Introduction

Number of studies indicates a correlation between executive compensation and organizational performance. Often organizational performance becomes depressing for high burden of executive compensation.

Concepts and Issues

Organizations extent of payment of compensation to executives plays the most important role to motivate critical performance. Such critical performance achievement helps the company to achieve the results. Base salary is not the only component in executives compensation. Organizations have to make available various short-term and longterm incentives (STIs and LTIs). Such incentives need not always be in terms of cash, it also includes stock options, and various other innovative deferrals like loyalty bonus with the time-cap, golden parachute schemes, etc.

Components of Executive Compensation

Components of executive compensation can be studied in three perspectives, i.e., variable pay (e.g., bonuses, commissions, profit sharing, etc.), base pay (e.g., salary and perquisites), and employment status (e.g., promotions and termination). Distinction in these perspectives focuses on the uncertainty of present and future wealth, and emanate from agency discussions of risk bearing. Effective executive compensation packages typically comprise the following components: Base Salary Annual Incentives Long-Term Capital Accumulation Deferred Compensation Arrangements Supplemental Benefits and Perquisites Special Severance and Retirement Arrangements Employment and Change of Control Agreements

Different Theories of Executive Compensation

Executive compensation need to be designed innovatively primarily with three core components; cash (salary and bonus), various perquisites and supplementary benefits, and finally various long-term incentives. Tournament Theory As per this theory, compensation is viewed as the prize in a series of tournaments or contests among middle and top-level managers, who aspire to become CEO. Winners of the tournament at one level enter the next tournament. In other words, an executives promotion to a higher rank signifies a win, and more lucrative compensation represents the prize. Social Comparison Theory This theory suggests designing of compensation by comparing with similar individuals.

DIFFERENT THEORIES OF EXECUTIVE COMPENSATION

Balance Sheet Approach This approach provides expatriates the standard of living they normally enjoy in their own country. Headquarters based pay Compensation to all according to the rate used at the headquarters.

Golden handcuffs Compensation components earned over a period of time that assist in retaining an employee. Many organizations practice this approach to avoid attrition.
Competency based pay Pay related directly to the kinds and levels of competencies required in the performance of the work/job. Golden parachutes Provide pay and benefits to executives after their termination resulting from a change in ownership, or corporate takeover. This is particularly for very senior level executives, who may dictate this condition in their terms of employment to protect their interests in the event of take over.

DIFFERENT THEORIES OF EXECUTIVE COMPENSATION

Cafeteria plan For executives, options for different nature of benefits, is commonly termed as cafeteria plan. Executives may select either of the alternatives as compensation benefit. Profit sharing plan It provides direct or indirect payments, based on organizations profitability, apart from regular compensation. Although employee stock options fit here as a good example, more applicable fit is Tata Groups EVA plan.

Executive Compensation Design Process

Executive compensation design process link compensation criteria (e.g., organizational performance or size) to compensation consequences (e.g., pay at risk). Such process or mechanism is categorised into two forms; process that centers on contract and the process that involves direct monitoring of the executive.

Use of Performance Criteria for Designing Executive Compensation

Use of performance criteria to design executive compensation, account for measurable performance targets, behaviour, job requirements, and experience of the executives, job role, peer compensation, market considerations and the size of the organization.

Context of Executive Compensation Design

Executive compensation design has its multifaceted effects on the firm's strategy, industry, and on the culture in which it operates. Such multifaceted dimension of effects, require us to examine executive compensation from different contexts. The decision context encompasses the individual choices of executives. The strategic context examines organizational goals, and suggest on matching resources to goal achievement. Environmental and cultural factors examine industry characteristics, national and global economic, cultural, and political factors. Influence of contextual factors on the executives decision on compensation in a globalised world, has now started gaining importance. Cultural factors examine effect of compensation strategy across many countries. This aspect is more important for multi-nationals and transnational, who operate globally.

Decision Context
Compensation design in the decisional context considers framing of problems of a decision maker, and is part of behavioural economics. Executive compensation decision considers utility or preference theory of decision making. An individual employee may be risk aversive at one point of time and gambler at another point of time more or less on same decisional issues. In compensation context, an individual employee may prefer opting for a job in large organization with stringent targets over a more stable with decent compensation job in small organizations.

