Practices of Pay Differentials by Multinational Corporations - Essay Example

Equity is a fundamental principle of compensation”. How do multinational corporations ensure that pay differentials between international staff reflecting different labour market conditions does not lead to resentment and de-motivation of staff? Introduction From the very beginning of the history of wage labour, equity has been considered as the fundamental principle of compensating labour. However, as globalisation is being strengthened, the phenomenon of the booming of multinational corporations too is becoming more apparent. At this juncture, the issue of international compensation emerges. The international compensation is essentially varied due to a number of reasons. Differential payment is not just a business tactics but a whole some strategy developed by new international human resource management for multinational corporations. Yet, the reality of pay differentials among the international staff does not normally lead to grievances among them. Multinational corporations usually stick to a number of principles of international compensation strategies in order to overcome the ill-effects of pay differentials. The present study is an effort in delineating the mechanism of pay differentials followed by multinational corporations and its effect over the employees from different national environments. The practices of multinational corporations aim to get rid of the resentments and motivational issues pertaining to pay differentials among the international staff would be examined in detail and with theoretical rigour. There is no consensus among the theorists of international compensation strategies over the question of the correct approach to the understanding of pay differentials, related grievances and appropriate compensation strategies (Scullion and Linehan, 2005). Rather than adhering dogmatically to a single approach, the paper tries to synthesise the wisdom each approach in understanding and defining the subject-issue. The paper would primarily give a clear picture of the existing practices of international compensation and multinational common and theoretically validated reactions for addressing the possible and real negative effects of pay differentials among the international staff. The issue of performance management, especially the difficulty of neutral performance appraisal would be examined with special emphasis. Moreover, the paper would be a comprehensive and introductory appraisal of a complex issue which is an important matter of debate in the present business world. Pay Differentials and Compensation Strategies of Multinational Companies International compensation as a concept encompasses the issues and concerns regarding the defining aspects of international compensation, the determining factors of international compensation strategy, reforming compensation along with international transfer within MNCs, and disparities in international compensation (Dowling and Welch, 2004). Performance appraisal is vital in performance management as a core human resource management activity. Revealing the importance of compensation strategy in the practices of multinational companies, Fenwick defines the compensation system of an organisation as “the usual means by which employee rewards are planned and administrated” ( 2004, p. 308). Compensation strategy is increasingly becoming integral to the conduct of organisational strategy as globalisation of market became a reality with an unprecedented pace and intensity (Tayeb, 2005). It is important to not that no distant corner of the world is out of the reach of the twenty first century globalised market. For Fenwick, international compensation is “the provision of monetary and non-monetary rewards, including base salary, benefits, perquisites, long- and short-term incentives, valued by employees in accordance with their relative contributions to MNC performance”( 2004, p. 308). The very structure of organisation itself has become transformed in great deal to get adapted with the challenges of globalised market. The HRM department of an MNC undertakes job evaluation by identifying internal relativities and compensable factors and, thereby, give form to a just and fair compensation strategy. Individuals’ labour and their given work roles, the quality of their skills, and the vitality of their responsibilities are the key factors for any successful formula of compensation strategy (Bamber, et.al, 2004). Moreover, the employment relationship itself is constituted by mutually agreed notion of compensation. Fenwick argues that, on the other hand, “[f]rom the perspective of employees, in particular, compensation is one of the most visible aspects of strategic international human resource management” ( 2004, p. 308). The existing theoretical explorations on international compensation are not adequately addressing the vast scope of the topic. “However, contingency, resource-based and agency theories offer some insight” (Fenwick, 2004, p. 308). The contingency approach, as one of the most rigorous theories of management, asserts that although compensation strategy is formulated with extreme caution, it could be deprived of effectiveness and appropriateness due to the impact of one or another uncontrolled (or uncontrollable) variable (Fenwick, 2004). The implicit rationale of contingency theory is being popular in the theoretically withstanding analyses of the constitutive factors of international compensation strategy. Some of the expatriate compensation models, for instance, global model of international compensation or Balance Sheet approach are more or less adaptations of the postulate of the contingency approach. Such approaches “incorporate the need to consider particular contingencies or situations, such as host country preferences, when devising and implementing international compensation” (Fenwick, 2004, p. 308). Milkovich and Bloom are well-known for formulating the global models of international compensation as full scale theoretical approach or a new paradigm in itself. Balkin and Gomez-Mejia have examined the contingency management theory with relations to international compensation strategies (Perkins and Shortland, 2006). Resource-based theory is extremely distinct as it asserts the primacy of human resources. Human resources are incredible and not easily replicable, therefore, its appropriate acquisition could give the company the necessary competitive advantage where such positions as extremely limited in a global market of high vulnerability. In other words, the possession of enabling human resources is a matter of high longevity and sustainability for an organisation (Fenwick, 2004). Here, the underlying wisdom is that value creation is directly linked to the sophistication of human resources (Briscoe and Schuler, 2004). According to resource-based theory, not only the induction but also the maintenance and retaining of key