CASE SUMMARY

The case talks about an IT multinational company who has expanded their workforce
diversity. Even though the decision to include non-parent country nationals gave the
advantage of increased capabilities, the director of international HR is currently facing a
dilemma; the diverse workforce is yelling about their allowances and the headquarters is
yelling at him for high costs that are incurred. He is now in a very complicated situation
where he cannot decide on how the compensation for a global workforce should be designed.
The typical example of the problem handled by the international HR director is when two
foreign national field engineers working in Manila and Bangkok who was earning a salary of
US$25.000 and US$30,000 respectively relocated to the headquarters and works side by side
with an American field engineer who earns US$60,000 for the same job. Now they are
agitated because they not only work but live near each other, eat in the same place and shop
at same stores, but still their allowances dont match. And most companies in order to solve
the problem raise the salary of both foreign national to US$60,000. But this in-turn creates a
problem because when the foreign nationals on returning to their home country their salary
would then be adjusted to their pre-headquarters salary. This was just one such situation
faced by the HR director.
So now the international HR director is in a dilemma as he is not sure on how to
create a pay system that will compensate your foreign nationals either by pay or benefits in a
fair and equitable manner and at the same time repatriate with minimal trauma.

Q1. What would you do if you were the IHR manager?

The design and maintenance of an enterprises compensation system is always a
critical responsibility for human resource managers. The conduct of international business
makes this responsibility much more complex and difcult. The determination of individual
and organizational pay and benets on an international basis becomes extremely complicated
because of considerations such as pay and benets for international assignees, subsidiary
workforces in multiple countries, employees from many different countries (such as inpatriates, HCNs, and TCNs), varying country approaches to and levels of pay and benets,
and problems such as dealing with multiple currencies, exchange rates, ination rates, tax
systems and rates, and differing standards and costs of living.

The main objectives for the typical MNE global compensation program include:
Attraction and retention of employees who are qualied for foreign assignments (from the
perspective of the parent company, but includes the perspectives of the PCNs, HCNs, and
TCNs).
Facilitation of transfers between foreign afliates, between foreign afliates and the parent
company (usually headquarters), and between parent-company and foreign locations.
Establishment and maintenance of a consistent and reasonable relationship between the
compensation of employees of all afliates, both at home and abroad.
Maintenance of compensation that is reasonable in relation to the practices of competitors
yet minimizes costs to the extent possible.

One of the most important considerations for multinational enterprises in the design of their
compensation programs is the problem of comparability (although cost is probably a very
close additional and primary consideration). This problem of comparability has at least two
signicant components:
(1) Maintaining comparability in salaries and benets (to similar employees in other rms
and to peers within the rm) for employees who transfer from one country to another (either
from the parent company to foreign subsidiaries or from one subsidiary to another or to
headquarters); and
(2) Maintaining competitive and equitable salaries and benets among the various operations
of the organization.

Let us start by assuming that the rm can determine fairly accurately what the community
pay levels are within each of the countries of its subsidiaries.

Here the case illustrates issues related to not having a company-wide compensation
system. Even though there seem to be many reasons to maintain company-wide pay scales
and comparable benet packages so that, for example, all marketing managers for consumer

products worldwide are paid on the same pay scale, not adapting wage scales to local markets
presents numerous problems. In the rst case, such marketing managers are less likely to feel
inequities among themselves around the world and the problems associated with keeping
track of disparate country-by-country wage rates is simplied.
In the second case, problems are created because it is much more expensive to live in some
countries (such as Japan) than others (like Greece). If these cost-of-living differences arent
considered it may be almost impossible to get expatriates to accept postings to high cost
locales. But paying marketing managers in different countries different salaries based on the
local cost of living wont solve all problems either. New problems are thus created by, for
example, moving a highly remunerated marketing manager from, say, Tokyo, to Athens.

So if I was the IHR manager then these are the actions that I would take:
The main foundation of my decision is on the fact that the company has a policy of sending
them out for less than five years and returning them to the home country. Thus it is
important that the employees base pay reflect that of their counterparts in the home country
or the company being a huge MNE will be in a position to determine a global base pay. Here
the relative worth of all jobs are identified and the base salary of every job is established.
With this the employees are provided with other incentives and equalization adjustments that
varies depending on the country you work in.
The main advantage of having a compensation system created in this manner is that it would
create lesser inequalities for the same job done by an American as well as by any other
foreign nationals in their headquarters. Moreover tomorrow when they are relocated to their
home country it would be much easier to adapt to the lesser salary as only the incentive part
changes, whereas your base salary remains the same.
Also another problem that needs to be addressed by the IHR manager is how to repatriate
them with lesser trauma. Repatriation from an international posting can be even more
difficult and traumatic for the expatriate than the culture shock of going abroad on
assignment.
Most of the expatriates experience a significant decrease in compensation after returning
home from an international assignment. This is mainly because of loss of a monthly premium

to which the expatriate has been accustomed is a severe shock financially, whatever the
rationale.
Some of the solution to address these problems are:

Some firms have replaced the monthly foreign-service premium with a one-time
mobility premium (e.g., 3 months pay) for each moveoverseas, back home, or to

another overseas assignment.

