Factors Influencing International Compensation
Recently, the dilemma between sector and cultural predictors of compensation policies has
become a public concern, and is extremely important in the background of internationalization.
Even some well-known cultural traditions at working styles of many countries, examples like the
Industry Wide Bargaining of Germany, the Lifetime Employment of Japan and the Wide-range
Social Safety Net of France, now are facing the threats of being damaged owing to the big
pressures from economic globalization. As a result, multinational employers are facing
unprecedented challenges when choosing a job due to the pressures of economic globalization
and market economy.
The growth of global economy plays a major role in general business, especially in the
areas of human resource management. It has been at the agenda of company leaders to chase
the qualification of global mind-sets by which they used to meet the challenges brought by the
trend of globalization of economy and create more opportunities. Compensation in
international human resource management is one of the aspects for them to come up with to
form the global mind-sets, which is more than complex. When it comes to use some incentives
and rewards to motivate employers from different countries, so-called multinational
employers, the multinational cultures are extremely important to be taken into consideration.
In all, the global mind-set talked earlier can be attained by the proper adoption of
compensation and reward systems. Otherwise, the systems will come to hinder the
development of global mind-set if improper.
Factors Affecting International Compensation Strategy
The understanding of the economic, political and social conditions of the business where
they are is vital to make sound compensation strategy in the competing markets.
Though compensation and reward system is used to motivate employees, but it isn’t just used
to attract and hold talents. It serves as a comparative advantage for companies if used properly.
Thus, the establishment of international compensation and reward system has been at the top
agenda of multinational giants. It becomes a new boom that many multinational giants try to
establish compensation and reward system in a perspective of global mind-sets rather than
local. Global knowledge and information are collected to overcome the limits of local
experience and the result is that the integration of global mind-sets in the system contributes
to the competitive advantage of those brilliant companies.
The main factors affecting international compensation strategy are; (1) social contract (2)
culture (3) trade union (4) ownership and capital markets, and (5) managers’ autonomy.
1. Social Contract
Considered as part of the social contract, the employment relationship is not just an
interaction between an employee and an employer, and it also includes the government, all
managers and all employees. The relationships and expectations of these groups form the
social contract. When thinking about how people get salaries around the world, it is apparent
that different people have different ideas, so they think variously of government, employers
and employees. The understanding of employee compensation management requires
understanding of the social contract in that country. How to change employee compensation
systems–for example, to make them serve better to customers, encourage innovative and
quality service, or control costs–requires changing the expectations of groups to the social
contract.
2. Culture
Culture is an abstract but collective concept, which is not defined as a certain object but
covers more than one object. It is a collection of Material wealth and Spiritual wealth including
religious, customs, education, regulations, laws, economy and even science. Culture also plays
its part in the international compensation system.
People with different cultural backgrounds will view compensation system differently
under the influence of culture. So does the management of the system. Culture is a thing
deeply rooted in the blood of people. People in the same nation tends hold the same or similar
mental programming way to process ideas and information. In other countries, the way may
differ. So is the case of compensation system, the certain culture will inclines to match one
culture of a nation if global mind-sets are not brought in and lead people to manage systems in
a certain way. A simple and direct way to confirm it is to see the different meanings
compensation in different countries.
Culture which forms a system of knowledge, information and beliefs will affect attitudes
and behaviors associated with the work. Culture affects the variables of the established
compensation system. Though equity customs are shared among the employees from many
countries, America and Japan for example, the force of the customs really works differently in
different countries. In all, having the awareness of focusing the influence of culture values on
employees is extremely important for corporate leaders. When dealing with compensation
system, the controlling for context of culture should be paid attention.
3. Trade Unions
Europe keeps highly solidaric and Asia is less heavily unionized. In some countries, team
agreement sets how much the workers can earn even though the workers may not be union
members. In France for example a majority of workers are paid by collective agreements, but
only a few are union members. Social legislation differs among European countries; UK has the
fewest requirements, because it has no minimum salaries, no maximum working hours, and no
common methods for employee participation. Social insurance in Germany and France are the
most generous.
