Discuss the Challenges to Effective Compensation in Mncs and How Consistency and Equity of Compensation Can Be Achieved. Assignment

Discuss the Challenges to Effective Compensation in Mncs and How Consistency and Equity of Compensation Can Be Achieved. Assignment Words: 2443
[pic] Royal Holloway University of London MSc International Management Discuss the challenges to effective compensation in MNCs and how consistency and equity of compensation can be achieved. Introduction In today’s increasingly competitive environment, businesses are globalizing their firms in order to maximize their profitability and compete effectively. This globalization is exasperated by the availability of cheap labour, raw materials, increased market share and competitive taxation systems.

This has led to an increase in Multinational Corporations (MNCs), which are enterprises that deliver services or mange production in more than one country. With the rise of MNCs, managers have to deal with diverse challenges, some of which they are not prepared to handle. They are discovering that there is no single solution for all of these challenges and that each situation presents unique challenges and parameters that require localized solutions. These localized solutions are particularly needed in markets with different cultures and value systems.

There are multiple cultural issues that mangers of MNCs need to address. Some are visible and include different dress codes, language, behaviour, art, fashion and food. However it is the non-visible cultural aspects that are posing serious challenges to MNCs. These include customers’ customs, beliefs, histories, personalities, family and national values, religion, national culture, gender, corporate culture and job functions. To illustrate the complexities that MNCs face, take the example of a corporation headquartered within the United Kingdom (U.

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K. ) that wants to expand into Singapore. In the United Kingdom this corporation has been exposed to a business environment that is autonomous, self directed, and includes an individualistic culture (independence). However, upon expansion into Singapore, it will face a new working environment that has a collective culture-identity defined by group membership. Additionally, rewards are done by group allegiance which is a very different compensation system (Beaman & Walker 2007).

Its management has several crucial decisions to make that directly influence whether or not the new subsidiary will succeed. Some include whether or not the company should import the culture of the parent company to the subsidiary, adopt entirely the culture of the new subsidiary location or a try to combine both cultures into a new one. Management will also need to teach the new subsidiary the MNCs corporate values and determine how to best incorporate them into operations. A corporation’s ultimate resource is their human capital – the employees (Shuller & Rogovsky 1998).

Thus in order for the company to succeed and ensure their long-term sustainability they must invest in their staff and have good Human Resources (HR) practices in place that address hiring, training, promotions and layoffs. Schuller and Rogovsky (1998) believe that the unique challenges affecting MNCs in different countries are a direct result of the way they ordinarily do business, the laws and interactions of the local people, and the employment practices of both the corporation and the locals.

As such, in order for MNCs to be successful in their new countries, they must anticipate the unique HR challenges they might face and develop ways to respond to them. If these are cautiously anticipated and the organization has a clear understanding of possible cultural-HR practice relationships, this will help the organization succeed. The organization needs to adapt their original HR policies to include localized standards within the new location. Simply put, the organisation should think globally and act locally.

Additionally, management must also determine how to appropriately compensate and incentivize their employees. Compensation is viewed as anything an employee would be willing to receive in lie of services rendered to an employer. (Henderson cited in When in Rome). Management has several staffing decisions to make. They must decide whether or not to staff the new subsidiary entirely locally or transport some of their existing staff to the new location (expatriates). In most situations, management will want to hire expatriates as they already have a good understanding of the business.

Management must then determine how to reward the expatriates and local managers fairly in order to avoid discrimination. They must also determine the demographic dispersion of the new work force, and the appropriate salaries and benefits for the new workers in order to attract top talent and keep their employees motivated. Additionally, management must also determine how to integrate both the work ethics and culture of the new locations’ population in order to avoid conflict and maximize the success of the change effort. Discussion.

In order for companies to grow globally and gain international experience, expatriate assignments are a necessary investment. The challenge that faces HR practitioners in an MNC are to find out the Return on Investment (ROI) (McNulty 2004) of relocating an expatriate. In simple terms, ROI is what is left over after the costs of an asset, in this case the expatriate, have been subtracted from the benefits that they deliver. Their main challenge is that tracking costs directly can be cumbersome, and calculating returns can be imprecise.

