Compensation strategy in transnational corporations

Larry Phillips
Indiana University South Bend, South Bend, Indiana, USA
Mark A. Fox
Indiana University South Bend, South Bend, Indiana, USA

Keywords Transnational corporations can be thought of

Transnationals, Compensation, Introduction as a particular case of the multinational
Globalization, Expatriates
Michael Porter in his influential book, corporation (MNC). The defining
Abstract Competition in Global Industries, observed characteristic of TNCs is their geocentric
Forces associated with that: orientation (see Table I). Put another way,
globalization have facilitated the Competing internationally is a necessity TNCs have increasingly moved from
development of transnational
rather than a matter of discretion for many international and multi-domestic to global
corporations (TNCs). Such
firms (Porter, 1986, p. 1).
companies have a geocentric and transnational strategies (Jones, 2000,
orientation and attempt to be p. 949). Grant (1998, pp. 356-7) refers to a
More recently, Hax (1989) and Ohmae (1989)
responsive to both national
markets, while simultaneously proposed that success or failure of businesses transnational as:
seeking global coordination. In in the twenty-first century will depend on An integrated network of distributed and
this paper we propose that such effectively competing in world markets. interdependent resources and capabilities
companies need to reconsider the
Accordingly, globalization is increasingly [that allow an organization to] pursue both
traditional balance sheet responsiveness to national markets and
approach to expatriate being adopted as a business mandate.
global coordination simultaneously.
compensation. Accordingly, we The modern meaning of ``globalization''
suggest that transnational implies a global perspective of the particular One area of concern to human resource
corporations need to engage in a
area of study, a perspective that arises from managers is the extent to which HR
paradigm shift from the notion of
expatriate compensation to the increased interdependence of national strategies can meet these needs for
transpatriate compensation. We institutions and national economies. Bradley responsiveness and co-ordination. In this
suggest that such a paradigm shift et al. (1993, p. 3) describe globalization as a context, Jones (2000, p. 945) delineates the
is necessary in light of increasing business concept in this way:
globalization of markets and role of the TNC with regard to employees:
Globalization is an important emerging . . . Because TNCs by definition operate in
operations.
business mandate relevant to virtually all multiple host countries, they have the
businesses. It is an Information Economy, as opportunity to enhance their structural
opposed to an Industrial Economy, business bargaining power versus workers and states,
concept. Modern communications enable and thus reduce the claims by these
businesses to operate in multiple countries stakeholders on their income streams. This
with diverse shapes and forms of
increase in bargaining power is achieved
organization and control. They make it
most simply by placing multiple groups of
possible to send information to any part of an
workers located in different nations in
organization instantaneously, enabling every
competition with each other for the jobs
part to know what every other part ± and the
which the TNC provides, and similarly
organization as a whole ± is doing all the time.
putting states in competition with each other
Moreover, global businesses can link directly
to their customers, suppliers, and partners for the (again) jobs, capital, technology, tax
around the world . . . revenue, etc. that TNC investment is
associated with . . .
Organizational structures have emerged to
For transnational corporations, the use of
meet the demands of globalization. One such
organizational form, the transnational expatriate employees is seen to have strategic
corporation (TNC), has been made possible value, as:
by:
. expatriates are more likely than local
Compression along the dimensions of time, employees to have knowledge of global
space, culture and government policy (Jones, operations and identify with corporate
Management Decision 2000, p. 949). objectives;
41/5 [2003] 465-476
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[ 465 ]
Larry Phillips and Mark A. Fox . expatriates are a means of exerting we suggest that a paradigm shift is needed to
Compensation strategy in strategic control; and develop a globalized transpatriate
transnational corporations . expatriate assignments provide compensation system, based largely on host
Management Decision international expertise to employees country levels and traditions but influenced
41/5 [2003] 465-476
(Kobrin, 1988). by a global market for transnational ± as
opposed to transpatriate ± employees.