4. Ownership and Capital Markets
Ownership and financing of companies are dramatically different around the world. These
differences are vital to the understanding and managing of international payment. These
patterns of ownership make certain kinds of pay systems have no significance. Employees in
these corporations have various values and expectations. One research indicated that people
who work for local or public corporations like salaries according to one’s performance more;
however, those who work in federal-owned corporations are on the opposite side. So it is
obvious that ownership differences have great effects on types of payment. It is very misleading
to consider that every place is just like home.
5. Managers Autonomy
Managerial autonomy reflects managers set his employees to make decisions by
themselves. There is a relationship between it and the degree of centralization. Government,
trade unions and corporate police are responsible to restrict managerial autonomy.
Compensation decisions made in the domestic corporate offices and exported to subsidies all
over the world may relate to the corporate strategy but discount local economics and social
conditions.
To sum up, international compensation is affected by economic, institutional,
organizational, and individual conditions, globalization really represents that these conditions
are varying– thus international pay system are altering too.
Other Factors
Besides the factors affecting compensation strategy talked about above, there exist some
other important factors worth consideration. Global national policy is an example. Global
national policy concerns many parts of the society, like tax. Taxation burden for the citizens
vary across different countries. And so does welfare policy like retirement plan. The two are
only two small parts of the national policy. National policy relates to the relationships among
employers, employees, government and companies, which can exert influence on the
compensation and reward systems as well. National policy of different countries will vary, so it
will influence the international compensation and reward system. Some examples can be listed
to support it. In German and Japan and in America and England, taxation and some regulation
policies will show differently in the use of stock options. And the taxation will in turn decide the
variable payment of a person. Different tax rates will decide different variable pay schemes.
Besides, bonuses and allowances win popularity among employees in Korea or Japan. The
increase of bonuses and allowances are not directly decided by the performance at work.
However, this is not the case in other places. As we all know, only the base pay rather than
bonuses and allowances can be the base point to be calculated in some welfare schemes like
national health insurance rates. And in America, the income tax doesn’t mean too much to
benefit schemes. In this way, the taxation can function more effective to create employment.
Besides, the complying with national policies is also a problem. When the government
takes some initiatives, the corporate leaders is not easy to deal with even they are given
discretion. They can’t just follow what others do. In many cases, companies can still have the
clear mind to make decision about whether to follow the pervasiveness or to persist in the
traditions. This just depends on the real condition of the company. For example, America once
put forward some creative and innovative compensation schemes like phantom, ESOPs. The
fact is that some companies adopted the initiatives and benefited a lot. And some didn’t, they
just picked out what was proper for their companies. So whether to observe the national
policies is a big choice worth consideration.
Finally, there are social contracts in terms of the national policies. Social contracts are
related to fairness and justice. The other concept is psychological contract. It means the
company can benefit from benefiting employees. That is to say, though the psychological
contract is invisible, the company can use to motivate. It concerns the employee participation
and the emotions of employees. Companies can benefit development by satisfying the inner
needs of employees to increase employee participation. The national policies put forward by
government can show the social contract customs. Some public policies are issued to put limits
to the employment relationship like minimum wage and family leave statutes. However, those
national policies will influence the psychological contract by influencing the expectations
related to the psychological contract.
The compensation awarded to the employee is dependent on the volume of effort exerted,
the nature of job and his skill. Besides, there are several other internal and external factors
affecting the compensation.
I. External Determinants of Compensation:
1. Labour Market Conditions:
The forces of demand and supply of human resources, no doubt, play a role in
compensation decision. Employees with rare skill sets and expertise gained through experience
command higher wage and salary than the ones with ordinary skills abundantly available in the
job market. But the higher supply of human resources for certain jobs may not lead to
reduction of wages beyond a floor level due to Government’s prescription of minimum wage
levels and employee union’s bargaining strength.
