonus is not necessary in this case because the cost of living is similar. However, if the employee is sent from a European country to Asia or South America, bonuses are common.¹⁶ The home-based approach is particularly suitable for assignments of senior managers who demand an appropriate and attractive salary based on their experience. The advantage for the expatriate is that he/she can maintain the salary that he/she would receive for his/her work and area of responsibility in the home country, including salary increases.¹⁷ The advantage of the home-based approach is that the employee is paid the same salary regardless of where he or she works. This means that the employee has no financial disadvantages from working abroad and can maintain his or her standard of living.¹⁸ A further advantage of the approach is that the expatriate's salary is still linked to the remuneration system in the home country, allowing for comparison with employees in comparable positions in the home country. This in turn simplifies the employee's reintegration upon his or her return to the home country, as the basic salary is updated in its amount. A disadvantage of the model may be that the expatriate's salary may be considerably higher than that of a Host Country National (HCN). This difference in salary can lead to demotivation of the local HCNs and thus endanger the cooperation of the employees.¹⁹

3.2 Host-Based-Approach

Another common method in the area of compensation models is the host country- oriented approach or "host-based approach". With this method, the compensation policy is based on the compensation guidelines of the country to which the expatriate is posted. The compensation policy of the parent company has little or no impact on the compensation of the expatriate. Therefore, country-specific features dominate and there is no coordination between the head office and the foreign branch. Therefore, the basic salary of the expatriate is generally based on the salaries of employees in the host country, as the benchmark is the local market value.²⁰ In countries with a large expatriate population, the salary can also be determined according to guidelines that have been specially established for expatriates. This approach is most often used when the expatriate assignment is intended to further the employee's career or, for example, when an employee is being permanently transferred abroad. The model is also applicable when several expatriates from different countries are working in similar positions at the same location.²¹

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¹ cf. Malik 2018: pp 133

² cf. Weber et al. 1998: pp 211

³ cf. Batsching 2018: pp 116

⁴ cf. Laws et al. 2008: pp 43

⁵ cf. Weber et al. 1998: pp 211

⁶ cf. Gericke 2018: pp 42

⁷ cf. Ortner 2016: pp 45

⁸ cf. Laws et al. 2008: pp 44

⁹ cf. Weber et al. 1998: pp 218

¹⁰ cf. Fischlmayr 2015: pp 42

¹¹ cf. Siller et al. 2017: pp 112

¹² cf. Laws et al. 2008: pp 43

¹³ cf. Siller et al. 2017: pp 113

¹⁴ cf. Elert 2013: pp 149

¹⁵ cf. Laws et al. 2008: pp 45

¹⁶ cf. Siller et al. 2017: pp 113

¹⁷ cf. Eklund 2019: pp 113

¹⁸ cf. Fischlmayr 2015: pp 39

¹⁹ cf. Weber et al. 1998: pp 218

²⁰ cf. Siller et al. 2017: pp 113

²¹ cf. Elert 2013: pp 150