Designing Compensation Systems

For Expatriates:

Developing an equitable and functional compensation plan that combines balance, consistent motivation and flexibility is extremely challenging in International operations. This is especially true when a company operates in a number of countries, when it has individuals who work in a number of countries or when the sales force is composed of expatriate and local personnel. Fringe benefits play major role in many countries. Those working in high tax countries prefer liberal expense accounts and fringe benefits that are nontaxable instead of direct income subject to high taxes. Fringe benefit costs are high in Europe, ranging from 35 to 60 percent of the salary.

Pay can be a significant factor in making it difficult for a person to be repatriated. Often those returning home realize they have been making considerably more money with a lower cost of living in the overseas market; returning to the home country means a cut in pay and a cut in the standard of living.

Conglomerate operations that include domestic and foreign personnel cause the greatest problems in compensation planning. Expatriates tend to compare their compensation with what they would have received at the home office during the same time, and local personnel and expatriate personnel are likely to compare notes on salary. Although any differences in the compensation level may be easily and logically explained, the group receiving the lower amount almost always feels aggrieved and mistreated.

Short term assignments for expatriates further complicate the compensation issue, particularly when the short term assignments extend into a longer time. In general, short term assignments involve payments of overseas premiums (sometimes called separation allowances if the family does not go along), all excess expenses and allowances for tax differentials. Longer assignments can include home leave benefits or travel allowances for the spouse.

Besides rewarding an individual’s contribution to the firm, a compensation program can be used effectively to recruit, develop, motivate or retain personnel. Most recommendations for developing a compensation program suggest that a program focuses on whichever one of these purposes fits the needs of a particular situation. If all four purposes are targeted, it can result in unwieldy programs that become completely unmanageable. International compensation programs also provide additional payments for hardship locations and special inducements to reluctant personnel to accept overseas employment and to remain in the position.

For a Global Sales force

Compensation plans of American companies vary substantially around the globe reflecting the economic and cultural differences in the diverse markets served. As reflected in Exhibit some experts feel compensation plans in Japan and southern Europe are most different from the standard US approach. Those same experts believe that generally compensation schemes around the world are becoming more similar to the US system with its emphasis on commission based on individual performance . However, the data in Exhibit still reflect the locations of the larger differences.

One company has gone to great lengths to homogenize its worldwide compensation scheme, Beginning in the late 19 cross border team work. IBM rolled out what is perhaps the most global approach to compensating a worldwide sales force. The main features of that plan, which applies to 140,000 sales executives in 165 countries are presented. The plan was developed in response to global complaints from sales representatives that the old plan was confusing and did not provide for work done outside one’s territory and that therefore did not promote cross border team worker. IBM sales incentive managers from North America , Latin America, Asia Pacific, and Europe together with consultants on the design for some nine months . At first glance it may appear that IBM is making the cardinal error of trying to force a plan developed centrally onto sales offices literally spread around the world and across diverse cultures; however the compensation plan still allows substantial latitude for local managers. Compensation managers in each country determine the frequency of incentive payouts and the spilt between base and incentive pay while following a global scheme of performance measures. Thus the system allows for a high incentive components in countries like the United States and high salary components in countries like Japan.