Similarly, this factor by itself does not result in lower pay if the vast majority of available
resources are unemployable due to poor skill and low talent. Thus, it is clear that law of
demand and supply applies to labour market only to a limited extent.
2. Economic Conditions:
Organizations having state-of-the-art technology in place, excellent productivity records,
higher operational efficiency, a pool of skilled manpower, etc., can be better pay masters. Thus,
compensation is the consequence of the level of competitiveness .prevailing in a given industry.
3. Prevailing Wage Level:
Most of the organizations fix their pay in keeping with the level for similar jobs in the
industry. They frequently conduct wage survey and accordingly seek to keep their wage level
for different jobs. If a particular firm keeps its pay level higher than those of others in the
industry, its employee cost becomes heavier which may escalate the end cost of the products.
This will affect the competitiveness of the firm. On the other hand, if a firm keeps its pay level
lower than the prevailing rates, it may not recruit the skilled and competent manpower.
4. Government Control:
Government through various legislative enactments such as Minimum Wages Act, 1948,
Payment of Wage Act, 1936, Equal Remuneration Act, 1976, Payment of Bonus Act, 1965,
dealing with Provident Funds, Gratuity, Companies Act, etc., have a bearing on compensation
decisions. Therefore, firms have to decide on salaries and wages in the light of the relevant
Acts.
5. Cost of Living:
Increase in the cost of living, raise the cost of goods and services. It varies from area to
area within a country and from country to country. The changes in compensation are based on
consumer price index which measures the average change in the price of basic necessities like
food, clothing, fuel, medical service, etc., over a period of time. Allowances like Dearness
Allowance. City compensatory allowances are paid to meet the increasing cost of living and
parity among employees posted at different geographies.
6. Union’s Influence:
The collective bargaining strength of the trade unions also influence the wage levels. Trade
unions enjoy an upper hand in certain industries like banking, insurance, transport and other
public utilities. Therefore, wage structure in such industries and in such Union-active regions,
salary and wage need to be fixed and revised in consultation with the unions for ensuring
smooth industrial relation.
7. Globalization:
It has ushered in an era of higher compensation level in many sectors of the economy. The
entry of multinational corporations and big corporates have triggered a massive change in the
compensation structure of companies across sectors. There is a salary boom in sectors like
information technology, hospitality, biotechnology, electronics, financial services and so on.
8. Cross Sector Mobility:
Contemporary companies find it difficult to benchmark the salaries of their staff with
others in the industry thanks to mobility of talent across the sectors. For example, hospitality
sector employees are hired by airlines, BPOs, healthcare companies and telecom companies.
II. Internal Determinants of Compensation:
1. Compensation Policy of the Organization:
Firm’s policy regarding pay i.e., attitude to be an industry leader in pay or desire to pay the
market rate determines its pay structure. The former can attract better talent and achieve
lower cost per unit of labour than the ones that pay competitive pay.
2. Employer’s Affordability:
Those organizations which earn high profit and have a larger market share, a large business
conglomerate and multinational companies can afford to pay higher pay than others. Besides,
company’s ability to pay higher pay is impaired by sector- specific economic recession and
acute competition.
3. Worth of a Job:
Organizations base their pay level on the worth of a job. The wages and salaries tend to be
higher for jobs involving exercise of brain power, responsibility laden jobs, creativity-oriented
jobs, technical jobs.
4. Employee’s Worth:
In some organizations, time rates are granted to all employees irrespective of
performance. In such cases, employees are rewarded for their mere physical presence on the
job rather than for their performance. However many private sector organizations follow
performance-linked pay system. They conduct performance appraisal more often than not
which provides input for determining pay levels. It distinguishes the high-performer from the
low-performer and the non-performer.
Factors Affecting Employee Compensation – 8 Important Factors: Supply and Demand for
Employee Skills, Company’s Business Strategy, Job’s Worth and a Few Other Factors
Working out the compensation policy is a very difficult job for an organisation. Several
factors play an important role.
