Role of International Compensation Activities in Creating a Competitive Advantage.
International compensation activities are considered as an internal rate of return, both monetary and non-monetary rewards that include benefits, salaries, short term, and long term incentives. The increasing pace of globalization is increasing the demand for organizations to develop efficient international compensation programs. The human resource function is under great scrutiny in the global competitive market. This is because international businesses need to motivate, attract, and retain an effective workforce and achieve a competitive advantage. Proper compensation is considered an important factor in retaining and attracting employees leading the company to success (Mulugeta and Mokonnon, 2018). Low turnover rates and employee retention are greater ways through which employers can cultivate a productive workforce.
With effective compensation plans, employees are likely to be attracted to the organization. Through this, international businesses can acquire qualified personnel and expatriates. High compensation tends to attract applicants. Employees demand competitive compensation levels that respond to the demand and supply workers in the labor market. Gaining qualified personnel and expatriates help companies in entering global markets and facilitating successful business operations.
In an effort to maximizing the workforce effectiveness, organizations have paid attention to compensation activities. Competition for keeping valuable and high performing workers has been high. Considerably, organizations have relied on compensation strategies, which increase the level of employee satisfaction and performance (Ismail and Razak, 2017). Recognition and reward programs have boosted company loyalty and reduced turnover rates. Proper compensation plans show that the organization values the workers. Ideally, when employees know that there are commissions and bonuses, they are increasingly motivated to deliver better results. This will boost the performance of the organization in line with the global business strategy.
Considerations when Designing an International Compensation Program.
In order to maintain a sense of wholeness in an international compensation program, there are certain considerations that should be taken when designing the international compensation program. The understanding of the political, social, and economic conditions of different countries is vital in making an effective international compensation strategy. Culture plays an important role while designing the compensation program. This is because people with different cultural backgrounds will have different perceptions of the program under the influence of their culture (Mitra, 2017). Thus having an awareness of the cultural values of employees is greatly important since it affects the behaviors and attitudes of employees. When designing an global compensation program, there is a need to consider the host country’s market cost of living.
The host nation compensation system has a greater impact on every employee’s perception of the international compensation program. The consideration of the local market includes health care education and housing cost, as well as the cost of products and services (Mitra, 2017). This will enable the organization to pay centered on the market cost of the host nation, which may differ extensively from one country to another. Ideally, the employees will have to consider the native markets and the rates of services as well as products within the state.
While designing global compensation programs, there is a need to consider possible inflation impact. Local inflation can greatly influence global compensation design. Thus, the influence of currency fluctuation and inflation needs to be reviewed while planning the compensation program. For instance, the dollar has been the strongest over the years. This has affected the United States-based organizations in their ability to plan compensation programs. The United States companies paying their executives overseas have reduced compensation costs since the dollar is strong. Therefore, there is a need to consider the impact of local currency.
Components of an International Compensation Program.
An international compensation program involves elements of any rewards with additional allowance and incentives, with regards to the host country. These include Base pay, premium and allowances, variable pay, tax equalization payments, and partner assistance plans.
The base pay is the opening salary paid to the worker without the benefits, raises, or allowances. This is the rate of reward that the employee is offered in exchange for their services. This is the minimum rate that an employee will receive to do a specific job. For instance, there are different base pay approaches. One is the home country based approach, which aims at equalizing ton their living standard in the home country.
Variable pay is considered as the portion of compensation that is evaluated by the employee performance. When an employee achieves their goals, variable pay is offered as a type of bonus out of achieving the goals (Morantz et al., 2016). Variable pay falls into two categories, the short term and the long term categories, the long term as well as short term incentives. The short term is usually annual plans that associate awards based on individual or group performance. On the other hand, long term plans differ in length from three to five years.
Premium and Allowances
Allowances and premiums are added to the base salary for the employees to maintain their standards of living. For instance, the organization needs to send employees to host countries that have difficult conditions. A hardship allowance can be granted as an incentive to compensate the employees for accepting the task in less desirable countries.
Partner/ spouse assistance
The spouse support plan is used to relief pay lost by the partner as a result of having to relocate to a new country. This has generally been used by multinationals in encouraging employees to accept international assignments.
Tax equalization payments
To prevent an employee from suffering more taxation from both countries, many multinational organizations have implemented tax equalization payments (Mitra, 2017). Thus, this incentive is aimed at protecting employees from the negative consequences of taxation. The company adjusts the base pay of the employee to prevent them from paying more tax while in the host country.
Balance Sheet Approach for U.S. Expatriates’ Compensation Packages
The balance sheet approach for U.S. expatriates is used to maintain their purchasing power. Ideally, it ensures that the workers in the host country will maintain their purchasing power. Considerably, in this approach, the expatriates continue to be paid their home salary as a way of helping them link to their home benefits (Mane and Arora, 2018). The expatriates receive some allowances to stabilize their homebased expenses and host expenses due to income taxes that vary for the services, goods, and housing. These allowances are linked to the United States or the home state, pay, the family size and are attuned overtime to take the host as well as homebased exchange rate and price rises into account. The compensation is counted using the United States approach with allowances, reimbursements, and deductions. After the net salary is determined, it is converted into the host nation’s currency.
There are to major techniques of calculating this approach; the home-based and the headquarter based (Mane and Arora, 2018). The home-based method is where the expatriate pay is based on their home city while the headquarter is that the salary is based on the headquarter city. For instance, an expat from a New York City-based business will receive a salary based on New York City rates. The idea of the balance sheet method is the employee to sustain their living standards throughout their duties. This is to ensure that the expatriate’s household does not complain due to international relocation. This has been used by the companies also to ensure that the employees do not lose money in case the cost of living is higher than in the United States.
Ismail, A., & Razak, M. R. A. (2017). Compensation Management as a Determinant of Job Satisfaction. IPN JOURNAL, 53.
Mane, P., & Arora, C. (2018). Challenges of Expatriate Management with Special Reference to Compensation. Journal of Commerce and Management Thought, 9(3), 377-386.
Mitra, A. (2017). Culture, Institutions, and Global Compensation Systems.
Morantz, A., Bodson, J., Levine, S. M., & Palsson, M. V. (2016). Economic Incentives in Workers’ Compensation: A Holistic, International Perspective. Rutgers UL Rev., 69, 1015.
Mulugeta, W., & Mokonnon, R. (2018). Effects of Compensation on Employee Job Performance.