Culture and Executive Compensation

Culture of an organization evolves over time and is influenced by several factors. It is moulded by unusual business conditions. Organizational culture influence managerial practices, and so also the compensation practices. Calibration of Executive compensation to performance The concept of calibrating pay to performance is the 'Market value measure'. The key to the model is ensuring the measures being selected are pertinent, so that the right set of behaviours are being encouraged. To simply say that a particular executive is a high performer may not only be a sweeping generalisation, it may also be in reference to measures that are not currently important to the organization.

Pay Calibration

High Pay/ Low Performance

High Pay/High Performance

Low Pay/Low Performance

Low Pay/High Performance

Performance measurement in executive incentive programmes

Linking executive compensation to organizational performance, shareholders value creation has become extremely important. Effective performance measures ensure that executive compensation is commensurate with performance. Points for consideration are: Alignment with shareholders interests Definable Measurable Controllable Easily communicated and understood

Assessing potential performance objectives against these criteria can help to ensure the appropriateness of the measure or measures ultimately used.

Relating Executive Compensation to organizational strategy

Organizations need to design executive compensation to reward the work, which by default can realise the organizational strategy. Designing executive compensation in the era or economic uncertainty, rationalizing both the expectations of the executives and organizational strategic intent, is the most challenging task. It requires optimisation of the cost of compensation, rationalisation of compensation budget restructuring the deferral components of compensation, optimisation of the cost of retirement benefits, using funded pension assets through stock build-up.

Chapter-8 Employee Benefits

Introduction
An employee benefit comprises of both wage and non-wage component of total labour costs. Non-wage components are given more in the form of benefits in kind. Employee benefits are also called fringe benefits, perquisites, or perks. Wage component of employee benefits are paid in cash, hence it is more like a normal wages or salaries. Where employee benefits are given in cash, we call it salary sacrifice, as employees avail such benefits, per se in exchange of their cash salaries. Both the wage and non-wage component of employee benefits are taxable, barring a few strategically chosen one.

Non-monetary Benefits Non-monetary benefits or compensation is used, either when organization feels that any additional monetary compensation will reduce the firms cost competitiveness or when the organizations strategically use this for motivation and retention. Non-monetary benefits can be provided in various forms, such as stock or fixtures for no charge instead of, or in addition to, money. Both the monetary and non-monetary benefits are made available to employees in accordance with the employment contact or the agreements. According to Watson Wyatt (2000) there are three common non-monetary incentives; career advancement opportunities, flexible working hours and opportunities to acquire new skills and knowledge. Particularly for exploratory age group employees, non-monetary compensation and benefits are very important.

Advantages of non-monetary compensation Memory value, which is possible for its long lasting effect (more than the cash payouts). Flexibility for ease of design, depending on the organizational goals and budgetary constraints.

Trophy Value for obvious display advantage to the co-workers and colleagues.
Less expensive, as employers payout is less compared to cash awards.

Tax obligations on employee benefits

As per tax laws employee benefits both monetary and nonmonetary is considered as fringe benefits and in most of the countries, including India it is subject to tax liabilities.

Types of Employee Benefits Some common employee benefits can be classified as under: Benefits classified under employment security Benefits for medical and health care Benefits for old age and retirement Miscellaneous benefits for personnel identification

Statutory Employee Benefits in India

Indian Labour Laws require organizations to provide some statutory employee benefits, both monetary and non-monetary in nature. Some statutory benefits are as under: 1. Employee Security (both physical and job security). 2. Retrenchment Compensation - Provides for the payment of compensation in case of lay-off and retrenchment. 3. Lay-off Compensation Can normally be paid up to 45 days in a year to the extent of 50% of total basic wage and dearness allowance. 4. Safety and Health Provisions - In India, the Factories Act, 1948, stipulated certain requirements regarding safe working conditions like; cleanliness, disposal of waste and effluents, ventilation and temperature, dust and fume, artificial humidification, over-crowding, lighting, drinking water, latrine, urinals, and spittoons.

