Global Compensation: Learn the ABCs
For U.S. companies to be able to succeed
abroad, the key factor is the expatriate's compensation package.
With the continual growth of U.S. companies today, expansion abroad, even
through acquisitions, these companies need to evaluate their compensation
packages both abroad and within the United States. With ever
changing cultures, Human Resource Managers need to be able to ensure
fairness, but also maintain cost-effectiveness in today's global
marketplace. Today, with the increase in overseas assignments, costs
will take on more importance. "Compensating expatriates in a
cost-effective way that maximizes performance is one key element to
accomplishing the business mission." Solomon mentions that
effective companies will be able to balance their business objectives with
a compensation package. Within this compensation package, for
example, will be the base salary, taxes, allowance, COLAs, housing and
reimbursable expenses.
Solomon relates to five issues for the
Human Resource Manager to be aware of so as to accomplish a competitive
compensation package. With the ever-changing cultures and growth of
companies, it is of great concern to assure that full analysis of
compensation packages is done without having to penalize the employees or
the company with "cut backs on personnel".
First consideration is that
"compensation policies should support business
objectives". Basics to consider for international compensation
should include: "different methods of calculating payment,
remuneration packages and cost-containment alternatives." Even
though a small proportion, expatriates are an important part of the
staffing efforts of the global organization. If the organization
desires to maintain an effective compensation 
policy,
all of these factors should be considered and they should also support the
objectives of the business itself. Calvin Reynolds, President of New
York-based Industrial Relations Counselors, Inc. states an excellent
thought that needs to be considered: "The most important thing
is to know what you're trying to accomplish." Definitely, if
you do not know what you want to accomplish in regards of mobility and
staffing, then Reynolds' statement "it's impossible to develop a
sound international compensation policy" says it all.
When looking at the international
compensation issue, look at what the business strategy plans
prevail. The question that needs to be answered is why are these
expatriates being sent abroad? What type of revenue will be
benefited from this intention? Is the issue of whether these
individuals will be only abroad for a certain amount of time, or will this
be a permanent transfer (relocation)? Again, the consideration is
the "costs" to the development of the compensation package along
with the actual interlocking of the business strategy. What benefits
will be gained from this plan?
Second consideration is to "use
a variety of methods to calculate compensation:. Definitely the most
common approach used in the United States is 
the
Balance-Sheet approach (also know as the Home-Based approach). The
concept of the balance-sheet approach is to begin with the home-country
salary (basically, where home base is). The balance-sheet approach
is popular due to the ability to incorporate mobility as the employees
move from their home base to host-country operations. Another
positive aspect of this approach is that the individuals should not lose
or gain in their spending power as they are transferred from one location
to another.
Even though the Balance-Sheet approach is
the most popular method to calculate compensation, again,
"costs" enter the equation. Where the "costs"
begin to escalate may be when the individual is being transferred to a
higher-cost country. An example of such given by Reynolds is an
individual going from the United States to Japan, or if reversed, say the
individual is going to a lower-cost country such as South Asia.
Guidelines should be developed for utilizing the Balance-Sheet approach so
as to not remove spending power for the expatriates, yet, to be able to
control overall costs to the organization so as to not destroy profits
over time.
Third consideration is that
"some companies tie compensation to host-country
standards". When a company utilizes this method, it
appropriately is 
called
the destination-based approach. Compensation is calculated based on
the host-country standards. The expatriate has their compensation
tied to the local organization, and by utilizing this method, the
organization maintains a close relationship with the location
organization. The disadvantages to this method are the currency
differentials between countries. What will this entail in terms of
salary of the expatriate for the first year as compared to their equals in
the United States (or vice versa)? There could be the issue of the
first year showing no changes in equality, yet the second year that the
expatriate is retained to continue their transfer, salary comparisons
could show an inequality due to the fluctuating dollar market.
What about the international approach
instead? Discussion within this article brings about an interesting
system with this approach as applied to senior-level management.
"The international approach tries to create an equitable system among
all international employees. It's especially useful for highly
placed executives who will be moving from location to location.
Usually, this approach begins with a common point of reference for
senior-level management who receive equivalent pay and benefits regardless
of country or origin or destination." One question that can be
asked reference this type of approach is -- why would utilizing the
international approach with "senior-level management" be more
suitable for the "costs" issue? Feelings might surface in
that by utilizing this approach for this type of expatriate may show
extensive profits for the individuals, yet, in the long term, become
destructive for the organization itself.
Fourth consideration is that
"housing and taxes constitute the greatest expenditures".
Definitely the most costly expenditure of the compensation package will be
the housing allowance. Even though it is difficult to be able to
recreate, for example, the exact living conditions/style that an
expatriate will have in the United States, consideration and appropriate
planning must go into the housing allowance so as to maintain a comparable
lifestyle and living conditions for the individual. But, this must
also be done within a reasonable limit. Appropriate planning must go
into this part of 
the
compensation package with consideration of the expatriate's status and the
size of their family. Much research will need to be spent in this
area so as to assure that outstanding costs are not entailed, which in
turn will financially reflect back to the organization over time.
Within the research, consideration on whether to totally compensate for
the housing and taxes or implement a percentage to be the responsibility
of the expatriate. Again, if the expatriate is being transferred as
a benefit to the organization, costs along with profits must be calculated
within the research of how much to set the housing allowance budget to.
Fifth and final
consideration brought out in this article is to "pay attention to
cost control in developing policies". Again, "costs"
become an issue. If the organization does not pay attention to the
costs control when developing their international compensation packages,
costs control becomes 
non-existent.
Mentioned in this article, which summarizes the nature of the article is
"in addition to a more consistent application and fairer treatment of
employees, a centralized policy can help contain costs. Centralizing
policies further helps cut costs because international HR practitioners
can look at their compensation packages in a company-wide
context." With this final consideration being the basis of the
development of a sound international compensation package, then the quest
to request employees to accept international assignments as a business,
career and personal opportunity will definitely enhance organizations in
expanding their international quests and employees equally. Even
though the task of developing a sound international compensation package
is a deeply involved project, if time is given to the development, then
the organization has a better opportunity in obtaining their business
objectives.
Charlene Marmer Solomon, "Global
Compensation: Learn the ABCs" Personnel Journal, July
1995, Vol. 74, No. 7, pp. 70-76 (if you have problems getting to the link
to read Solomon's article, you may have to register for member to
Workforce, but, registration is free and you receive a method of receiving
great methods of doing research)
"Global Compensation: Learn the ABCs" Personnel Journal