employees by smart distribution of suitable rewards would only strengthen an MNC as whole and its competitive edge in particular. Agency theory proposes that the headquarters of a company must be considered as principal and the agency to which the delegation of work and responsibilities are done must be considered, on the other hand, as subsidiary. Importantly, the subsidiary agencies are in the positions of decision making within their spheres of influence. It means that MNCs do not have all-encompassing power over matters at all the levels. Therefore, an appropriate international compensation strategy should be designed based on a necessary alignment between the principal and the subsidiaries. Multinational corporations are essentially complex structures thanks to its multicultural and varying geographical characteristics. The relativities that are otherwise so crucial in establishing the equity principal of competition cannot easily be fixed for determining appropriate international compensation packages. Here, the fact that job-based human resource management systems are increasingly paving way for person- based approaches must by given adequate attention (Fenwick, 2004). “In practice, international compensation strategy must facilitate equity and the movement of staff throughout the MNC. Equity is a fundamental principle of compensation. In human resource management terms, the basis of equity is the definition of relativities between work performed by employees, usually determined by the job evaluation activity, and expressed via the different rates of compensation administrated to employees. Extending the equity principle to international compensation has been a significant challenge” (Fenwick, 2004, p. 309).Therefore, it must be understood that the reality of pay differentials is not merely coincidental to the varying cultural and national environments. Furthermore, Fenwick indicates that “the key differences for HRM in MNCs lie in the increased scope, perspective and level of involvement required in employees’ lives as well as the level of risk. For example, the fundamental principles of compensation strategy are to balance the organisation’s capacity to pay with the provision of fair and equitable compensation. In MNCs, achieving this balance in practice is much more complex as it involves multiple international contexts and employee groups” (Fenwick, 2004, p. 309). Therefore, it is somewhat crucial and inevitable for a multinational company to follow the strategy of pay differentials. For any given multinational company, there are both internal and external variable which varyingly influence the making of its international compensation strategy. As of today, the notion of minimum status difference across the organisational hierarchy is becoming prevalent against the non-internationalised old view favouring greater status difference between various levels in a complex organisation (Philips and Fox, 2003). Providing consistency and adaptation to differing international market environments is what distinguishes the emerging global compensation strategies from the nationalised traditional compensation strategies. International compensation strategies and international performance management strategies of a multinational corporation are not mutually excusive. The agency of performance appraisal i.e. the question that who conducts the appraisal and the content of appraisal are issues cannot be easily resolved due to the problems raising from the multicultural context of MNCs (Philips and Fox, 2003). There is no unanimous view that how managers from different cultures could have similar appraisal of equal work. International assignments are quite often non-standardised so that it becomes difficult to measure the performance and decide the compensation strategy in accordance with the performance appraisal (Dowling and Welch, 2004). “Performance criteria which recognize the international context, that are therefore accurate and reliable measures of the international work being performed, and which align with the mission and objectives of the MNC, are essential for individuals and organizations” (Fenwick, 2004, p. 328). Moreover, the nature of international work itself is undergoing tremendous transformation along with the multinationalisation of business. Conclusion International competition does not remain to be a choice for immediate profit raising or rapid organisational growth. Rather, no corporation can survive in today’s globalised world without multinationalising itself. When a corporation goes multinational, it is inevitable that it would no more be able to go along with the principle of equity in compensation. The argument is not that multinational corporations are structurally compelled to develop the notion of pay differentials among the international staff. On the contrary, multinational corporations necessarily become multinationals in order to exploit the varying labour conditions in different countries. Otherwise, a big national conglomerate could just produce more and more commodities and export them into any national market, without being a multinational. Precisely, it is not possible in present globalised world as it curtails the chances of an organisation from using the favourable conditions, especially labour conditions, for its rapid growth. The paper has examined the existing practices of pay differentials by multinational corporations from the standpoint of multiple theories. The emergent understanding is that international compensation strategies developed my multinational corporations are useful in abolishing the possible ill-feelings among the international staff. The paper definitely shows up that pay differentials are increasingly determined in accordance with the provisions of performance management. Bibliography Bamber, G. J., Lansbury, R. D. and Wailes, N. (2004) International and Comparative Employment Relations: Globalisation and the Developed Market Economics, London: Sage Publications  Briscoe, D. R. and Schuler, R. S. (2004) International Human Resource Management: Policy and Practice for the Global Enterprise, London and New York: Routledge  Dowling, P.J. and Welch, D.E. (2004) International Human Resource Management, London: Thomson Learning Fenwick, M. (2004), International Compensation and Performance Management. Ch.12. in Harzing, A.-W. and Van Ruysseveldt, J. (2004) International Human Resource Management, London: Sage Publications Perkins, S.J. and Shortland, S. (2006) Strategic International Human Resource Management, London: Kogan Page  Philips, L. and Fox, M. A. (2003). Compensation Strategy in Transnational Corporations. Journal of Management Decision. Vol. 41. Issue. 5. pp. 465-476. Scullion, H. and Linehan, M (2005) International Human Resource Management. A Critical Text, Basingstoke: Palgrave  Tayeb, M. H. (2005) International Human Resource Management: a Multinational Company, Oxford: Oxford University Press  Read More