Deferred Compensation Plans A deferred compensation plan is an arrangement whereby an employee or owner defers some portion of their current income until a specified future date. treatment. Fringe Benefits Fringe benefits can be defined as any wage cost not directly connected with the employees productive effort, performance, service or sacrifice. Fringe benefits may be welfare measures, social charges, social security measures, supplements, sub-wages, employee benefits etc. Flexible Employee Benefits Programme Flexible employee benefits allow employees to pick benefits from bundle of alternatives. Many organizations deliberately tailor-made such benefits for their employees to address their needs. Payment of Bonus as Employee Benefits Bonus is a share of the workers for organizational surplus, and operationally it helps to bridge the gap between the actual wage and the need-based wage. As a legal obligation, every organisation in India, classified as industrial undertaking as per the legal provision are liable to pay 8.33% of pay as minimum bonus irrespective of the profit or loss.

Chapter-9
Employee Motivation and Compensation

Introduction Organizations design compensation to motivate employees. Motivated employees deliver their best and significantly contribute to organizational growth and prosperity. However, compensation designing keeping employees motivation on the agenda requires at the outset to understand what motivates them and how such perceived reinforcers can be included in compensation structure.

Definition and concepts Motivational factors are perceived needs of the employees, satisfaction of which contribute to employees performance and productivity. Motivational process may be internal or external to the individual that arouse enthusiasm, and persistence to pursue a certain courses of action. Motivational process enforces goal directed behaviour. Goal directed behaviour enhances performance and productivity of employees, which further influence compensation strategy and other motivational reinforcers.

Compensation Motivation nexus Employee Compensation has a linkage between intrinsic and extrinsic factors of motivation of an individual. Any compensation system needs to be motivating, primarily for following reasons: To attract individuals with knowledge, ability and talents as demanded by specific organizational tasks. To retain effective, valued and productive subordinates. To motivate to the desired level of performance. To promote attitude conducive to loyalty and commitment to the organization, high degree of job involvement and job satisfaction. Like motivation, compensation also has two important components, i.e., monetary and non-monetary. Organizations try to fulfill the extrinsic motivational requirements designing compensation, which emphasise on the cash component. On the other hand intrinsic motivational elements emphasise on non-monetary aspects of compensation.

Theories of Motivation Perspective Theories - Taylors Scientific Management Approach, various Human Relations Theories, McGregors Theory Y, etc., which, in reality, tell management to motivate people. Content Theories - Maslows Hierarchy of Needs Theory, Herzbergs Two-factor Theory, McClellands Achievement Need Theory, etc., which try to identify the causes of behaviour. Process Theories - Various Behaviouristic Theories which believe in stimulusresponse relationship vis-a-vis motivation (e.g. Skinner's Behaviour Modification Theory) and Cognitive Theories (e.g., Vrooms Expectancy Theory and Porter-Lawlers Future-oriented Expectancy Theory) which deal with the genesis of behaviour.

Chapter 10 Sales Compensation Plan

Introduction Sales Compensation programme consists of series of decisions to objectively reward the sales people, based on individual and group achievement. Design of sales compensation requires adequate focus on strategies and business intents of the organization, failing which, organization may only add to the cost without achieving the results. Individual sales compensation plan is easy to draw. Group sales compensation design, however, requires lot of thoughts and board work. Most important aspect is to cascade the MBO to group and individual level performance standards and then decide on the variables and incentives.

Understanding the sales job Sales jobs is different from other job families. Companies top line and bottom line depend on sales persons performance; hence sales compensation also needs to be different, as it largely uses the incentives. Sales work involves working with customers, who are outside the organizations. It requires lot of persuasion and interaction, high level products and service knowledge and finally the emotional balance. For managers to understand the sales job it is necessary to study the activities involved, right from the beginning, i.e., tapping the potential customers, to end, i.e., concluding a sale deal. Most sales jobs include activities such as soliciting orders, servicing customers, seeking out buyers, obtaining information, and performing missionary work such as cold calls and product promotion. Some sales personnel also engage in credit-information collection and analysis, product modification, customer-personnel training, and technical advice and assistance.

