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COMPENSATION MANAGEMENT
Introduction:OneofthekeycomponentsofIHRMisthecompensation
administration in MNCs. Today, compensation and employee benefits
contribute to 4050% of the total costs. Compensation is strategically
reportedandmonitoredatthebroadlevelsandwiththeinvestorsto
assess the health of the organization. What is compensation
management?Effectiveandefficientprocessofmanagingtheearnings
financialandnonfinancialrewardsoftheemployeesinanorganization
based on their performance towards organizational goal is called
compensationmanagement.
Organizationalculture
Recruitmentandselectionofcompetentemployees
Motivationandperformance
Objectivesofcompensation:
Provideaconsistentandreasonablerelationshipbetweenthepay
levels of employees at headquarters, domestic affiliates and
foreignsubsidiaries.
Becosteffectivebyreducingunnecessaryexpenses.
Shouldbeeasilyunderstoodandeasytoadminister.
ComponentsofCompensation:
BaseSalary:
Benefits:
Alternativelyknownasindirectcompensation,
Benefits constitute a substantial portion of international
compensation ( approx. one third of compensation for regular
employeesisbenefits).
Benefitsincludeasuitofprogrammessuchas:
Entertainment, Festival celebrations, Gifts, Use of club
facilities, provision of hospitality including food and
beverage, employee welfare, use of health club,
Conveyance tour and travel, Hotel Board and Lodging,
vehicles,telephoneandothertelecommunicationfacilities,
Sponsorshipofchildren.
Basically an employee tends to join and stay with an org. which
guaranteesanattractivebenefitsprogramme.
Vacation along with holidays and rest breaks help employees
mitigate fatigue and enhance productivity during the hours
employeesactuallywork.
Allowance:
Incentives:
Anadditionalpayment(orotherremuneration)toemployeesasa
means of increasing output. Increasingly, MNCs these days are
designing special incentive programmes for keeping expatriates
motivated. In the process, a growing number of firms have
dropped the ongoing premium for overseas assignments and
replaceditwithaonetime,lumpsumpremium.
Thelumpsumpaymenthasatleastthreeadvantages:
First,expatriatesrealizesthattheyarepaidthisonlyonceandthat
too when they accept an overseas assignment. So the payment
tendstoretainitsmotivationalvalue.
Second: costs to the company are less because there is only one
payment and nofuture financialcommitment.This issobecause
incentive is a separate payment, distinguishable from a regular
pay,anditismorerapidlyforsavingorspending.
Third,lesschancesforprematurerepatriation.
ForeignService/HardshipPremium:
Certaincountriesarehighlyhostiletoforeignersstayingandworking.
Indians engaged in road construction work in Afghanistan, for
example, face constant threat lives. In fact, ten such emigrants got
killedinrecenttimes(20062007).Expatriatesinsuchenvironments
arepaid23timesmorethantheirdomesticsalaries.
LongtermBenefits:
ThemostcommonlongtermbenefitsofferedtoemployeesofMNCsare
EmployeeStock OptionSchemes(ESOS).TraditionallyESOSwere used
asmeanstorewardtopmanagementorkeypeopleoftheMNCs.Some
ofthecommonlyusedstockoptionschemesare:
EmployeeStockPurchasePlan(ESPP)Thisisaplanwhereinthe
company sells shares to its employees usually, at a discount.
Importantly, the company deducts the purchase price of these
shareseverymonthfromtheemployeessalary
Taxes:
Taxes
Salary
International
Compensation
Incentives
Allowances
Benefits
Factorsinfluencingthesecomponents:
RemunerationorcompensationvariescountrytocountryandoneMNC
toanother.Mainlybasedontwofactors:ExternalandInternal.
Domestic
Remuneration
/
CompensationInternational
ExternalFactors
InternalFactors
LabourMarket
Costofliving
LabourUnion
Govt.Legislation
Society
Economy
Businessstrategy
Job Evaluation
and Performance
Appraisal
Theemployee
ParentNationality
Labour
market
characteristics
LocalCulture
Home and Host
Countries
GovernmentsRoles
IndustryTypes
Competitors
Strategy
Goalorientation
Capacitytopay
Competitive
Strategy
Org.Culture
Int. Workforce
composition
Lab.Relations
Subsidiaryrole
However,thesefactorscanbeclassifiedinfivecategories:
1. Prosperity&SpendingPowerOfthecompany(arelatedfactoris
thedifferentTaxandsocialsecuritySysteminthecountry.
2. CulturalDifference
3. Policy&Strategies(inproductivityandPerformanceevaluation)
4. SituationsontherelevantLabourmarket&Labourcapitalratios
5. Institutional Frameworks within which wage Bargaining takes
place
CompensationPhilosophy:
Sincecompensationisacrucialfactor,havingitsbearingonperformance
andsatisfaction,itisadvisablethatinternationalbusinessshouldhavea
clearcutcompensationphilosophy
NowthequestioncomeswhatisCompensationPhilosophy?
Anycompensationphilosophyshouldcoverthefollowingaspects:
Goalsoftheorganizationalcompensationsystem
Percentage of compensation linked to individual
performanceandbasesalary.
