Remuneration Policies for an Australian Multinational Corporation - Term Paper Example

Table of Contents Introduction 2. Defining PCN, TCN and HCN Employees 2 3. IHRM Approaches to Staffing 3 3 Ethnocentric approach 3 3.2. Polycentric approach 4 3.3. Geocentric approach 5 4. International Remuneration Systems 5 5. Performance-based Remuneration 8 6. Cost of Living Index 9 7. Recommendations 9 References 11 1. Introduction As more and more organizations are entering international market these days, each company should ensure that it is able to provide itself with the best talent available in the market, reduce employee turnover, and establish effective HR management practices within the limits of provided budget. Furthermore, such practices should follow and enhance corporate mission and vision, as well as support the overall culture of the organization. Since all the aspects of organizational management are to work for the achievement of corporate goals, all the policies are to be aligned with the company’s objectives and work in such a way that, in consolidation and as a result, they bring the organization to the targeted level. All the above mentioned goals can be achieved though a combination of a number of strategies, including various international HR management practices, in our case, being consistently implemented within the organization. Such practices should, first of all, be well determined on the basis of the company’s strategic goals, its mission, vision, and corporate culture, and, secondly, be implemented throughout all the levels and branches of the organization. One of the most important aspects of the organization’s HR practices is, of course, effective and well-designed remuneration policy. A successfully designed remuneration policy with further implementation will: on the basic level – help to define the appropriate pay rate for every position within the company (National Association of Social Housing Organizations, 2005, p. 91); in general – be one of the tools for achieving organizational objectives; internationally – effectively position the company in the world labor market; both at home and abroad – provide the company with opportunities for hiring and keeping the best talent; financially – help the organization to manage its financial resources, and remuneration expenses in particular, in a more structured, organized and appropriate manner (Stellenbosch University, n.d., p. 5); within the corporate development strategy – ensure the company’s competitive advantage through having its employees locked into their careers and, hence, reduced employment costs (Lai Wan, 2010, p. ). 2. Defining PCN, TCN and HCN Employees As stated above, effective remuneration policy is one of the key elements of successful business development. This statement is even more true in relation to international businesses – multinational corporations – the remuneration policy of which is to be far more complex and sophisticated. First of all, it is related to the fact that remuneration policy of each country’s subsidiary should be aligned with local legislation, culture and needs of potential local employees. Secondly, international HR management involves managing three different types of employees: Parent country national employees (PCN) – employees that come form the company’s parent country, but work for foreign subsidiaries. In our case these would be Australian citizens that work in Hong Kong and Malaysia. Host country national employees (HCN) – inhabitants of Hong Kong and Malaysia – carriers of local cultures and values. Third country national employees (TCN) – citizens of a foreign country that work at one of the company’s subsidiaries abroad, and out of the their native country. This can be, for example, a person form Malaysia that works for the Australian company in Hong Kong. A decision to hire a TCN might be based on a potential relative cheapness of such an option (cheaper than hiring a PCN), according to Dowling and Welch (2004, p. 63). Though from the first sight such a classification might seem not crucial for the overall success of the business, it not an uncommon practice to use this division as a basis for forming remuneration and promotion decisions (Treven, 2001, p. 181). Furthermore, it should also be considered that all the three categories of people come from different cultural backgrounds, while, according to Park, Gowan and Hwang (2002), cultural factors are the ones that have the greatest influence of organization’s success abroad. Failure of a subsidiary with effective managerial and financial policies and strategies are, in many cases, the result of problems “with managers having strong subgroup identification as opposed to identifying with the new entity” (Park, Gowan and Hwang, 2002). 3. IHRM Approaches to Staffing Choosing which kind of a manager (PCN, HCN or TCN) is to work at the particular subsidiary depends on the company’s overall approach to staffing. According to Haile (2002, p. 7), there exist three major options: 1. Ethnocentric approach 2. Polycentric approach 3. Geocentric approach 3.1. Ethnocentric approach Ethnocentric approach will lead to the situation when most of the company’s managers in Malaysia and Hong Kong are Australian. On one hand, this will help the organization to establish effective communication channels with the subsidiaries and organize company’s operations abroad. Australian managers are sure to maintain and develop corporate culture standards within the subsidiary enterprises, while ensuring the enterprise’s following the best practices and strategies developed by the parenting organization. However, since in our case this goal has already been achieved, it might be a good option to consider applying a polycentric approach to further organizational development. Furthermore, sending Australian employees to Hong Kong and Malaysia might be more expensive than hiring local managers, especially considering the high cost of living in Hong Kong and low cost of living in Malaysia (Moveforward, 2009). In addition, an excess of PCNs may limit potential growth opportunities for other managers. This, in its turn, will lead to lower motivation (Dowling and Welch, 2004, p. 63). 