Sales Compensation issues Organizations essentially for cost control, and achievement of goals and objectives, competing with others, need to design separate sales compensation plan. Again sales persons jobs are clearly visible, hence efforts of good sales person can be suitably rewarded with variables and incentives. Internationally it is observed sales compensation costs for the organizations are almost 25 35% of the gross profit. It means it exceeds the average compensation cost for the organization as a whole to the extent of 5 to 15%.

Sales Goals Some organizations assign weight on sales volume within a time frame, some may be more interested in new business development, some may value customer retention, some may emphasise on selling some productmix, some may feel customers awareness is more important, while some may be more interested about information on competitors sales strategies. Sales Compensation Plan Sales compensation plan depends on their compensation practices and the strategic intent of the organizations.

A carefully crafted sales compensation plan, considers three levels of performance, like; threshold, target achievement and exceed expectations level.

Determining the sales cycles A sales cycle is the time required to conclude a sale. Depending on the nature of the products and services, organizations select short-sales cycles or long sales cycles. Short-sales may extend to 12 months period, with provision for periodic payouts to motivate the employees. Long sales cycles extend beyond 12 months period. Non-cash incentives as sales compensation To design a sales compensation plan, cash is not the only award that motivates. There are various non-cash incentives like; plagues/awards, recognition dinners, leisure trips/travels, merchandise/gifts and other. Many organizations involve their sales people while they design their sales compensation plan. Sales Compensation design and administration A sound sales compensation package enables the organization to focus on sales activities towards desired results, and rewards these outcomes with compensation tied directly to the level of achievement. Such steps are broadly classifiable in to identification of realistic and challenging sales goals, translating sales goals into measurable objectives, and designing sales compensation, which is competitive and motivational for the employees.

Steps to design effective sales compensation plan

Industry practices on sales compensation plan vary. Some of the fundamental steps in effective designing of sales compensation are:
Basic understanding of the sales job descriptions Understanding the objectives Understanding of controllable and measurable elements of jobs Determine the level of compensation Understanding the compensation method (straight salary, straight commission and the combination of both) Pilot testing of the designed compensation method Installation of the plan

Sales Compensation Components Sales compensation packages consist of one or any of the following components:
Base Salary Short-term incentives linked with short-term goals Long-term incentives, linked with annual target achievement. Long-term incentives plan

can also extend to a longer sales cycle, depending on the organizational policy Incentives in the form of sales commission Perquisites to support sales initiatives.

Sales Incentives and Motivation Sales motivation depends on understanding of the sales persons needs first. Managers through their day-to-day interaction with the sales people can understand their needs better and can come out with the appropriate incentives programme that can motivate and lead them to desired level of performance. Contribution-based sales compensation approach Contribution-based sales compensation strategy benefits the organization, relating the compensation to the costs of running the organization. Any sales person contributes to the expenses and profitability of the organization. Design of compensation based on their contribution, benefits the organization can benefit the organization in following ways: It gives opportunity to the sales people to earn without any ceiling, without straining the organizational compensation budget. It makes recruitment of sales people more flexible, as organizations can avoid payment to those who fail to perform. It ensures long-term profitability, as it enhances the performance of the organization and make them more stable.

Chapter 11
Legal and Taxation Issues on Employee compensation

Chapter 13
Quantitative Tools and Innovation in Compensation

Introduction
A good compensation programme of an organization aligns with business and people. We understand the best practice in compensation management through compensation research. Compensation research requires detailed analysis, using various mathematical and statistical techniques. Quantitative considerations for Variable Pay Systems Variable pay varies with the organization's business performance. Profit sharing plans, lump sum merit awards, spot bonuses, gain sharing plans, alternative pay, stock plans, etc. are some of examples of innovative variable pay design. Again under stock incentive options, there is ESOP at pre-determined price, at discounted price with minimum lock in period, phantom stock, etc. In designing retirement plans, health and welfare plans, etc. we also need to consider quantitative issues.

Quantitative Analysis of Compensation In compensation designing and management, we follow certain norms in mathematical systems. For example, the observations must be independent, i.e., one measurement should not bias the other. The measurements must be from a normally distributed population, the traditional "bell-shaped" curve. The populations must have the same variance. The measurement must be of at least an interval scale, the effects must be additive, etc.