Roleofperformanceappraisalindisbursingcompensation
The positioning of compensation of employees relative to
market
Theoriesofcompensation:
1. Contingencytheory(mostpopular):Expatscompensationshould
be based on particular contingencies or situation prevailing in a
host country. The compensation Phil. In every organization is
normally de centralized and allows units to localize the
compensationstructure
2. Resourcesbasedtheory:Humanresourceisthegreatestassetof
the MNCs in its competitive advantage needs good pay and st.
salary band for cont. motivation. The organizations follow this
theory, remain market sensitive and are constantly reviewing
compensationtoretaintheirpositioninthehiringandretaining
thetalents
4. EquityTheory:Equitytheorysuggeststhatthereshouldbeafair
balance between an expatriates contribution to an MNC and
what he / she receives as compensation. Of late, the equity
principle is sought to be compromised with a new approach to
compensationPersonbasedratherjobcentric.
Compensationpracticesindifferentcountries:Theoverallcompensation
package often varies from country to country due to legally mandated
benefits,taxes,costofliving,culturesandemployeeexpectations.
America
Orientation
Performance
oriented
Components
BS,VB,LTI,CBC,VBC MW(BA+OT),VB
Link
withExcellentlinkage
performance
Japan
Senioritybased
Moderatelinkage
Russia
MiddleEast
Joblevel
based
BS,FB,NMB BS,HA,AA,FA,AF/VT,SF,
VBIncentives.
Poorlinkage ModerateLinkage
BasisofIncreaseAnnual
increase
Influencing
Cultural
variables
BSBasicSalary,VBVariablebonus,LTILongternincentives,CBCCompulsory
benefitcontributions,VBCVoluntarybenefitcontribution,MWMonthlywage,BA
BasicAllowance,OTOvertime,FBFixedBonus,NMBNonmonetarybenefits)
Approachestoexpatriatearecompensation:
1. TheBalancesheetorHomenetsystem
2. ThelocalGoingratesystemorlocalizationsystem
BalanceSheetApproach:
Whichinvolvesensuringthattheexpatriatesismadewholeanddoes
notlosemoneybytakingtheforeignassignment.Thebasicobjectiveis
tomaintainthehomecountrylivingstandard,plusoffersomefinancial
inducement
Thus,itlinksthesalaryofexpatriatesandTCNstohomecountrysalary
structure.
Thekeyassumptionisthatforeignassigneesshouldnotsufferfinancially
duetotransfers.Thesalarypackageisdividedintofourparts:
Forexample,ifUSnationalispostedinIndiaandsupposethedollar
exchangerateis$1=Rs.50/andCOLAIndexis5,thenthebreakup
oftheannualpaywillbe:
Item
Amount in $ per Paid in $ in Paid in Rs. In
yearinUS
India
India
Basepay
1,00,000
60,000
20,000,00
Cost of living 10,000
Nil
5,00,000
allowance
Overseas
allowance
20,000
20,000
Nil
Hardship
allowance
5,000
5,000
Nil
Housing
deduction
10,000
- 10,000
Nil
Income
tax
deduction
30,000
30,000
Nil
Totalpay
$95,000
$45,000
Rs.25,00,000
Advantages:
Expatriateisguaranteedhishomecountryspendingpower.
Easytocommunicatetoemployees
Disadvantages:
Threeproblemsfacedinapplyingthissystemare:
1. Recalculatingthesalaryfromgrosstonetandviceversa.
2. Ingrossingupthenetincomeinthehostcountry,thereshouldbe
strictly identical items (same car and housing). This is the
difficulty.
3. Canresultindisparitiesbetweenexpatriatesofdifferentcountries
2.GoingRateApproach:
Advantages
Equalitywithlocalnationals
Simplicity
Identificationwiththehostcountry
Equityamongdifferentnationalities
Disadvantages
Variationbetweenassignmentsforsameemployees
Variation between expats of same nationality in different
locations (Indian expatriated to the US may be
compensated better than those assigned to a developing
country) Potential reentry problems ( on return to home
country, the expats. finds that his or her compensation is
lowerthanthatofthehostcountry.
TheStandardPolicyofCompensationmanagementrequired:
C)
The knowledge of foreign exchange rate fluctuations and
monitoring rate of inflation or cost of living Index in different
countries.
D) Theknowledgeandclearconceptionaboutthevisionandmission
of the company, its corporate philosophy regarding managing
humanresources,itscorporatestrategyofgrowthorstabilityand
strategy of its business units regarding cost, leadership,
differentiationandinnovation
Conclusion:
Higherbasicsalarywithlowerbenefitsandincentivesor
Lowersalarywithhigherlevelofbenefitsandincentives,maynot
motivatedtheexpatriatesandtherefore,requiredhighdegreeof
expertise / standard policies for MNCs specially in the field of
compensationmanagement.
Thepolicydecisionsshouldbeconsistentwiththeoverallstrategy
structureandbusinessneedsofthemultinationals.
The policy should be attract and retain the best staff in those
areas where the firm has greatest needs and opportunities and
whereitscorecompetencies.
Thepolicymustfacilitatethetransferofinternationalemployees
inacosteffectivemanner.
The policy should give due consideration to equity case of
administration.
PreparedbyDr.ShyamalGomes
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