Compensation systems

The success of multinational corporations has been greatly influenced by the management of global compensation and benefits. This is because it involves managing tumultuous and extremely complex local details while ensuring the concurrent establishment and maintenance of a strategic, unified pattern or system of compensation policies, values, and practices (Gomez-Mejia, 1992). Fey and Furu (2008) claim that in order for multinational corporations to successfully manage compensation and benefits, they must be familiar with the tax and employment laws, environments, customs, and employment practices of numerous foreign nations. They also need to understand how currency fluctuations affect employee compensation and benefits. Additionally, it is necessary to have a concise understanding of the necessary allowances in various nations within the context as well as in different countries within the context of the dynamics of social, economic and political conditions.

Systems and Strategies of Accommodating International Compensation and Benefits

Organizations must employ different systems and strategies to accommodate its global compensation and benefits. For instance, in international compensation and benefits the two main systems that are used include: 1) The Market Rate Approach or The Going Rate Approach; and 2) The Build-up Approach or The Balance Sheet Approach. With the first system, there is a linkage between the host country salary structure and the base salary for international expatriates. As such, the information obtained by multinationals from local compensation surveys is used to determine whether expatriates of all nationalities, expatriates of the same nationality or local nationalities will serve as the focal point in terms of compensation benchmarking. For example, an American bank operating in Tokyo has to make a decision on whether its point of reference would be local Japanese salaries, other American competitors in Tokyo or all foreign banks based in Tokyo. With this system, if the location is a country with low pay, there is usual supplementation of base pay by multinationals with additional payments and benefits.

With the second system, keeping expatriates at par with home colleagues is the basic objective, and this is achieved through compensation for the international assignment costs through home-country’s living standard maintenance in addition to financial inducement aimed at making the package attractive. This balance sheet system or approach links the base salary of expatriates to the relevant home country’s salary structure. For example, an international position taken up by a US executive would require the US base-salary level to be used as the basis of his or her compensation package rather than that applied in the host country.

Alternatively, the compensation strategies include: 1) skill-based pay where employee’s skills determine their salary levels; 2) competency-based pay where employee’s characteristics or traits determine salary level; 3) broad-banding where a specific pay category is assigned to jobs a particular category; and 4) variable pay strategy where employee’s salary level is determined by their performance.

The systems and strategies of global compensation and benefits discussed above must be in tandem with principles of compensation, which dictates that they should be equitable, cost-benefit effective, adequate, legal, motivating, as well as be able to provide security (Ferris, 2015). As a result, they should put some ethical, legal and cultural factors into consideration. For instance, the fundamental ethical consideration is to ensure that foreign employees do not suffer material loss as a result of their transfer, and promotion to different grade levels is merited based on performance, which subsequently determine their level of benefits and incentives. Legal considerations must also be considered within the context of labour or employment and taxation laws and regulations (Jensen & Murphy, 1990). This will ensure that employees’ compensation is aligned to the stipulated base pay, allowances, as well as other benefits. Furthermore, cultural considerations must also be taken care of by ensuring that the compensation and benefits strategies and systems are culture sensitive, and do not discriminate employees based on their cultural background in order to avoid resentment and halo effects with the company (Carpenter & Sanders, 2004).

Analysis of Compensation Strategies of McDonald’s in Thailand

An example of a U.S. company that operates in a different country is the McDonald’s Corporation, which is undoubtedly the leading global retailer of food service in the world operating in more than 100 countries and over 36,000 locations (McDonald’s Corporation, 2017). Through its international franchising, McDonald’s has managed to establish its operations in many countries where over 80% of its restaurants globally are owned and operated by local businesspeople independently. However, there are a considerable number of restaurants outside the U.S., which are directly operated by McDonald’s.

Through McDonald’s international compensation strategy, the company has managed to create opportunity, facilitate teamwork, offer training, encourage diversity, and reward achievement (McDonald’s Corporation, 2017). The other country of McDonald’s operations is Thailand, where it was launched in 1985 becoming the 35th country for the company to establish its presence in the world (McDonald McThai, 2017). The initial McDonald’s restaurant in Thailand is located in Amarin Plaza, Bangkok, and as of February 2016, McDonald Thailand had already established 227 restaurants across the country to serve excellent standards in food service (McDonald McThai, 2017). For over 30 years, McDonald’s operations have been expanding in Thailand and through the understanding of the behaviour and culture of its employees and proper compensation and benefits strategy, the company has managed to effectively meet the needs of its Thai customers.

McDonald’s Thailand uses the Market Rate Approach (also referred to as the Going Rate Approach) compensation system, which depends of other American competitors as well as foreign food service retailers in Bangkok as reference point. However, due to the low base pay level in Thailand, the base pay of expatriates is supplemented through additional pay and benefits (McDonald McThai, 2017). On the other hand, McDonald’s Thailand uses the broad-branding strategy of compensation, which assigns all jobs in a particular category to a specific compensation level. However, this strategy is sometimes blended with variable pay strategy through commissions and incentives based on the performance of an employee (McDonald McThai, 2017). These employees need to be compensated differently because the expatriates should not be allowed to suffer material loss as a result of their transfer, and also need a higher compensation for their international role. The compensation and benefits similarities between the two employees’ populations are in terms of vacation, medical, recognition programs, incentive pay, sabbatical program, as well as employees’ and dependents’ life insurance (McDonald McThai, 2017)

The Role of HR Department in the Formulation and Implementation of an International Compensation Strategy

The human resources department plays an imperative role in the formation and implementation of an international compensation strategy, because compensation administration in multi- and trans-national corporations is one of the undeniable key components of International Human Resources Management (Lane, 2001; Le et al, 2013). According to Baker, Jensen & Murphy (1988), employees’ compensation and benefits today contribute about 40-50% of the multinational corporations’ total costs, which necessitates human resources departments to form and implement appropriate compensation and benefits policies in order to achieve optimal profitability for these international corporations. Through the HRM and accounting departments, strategic reporting and monitoring of compensation is achieved at broad-levels as well as with the investors and shareholders for the assessment of the organization’s financial health (Ferris, 2015; Kaufman, 2010).

Le et al. (2013) emphasize that compensation management enables a process, which is effective and efficient to manage the company’s earnings through employees’ rewards in an organization, both financial and non-financial based on their performance towards achieving the organization’s goals and objectives. According to Watson (2005), international compensation strategy is benchmarked by the human resources department as an internal rate of return in terms of non-monetary and monetary rewards or package to employees including perquisites, benefits, base pay as well as short-term and long-term incentives. However, the human resources department also plays a fundamental role in the valuation of these rewards or packages for each employee with regards to their relative contributions to the organization’s overall performance. Consequently, the international compensation strategy formulated and implemented by the human resources department, not only influences organizational culture but also recruitment and selection of employees who are highly competent, as well as improving employees’ motivation and performance levels (Southam & Sapp, 2010).

Conclusion

To sum up, employees’ compensation and benefits through an international compensation strategy, including the overall rewards’ system both formal and informal play a key role in providing the impetus for effective attraction, retention, and encouragement of talented human capital at home and abroad. As observed from the McDonald’s compensation and benefits strategy, it is important to ensure that all factors for both sets of employees are considered to make sure that a fair strategy is formulated and implemented. Important and fundamental practices for compensation management on a global scale include strategic management of international compensation, considering performance-based compensation where appropriate, with an anticipation of local culture’s influence, utilizing a perspective of a total rewards system, as well as addressing the duality challenge of localization and global integration.



References

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