Some costs are easy to calculate those involve flights, housing, living allowances, moving fees, physical relocation etc. However a major cost of expatriate relocations which is challenging to determine involve smoothing out differences in benefits and pay between the two countries. These costs vary based on factors such as taxes, exchange rates, and currency fluctuations which are very difficult to determine precisely. Additionally, the returns specifically are difficult to monitor and determine as it is challenging to quantify the return/value of providing expatriates with a cross-cultural and international experience.

An organization must determine the key drivers of its expatriate program, in order for HR to begin to define objectives and assess expatriates return. In order for an expatriate to succeed in their new location, the posting must be planned for strategically. Clear business goals and objectives need to be set and agreed upon right form the onset. When a posting is based on the premise of achieving strategic objectives, then the potential to succeed is enhanced (accruing benefit) and cost reduced (chance of failure).

The method used to identify, select, and train the expatriate for a particular position needs to be very clear. It needs to be embedded with the necessary qualities the MNC is looking for within the open position. It must also teach the expatriate about the country’s values and beliefs in order to properly prepare them for what is to come. When this is done clearly, the cost of the assignment will reduce and benefit will increase. Additionally, different jobs come with different challenges, both in terms of the physical location of the position and the MNCs strategic objectives.

Compensation should thus be structured to take into account these two factors. It should be made enticing so as to attract the best possible talent. When this is achieved, the ROI of the MNC increases. In order to set up an expatriate for success, training and development is crucial. Areas that need serious attention will include cross cultural preparations and language programs. This will constitute a significant cost. However, this will help the expatriate in gaining a better understanding of the new culture which in turn will increase their motivation and performance.

This also results in an increase in ROI for the MNC. When an expatriate knows that the immediate family will get the best chance to settle in a new environment, their output and enthusiasm for the job increases. This is the single most critical point during the decision making process of the expatriate on whether to accept the position or not. MNCs that can determine if the MNCs family will be able to accommodate the change are guaranteed to last longer in the new location which sets the firm up for a higher ROI. An MNC must always be cognisant of the fact that no two environments are the same.

Therefore, when coming up with a compensation system for the local staff it needs to carefully factor local environmental factors. The financial and non-financial component of the compensation, need to be responsive to the local environment. When this aspect is rushed and not well structured, the MNC runs the risk of failure. Mahajan & Benson (2005), remind us of Lincoln Electric which failed miserably in Europe when it translocated its best practice from the United States where they had been extremely successful but failed to account for cultural differences.

When an MNC is able to align its management practises beliefs and desires of the local population (Mahajan & Benson 2005), it is able to develop a best practise for the host culture. By attaining management practices that are locally responsive, the MNC is able to overcome cultural barriers. What this achieves for the MNC is a culturally aligned international pay system. Thus in order to have sustainable competitive advantage, international pay and national cultural must be aligned. This is a very critical aspect of a global firm.

When care is not taken to unite organizational values, and align organisational compensation practises with local cultural values, the organisation is setting itself up for failure. When locals and expatriate cannot see eye to eye on compensation matters, this reduces the firm’s productivity and thus overall profitability. It is clear that for a compensation plan to succeed in a global organisation, it has to take into consideration local environmental factors. When this is achieved, and the corporation has a quality product or service to offer, success is much easier to achieve.

Therefore, a compensation package arrived at after combining the corporation best practise and the locals expectations is useful as it will facilitate a sustained competitive advantage (Barney cited in Mahajan & Benson 2005). Designing a compensation package with the locals in mind adds value to the corporation. It is much more readily acceptable since the employees feels the corporation is cognisant of their uniqueness. This gives rise to loyalty and encourages the employee to work extra hard. They also value the corporation owners and suppliers since they appreciate each of their individual contributions on their continued employment.

