Variables Influencing the Development of International Compensation Strategy

Introduction:

Compensation strategy is considered as the heart of every organisation as it regulates the performance potential of all organisational members. It consists of all monetary and non-monetary rewards which are valued by the workforce in accordance with the contributions made to the international organisations. It is a vast HRM practice which has proven its usefulness in attracting, retaining and motivating the personnel who are very much required by the MNCs. The present study would analyze the factors and variables that are responsible for creating a potential international compensation strategy.

1.0 Variables influencing the development of international compensation strategy:

Numerous factors need to be considered while developing global compensation plans which might not be required to maintain in a domestic environment. As stated by Schuler and Jackson (2007), global HR practitioners are facing few unique challenges while formulating and developing suitable HR policies for meeting organisational strategies. Few challenges are dealing with diversified set rules, economic system, culture, tax systems, inflation and other factors. On the other hand, Schuler and MacMillan (2006) cited that internal and external variable both can influence international compensation strategy in a significant and cumulative way.

 

1.1 Internal Variables influencing the development of international compensation strategy:

1.1.1 Role of Culture:

A particular compensation benefit can be extremely appreciated in one country, while the same cannot be treated with the same degree in another country.As cited by Smith and Bath (2006), mostly the variations are rooted in values, beliefs and attitudes. Few areas across the world have employed command principle interest in the job and income security. In this case, the operating organization needs to engross the local contacts to be comfortable with its traditional compensation and benefit plans.

Tesco has employed risk-averse culture and reward recognition program to reward individual contributions for placing greater prominence on work groups.

1.1.2 Role of Goal Orientation:

Goal orientation is a process which describes the input given by the employee and the compensation package is created accordingly. Most of the UK based manufacturer organizations are prioritizing on equality and paying compensation based on the allocated job role. In this context, Som (2006) cited that UK-based foam manufacturer firm Zotefoam considers quality as the key aspect of HRM in the mission of the firm(www.cipd.co.uk, 2014). Only car service differentiates the executives from other workers as the overall compensation strategy is based on the achieved goal of the individual. However, few organizations have employed profit sharing to make people more satisfied and to attract fresh talents towards the organization. A similar fact can be observed in Tesco, which offers a minimum of 1.5% profit sharing to each staff employed at Tesco.

1.1.3 Role of strategy:

In most of the global organization, the compensations and benefits are getting magnetized to sustain highly skilled talent. Furthermore, sustaining talent is determined by aggressive demand placed on the talent. The compensation strategy varies depending on the area of operation and global regions. Considering the fact, Som (2006)stated that most of the organizations are employing people with similar skills when the competition level is found much higher.

As a part of the MNC competitive strategy, the international human resource management strategy (IHRM) needs to be unique to employ most valuable resources into the systems. In this case, the salary package and other benefits offering become very high to the potential candidates to compete and sustain in a parallel competitive environment.

1.1.4 Role of Workforce Characteristics:

Different compensation approaches are formed depending on the level of trade union involvement within MNCs and labour relationship factors. As stated by Smith and Bath (2006), age, education level, quality, seniority, experiences are the vital parameters depending on which the compensation policy gets altered. ASDA is one of the most leading retail organizations of UK, which pays more to the experienced staff rather than fresher people. Furthermore, the compensation also gets varied according to the knowledge level of the employees also irrespective of the seniority and age (Schuler and Jackson, 2007).

1.2 External variables influencing the development of international compensation strategy:

1.2.1 Role of Economic factors:

Country specific inflation rates normally range from flat to 20% (+). Depending on the theme, salary offering varies from one country to another. It becomes impossible to offer same salary increment in all countries. On the other hand, Som (2006)argued that along with inflation rate several other factors influence the compensation distribution of MNCs. The factors such as wealth distribution pattern across the country and the influence of power politics are treated as a significant factor influencing the compensation strategy.

The same approach is found to be maintained by Tesco. The economy of the UK is much higher than the USA.  Taking the same into consideration, Tesco is offering fresh marketing graduate trainee Pound 30,000 annual whereas, the firm is paying pound 20,000-25,000 annual to the employees of USA (www.cipd.co.uk, 2014).

