Compensation Strategy in Transnational Corporations

COMPENSATION MANAGEMENTSEMINAR

Compensation Strategy in Transnational Corporations


TNCs: An Overview

TNCs are companies having a geocentric orientation and attempting to be responsive to regional as well as global markets, while simultaneously seeking global coordination.


Employee Profile

Based upon country of origin employees can be of the following types:

• Local nationals: citizens of host country• Expatriates: citizen’s of corporation’s

headquarter country• Third Country Nationals: citizen’s of a

country other than HQ or host country


Compensation System

Purpose : Attract and retain employees and motivate them to increase their efforts to achieve organizational goals

•Assumes a greater significance in case of compensating expatriates


Expatriate Compensation Strategy

Conventionally aimed at compensating for :

1. High risk career move2. Inconvenience of living abroad 3. Inability to access friends, relatives and

preferred activities4. Higher cost of living5. Differences in tax rates across different

countries


Balance Sheet Approach

Guiding Philosophy:Increase in compensation on one side of ledger to compensate for the increased costs and inconvenience of the overseas assignment on the other side of the ledger

Strategic Goal: Attract, retain and motivate employees to

accept assignments anywhere in the world by making these assignments equally attractive in terms of extrinsic and intrinsic rewards



Basic salary can be based upon the salary structures in the country of operations:

1. Host country based: if compensation levels are higher in the host country vis a vis HQ country

2. HQ based: basic salary for Third Country Nationals is usually decided through this approach

3. Home country based : guided by what employee would earn in his home country



Typical adjustments in basic salary:1. Assignment premium/incentive: percent of

salary to compensate for inconvenience associated with global assignments and as incentive to accept them. It could be as high as 50% of salary

2. Cost of living: compensate for differential cost of market bundle of goods

3. Housing allowance: compensate for increased housing costs in foreign location



• Tax equalization/tax protection: compensation for differences in tax rates in home country and foreign location/payment of additional taxes attributable to overseas assignment

• Long and short term performance incentives: reward above standard performances and improve foreign operations


HQ Based Approach As Per ORC Worldwide

Source: ORC Worldwide


Shortfalls in BS Approach

1. Defeats basic philosophy of a Transnational

Corporation2. Ethnocentric approach not allowing enculturation by employees3. Creates perception of inequity by citizens of host country4. Leads to resentment among employees upon removal of allowances on return to HQ country


Shortfalls in BS Approach

5. Cumbersome and staff intensive process6. Requires constant monitoring for changes

in cost of living and exchange rates7. Extremely expensive: expat compensation

may be 5 times of that of a domestic peer


Alternative Strategy:Transpatriate Compensation

• Aimed at developing employees who are world citizens, accepting foreign assignments as normal course of career development

• Transpatriates include employees formerly known as expatriates, TCNs and host country nationals

• Keeps in view the absence of erstwhile factors such as high level of risk associated with foreign assignments

• Envisages global compensation and reward strategies aligned with global mindset of TNCs.


Transpatriate Compensation

• Strategy includes linkages to host country and larger global compensation structure, with primary emphasis on local wage market

• In case of unattractive local rates global rates may be used to attract best global and local talent

• As supply matches with demand overall compensation rates will gradually duplicate host country levels


Advantages of Transpatriate Strategy

• Eliminates feeling of perceived inequity among home country citizens and TCNs in relation to expatriates

• Reduces time spent and number of staff assigned for complex allowance calculations

• Aims at developing employees wiling to take on foreign assignments for the experience gained rather than monetary compensation


Transpatriate Compensation Strategy Framework

Transpatriate Compensation Strategy

Transpatriate RetentionStrategic Goal Achievement

Organizational Performance (ROI,ROS,EPS etc.)

Compensation Costs


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Compensation Strategy in Transnational Corporations