Compensation System For Multinational Corporations Economics Essay

Compensation System For Multinational Corporations Economics EssayGlobal honorarium managers that is, everyone bear on at any level in pay-related decisions increasingly deal with two sectors of focus. They must manage highly labyrinthian and turbulent local details while concurrently building and maintaining a unified, st reckongic configuration of fee policies, practices and values. For multinationals successfully to manage stipend and benefits requires knowledge of employment and levyation law, customs, environment and employment practices of many opposed countries, familiarity with currency fluctuations and the effect of flash on compensation and an understanding of why and when special allowances must be supplied and which allowances be necessary in what countries all within the context of shifting political, economical and affectionate conditions.DIFFERENCE BETWEEN MULTI NATIONAL CORPORATION (MNC)AND TRANS NATIONAL CORPORATION (TNC)The both multinationals corpora tions and transnational corporations operate world(prenominal)ly and their compensation or reward system is as well as similar, and few differences exist in the midst of two, which areMNCs operate in several different countries while transnational implies just across the border as in the US and Canada. Obviously, both operate internationallyA MNC has a centralized headquarters is a corporation with extensive ties international operations in much than one irrelevant rude. Examples are Coke, Pepsi, General Electric, Exxon, Wal-Mart, and Mitsubishi.A transnational company has no head office and moves whatever sales booth of operations it has fluidly between its national offices. It is a MNC that operates worldwide without being identified with a national home base i.e. it is said to operate on a borderless al-Qaeda. Examples are Daewoo, beau ideal Gobain, Sony, Samsung Group, Shell Oil etc.OBJECTIVES OF INTERNATIONAL hireWhen girding international compensation policies, a trusty seeks to satisfy several objectives.The policy should be unvarying with the overall strategy, structure and business needs of the multinational.The policy must work to attract and retain staff in the areas where the multinational has the greatest needs and opportunities. thence the policy must be competitive and recognize factors such as incentive for Foreign Service, tax equalization and reimbursement for reasonable addresss.The policy should facilitate the commute of international employees in the most speak to-effective manner for the firm.The policy must give due consideration to equity and ease of administration.The international employee will as well oblige a number of objectives that need to be achieved from the firms compensation policy. First, the employee will expect the policy to offer financial protection in terms of benefits, accessible security and living costs in the foreign location. Second, the employee will expect a foreign assignment to offer oppo rtunities for financial advancement through income and/or savings. Third, the employee will expect issues such as housing, education of children and recreation to be addressed in the policy.If we contrast the objectives of the multinational and the employee, we see, of course, the potential for many complexities and possible problems, as some of these objectives cannot be maximized on both sides. Firms must rethink the traditional view that local conditions dominate international compensation strategy.COMPENSATION MANAGEMENT OR SYSTEMThe type and amount of compensation necessary to attract technically and culturally qualified international managers and technical professionals to the threesome nationals or clownish categories involved international human resource management activities from which employees are selected whether the people arePCNs (parent demesne nationals)TCNs (third outlandish nationals)HCNs (host country nationals)An expatriate is an employee working in a countr y other than their country of origin.PCNs (Parent Country Nationals)Those personnel who are of the same nationality as the contracting government or personnel from headquartersThey come from the home country of the operation.The policy of using PCNs is commonly employed when one or more of the following situations exist (1) the host country cannot readily supply desired managerial personnel, (2) efficient communication with headquarters is required, and (3) the company adopts a centralized approach to globalization.TCNs (Third Country Nationals)Those personnel of a separate nationality to both the contracting government and the area of operations i.e. whose nation of residence is neither the host country nor the home country.Such an employee normally is recruited from outside the host country and relocated from the point of enlisting to the host country.HCNs (Host Country Nationals)These are Indigs (Indigenous Personnel) / Nationals / Locals those personnel who are indigenous to t he area of operationsWhose basic residence or home is the host nation.Local colleagues of the expatriate, they are valuable socializing agents, sources of social support, assistance, and friendship to expatriates. Expatriates are more likely to adjust when HCNs engage in this behavior.HR managers focus on their strategic objectives to develop a ecumenical compensation plan, in terms of considering base pay, short and considerable-term incentives, benefits and growth opportunities. The objective of this kind of strategy is to insure that both TNC/MNCs long and short-term objectives coexist in the compensation system without overlap, which would duplicate a single pay plan for the same objectives. The purpose of the planning is withal knowing to ensure that the compensation system attracts and retains the desired employees and that it motivates them to do those things that support the business plan.KEY COMPONENTS OF AN INTERNATIONAL COMPENSATIONPROGRAMThe area of international co mpensation is complex primarily because multinationals must cater to three categories of employees PCNs, TCNs and HCNs.Key components of international compensation are as followsCOMPONENTS OF MNCS COMPENSATIONBASIC SALARYALLOWANCESOTHER BENEFITS1. Base paymentIn a domestic