Compensation, in its broadest sense - the perspective that managers must take in the global economy – is at the very heart of every organization’s performance potential. Compensation provides the point at which organizational and individual priorities and goals meet, encouraging the contentment of both parties. It provides the driving force for effectively attracting needed human talent, retaining that talent and encouraging the talent in enduring persistent, enviable and enhanced performance.

While developing the global compensation and benefit composition, HR must deal with many factors that are not present in a domestic environment. In this article, we will discuss about some of those factors that unswervingly impacts global compensation and benefits strategies and general insinuation of those factors on HR professionals.

Factors affecting Global Compensation and Benefits
Developing suitable compensation policies to meet organizational strategies, while efficiently accommodating different types of employment terms and conditions, poses many distinctive challenges for global HR practitioners, such as:

A. Dealing with diverse standards and costs of living and multiple currencies, exchange rates, inflation/deflation rates, tax systems and tax rates.
B. Maintaining the suitable balance between global consistency and local significance.
C. Addressing organizational business changes (expansions, mergers and acquisitions, joint ventures, Greenfield operations and investitures).
D. Complying with local compensation practices, laws and regulations.
E. Accommodating varied employee values and expectations stemming from differences in cultures, languages and communication preferences.

In order to effectively strike a balance among all the above mentioned influences, the HR professional must be aware of the following:

1) Culture: Cultural differences necessitate understanding that the value of compensation and benefits programs is in “the eye of the beholder”. A benefit highly valued in one country may be comparatively worthless in another. Differences are often rooted in subconscious beliefs, attitudes and values.

Compensation and benefits strategy recommendations:
a. Engross local contacts to understand usual and traditional compensation and benefits practices.
b. Circumvent headquarter biases or imitation of HQ country policies and procedures (for example, paying sales commissions in risk-averse cultures or reward and recognition programs that reward individual contributions in cultures that places greater prominence on team or group contributions or prefer private gratitude).

2) Economic factors: Many differences subsist from country to country, in terms of the:
I. Influence of politics and power
II. Distribution of wealth across country’s citizenry
III. Unpredictability of events (i.e., sometimes rapid changes in rates of inflation, currency)

Compensation and benefits strategy recommendations:

a. Conduct a risk analysis of economic factors and their consequences.
b. Recognize that unofficial sources of authority in a community or region and official governmental personnel may have large impact on what is considered acceptable.
c. Make allowances for local inflation/deflation or currency fluctuations.
d. Create contingency plans to mitigate the risks associated with probable changes in economic factors.
e. Contribute to the local area to support educational facilities, internal training, and child care or other local services.

3) Taxation: Tax regulations vary extensively from country to country. Some countries have no income tax, while others have income tax in excess of 50%. Some benefits that are taxable in one country are not taxable in the geographically adjacent country or vice-versa.

Compensation and benefits strategy recommendations:
I. Comprehend the taxation of cash and noncash compensation, benefits and perquisites – what is taxed, at what rates and at what levels.
II. Engage experts in local compensation and benefits laws and practices.
III. Distinguish that a benefit may be undesirable, depending on how it is taxed.

4) Competitive labor market: At a broader level, the compensation and benefits required to magnetize and sustain talent are determined by the aggressive demand for that talent. However, the nature of the competition for talent may differ across countries and regions, depending on factors such as:
I. Type of talent sought
II. Geographic scope of the talent market
III. Industries in which the talent may be found
IV. Mix of remuneration components

Compensation and benefits strategy recommendations:

a. Employ people with similar skills when industry-specific expertise is in short supply or competition is high; retrain or coach the hires on the job.
b. Lead, lag or match the rates of pay in the relative marketplace based on the skills needed, the demand for required talent and the best way to compensate those types of workers.
c. Recommend suitable blend of pay and benefits that will appeal to current or potential employees.

5) Laws and Regulations: Laws and regulations impact the remuneration of employees in many areas, such as:
I. Work hours and compulsory time-off (paid and unpaid)
II. Minimum wage
III. Overtime
IV. Compulsory bonuses
V. Employment at will
VI. Acquired rights

There are remarkable country-to-country variances as well as some regional differences.

Compensation and benefits strategy recommendations:
a. Identify benefits that are government-provided, mandated by the government or chosen by the employee.
b. Recognize the differences and similarities in each market.
c. Involve experts in local compensation and benefits laws and regulations.

6) Standardization versus localization: Characteristically, strategies are standardized in keeping with the organizations’ overall compensation and benefits philosophy. Definite practices tend to be localized to fit the context of country, regional or local conditions.

Compensation and benefits strategy recommendations:
a) Have a long-term program to sustain the organizational compensation philosophy but also mull over local restrictions, tax regimes and culture.

7) Collective bargaining, employee representation and government mandates: Employees in most parts of the world are protected from actions that impact their wages and employment conditions. Unions play a very strong role in many countries and sometimes include provisions for management as well as employees. Work councils also offer worker protection.

Compensation and benefits strategy recommendations:
a. Appreciate the inferences for minimum wages, severance packages and pensions.
b. Meet requirements of a third-party representation.
c. Distinguish related government regulations and mandates and industry-wide collective agreements.

In addition to above listed factors, the organizational approach to global staffing also influences the compensation and benefit strategies. Relation between global orientation of the organization and its impact on global compensation and strategies is discussed here.

1) Ethnocentric: Tight control of international operations; little autonomy; key positions held by headquarters (HQ) personnel.
Impact on compensation and benefit strategy:
I. This may lead to transfer of headquarters total compensation policies with insufficient contemplation of local legal cultural differences.
II. Dictates to local country management may result in superficial conformity but actual rejection of headquarters practices.

2) Regio-centric: Operations managed regionally; communication and coordination high within the region and less between regions.
Impact on compensation and benefit strategy:
I. There is greater potential for uniformity of remuneration approaches within regions.
II. The proximity of countries may lead to the perception that remuneration practices are more similar than they really are.
III. Regional headquarters may suffer blind spots with respect to country differences, leading to ethnocentrism at the regional level.

3) Polycentric: Subsidiary treated as own entity; local personnel manage operations; few promotions to headquarters.
Impact on compensation and benefit strategy:
I. Local cultural and legal compensation norms are more likely to be understood and implemented.
II. Remuneration policies are likely to be steady and incorporated within each subsidiary.
III. Incentives may tend to maximize achievement of local rather than global objectives.

4) Geocentric: Organization seen as single international enterprise; management talent comes from any location; strategic plan global in orientation.
Impact on compensation and benefit strategy:
I. Local compensation strategies are more likely to be consistent with global policies.
II. A desire for too much global consistency can lead to the imposition of inappropriate policies at the local country level.
III. The development of consistent and equitable remuneration policies among global managers may be challenging as top-level managers move from one country to another.

Conclusion

Compensation, including the overall system of rewards – formal and informal – provides the driving force for effectively attracting, retaining, and encouraging human talent at home and abroad. Important and fundamental practices for managing compensation on a global scale include managing global compensation strategically, considering performance-based pay where appropriate, anticipating the influence of local culture, using a total rewards system perspective, and addressing the duality challenge of global integration and localization.

We hope that the information given in this article will be of use to Compensation and Benefits Specialists in particular and HR Professionals in general.