Some companies provide low-cost loans or other financial assistance so that
expatriates can get back into their hometown housing markets at a level at least

equivalent to what they left.

Those expatriates, who have rented their houses while on overseas postings, may need
assistance with temporary accommodation while any damage done by tenants is

repaired.
Some firms even offer pre-repatriation leave for returning managers, to make
preliminary arrangements for their return, which might include housing and education

planningall with the assistance of the organisation.

There may also be a strong need for financial counselling for repatriates, to advise
them of changes that may have occurred in the home country during their assignment,
or perhaps to assist them in taxation and other financial planning.

All these have their advantages as they create a feeling that the company would be willing
to support the repatriates to help with the financial problems that they may encounter in
uprooting their families once again to bring them home.

Q2. What kind of a global compensation policy would deal effectively with this sort of
problem?
There are many types of global compensation policy. These include the Balance-sheet or
Home-based approach; the Host-based approach; the Better-of-Home-or-Host approach; and
the International approach. There are other approaches as well which are localization, lump
sum, cafeteria and regional systems.
Home-Country Concept (the Balance Sheet Approach), all expatriates are tied to
their respective home-country payrolls regardless of where they are working (Dwyer 1999).
Doing so provides, in essence, a cultural frame of reference within which to make
compensation decisions.

Host-country concept (the going rate approach) This approach breaks the
compensation package down into separate elements, and, relative to host-country pay rates,
modifies the total remuneration so that the expatriate neither loses nor gains because of the
posting. The expatriates salary is supplemented by a post differential which may include a
cost of living allowance, hardship allowance, family allowance, and expenses for complying
with local business and entertainment practices.
Localization is being used to address problems of high cost and perceived inequity.
Under localization, expatriates are paid comparably to local nationals. This can be relatively
simple to administer, but since expatriates may come from different standards of living than
that experienced by local nationals, special supplements for expats may still have to be
negotiated.
In lump sum the rm determines (sometimes in negotiation with the expat candidate)
a total salary for the expat, to cover all the major incentives and adjustments, and then lets the
expat determine how to spend it.
Cafeteria is an approach which is increasingly being used for very highly salaried
expat executives is to provide a set of cafeteria choices of benets, up to a predetermined
monetary limit in value. The advantages accrue to both the rm and to the individual and are
primarily related to the tax coverage of benets and perquisites as compared to cash income
(pay check).
Regional systems are for expats who make a commitment to job assignments within a
particular region of the world, some rms are developing a regional compensation and
benets system to maintain equity within that region. This is usually seen as a complement to
the other approaches.
International or global approach: A nal approach being followed, at least for expats
above a certain pay level (i.e., therefore, for professional/technical/managerial employees), is
to implement a common global pay and benets package for each covered job classication
applied to everyone in that classication, worldwide.

The global compensation policy that can affectively deal with such problems is the
Balance sheet method or the home based approach.

Home-Country Concept (the Balance Sheet Approach):

The principle is that the expatriate should not be any worse off financially in their
overseas assignment than they would be in a similar position at home and will not suffer any
loss or change in their standard of living when taking an international assignment. This
balance sheet approach usually includes generous allowances for cost of living, housing,
education expenses for the expatriates children, tax and social service levies, and additional
benefits and allowances deemed appropriate for the circumstances of the assignment.
The balance sheet approach to determination of an expats compensation begins with
the employees existing parent-company compensation (salary, benets, and any other forms
of monetary or non-monetary remuneration). To this is added two other components: a series
of incentives to accept and enjoy the foreign posting and a series of equalization components
that ensure the expatriate does not suffer from foreign-country differences in salary or
benets.
The main advantages of having this system in place is that it creates equity between
the assignments, creates equity between expatriates of the same nationality, it facilitates
repatriate and also it is easier to communicate the compensation structure and system of the
company to its employees.

Thus for these reasons, the balance sheet approach would be

ideal to deal with the problems faced by the company.