Some of the important ones are explained as under:
Factor # 1. Supply and Demand for Employee Skills:
Though the commodity approach to labour is not completely correct, it is nevertheless true
that a wage is a price for the services of a human being. The firm desires these services and it
must pay a price that will bring forth the supply, which is controlled by the individual worker or
by a group of workers acting together. The primary practical result of the operation of this law
of supply and demand is the creation of the “going wage rate policy.”
Even though practically it is not possible to draw demand and supply curves for each job in
an organisation, but in general, if anything was to decrease the supply of labour, such as the
restriction of particular labour unions, there will be a tendency to increase the compensation.
If anything works to increase the employers demand for labour, there will be a tendency to
increase the compensation. The reverse of a situation is likely to result in a decrease in
employee compensation.
Factor # 2. Company’s Business Strategy:
The compensation method followed by an organisation depends to a large extent on the
business strategy followed by them, such as an organisation following the aggressive strategy
for rapid growth will maintain higher levels of compensation than their competitors.
As against this, business pursuing a defensive strategy will keep its remuneration levels at
average or below average levels than the ones prevailing in the market.
Factor # 3. Job’s Worth:
An organisation would like to pay their employees in terms of the worth of the job which
they are going to perform for the organisation. The job’s worth can be calculated by conducting
a thorough job evaluation and comparing the job with other jobs in the organisation as well as
with jobs in competitive organisations.
Factor # 4. Labour Unions:
They try to regulate the supply side of the labour. From time to time labour unions put
pressure over the management for providing better work facilities, better wages, or service
conditions for workers. At times they do resort to strike or lockout affecting the supply of
labour to the industry.
So it becomes important for the employers to keep their labour happy and satisfied by
compensating them well so that their union should not pose any problems to them.
Factor # 5. Ability to Pay:
The level of compensation being paid to the employees depends to a large extent on the
paying ability of the organisation. In case the organisation is big and prosperous, its employees
expect a better level of salary and better perks and facilities from the management.
Such organisations generally compensate their employees at higher levels than their
competitors, while in case the firm is marginal and cannot afford to pay competitive rates its
employees will always have a tendency to leave the organisation for better paying jobs.
Factor # 6. Productivity:
The employee’s salary at times is directly related to their level of productivity. Every good
management would try to bring equity between the results and rewards of an employee.
Employee’s productivity results in increasing turnover for the organisation resulting in better
revenues and ultimately an increase in the salary of its employees.
Factor # 7. Cost of Living:
The consumer price index is widely accepted and followed by many employers and labour
organisations for fixing the basic level of employee’s salary. Cost of living adjustment of
compensation does not provide any fundamental solution to the principle of equitable
compensation to employees. It is useful as a stopgap device in times of inflation when labour is
pressed to keep up with the rise in prices.
Factor # 8. Government Regulation:
Government plays a very important role in fixing the basic level of salary for employees.
From time to time government has made various laws to protect the interest of employees at
various levels. It is expected of every organisation to keep the various laws into account while
fixing the compensation for employees so that they should not finally land into any legal
trouble.
Factors Affecting Employee Compensation – Demand & Supply of Labour, Capacity to
Pay, Cost of Living, Productivity of Workers, Trade Unions, Wage Laws & Wage Rates
The compensation to be paid to the different categories of workers depend upon the
following factors:
(i) Demand for and Supply of Labour:
Wage is a price or compensation for the services rendered by a worker. The firm requires
these services, and so it must pay a price that will bring forth the supply which is controlled by
the individual worker or by a group of workers acting together through their unions. The
primary result of the operation of the law of demand and supply is the creation of the “going-
wage rate”.
It is not practicable to draw demand and supply curves for each job in the organisation
even though, theoretically, a separate curve exists for each job. But, in general, if anything
works to decrease the supply of labour such as restriction by a particular labour union, there
will be a tendency to increase the wage.