There are four basic kinds of measurements: nominal, ordinal, interval, and ratio. Nominal measurements (or scales) are composed of numerical values that serve to identify discrete categories; which we use in salary surveys. Nominal measurements can also count classes (the numbers of positions numbered "2" for instance), or "Yes" - "No" responses (assuming yes = 1 and no = 0) Ordinal measurements rank differences between categories, without, however, indicating the degree of difference. Ordinal scales are applied to observed events, viz., in job evaluation plans, where factors cannot be easily broken down into quantifiable units. Interval scales are equal unit scales; that is, the distance between adjacent units on an interval scale is the same, irrespective of the magnitude of the adjacent scale units. The ratio scale can measure the absolute zero In compensation administration, rupees in value can be shown on the interval scale, while percentages can be shown on a ratio scale.

Quantitative considerations in compensation design

Core statistical knowledge like; computation mean, median, mode, variance, standard deviation, correlation and regression, etc. are essential in designing compensation, so that we can understand different phenomena.

Pay Structure Formation Companies make adjustments to their salary structures, using survey data to aid in determining the necessity for changes in the structure. Compa-ratios serve as a measure of relative performance of individuals within an organization. Cost/Benefit Analysis produces a ratio that plots a companys cost against the real benefit received by an employee. Cost of living index establishes a base period for comparison and use against the present costs. Gratuity computation, provident fund payment issues, pension calculation, etc. also require quantitative considerations. Incentive determination using different incentive methods also makes extensive use of various mathematical and statistical analyses. Quantitative detailing for calculating overtime wages, for introducing merit pay system, etc. are important.

Economic Value Added (EVA) EVA measures internal and external company operating performance, funds the credit initiative, constraints, and challenges. It can be tied to evaluating employee performance and success by developing a goal oriented compensation package based on an incentive reward system that links cause and effect accountability. The excess EVA equals profit. Four Ms of EVA are:
Measurement designing a measure of value creation that best reflects economic

reality in a particular industry. Managementdeveloping policies, procedures and tools, which link decision-making to the measure of value-creation. Motivationestablishing incentive plans that simulate ownership by giving managers a share of value created. Mindsetincreasing the business literacy of employees through training and communications. Main drivers of EVA are operating revenues, operating expenses, and capital charges. EVA based compensation aligns the interests of management and employees with the shareholders.

Chapter 14
International Compensation Management

Introduction
Globalization exerts two influences; market globalization and the need for reducing the cost of production. To reduce the costs of production, organizations relocate their production facilities to low labour cost countries and recruit people, both from the local markets and also depute their own people as expatriates. Compensation design both for the local country nationals (LCN) and for the expatriates is a biggest challenge. Expatriates are the third country nationals (TCN). Both for LCN and TCN, organizations have to frame compensation strategically, so that the brunt of compensation cost, cannot defeat their business goals in global markets.

Fundamentals of International Compensation

Free flow of information across the nation; influence the market and the people, and so also the compensation management practices. International compensation management is a complex area, because of cross-cultural issues, difference in organizational practices, labour costs etc. Problems in international compensation become more serious when organizations send their employees on overseas assignments and subsequently return of such employees to their home countries. An expatriate is a citizen of the country, where his/her organization is headquartered. For international assignments, workforces are classified as shortterm transferees, permanent transferees, expatriates, third country nationals, etc. Organizations send workers to international assignment with some definite goals and objectives; hence alignment of international compensation with defined goals and objectives is very important.

Cultural issues in international compensation International compensation design also requires consideration of cultural constructs of the respective countries. Most important among such issues are collectivism and individualism. In countries like China, Israel and Japan, group based compensation need to be designed, following the principles of equity. Recognition of individual merit and giving rewards accordingly cannot be allowed, because of their collectivist cultures. On the contrary, in countries like the United States or in the U.K., because of their individualistic cultures, design of compensation based on individual merit is very important. Variation in International Compensation Variation is the degree of heterogeneity in wage related laws in respective countries. Wage related laws in many countries vary from region to region. Such variation influences the compensation design, and more specifically in designing employee stock options. Variation in the social norms also affects compensation design. For example payment of vacation allowances in many countries is a social norm. Also multinationals in local host context, strategically vary their compensation structure to fit their specific requirements.