In this paper we focus on the issue of
expatriate compensation. This area is
particularly worthy of attention in light of
Bonache and FernaÂdez's (1997, p. 457) Purpose of compensation systems
observation that: and strategies
[T]he aspect of expatriate management that Compensation systems have traditionally
has received the least amount of attention is been designed to attract and retain
compensation. employees and to motivate them to increase
With regard to terminology, expatriates are their effort and output towards the
defined as citizens of the corporation's achievement of organizational goals
headquarter country, but who are working in (Bergmann and Scarpello, 2001).
a foreign country (host country). Third Compensation strategies should facilitate the
country nationals (TCNs) are citizens of a achievement of organizational objectives
country other than the headquarters or and, to be effective, must be in alignment
host country, and local nationals are citizens with the strategic plan and be cost-effective
of the host country. in terms of input/output ratio; that is ±
Next, we discuss the current expatriate within a firm's ability to pay ± increases in
compensation system, along with a total compensation levels should be
consideration of the weaknesses of the correlated with some measure of
traditional ``balance sheet'' approach to organizational goal achievement whether it
expatriate compensation. We then consider be increased productivity, profitability,
alternative strategies that we contend are employee retention or any other
increasingly necessary to fit the culture and organizational strategic objective. In an
goals of transnational corporations. Hence, environment of increasing global

Table I
Headquarter orientation toward subsidiaries
Aspects of the enterprise Ethnocentric Polycentric Regiocentric Geocentric
Complexity of organization Complex in home country; Varied and independent Highly interdependent on a Increasingly complex and
simple in subsidiaries regional basis highly interdependent on a
worldwide basis
Authority: decision-making High in headquarters Relatively low in High regional headquarters Collaboration of
headquarters and/or high collaboration headquarters and
among subsidiaries subsidiaries around the
world
Rewards and punishment: High in headquarters; low Wide variation: can be Rewards for contribution Rewards to international
incentives in subsidiaries high or low rewards for to regional objectives and local executives for
subsidiary performance reaching local and
worldwide objectives
Communication: High volume of orders, Little to and from Little to and from Both ways and among
information flow commands, advice to headquarters; little among corporate headquarters, subsidiaries around the
subsidiaries subsidiaries but may be high to and world
from regional headquarters
and among countries
Geographical identification Nationality of owner Nationality of host country Regional company Truly worldwide company,
but identifying with
national interests
Perpetuation (recruiting, People of home country People of local nationality Regional people developed Best people everywhere in
staffing, development) developed for key developed for key for key positions anywhere the world developed for
positions everywhere in positions in their own in the region key positions everywhere
the world country in the world
Source: Welch (1994, p. 53); originally adapted from Heenan and Perlmutter (1979)

[ 466 ]
Larry Phillips and Mark A. Fox competition the success of global multinational is headquartered (a
Compensation strategy in corporations is influenced by the quality of headquarters based balance sheet) or may be
transnational corporations linked to what the employee would make in
their international employees. Compensation
Management Decision systems that attract, retain and motivate his/her home country (home country based
41/5 [2003] 465-476
outstanding individuals into foreign balance sheet). Some corporations use a
assignments can have a significant impact on combination of strategies to compensate
the achievement of strategic goals. expatriates and third country nationals,
giving the highest salary by comparison of
two or more approaches; e.g. the highest of
Current expatriate compensation the headquarters, home country, or host
strategy country, balance sheet approaches.
Regardless of which approach is used,
The practice of compensating overseas
adjustments are normally added to the basic
employees differently from domestic
salary to keep the person ``whole'' in terms of
employees has been commonplace
purchasing power and after tax income and
throughout history. For example, John
to compensate for the perceived hardship of
Adams complained about the high cost of
an overseas assignment. Typical adjustments
living in London during his assignment as
to basic salary include:
US ambassador in 1785 (Lay, 1925). Financial . Assignment premium or incentive. An
allowances for overseas employees of the US amount, typically a percentage of salary,
government have been granted since 1792 that is paid to the expatriate to
(Reynolds, 1997). Also, the Balfour Report compensate for the inconvenience
was prepared for the League of Nations in associated with global assignments and as
1920 to discuss the issue of compensation of an incentive to accept those assignments.