3.2. Polycentric approach Companies that follow a polycentric approach to staffing try to hire more of local managers – HCNs. Since employees of lower levels are local, it might be more effective if they are managed by local managers. Local managers have an advantage in understanding local culture better, as well as having no language barrier. This will result in their better understanding of the staff and, consequently, improved communication. The disadvantage of this approach, however, might be in HCN’s associating oneself more with the local community instead of the organization. So, additional efforts should, in this case, be made for integrating a local manager into the management process (Keeley, 2001, p. 203). At the same time, it, in many cases, is cheaper to hire an HCN instead of a PCN for a foreign subsidiary. So, relative cheapness and better understanding of local culture are the factors that might influence the company’s decision on the number of HCNs to be hired for working at local divisions. 3.3. Geocentric approach Nevertheless, one of the most recommended approaches is a geocentric one, which involves hiring the best person for the particular position, no matter what his or her origin is. Definition of ‘the best’ in this case should include such factors as cost-effectiveness of the decision, the person’s proficiency and experience, and the person’s possession of skills that are to help the organization in reaching its objectives in the region. In this case the manager might equally be a PCN, an HCN or a TCN. The advantage of this approach is that it allows a company to balance its remuneration expenditures with results expected from potential managers. In any case, whichever approach the company undertakes, its international remuneration policies should satisfy the needs of all the three categories of managers (Fisher, Schoenfeldt and Shaw, 1999). 4. International Remuneration Systems On this matter Festing, Eidems, Royer and Kullak (2006, p. 10) write that “transnational compensation strategies require global integration and local responsiveness”. This means that the remuneration system of the organization should be: Standardized. It should be an easy-to-follow system for calculating an employee’s remuneration. The basic principles of the system should work in all the environments, whether it is a parent or a host country of the corporation, in order to achieve global consistency (ibid). Adequate. The remuneration policy should reflect the local cost of living and ensure that PCNs and TCNs can maintain the level of life they had at their parent countries holding a similar position. Fair. HCNs, TCNs and PCNs should not feel deprived in relation to each other. Though this aspect might be difficult to implement in relation to PCNs and, partially, TCNs, their higher salary might be justified by the fact that they work abroad, away from their homes and families. At the same time, as it was mentioned above, a decision regarding whom to hire – an HCN, a TCN or a PCN – should be based on factors that include cost-effectiveness and value brought to the organization by the particular individual. Taking into account the above criteria, either a headquarters or citizenship salary system can be used for the multinational business. Headquarters salary system, or a balance sheet approach (Atchison, Belcher and Thomsen, 2000) involves paying an employee a basic pay rate and a differential. So, in our case the salary of an employee that works abroad (in Malaysia or Hong Kong) will be based on the salaries of Australian employees. The differential would be an addition to the determining salary that is related to working overseas, or a subtraction based on additional benefits (including lower cost of living) an employee receives working abroad. Citizenship salary system involves paying an employee the same amount one would receive at the same position in the country of origin. However, some adjustments are usually made on the basis of the two countries’ differences (Phatak, Bhagat, Kashlak, 2005, p. 16-19), which include cost of living, cultural peculiarities, legislation, etc. A going rate approach involves linking the salary system to the salary structure of the host country (Bagwe, n.d., p. 24). This is one of the simplest approaches and is especially favored by PCNs and TCNs in cases when salaries in the host countries are higher than those of their native countries. However, with the going rate approach it might be rather difficult to make a PCN or a TCN be willing to work in Malaysia, for instances, where the salaries are lower than in Hong Kong or Australia. Furthermore, the organization has to determine whether it will be using variable, fixed, or combined pay. This decision should be based on the company’s ability to measure employees’ performance (Gomez-Mejia and Welbourne, 1988, p. 174). Though variable salary that is based on performance has more motivational effect, fixed pay for managers should be used if the company’s performance evaluation system does not allow to measure performance adequately. However, as The Financial Express (2005) outlines, fixed salary, though was once a popular approach, shows to be a less effective reward these days. It does not motivate managers well enough. Therefore, the best option would be a combination of the two: a fixed base plus a variable incentive. In addition, the variable part should be based on performance, not on the employee’s age or country of origin. 