Components of International Compensation

Common international compensation components are; base salary, indirect monetary compensation (benefits), equalisation benefits, and incentives. Base salary has two dimensions; determination of base salary for the expatriate in accordance with the policies and procedures of the parent country or the host country. For short-term assignments (< 5 years) parent countrys base salary is kept, while for long-term assignments (> 5 years) host countrys base salary is considered.
Non-monetary compensation or benefits for expatriates, although normally made

compatible with the home country, keeping pace with the country specific practices, often organizations feel compelled to vary.
Equalisation in benefits is practiced in international compensation as a transitional

support to expatriates, as part of social adjustment assistance. Some of the areas where equalisation is sought are; housing allowance, educational allowance for children, foreign service premium, assignment completion bonus, emergency leave, home leave, language training, domestic staff, club membership, spousal employment, cultural training for family, etc. In international compensation various cash bonuses, stock options and performance related payments are used as incentives. Whatever is chosen, it should be strategically designed, keeping in view the nature of assignment, duration and level of employees.

Issues related to repatriation In overseas assignments transparency in repatriation policy, i.e., information on career progression path, degree and support from the organization during international tenure, etc. are very important. These can instill the confidence in the minds of the people, and they can volunteer for such assignment. Immigration issues The respective countries immigration laws and procedures largely govern immigration issues for expatriates. In many countries it is largely influenced by their local regulatory norms. Tax issues In international compensation, biggest challenge is to accommodate the tax issues. Tax regulations are quite different across the nations, creating problems of tax equalisation for the expatriates. Indian Tax Laws are quite friendly with expatriates, hardly leaving any difference in matters of tax liabilities between an Indian employee and an expatriate.

Social security For expatriates, payment of social security contributions in host countries, again become a major problem. For many expatriates, social security contributions often become dual in the host countries where they get posted and in the country of their own origin, where their parent organization operates. Designing compensation for such international assignments, become a serious problem, as contribution to social security schemes is regulated by country specific legal norms. Secondment agreements Secondment is temporary assignment of worker in another job. For international assignment this term is used as an extension to a job in another country, without affecting the terms and conditions of contract of employment.

International Compensation Design

International compensation design requires global mind-sets., to

balance the corporate, business unit and functional priorities of a global scale. There are two main approaches to international compensation design; the going rate approach and the balance sheet approach. The going rate approach is basically design of compensation based on the market rate. The balance sheet approach is a build-up approach, as compensation is designed based on the home-country living standard.

Cross-country differences in Compensation Practices

Example of ESOP
USA More emphasis on incentives and ownership Relatively higher dilution level, which offers more, benefits to the ESOP holders. Hardly any performance conditions are attached. UK Less preferred as more emphasis on fixed pay component. Performance conditions are imposed. Continental Europe ESOP is used is a smaller way for few people. More tax friendly. Asia Mostly offered by multinationals. Offered only to a privileged few. China Highly regulated. Offered only to key senior managerial people. Hong Kong Used extensively as LTIs (long term incentives) Maximum income tax rate is 15% India Regulated by the Securities & Exchange Board of India.

Chapter 14
International Compensation Management

Introduction
Globalization exerts two influences; market globalization and the need for reducing the cost of production. To reduce the costs of production, organizations relocate their production facilities to low labour cost countries and recruit people, both from the local markets and also depute their own people as expatriates. Compensation design both for the local country nationals (LCN) and for the expatriates is a biggest challenge. Expatriates are the third country nationals (TCN). Both for LCN and TCN, organizations have to frame compensation strategically, so that the brunt of compensation cost, cannot defeat their business goals in global markets.

Fundamentals of International Compensation

Free flow of information across the nation; influence the market and the people, and so also the compensation management practices. International compensation management is a complex area, because of cross-cultural issues, difference in organizational practices, labour costs etc. Problems in international compensation become more serious when organizations send their employees on overseas assignments and subsequently return of such employees to their home countries. An expatriate is a citizen of the country, where his/her organization is headquartered. For international assignments, workforces are classified as shortterm transferees, permanent transferees, expatriates, third country nationals, etc. Organizations send workers to international assignment with some definite goals and objectives; hence alignment of international compensation with defined goals and objectives is very important.