context, base salary denotes the amount of cash compensation serving as a benchmark for other compensation elements (such as bonuses and benefits).For expatriates, it is the primary component of a package of allowances, many of which are directly related to base salary (e.g. Foreign Service premium, cost-of-living allowance, housing allowance) and also the basis for in-service benefits and pension contri besidesions. It may be paid in home or local-country currency.The base salary is the foundation block for international compensation whether the employee is a PCN or TCN. Major differences can occur in the employees package depending on whether the base salary is linked to the home country of the PCN or TCN, or w hether an international rate is paid.Foreign Service inducement/hardship premiumParent-country nationals often receive a salary premium as an inducement to accept a foreign assignment or as compensation for any hardship caused by the transfer.The definition of hardship, eligibility for the premium and amount and timing of payment must be addressed. In parts in which hardship is determined, US firms often refer to the US Department of States Hardship Post Differentials Guidelines to determine an appropriate level of payment.Making international comparisons of the cost of living is problematic. These payments are more commonly paid to PCNs than TCNs. Foreign service inducements, if used, are ordinarily made in the form of a percentage of salary, usually 5-40 per cent of base pay. Such payments vary, depending upon the assignment, actual hardship, tax consequences and length of assignment.2. AllowancesIssues concerning allowances can be very challenging to a firm establishing an over all compensation policy, partially because of the various forms of allowances that exist.(a)The cost-of-living allowance (COLA), which typically receives the most attention, involves a payment to compensate for differences in expenditures between the home country and the foreign country (to account for inflation differentials, for example). The COLA may also include payments for housing and utilities, personal income tax or discretionary items.(b)The provision of a housing allowance implies that employees should be entitle to maintain their home-country living standards (or, in some cases, receive accommodation that is equivalent to that provided for similar foreign employees and peers).Other alternatives include company-provided housing, either mandatory or optional, a fixed housing allowance or assessment of a portion of income, out of which actual housing costs are paid. As a firm internationalizes, formal policies become more necessary and efficient.(c)There is also a provision for home leave allowances. Many employers cover the expense of one or more trips back to the home country each year. Firms allowing use of home leave allowances for foreign travel need to be aware that expatriate employees with limited international experience who opt for foreign travel rather than returning home may become more homesick than other expatriates who return home for a reality check with fellow employees and friends.(d)Education allowances for expatriates children are also an integral part of any international compensation policy. Allowances for education can cover items such as tuition, language class tuition, enrolment fees, books and supplies, transportation, room and board and uniforms. PCNs and TCNs usually receive the same treatment concerning educational expenses.(e)Relocation allowances usually cover moving, shipping and storage charges, pro tempore living expenses, subsidies regarding appliance or car purchases (or sales) and down payments or lease-related cha rges. Allowances regarding perquisites (cars, club memberships, servants10 and so on) may also need to be considered (usually for more senior positions, but this varies according to location). These allowances are often contingent upon tax-equalization policies and practices in both the home and the host countries.(f)Spouse assistance to help guard against or offset income lost by an expatriates spouse as a result of relocating abroad. Although some firms may pay an allowance to make up for a spouses lost income, US firms are graduation to focus on providing spouses with employment opportunities abroad, either by offering job-search assistance or employment in the firms foreign office (subject to a work indorse being available).(g)Multinationals generally pay allowances in order to encourage employees to take international assignments and to keep employees whole relative to home standards. In terms of housing, companies usually pay a tax-equalized housing allowance in order to dis courage the purchase of housing and/or to compensate for higher housing costs. This allowance is adjust periodically based on estimates of both local and foreign housing costs.3. BenefitsThe complexity inherent in international benefits often brings more toughies than when dealing with compensation. bonus plans are very difficult to deal with country-to-country, as national practices vary considerably.Transportability of pension plans, medical coverage and social security benefits are very difficult to normalize.Firms need to address many issues when considering benefits, includingWhether or not to maintain expatriates in home-country programs, particularly if the firm does not receive a tax deduction for it.Whether firms have the option of enrolling expatriates in host-country benefit programs and/or making up any difference in coverage.Whether expatriates should receive home-country or host-country social security benefits.In some countries, expatriates cannot opt out of local s ocial security programs. In such circumstances, the firm normally pays for these additional costs.Laws governing private benefit practices differ from country to country, and firm practices also vary. Multinationals have generally done a good job of planning for the retirement needs of their PCN employees, but this is generally less the case for TCNs.TCNs may have little or no home-country social security coverageThey may have spent many years in countries that do not permit currency transfers of accrued benefit paymentsOr they may spend their final year or two of employment