5. Performance-based Remuneration A performance-based incentive is a variable part of the salary, which is based on individual, group, or organizational performance. One of the major advantaged of a performance-based pay system is that it recognizes and rewards individual efforts of each manager, as well as motivates for effective future performance. In addition, it reflects the level of the job’s complicity and number of manager’s responsibilities (Mishra et al, n.d., p. 10). Though there exists a number of performance related incentive types, the most appropriate to be considered in our case are the following: Payment by result – based on the achievements of an individual or group within a specified time frame. Merit incentives – based on the “general assessment of an employee’s contribution to performance” (Mishra et al, n.d., p. 11). Objectives related incentives – based on the employee’s or group’s success and progress in achieving the previously set goals. Competence based incentive – a reward for manager’s achievements in specific areas, such as decision making, leadership, etc. This type of incentive, however, should be used mostly as a motivational tool, and might not make a percentage of the overall bonus, but act as once-off award for special achievements (Blazing Solutions, 2005, p. 100). In addition, a performance-based incentive system is already known and used in Malaysia (Mishra et al, n.d., p. 17), so it won’t be something new for Malaysian managers. In our case performance-based remuneration should be based on either individual or group performance. Individual effort should be recognized and rewarded in case it is the key to achieving corporate goals. However, when reaching the set goals involves close cooperation of employees and team work, the group effort should be recognized and rewarded as well (Gomez-Mejia and Welbourne, 1988, p. 173). As an option, it is possible to establish a policy that will be distinguishing and rewarding both individual and group contributions. However, in order to implement the described above system the company has to determine a bonus potential (Mullen, 1994). It means that if, for example, a bonus potential is set at 25% and a manager (or a manager with one’s team) successfully accomplishes all the assigned tasks, reaches all the set goals, and meets organizational objectives, then he or she will get a salary plus 25% of the salary in the specified time frame (Festing et al, 2006, p. 20). 6. Cost of Living Index According to Cost of Living Index for 2010, the price plus rent index for the three countries under consideration is as follows: Melbourne, Australia – 71.22 Hong Kong – 64.25 Kuala Lumpur, Malaysia – 26.97 This means that cost of living in Australia is somewhat higher than that in Hong Kong, while the cost of living in Malaysia is 2-3 times lower than that of Australia. 7. Recommendations Since host country based method of defining the basic pay level is not likely to attract PCNs to work in Hong Kong and Malaysia, it is advised that fixed part of PCNs’ base salary is determined according to the balance sheet approach, when the salary of a PCN will not be lower than if he or she would be working in Australia. In this case a PCN will be spending even less than when working in Australia. A host country method may be used for TCNs and HCNs working in Hong Kong. Since in this case their salary won’t be much lower than that of PCNs. However, the above mentioned approaches will not work in Malaysia. Since the living cost there is much lower than in Hong Kong and Australia, it might be a financially good option to determine the fixed part of the salary according to the host country’s rates for HCNs, but with a higher bonus percentage in order to bring HCNs’ salaries closer to those of foreign managers. As for PCNs and TCNs working in Malaysia, their base pay rate should be determined in accordance with the citizenship salary system. This will ensure foreign managers’ satisfaction from working in Malaysia – they will be receiving the same salary that in their home countries, while spending less. Since a variable pay system is a better motivator for employees, this particular system should be implemented at all the headquarters of the organization. If the company’s activities require team work, the incentives of each manager should include a percentage paid for individual contributions and a percentage paid for group achievements. Finally Payment by result, merit, objectives related and competence based incentive types should be applied to all the headquarters of the corporation. References 1. Atchison, T., Belcher, D. and Thomsen, D., 2000. International Remuneration. In Internet Based Benefits & Compensation Administration. ERI Economic Research Institute 2. Bagwe, n.d. Guide To International Human Resource Management. [online] Available at: [Accessed 1 October 2010]. 3. Blazing Solutions, 2005. Remuneration Guide. In Human Resources Manual: Remuneration and Benefits. National Association of Social Housing Organisations. 4. Cost of Living Index for 2010. [online] Available at: [Accessed 1 October 2010]. 5. Dowling, P. and Welch, D., 2004. International Human Resource Management. London. 6. 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[online] Available at: [Accessed 30 September 2010]. 19. Treven, S., 2001. Human resource management in international organizations. Management, 6(201:1-2), pp. 177-189. 20. The Financial Express, 2005. Fixed vs variable pay: the right ratio. [online] Available at: [Accessed 1 October 2010]. Read More