COMPENSATION MANAGEMENTSEMINAR Compensation Strategy in Transnational Corporations

COMPENSATION MANAGEMENTSEMINAR 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.

COMPENSATION MANAGEMENTSEMINAR 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 MANAGEMENTSEMINAR 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

COMPENSATION MANAGEMENTSEMINAR Expatriate Compensation Strategy Conventionally aimed at compensating for : 1.High risk career move 2.Inconvenience of living abroad 3.Inability to access friends, relatives and preferred activities 4.Higher cost of living 5.Differences in tax rates across different countries

COMPENSATION MANAGEMENTSEMINAR 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

COMPENSATION MANAGEMENTSEMINAR Balance Sheet Approach 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

COMPENSATION MANAGEMENTSEMINAR Balance Sheet Approach 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

COMPENSATION MANAGEMENTSEMINAR Balance Sheet Approach 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

COMPENSATION MANAGEMENTSEMINAR HQ Based Approach As Per ORC Worldwide Source: ORC Worldwide

COMPENSATION MANAGEMENTSEMINAR Shortfalls in BS Approach 1. Defeats basic philosophy of a Transnational Corporation 2. Ethnocentric approach not allowing enculturation by employees 3. Creates perception of inequity by citizens of host country 4. Leads to resentment among employees upon removal of allowances on return to HQ country

COMPENSATION MANAGEMENTSEMINAR Shortfalls in BS Approach 5. Cumbersome and staff intensive process 6. Requires constant monitoring for changes in cost of living and exchange rates 7. Extremely expensive: expat compensation may be 5 times of that of a domestic peer

COMPENSATION MANAGEMENTSEMINAR 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.

COMPENSATION MANAGEMENTSEMINAR 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

COMPENSATION MANAGEMENTSEMINAR 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

COMPENSATION MANAGEMENTSEMINAR Transpatriate Compensation Strategy Framework Transpatriate Compensation Strategy Transpatriate Retention Strategic Goal Achievement Organizational Performance (ROI,ROS,EPS etc.) Compensation Costs

COMPENSATION MANAGEMENTSEMINAR Thank You!!!! Questions????