International Compensation

Compensation is a critical tool to an organization's strategic planning, given its importance to both [Page 906]employees and employers. Research has shown that compensation is a key factor to employee attitudes and behaviors, and can be a determinant in retention of talented employees. Employers have to pay close attention to the compensation program, given the costs that are associated with it. Total compensation, which includes actual pay plus benefits, can be 23 percent or more of a company's revenue. The percentage can vary by industry and geographic location.

Pay decisions can be broken down into two categories: pay structure and individual pay. Pay structures focus on pay level and job structure, whereas individual pay highlights incentives and rewards that are of interest to the employee. Pay level is the average pay (i.e., wages, salaries, and bonuses) of jobs in an organization, and job structure refers to the relative pay of jobs in the organization.

Pay Structure

One of the most popular theories addressing the compensation field is equity theory. Equity theory implies that individuals evaluate whether or not they are being treated fairly by comparing their situation to others. In this scenario, it is common for an employee to compare his/her pay to the pay of other employees, especially those coworkers performing the same duties. Many researchers and practitioners in the field strongly believe that work attitudes and perceptions are based on whether or not an employee believes he/she is being fairly compensated in comparison to the perception of what other employees are being paid. This theory applies to both internal and external structures.

Organizations tend to address these concerns via market pay surveys (external equity) and job evaluations (internal equity). In order to ensure that external equity and internal equity issues are addressed, human resource professionals should consider the following tools when preparing an international compensation package: (1) an international compensation management grading system that is comparable to the domestic grading system; (2) a base salary delivery process that is integrated into the home country's base pay system as well as taking local country laws into consideration; (3) an incentive and reward system that motivates employees worldwide; and (4) a performance management system that rewards employees regardless of their geographic location.

Pay levels are influenced by two factors: product market competition and labor market competition. Product market competition creates a threshold on labor costs and compensation. The threshold can be constrictive when the labor costs are a larger share of total costs and when demand for the product is tied to the price. Labor market competition highlights the fact that the organizations must research and determine what is a competitive salary for positions, especially compared to what competitors are paying for similar positions. In order to compete for talent, many organizations will benchmark against product market and labor market competitions.

Job evaluations are used to measure a position's internal worth. An effective evaluation system is based on compensable factors and the weighing scheme for each factor (based on the factor's importance to the organization). These factors include working conditions, education, experience, and job complexity. Once scores have been assigned to each of these factors, a point factor system is developed.

...