overseas employees. A follow-up commission, In extreme cases associated with
chaired by Noblemaire, developed the particularly arduous or dangerous
Noblemaire Principle in 1921. This principle assignments, the premium may be as high
subsequently became the compensation as 50 percent of salary (Hodgetts and
strategy used by the United Nations and links Luthans, 1993). There are several
compensation to that of the highest paid justifications for paying such an
national civil service system; first Great incentive, the most obvious of which is to
Britain and later the USA (Reymond, 1972). In attract individuals to accept assignments
more recent times, the commonly used in dangerous or arduous environments. In
``balance sheet'' approach (Solomon, 1995; addition, the payment compensates
Gould, 1999; Wilson, 2000) of businesses to individuals for the inconvenience of
expatriate compensation has been largely living abroad, not being readily accessible
modeled upon historical efforts by the US to relatives or friends and the inability to
State Department to compensate employees engage in preferred activities and attend
in overseas locales (Reynolds, 1997). A events that one is interested in, e.g.
balance sheet approach requires increases in sporting or cultural events. Historically,
compensation on one side of the ledger to premium payments compensated for what
compensate for the increased costs and was seen as a high-risk career move. As
inconvenience of the overseas assignment on Mervosh (1997, p. 14) observes, `` . . . in the
the other side of the ledger. The strategic goal 1950s and 1960s when going overseas was
of the balance sheet approach is to attract, considered, and often actually a high-risk
retain and motivate employees to accept hardship assignment. Shipping off to
assignments anywhere in the world by faraway places, even if they were exciting,
making these assignments equally attractive livable places such as Paris or London,
in terms of extrinsic and intrinsic rewards. takes employees out of the home-office
The starting point for compensation is power loop and can jeopardize career
typically a dollar amount representing the development''. In contrast, overseas
basic salary that an expatriate would be paid assignments in today's global business
in the ``home'' country for his/her position environment tend to boost career
(Reynolds, 1997). If compensation levels are development and be viewed as an
significantly higher in the country of essential element of career development
assignment, basic salary may be set using the (Mervosh, 1997). Accordingly, many
host country compensation practices (host companies are reducing the value of this
country based balance sheet). The basic benefit ± which is typically 15 per cent of
salary of third country nationals working for salary ± or are paying it in a lump sum,
multinational corporations is also often part at the beginning of the assignment
linked to the appropriate compensation and the remainder upon successful
schedule in the country where the completion.
[ 467 ]
Larry Phillips and Mark A. Fox . Cost of living allowance (goods and continues to deduct monies for taxes from
Compensation strategy in services). The purpose of this allowance is salary. This amount is often referred to as
transnational corporations
to compensate the expatriate for the a ``hypothetical tax'' and is used to
Management Decision differential cost of a (typically purchased) approximate the expatriate's tax burden
41/5 [2003] 465-476
market bundle of goods. This would had the international move not occurred
normally include food, clothing, (Gould, 1999; Kates and Spielman, 1995;
entertainment/recreation, medical/dental Wilson, 2000). The employer then pays any
care and other essentials that may take additional taxes attributable to the
many forms such as transportation and overseas assignment. Under tax
car allowances and children's education protection, expatriates are reimbursed for
allowances. Payment amounts for much of their foreign taxes. In certain
this allowance have typically been based circumstances this policy results in a
on the cost of headquarter country financial windfall for the employee
products in the foreign assignment. because, for example, US taxes often are
Hence, it is assumed that the expatriate reduced for citizens working in foreign
and his/her family would not wish to assignments and the expatriate receives
change their buying habits. Today, many allowances over the actual tax costs. In
companies are adjusting the allowance fact, tax protection has been cited as a
downward based on two assumptions. The disincentive for expatriates to move from
first is that expatriates often have friends one foreign assignment to another or back
and relatives purchase these items in to the USA because of the loss of this
their home country and ship them to the financial windfall (Reynolds, 1997).
expatriate's locale. Second, expatriates Because of this anomaly, tax equalization
tend to become more ``efficient shoppers'' is the more likely of the two strategies to
the longer that they are in a particular be employed.
locale and tend to shift from purely home . Long and short-term performance
country brands to comparable local incentives. The purpose of these incentive
brands, which may reduce costs programs is to reward above standard
substantially (Stagnitta, 1999). To reflect performance to facilitate the achievement
this, some companies ± instead of using of organizational objectives both at the
standard cost-of-living indexes ± use an corporate and local level. The success of
``efficient purchaser'' cost-of-living index such systems is predicated on the proper
to reflect, `` . . . how consumers shop if they balancing of performance incentives to
have lived in a location for a while and prevent sub-optimization to the local
know where the bargains are'' (Tilghman, metrics and retaining a corporate
quoted in Mervosh, 1997, p. 18). perspective while still enhancing the
. Housing allowance. The purpose of the performance of the foreign operation.
