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International Compensation

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    In today’s increasingly competitive environment, businesses are globalizing their firms in order to maximize their profitability and compete effectively. This has led to an increase in Multinational Corporations (MNCs), which are enterprises that deliver services or manage production in more than one country. With the rise of MNCs, managers have to deal with diverse challenges, one of the most important issues is to determine how to appropriately compensate and incentivize their employees.

    International compensation is defined as ‘the provision of monetary and non-monetary rewards valued by employees according to their relative contributions to MNC performance’ (Harzing, 2004). The main objective of any international compensation is to attract and retain the most talented people who are qualified for international assignments. In most situations, managers would want to hire expatriates as they already have a good understanding of the business. Management must then determine how to reward the expatriates and local managers fairly in order to avoid discrimination.

    The main challenge in international compensation is to facilitate international mobility and ensure equity. However, due to the multiple international contexts and employee groups, it is very complex to achieve this balance in multinational companies (Harzing and Ruysseveldt, 2004). For example, there is an inequity challenge through comparing the salaries of employees who transfer from one country to another, and equitable salaries among various businesses operations are difficult to be provided. Moreover, there are also some inequity problems between locals and expatriates of compensation gap.

    With the challenge of international compensation, there are four approaches to deal with equity issue of international staff, which are Balance Sheet Approach, Host country approach, regional systems and Going-rate approach. Taking going-rate approach as an example, it is a key approach to compensation for international staff transfers. This approach is based on local market rate in host country. In this approach, the base wage for the international transfer is related to the structure of salary in the host country.

    MNCs often gains information from the surveys of local compensation in order to decide the benchmarking by comparing local nationals, expatriates of same nationality, and expatriates of all nationalities. Then MNCs will establish the international compensation program according to the benchmarking. In this case, there are several advantages of this approach. Firstly, there is equality with HCNs, which is beneficial to attract PCNs and TCNs to a location that provides higher salaries than those being paid in the home country.

    Secondly, it is easy and simple for expatriates to understand this approach. Thirdly, with this approach, expatriates have an opportunity to identify with the host country. Finally, this approach creates equity for expatriates of different nationalities. Moreover, performance management is a significant method to motivate employees. Performance management highlights employee rewards as results of performance evaluation (Harzing and Ruysseveldt, 2004). There are several main steps of performance management.

    First of all, there is a need to link individual and unit performance to MNC strategy. Then, the essential relationship between employee’s performance and the realization of strategic objectives will be built (Harzing and Ruysseveldt, 2004). In addition, the multinational companies should set individual performance goals. From an organizational behaviour perspective, Expectancy theory and Goal Setting theory play an essential role in the performance management.

    Expectancy theory emphasizes that employees change their work performance in order to achieve their anticipated satisfaction of valued goals. Goal Setting theory highlights that objectives are important to enhance the employees’ performance. For instance, the challenging goals can motivate employees to put all their efforts into their works. As a consequence, the organizational performance will be increased. However, due to the cultural and country differences, there will be variations in the way of goal setting which is conducted across the multinational companies.

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    International Compensation. (2016, Oct 07). Retrieved from

    Frequently Asked Questions

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    What are the four types of compensation?
    The Four Major Types of Direct Compensation: Hourly, Salary, Commission, Bonuses. When asking about compensation, most people want to know about direct compensation, particularly base pay and variable pay.
    What are the main objectives of international compensation?
    Recruit & Retain Competent Employees. Consistency & Equity in Pay. Employability in a Cost Effective.
    What is international compensation strategy?
    International Compensation is an internal rate of return (monetary or non monetary rewards / package) including base salary, benefits, perquisites and long term & short term incentives that valued by employee's in accordance with their relative contributions to performance towards achieving the desired goal of an ...

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