If anything works to increase the employer’s demand for labour, there will be a tendency
to increase the wage. The reverse of each situation is likely to result in a decrease in employee
wage, provided other factors do not intervene.
(ii) Capacity to Pay:
Employer’s capacity to pay is an important factor affecting wages not only for the
individual firm, but also for the entire industry. This depends upon the financial position and
profitability of the firm. However, the fundamental determinants of the wage rate for the
individual firm emanate from supply and demand of labour.
If the firm is marginal and cannot afford to pay competitive wage rates, its employees will
generally leave it for better paying jobs in other organisations.
(iii) Cost of Living:
Another important factor affecting the wage is the cost of living adjustment of wages. This
tends to vary money wage depending upon the variations in the cost of living index following
rise or fall in the general price level and consumer price index. It is an essential ingredient of
long-term labour contract unless provision is made to reopen the wage clause periodically.
(iv) Productivity of Workers:
To achieve the best results from the worker and to motivate him to increase his efficiency,
wages have to be productivity based. There has been a trend towards gearing wage increase to
productivity increases. Productivity is the key factor in the operations of a company. Higher
wages and lower costs are possible only when productivity increases appreciably.
(v) Trade Unions:
Organised labour is able to ensure better wages than the unorganised one. Higher wages
may have to be paid by the firm to its workers under the pressure of trade unions, If the trade
unions fail in their attempt to secure higher wages and other allowances through collective
bargaining, they resort to strike and other methods whereby the supply of labour is restricted.
This exerts a kind of influence on the employers to concede at least partially the demands
of the labour unions.
(vi) Wage Laws:
To protect the working class from the exploitation of powerful employers, the Government
has enacted several laws. Laws on minimum wages, hours of work, equal pay for equal work,
payment of dearness and other allowances, payment of bonus, etc., have been enacted and
enforced to bring about a measure of fairness in compensating the working class.
Thus, the laws enacted and the labour policies framed by the Government have an
important influence on wages and salaries paid by the employers. Wages and salaries can’t be
fixed below the minimum level prescribed by the Government.
(vii) Prevailing Wage Rates:
Wages in a firm are influenced by the general wage level or the wages paid for similar
occupations in the industry, region and the economy as a whole. External alignment of wages is
essential because if wages paid by a firm are lower than those paid by other firms, the firm will
not be able to attract and retain efficient employees.
For instance, there is a wide difference between the pay packages offered by multinational
and Indian companies. It is because of this difference that the multinational corporations are
able to attract the most talented workforce.
The above factors exercise a kind of general influence on wage rates. In addition, there are
several factors which do affect the individual differences in wage rates.
The most important factors which affect the individual differences in wage rates are:
(i) Worker’s capacity.
(ii) Educational qualifications.
(iii) Work experience.
(iv) Hazards involved in work.
(v) Promotion possibilities.
(vi) Stability of employment.
(vii) Demand for special skills.
(viii) Profits or surplus earned by the organisation.
Factors Affecting Employee Compensation – Internal and External Factor Influencing the
Compensation Package Payable to Employees
There are number of factors influencing the compensation package payable to employees.
They can be categorized into:
1. External factor
2. Internal factor
1. External Factors:
These are demand and supply of labour, cost of living, society, labour unions, legislation,
economy and compensation survey.
(i) Demand and Supply of Labour:
Even in times of high employment, individuals with certain skills or abilities are in demand.
This demand and supply of labour influences wage and salary fixation. Jobs in high demand
frequently will receive premium wages, as in case of skilled labour. However, if supply of labour
exceeds the demand, then employers are willing to pay less. High remuneration to skilled
labour is necessary to attract and retain it. But exploitation of unskilled labour, like, for
instance, paying less wages because it is available in plenty, is unjustifiable. The Minimum
Wages Act, 1948, is precisely meant to prevent this kind of exploitation.