allowance is to reimburse the expatriate
for the increased cost of housing in the In addition to the allowances accruing
foreign location. Some firms reimburse directly to the expatriate, dual career
the expatriate for the actual cost of the couples, irrespective of marital status,
housing, however, most firms estimate the present additional issues and further
normal cost of housing based on the expenses for the firm. Many firms provide
expatriate's income and deduct that employment, placement assistance, or
amount from the allowance. Using this reimbursement for lost income for the
approach, the expatriate would only ``trailing'' spouse/significant other (Reynolds
receive the allowance if the cost of and Bennett, 1995).
housing was greater at the assignment There are several new practices that are
location. The housing allowance may also becoming more commonplace with respect to
include differentials for the increased cost how firms determine and pay these
of utilities in the foreign location. allowances. Increasingly, companies are
. Tax equalization/tax protection. bundling expatriate allowances together and
Expatriates often are subject to both home paying them as one allowance. One attraction
country and foreign income and social of this approach is that ± as separate
taxes. Under the concept of tax allowances frequently compensate
equalization, expatriates are compensated expatriates more than once for the same
for the difference in taxes between what expense ± companies can save money.
they would have paid in their home Furthermore, bundling more closely
country and what they are paying in represents traditional compensation systems
terms of total taxes, both foreign and in which the employee makes decisions as to
home country based. In practice, using the how his/her compensation is spent,
tax equalization process, the firm depending upon individual needs and wants.
[ 468 ]
Larry Phillips and Mark A. Fox In addition, many firms are electing to pay costs associated with travel and living
Compensation strategy in certain allowances in the form of lump sums, expenses can be considered business
transnational corporations partially upfront and the remainder upon expenses (Mervosh, 1997). In our view this is
Management Decision successful completion of the assignment. not a viable strategy for the transnational
41/5 [2003] 465-476
Another new practice is that some corporation in that it indicates a return to an
companies are focusing on shorter-term ethnocentric approach. Short-term
assignments. National Semiconductor is one assignments in which all living and travel
such organization. A human resource expenses are reimbursed do not encourage
manager at this firm observes that: any sort of enculturation by the assignee and
[W]e have evolved from sending seasoned are likely to be viewed with distrust and envy
people at the vice president or director level by others. Indeed, one could argue that such
for several years or more, which was the assignments do not fall in the category of
focus when I started 16 years ago . . . Now we
expatriate assignments at all but are merely
are sending younger, often technical people of
extended foreign travel. While some short-
assignments or less who see this as a good
career move (quoted in Mervosh, 1997, p. 17). term foreign assignments might be
appropriate for quick technology transfer or
for purposes of project and crisis
management, they do not seem to be in the
Weakness of current expatriate
best long-term interest of a transnational
compensation strategy
corporation in that they do not encourage a
Mervosh (1997, p. 14) proposes that the use of global perspective.
a balance sheet approach may well be Traditionally, expatriates have been
appropriate when companies are making assigned during the initial stages of
initial moves towards involvement in establishing a corporate presence in foreign
international markets ± say, through markets, with the number being reduced
exporting or licensing distributors. However, once the new operation is established and
as companies develop such that they become running relatively smoothly. The number of
multinational: expatriates then is typically reduced to a
The company's business is no longer simply small contingent sufficient to protect the
an extension of the home office. interests of the home corporation and to
One reason for a lack of movement away maintain relatively tight control. This, in
from the traditional balance sheet approach essence, reflects an ethnocentricity, that is
is the bureaucracy associated with TNCs. not justified and is expensive. In most
Many MNCs, in their attempt to globalize, do instances, there is a cadre of highly talented
not take into account local market managers and executives available that could
conditions. With globalization often comes achieve the same results without the high
the view that important company policies costs of expatriate compensation plans.