They will readily give responses to the corporation giving it a chance to have consumer responsive products, services and solutions. This sets up the corporation for certain success. Culturally aligned international pay is rare. Where as most MNC have the expatriate salary determined and set at the head office, more often than not this is an area that creates friction amongst the locals. Even though this particular pay determination method is best in attracting and retaining the best talent, the friction created in the host country does not justify its choice.

Where on the other hand pay is determined with the local culture in mind, it becomes more agreeable by all parties. When a corporation is able to achieve this it becomes a rare resource. This in turn gives a significant competitive advantage over its competitors. Human Resource practitioners in an MNC must appreciate that best practices do not necessarily mean adopting the status quo in a given locale (Lowe et al 2002). Thus it is in an MNCs best interest to understand what employees want rather than blindly introducing past compensation policies.

Instead of replicating what has worked in other environments, MNCs need to instead focus on what employees in a given culture want. When this is achieved increased employee satisfaction is one of the benefits. As much as compensation decisions are constrained by the laws and public policies in a given country, one should remember that this tool can heavily influences employees’ attitudes and behaviours (Bloom et al 2000). Therefore, getting it right from the onset will remove potential obstacles. Consistency and equity of compensations in an MNCs setting can therefore not be looked at the same as would a local corporation.

The dynamics affecting an MNC are different. Thus a mixed compensation method (Bodolica & Waxin 2007) must be adopted. Expatriates in different locations must be paid differently. The same applies to locals. The MNCs must strive to make sure all compensations adopted in a location, though guided by the organisational culture and values, practises and norms, are locally driven. The locals have to feel valued to embrace the MNC. Conclusion HR practitioners within MNCs need to remember, no two compensations strategies are the same.

No best practice can work in two places. They should instead have guidelines and use this when coming up with compensation strategies in each region individually. This will in return give rise to a feeling of equity and consistency in compensation within the MNC. Even when this is seen as costly by management to determine, it is very beneficially in the long run. HR practitioners going into new territories without taking time to study the unique characteristics of the local population as far as work ethics and compensation is concerned, are planning to fail.

On the other hand, those who are able to strike a balance between MNCs culture and practices and the local culture and practices will have achieved success even before they start. Equity and consistency will have been achieved through taking time to integrate the locals into the organisation. I believe that in the increasingly globalized environment, compensation remains one of the most critical areas within an MNCs operations. When the strategy is approached correctly, the benefit and learning potential is tremendous.

When an MNC can be able to achieve culturally aligned international pay (best practise), it can rest assured it has found a rare and sure competitive advantage. References Beaman, K & Walker, A (2007). Market-Driven Questions and Practises in Global Compensation [online]. Available from [Accessed 3 December 2009]. Bloom, M, Milkovich G T, Mitra, A (2000). Towards a Model of International Compensation and Rewards: Learning From how Managers Respond to Variations in Local Host Contexts [online]. Available from [ Accessed 1 December 2009]

Bodolica, V, Waxin, F. M. (2007). The Challenges of Managing International Assignments [online]. Journal of the International Academy for Case Studies, 13 (4) pp. 21-34. Available from [Accessed 3 Dec 2009] Lowe, K B, Milliman, J, Cieri, H D, Dowling P J, (2002). International Compensation Practises: A Ten-Country Comparative Analysis [online]. Available from [Accessed 3 December 2009] Mahajan, A & Benson, P. G. , (2005). International Pay, National Culture and Firm Performance: A Resource-Based Perspective to Sustain Competitive Advantage [online].

Available from [Accessed 3 December 2009] McNulty, Y. , (2004). Expatriate Return of Investment [online]. Available from [Accessed 3 December 2009]. Schuller, R & Rogovsky, N, (1998). Understanding Compensation Practices Variations across Firms: The Impact of National Culture [online]. Journal of International Business Studies [online] Vol. 29. Available from [Accessed 3 December 2009]. When in Rome Pay as the Romans Pay? – Consideration on Transitional Compensation Strategies for Executives [online]. Available from [Accessed 3 December 2009].

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