The basic point of this approach is that firm pays its employees the “going rate” for the
type of work they do. Going rate analysis is done by reviewing all job description and then
collecting relevant salary market data through participating in national, regional, and local
salary surveys and by third party survey administrators (generally human resources consulting
firms).
Going rates are those that are paid by different units of an industry in a locality and by
comparable units of the same industry located elsewhere. If the firm offers pay much below the
going rate, it may be unable to attract and retain qualified workers. If it pays much more than
the going rate, it may be unable to charge comparative prices for its product because its labour
costs are too high.
Productivity of labour also influences wage fixation in labour market. Productivity can arise
due to increased effort of the worker, or as a result of the factors beyond the control of the
worker such as improved technology, better management etc. Greater effort of the worker is
rewarded through piece – rate or other forms of incentive payments.
Productivity is the relationship between the input of labour measured in man-hours and its
output in the form of money or physical terms. Productivity linked wages may help utilize
human resources better and help determine fair wages.
(ii) Cost of Living:
The logic for using cost of living as a pay determinant is both simple and important. A pay
increase must be roughly equivalent to the increased cost of living, if a person is to maintain a
precious level of real wages. A rise in the cost of living is sought to be compensated by payment
of dearness allowance, basic pay to remain undisturbed. Some firms even index pay increases
to the inflation rate and sacrifice merit pay to provide across the board increases designed to
offset the results of inflation.
(iii) Society:
Compensation paid to employees often affects pricing of the firms goods or services. For
this reason, consumers may also become interested in compensation decisions. Businesses in a
local labour market are also concerned with the pay practices of new firms locating in their
area. The Supreme Court has been keeping social and ethical considerations in adjusting wage
and salary disputes. It was also considered to keep the company wages in line with other wages
in the community.
(iv) Labour Unions:
The presence or absence of labour organizations often determines the quantum of wages
paid to employees. When union uses comparable pay as a standard in making compensation
demands, the employer needs accurate labour market data. When a union emphasizes cost of
living, it may pressure management into including a cost of living allowance. The employees of
strongly unionized companies too, have no freedom in wage and salary fixation. They are
forced to yield to the pressure of labour representation in determining and revising pay scales.
(v) Legislation:
There are numerous Legislation Acts which affect the compensation system. Equal
employment legislation, including The Civil Rights Act, Family and Medical Leave Act, Payment
of Wages Act, 1948; The Payment of Bonus Act, 1965; Equal Remuneration Act, 1976; Payment
of Gratuity Act, 1972 etc. The Payment of Wages Act seeks to protect workers against
irregularities in payment of wages and unauthorized deductions by the employer.
The Minimum Wages Act enables the Central and State Governments to fix minimum rates
of wages payable to employees in sweated industries. The Equal Remuneration Act provides for
payment of equal remuneration to men and women workers for same or similar work. The
Equal Pay Act, 1963 prohibits an employer from paying an employee of one gender less money
than an employee of the opposite gender, if both employees are performing same nature of
job. (same skill, effort and responsibility).
In addition to legal enactments, there are wage boards, tribunals and fair wages
committees which aim at providing a minimal standard of living to workers. Also there is the
Companies Act, 1956, which checks the managerial remuneration.
(vi) The Economy:
The economy definitely affects financial compensation decisions. For example, a depressed
economy generally increases the labour supply and lowers the market rate. On the other hand,
a booming economy results in greater competition for workers and price of labour is driven
upward.
Since the cost of living is commonly used as pay standard, the economy’s health exerts a
major impact upon pay decisions. Cost of living typically rises as the economy expands.
(vii) Compensation Survey:
A compensation survey strives to obtain data regarding what other firms are paying for
specific jobs within a given labour market. The surveys may be either outsource to a consulting
firm or conducted by the organization itself. In this, market rates remain the most important
standard for determining pay.
Most big organizations provide low, high and average salary for a given position with the
help of compensation survey. It provides information for establishing both direct and indirect
compensation. A firm should take the determinants such as the geographical area of the survey
and the specific firms to contact before conducting a compensation survey.