should also be globalized. As Reynolds (2000, However, reductions in expatriates may
p. 31) observes: also occur for other reasons that are more
This is of course inconsistent with the justifiable; notably the development of
popular if overused mantra of ``think globally, managerial and technical competence among
act locally,'' but nonetheless many have a local nationals (Kobrin, 1988). As Kobrin
mindset of ``if it's not globalized, it's not (1988, p. 65) observes:
strategic.'' And for many, globalized means All things being equal, a local national who
standardized based on headquarters speaks the language, understands the culture
practices. and the political system, and is often a
member of the local elite should be more
The current expatriate compensation
effective than an expatriate alien.
strategy assumes that expatriates will return
to the home country within a relatively short The management of expatriate compensation
period of time and, thus, internal equity must is cumbersome and extremely staff intensive.
be maintained with their domestic peers For those human resource management
(Carmell, 2001). However, this situation no specialists who deal exclusively with
longer exists in many firms. Increasingly international assignments, a
there is an expectation that managers have disproportionate amount of time (often over
international experience and this experience 50 per cent) is devoted to the issue of
is required for younger managers on their compensation. In fact, expatriate
way up as well as for senior executives compensation expertise is likely to be
(Bitten, 2001). While some firms ± such as the the core competency required of these
aforementioned National Semiconductor ± professionals (Reynolds, 1997, 2000). The
use short-term assignments for both younger balance sheet approach requires constant
and senior personnel, this seems to us to be monitoring of living costs in both the home
driven largely by tax considerations as the and host countries, as a change in either will
[ 469 ]
Larry Phillips and Mark A. Fox result in needed changes to the allowances. compensation can become a problem in these
Compensation strategy in In addition, changes in exchange rates, situations.
transnational corporations The balance sheet concept of ``keeping the
particularly in countries with a volatile
Management Decision currency or economy, also must be expatriate whole'' in terms of purchasing
41/5 [2003] 465-476
constantly monitored and may require power is rarely accomplished. The definition
frequent adjustments to compensation in of ``whole'' is subject to interpretation and the
order to ensure consistency in purchasing interpretation invariably differs between the
power and after tax income of the expatriate. two vested interests in the arrangement, the
The current expatriate compensation expatriate and the employer (Oemig, 1999). A
system does not meet the basic purposes for large percentage of expatriates are
which it was designed. It particular, the dissatisfied with their compensation
process described does not facilitate (Harvey, 1993). There are often
attracting, retaining, and motivating the best disagreements between the two parties as to
and the brightest employees into meaning, purpose and amounts of the
international service. Research indicates a various allowances that typically comprise
high rate of failure of expatriate assignments, the total compensation package. If the
early returns to the USA and high expatriate interprets the term ``whole'' to be
resignation rates after repatriation (Harvey, ``the same'', this may be impossible to
1993; Gomez-Mejia et al., 2001). Several achieve. Allowances that place the expatriate
studies indicate high turnover rates ± in a worse condition than they would have
between 20 and 50 per cent ± for expatriates been domestically may cause recruitment
(Black, 1988; Black and Stephens, 1989; problems and result in low morale and
Copeland and Griggs, 1985; Mendenhall et al., motivation for the expatriate employee. On
1987; Tung, 1981; Zeira and Banai, 1985). the other hand, overcompensation in terms of
Another reflection of the specialized and balance sheet allowances adds unnecessary
time-consuming nature of managing cost to the firm's compensation budget and
expatriate compensation is found in the discourages the mobility of those being
increasing trend of outsourcing expatriate overcompensated. Why leave an exorbitant
compensation (see Reynolds, 1997). The cost lifestyle in one foreign location for a lesser
of expatriate turnover is significant, with quality and quantity of life in another
estimates ranging from $55,000 to $1 million location? Also, it is often impossible to
per turnover incident (Copeland and Griggs, duplicate one's living conditions in a foreign
1985; Harvey, 1985; Mendenhall et al., 1987; country. For example, the four-bedroom
Misa and Fabricatore, 1979; Shannonhouse, ranch with a pool and an acre lot in suburbia
1996; Zeira and Banai, 1985). While these would be difficult ± if not impossible and cost
problems are not always related to prohibitive ± to duplicate in Hong Kong, or
compensation, they do indicate a systemic Tokyo or Singapore. A 1999 survey by
problem with respect to expatriate Windham International indicated the cost of
assignments of which compensation is a renting a three-bedroom apartment in a
major component. Tokyo neighborhood, appropriate for the
Current compensation strategies expatriate's position in the firm, could cost
frequently discriminate against third country around $20,000 per month.