Cultural issues in international compensation International compensation design also requires consideration of cultural constructs of the respective countries. Most important among such issues are collectivism and individualism. In countries like China, Israel and Japan, group based compensation need to be designed, following the principles of equity. Recognition of individual merit and giving rewards accordingly cannot be allowed, because of their collectivist cultures. On the contrary, in countries like the United States or in the U.K., because of their individualistic cultures, design of compensation based on individual merit is very important. Variation in International Compensation Variation is the degree of heterogeneity in wage related laws in respective countries. Wage related laws in many countries vary from region to region. Such variation influences the compensation design, and more specifically in designing employee stock options. Variation in the social norms also affects compensation design. For example payment of vacation allowances in many countries is a social norm. Also multinationals in local host context, strategically vary their compensation structure to fit their specific requirements.

Components of International Compensation

Common international compensation components are; base salary, indirect monetary compensation (benefits), equalisation benefits, and incentives. Base salary has two dimensions; determination of base salary for the expatriate in accordance with the policies and procedures of the parent country or the host country. For short-term assignments (< 5 years) parent countrys base salary is kept, while for long-term assignments (> 5 years) host countrys base salary is considered.
Non-monetary compensation or benefits for expatriates, although normally made

compatible with the home country, keeping pace with the country specific practices, often organizations feel compelled to vary.
Equalisation in benefits is practiced in international compensation as a transitional

support to expatriates, as part of social adjustment assistance. Some of the areas where equalisation is sought are; housing allowance, educational allowance for children, foreign service premium, assignment completion bonus, emergency leave, home leave, language training, domestic staff, club membership, spousal employment, cultural training for family, etc. In international compensation various cash bonuses, stock options and performance related payments are used as incentives. Whatever is chosen, it should be strategically designed, keeping in view the nature of assignment, duration and level of employees.

Issues related to repatriation In overseas assignments transparency in repatriation policy, i.e., information on career progression path, degree and support from the organization during international tenure, etc. are very important. These can instill the confidence in the minds of the people, and they can volunteer for such assignment. Immigration issues The respective countries immigration laws and procedures largely govern immigration issues for expatriates. In many countries it is largely influenced by their local regulatory norms. Tax issues In international compensation, biggest challenge is to accommodate the tax issues. Tax regulations are quite different across the nations, creating problems of tax equalisation for the expatriates. Indian Tax Laws are quite friendly with expatriates, hardly leaving any difference in matters of tax liabilities between an Indian employee and an expatriate.

Social security For expatriates, payment of social security contributions in host countries, again become a major problem. For many expatriates, social security contributions often become dual in the host countries where they get posted and in the country of their own origin, where their parent organization operates. Designing compensation for such international assignments, become a serious problem, as contribution to social security schemes is regulated by country specific legal norms. Secondment agreements Secondment is temporary assignment of worker in another job. For international assignment this term is used as an extension to a job in another country, without affecting the terms and conditions of contract of employment.

International Compensation Design

International compensation design requires global mind-sets., to

balance the corporate, business unit and functional priorities of a global scale. There are two main approaches to international compensation design; the going rate approach and the balance sheet approach. The going rate approach is basically design of compensation based on the market rate. The balance sheet approach is a build-up approach, as compensation is designed based on the home-country living standard.

Cross-country differences in Compensation Practices

Example of ESOP
USA More emphasis on incentives and ownership Relatively higher dilution level, which offers more, benefits to the ESOP holders. Hardly any performance conditions are attached. UK Less preferred as more emphasis on fixed pay component. Performance conditions are imposed. Continental Europe ESOP is used is a smaller way for few people. More tax friendly. Asia Mostly offered by multinationals. Offered only to a privileged few. China Highly regulated. Offered only to key senior managerial people. Hong Kong Used extensively as LTIs (long term incentives) Maximum income tax rate is 15% India Regulated by the Securities & Exchange Board of India.