1.2.2 Laws and regulation:

Laws and regulations make an impact on the compensation of employees in varied areas. These are working hours and compulsory time off (paid/unpaid), minimum wage, compulsory bonuses and acquired rights of employees. Remarkable variance has been observed from one country to another as well as on some regional differences also(Schuler and Jackson, 2007). Most of the MNCs often employ experts in the section to recognize the similarities and differences of each market and to identify the benefits provided by the governments.

1.2.3 Taxation:

While entering into new international markets, the organizations need to deal with multiple compensations and taxation policies in numerous countries. In this case, effective planning and knowledge of taxation become significant to cope up with the situation effectively(Smith and Bath, 2006). As a matter of fact, few countries have no income tax while others have higher income tax up to 50% (+). Depending on the tax structure, the MNCs offer special compensation which can effectively serve the employees as well as the government also.Walmart is also offering higher remuneration to the employees of USA and UK as compared to Asian countries due to the fluctuation of the taxation structure.

1.2.4 Industry type:

As different industry sectors have different norms and a practice, the international compensations vary to a significant degree. Past evidence of global industries suggests that scientific measuring units can be more likely to allocate higher compensation and rewards rather than on the performance of the subsidy. Furthermore, Som (2006)stated that service sector and high technology MNCs have been more likely to pay better compensation than the manufacturing unit in order to incorporate equity based options into the international compensation strategies.

1.2.5 Competitive Labor market:

The compensation and benefits are required to customise in order to sustain highly skilled talent within the global industry. However, Som (2006)stated that the nature of talent is determined by identifying the aggressive demand for talent. Type of industry, the geographic scope of the talent market and mix of remuneration components are the prime factors of influencing the global compensation strategy. In this situation, the employers normally lead or matches the rate of pay in the relative market depending on the expertise needed to deliver the job and compensates workforce accordingly.

1.2.6 Standardization versus Localisation:

Organisational strategies are standardized by maintaining the overall compensation and a benefit philosophy of the firm. However, in the case of international business organizations, regional or local conditions impact much on the compensation structure of the organization. The majority of the MNCs is approaching to pay such a compensation which can be beneficial to both the employer and the employee with long run sustainability.

1.2.7 Collective bargaining, government mandates and employee representation:

In majority part of the world, employees are protected from the actions which could make an impact on the employment conditions. As cited by Schuler and Jackson (2007), trade unions play a significant role in many countries and it can impose special provisions for the management and the employees also. Apart from this, work councils also offer workers protection.

Mostly majority organisations appreciate the inferences on minimum wages along with other benefits and pension scheme. Added to these large retail organisations such as Tesco, Walmart always meets all requirements of third-party representation. Furthermore, distinguishing is done between the government regulations and all mandates along with all industry-wide collective agreements.

1.2.8 Global staffing:

Global staffing influences the compensation and benefit strategies of global companies. Global operations are divided into four segments such as ethnocentric, region-centric, polycentric and geocentric. In the case of ethnocentric approach, total compensation policies are transferred with the insufficient contemplation of local cultural and legal differences (Smith and Bath, 2006). On the other hand, operations are managed regionally in region-centric approach and a uniformity of remuneration approach with respect to regions are maintained in this scenario. Furthermore, in polycentric approach all subsidiaries are treated as an own entity and local legal compensations are understood and implemented accordingly(Schuler and Jackson, 2007). On the other hand, organisations are considered as single international enterprise and the compensation strategies are more likely to be fixed with the global policies.

Summary and conclusion:

Compensation and all kinds of rewards system mainly provide the driving force to attract and retain highly skilled employees at home country as well as in abroad also. Important practices for managing compensation on a larger scale include managing global payout in a strategic way. The overall process needs to be done by considering appropriate performance-based pay, or by anticipating the influence of local culture. Finally, total reward system perspective and duality challenge of global integration and localization need to be considered more to make the compensation strategy sound. This could make the contemporary business organizations successful in sustaining in a globally competitive environment.

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