nationals and almost always discriminate The balance sheet approach is
against local or host country nationals. An philosophically opposed to the concept of
expatriate strategy of compensation often transnational corporations in that it
differentially compensates equally talented continues a linkage to the home/
and productive employees doing the same job. headquarters country living conditions and
In the event that this differential in pay practices where a global perspective is
becomes known by those receiving lower desired. The balance sheet continues the
compensation, then negative impacts on practice of Americans living as Americans in
motivation and loyalty are almost separate expatriate communities rather than
guaranteed. The magnitude of this problem is living in local communities during foreign
exacerbated by a change in philosophy with duty assignments. In contrast, the successful
respect to the use of expatriates. Historically, management of foreign interests requires an
expatriates have been used to introduce new understanding of the host country's laws,
products into foreign markets and to manage customs and cultures. The current
the start-up operation, maintaining strong compensation practices do not encourage
linkages to the headquarters office. Today, enculturation. A transpatriate should
expatriates frequently work side by side with immerse herself in the culture of the country
host country nationals, often as peers or even of assignment and adjust her living
as subordinates. The strategy of differential standards and practices accordingly.
[ 470 ]
Larry Phillips and Mark A. Fox The allowances often become thought of as . . . welcome the opportunity to experience
Compensation strategy in entitlements rather than benefits associated new cultures and take advantage of learning
transnational corporations with making the expatriate whole in terms of and growth opportunities that could help both
Management Decision domestic counterparts. Thus expatriates the employees and the company
41/5 [2003] 465-476 tremendously over the long term.
often resent the loss of allowances upon
This basic sea change in attitude is largely
return to the USA, considering them part of
driven by the global economy. Companies
salary, resulting in job dissatisfaction and its recognize that building an international work
accompanying negative manifestations. force that views rotational positions and
The expatriate compensation systems still cross-border job change as normal elements
in existence are largely vestiges of the past of professional career development will be in
when overseas assignments were largely a much better position to exploit global
unaccompanied and placed the individual in opportunities. Indeed, as companies become
a location in which difficult living conditions more global in scope, they need more
and potentially dangerous circumstances employees with a true global perspective on
might be encountered. Many overseas their businesses. With operations in more
locations worldwide, companies will be able
assignees are now accompanied by the
to offer a wide range of geographic and job
spouse/significant other and children. Living options to people with a sincere desire to
conditions in most industrialized countries advance their careers (Dwyer, 1999, p. 48).
and many emerging economies are
comparable to those in, for example, many
Western European countries and the USA.
Proposal for alternative strategies
Often times the crime rates and potential
dangers associated with foreign assignments A wealth of anecdotal evidence suggests that
are less than or equal to those domestically. the traditional approach to compensating
Current expatriate compensation plans are expatriate employees may be outdated,
extremely expensive and this shortcoming is expensive, and does not meet the basic
undoubtedly a major flaw. Traditional requirements of an effective compensation
estimates are that expatriate compensation strategy because it often does not facilitate
costs three to five times as much as that of the accomplishment of organizational goals,
their domestic peer making the same salary nor does it attract and retain the best and
(Solomon, 1995; Thuermer, 2000). Reynolds brightest employees (Swaakk, 1995; Stanek,
(1997) reports that costs can rise to 2000). Balance sheet compensation was
compensation in excess of ten times the developed in the 1950s and 1960s when
domestic counterpart. These are just the overseas assignments were more likely to
actual compensation costs and do not include constitute high-risk assignments (Mervosh,
the associated administrative expenses, 1997). What is needed is a paradigm shift
which are also substantial. Furthermore, from the concept of expatriate compensation
using expatriates with high compensation to the concept of transpatriate compensation.
costs may put the firm in a competitive It is our intent to propose an alternative
disadvantage if the competition is using host strategy for those who wish to explore such
country compensation rates (Mervosh, 1997). alternatives.
