Compensation Management

International Compensation – Approaches to International Compensation

International compensation can be defined as the provision of monetary and non-monetary rewards, including base salary, benefits, and perquisites, long- and short-term incentives, valued by employees in accordance with their relative contributions to MNC performance. Its broad HRM purpose is to attract, retain, and motivate those personnel required throughout the MNC currently and in the future. Job evaluation is the means by which internal relativities and compensable factors, those elements such as skills, physical and mental demands, and responsibilities that comprise an individual’s work role in the MNC and contribute to its performance, are determined.

Approaches to International Compensation

(1) Going Rate Approach – When the compensation packages of the expatriates are determined on the basis of the salary structure prevailing in the host nation, it is called the going rate approach or market rate approach. Typically, the salary in this method is decided on the basis of the survey undertaken in the host country where the business is located. However, international companies usually grant additional pay and benefits to expatriates if they happen to work in nations where their pay is low.

(2) Balance Sheet Approach – It is also known as the build-up approach. The balance sheet approach is arguably the dominant compensation system used in multinational companies. The approach has been used for more than 20 years, yet nearly two of every three companies still use a form of this approach to compensation. The basic objective of the balance sheet approach is to ensure that employees can maintain a standard of living in the country of assignment similar to that which they enjoy in their home country. This keeps the shock from changes in standard of living relatively small. The basic premise of the balance sheet approach is that companies use a set of allowances or differentials to maintain employees’ purchasing power while on international assignments. Fundamentally, assignees should neither benefit nor be hurt economically as a result of relocating.

(3) Citizen’s Approach – In this approach, an international basket of goods is used for all expatriates, regardless of country of origin. The basket of goods includes food, clothing, housing, and so forth. However, expatriates are not provided salary adjustments that would allow them to purchase exactly the same items in the host country as in the home country. Rather, they receive adjustments that would allow them to purchase a comparable local product of the same nature; e.g., rather than a Mercedes (which they had in the home country), they would buy a local luxury car.

Alternatively called the global salary systems, the international citizen’s approach is appropriate when an MNC has a team of dedicated international managers Europeans, Americans or Asians – who are ready to move to any part of the globe easily and effectively. Global salary systems seek to provide worldwide equity in rewards and allow managers to move between countries with minimal effects on lifestyle.

(4) Lump Sum Approach – This involves giving the expatriate a predetermined salary and letting the individual decide about how to spend it. Finally, there is the regional system, under which the MNC sets a compensation system for all expatriates who are assigned to a particular region. Thus, everyone going to Europe falls under one particular system and those going to South Africa come under a different system.

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