in a country where final average salary is in a currency that relates unfavourably to their home-country currency.In addition to the already discussed benefits, multinationals also provide vacations and special leave. include as part of the employees regular vacation, annual home leave usually provides airfares for families to return to their home countries. Rest and rehabilitation leave, based on the conditions of the host country, also provides the employees family with free airfares to a more comfortable location near the host country. Emergency provisions are available in case of a cobblers last or illness in the family. Employees in hardship locations often receive additional leave expense payments and rest and rehabilitation periods.ADDITIONAL PAYMENTS AND SERVICES life-style enhancement services Provision for employee family to learn the local language Education training of employee family on local culture, customs and social expectations Counseling services for employee family assistance in finding a home at the foreign work site / school suitable education programmes for children dependents Company car, driver, domestic staff, and child care Use of Fitness facilities / subsidized health care services Assistance in joining local civic, social, professional organizationsAllowances Premiums Foreign Service premium tax equalization allowance Temporary living allowance Curre ncy protection Mobility premium Stopover allowance Completion of assignment bonus Assignment extension service bonus Emergency loan Extended work-week paymentAPPROACHES TO INTERNATIONAL COMPENSATIONThere are two main approaches in the area of international compensation The Going Rate Approach (also referred to as the Market Rate Approach)The Balance winding-clothes Approach (also known as the Build-up Approach).(a)The Going Rate ApproachWith this approach, the base salary for international transfer is linked to the salary structure in the host country. The multinational usually obtains information from local compensation surveys and must dissolve whether local nationals (HCNs), expatriates of the same nationality or expatriates of all nationalities will be the reference point in terms of benchmarking. For example, a Japanese bank operating in New York would need to decide whether its reference point would be local US salaries, other Japanese competitors in New York or all foreign banks operating in New York.With the Going Rate Approach, if the location is in a low-pay county, the multinational usually supplements base pay with additional benefits and payments.The Balance Sheet ApproachThe basic objective is to keep the expatriate whole (that is, maintaining relativity to PCN colleagues and compensating for the costs of an international assignment) through maintenance of home-country living standard plus a financial inducement to make the package attractive. The approach links the base salary for PCNs and TCNs to the salary structure of the relevant home country. For example, a US executive taking up an international position would have his or her compensation package built upon the US base-salary level rather than that applicable to the host country.The primeval assumption of this approach is that foreign assignees should not suffer a material loss due to their transfer, and this is accomplished through the utilization of what is generally referred to as t he Balance-sheet Approach.COMPENSATION ISSUES IN INTERNATIONAL SCENARIOIncentives provided to stimulate movement or expatriation to a foreign location/ host countryAllowances for repatriation to home countryAdditional tax burdens placed on employees working in a foreign locationLabour regulations in home and host countryCost-of-living allowances in the host countryHome country and host country currency fluctuationFormal and informal compensation practices unique to the host countryDetermining home country for setting base pay of TCNsMANAGEMENT CHALLENGES CONCERNING INTERNATIONALBENEFITS COMPENSATIONCompensation is one of the most complex areas of international human resourcemanagement yield systems must conform to local laws and customs for employee compensation while also fitting into global MNC policiesManagers face diverse political systems, laws regulations confront different economic climates, economic development, tax policies, diverse culture, customs, the role of labor uni ons, standard of livingIt is also important for MNCs to consider carefully the motivational use of incentives and rewards among the employees drawn from three national or country categoriesThe traditional function of pay to attract, retain and motivate employees has not changed The emphasis has shifted from the attraction and retention functions to the motivation function.TNC/MNCs must ensure that those skilled employees are compensated for achieving goals that make the international business operations succeedHR managers focus on their strategic objectives to develop a comprehensive compensation plan, in terms of considering base pay, short and long-term incentives, benefits and growth opportunitiesThe objective of this kind of strategy is to ensure that both TNC/MNCs long and short-term objectives coexist in the compensation system without overlap, which would duplicate a single pay plan for the same objectives.The purpose of the planning is also designed to ensure that the compe nsation system attracts and retains the desired employees and that it motivates them to do those things that support the business planThe compensation costs of a family with children are shifted to hardship allowance for schooling, childcare, increased residence cost and all fringe benefits associated with supporting a family life cycleIt may be that international compensation administration is more complex than its domestic counterpart, but not radically different in pattern or form.QUESTIONS-Q1. What is international compensation system? Explain its objectives.Q2. Explain the parties involved in international compensation system?Q3. List the components of an international compensation program.Q4. Explain the approaches to international compensation system.Q5. What are different challenges faced by the management concerned to various benefits in international compensation program.