Finally, human resource management A transpatriate is an employee of a
systems and philosophies have not kept pace corporation who is not stationed in the
with operational systems and philosophies headquarters (home) country of the
(Adler and Bartholomew, 1992). While corporation. A transpatriate may be a citizen
operations may be global and transnational of the home country or of another, including
in character, human resource management the host country. Transpatriates include
systems have not evolved to support current those employees formerly labeled as
operations. There is a lack of alignment expatriates, third country nationals, and may
between the competitive realities of the even include host country nationals. The
marketplace, the need for transnational transpatriate concept is a necessary
leadership and perspective, and the selection, paradigm shift associated with the movement
development, and compensation for to transnational corporations and is in
transpatriate leadership required in the alignment with increasing globalization of
future. markets and operations. A transpatriate is a
Increasingly, transnationals are citizen of the world and accepts foreign
rethinking the philosophies behind global assignments as a normal course of career
assignments. No longer are such assignments development. In reality, transpatriates may
seen as arduous and stressful. Accordingly, spend most of their careers in assignments in
companies are changing their view of global countries other than that of their citizenship
compensation and attempting to cultivate or of the headquarters country (countries) of
``global employees''. These employees: their employer (Hodgetts and Luthans, 1993).
[ 471 ]
Larry Phillips and Mark A. Fox The corporate movement to really nothing different than the traditional
Compensation strategy in transnationalism is a purposeful business domestic paradigm where employees are
transnational corporations strategy being pursued by many firms. often willing to move domestically for the
Management Decision Unfortunately, research indicates that right career opportunity, even though it may
41/5 [2003] 465-476
human resource management strategies are substantially impact on one's standard or
lagging significantly behind the corporate quality of living. The move is justified in
strategic plans (Adler and Bartholomew, terms of overall career success and getting
1992). Human resource management the correct boxes checked. With a switch to a
strategies, which include compensation transpatriate paradigm, the emphasis for the
strategies, must be brought into alignment to employee turns to getting the correct boxes
facilitate this movement towards a checked in a global rather than national
transnational position and the associated environment. For the employer, the
strategic goals. emphasis moves to development of a
The pressures of globalization are competent cadre of highly motivated
increasingly encouraging businesses to adopt professionals. The selection decision point
a global mind-set. In short, globalization now becomes selecting the best person for the
creates both challenges and opportunities for job using a geocentric point of view. This
businesses. TNCs need a geocentric mindset strategy is an expansion of that proposed by
to staffing in order to thrive in a global Anderson (1990) for use in the post cold war
environment. Milkovich and Bloom (1998, era in Europe and reflects to some degree
p. 16) suggest that a global mind-set involves: what has become common practice for
. . . adopting values or attitudes to create a foreign, but not American, firms (Reynolds,
common mental programming for balancing 2000). Anderson (1990) proposed that the
corporate, business unit, and functional creation of the European Community would
priorities on a worldwide scale. require new approaches to expatriate
Compensation systems need to support such compensation for firms both within and
a global mindset: outside the community. He proposed that
What is emerging is that some companies are firms would begin the use of a mix of local,
adopting global compensation and reward TCN and expatriate employees and that
strategies that are aligned with and signal various EU internal and external tax and
their global mind-sets. Rather than only social security totalisation agreements would
reacting to and matching local conditions, effectively create a competitive
companies with a global perspective shift to compensation environment in which the
finding how they can best use compensation
differences in costs among the three
and rewards to compete on a worldwide basis
categories of potential employees would often
(Milkovich and Bloom, 1998, p. 16).
be minimal. Under those conditions, firms
This paradigm shift requires the creation of a would be able to develop an international
new strategy with respect to compensation, compensation strategy for use in the EU and
one that includes both a linkage to a cadre of mobile, highly trained, employees
compensation levels of the host country and would evolve. Anderson envisioned that a
possibly to that of a larger global regional pay plan for the EU would emerge,
transpatriate compensation structure, with a much as we envision a global transpatriate
primary emphasis on the local wage market. compensation plan emerging.
The strategy must be one that cost-effectively As the concept of transpatriate
attracts and retains the best and brightest compensation is implemented, the strategies
into transpatriate careers in order to discussed above coalesce into a single
facilitate the achievement of transnational strategy. Effectively, the compensation based
organizational objectives. Local labor rates on host country rates and the appropriate
might make various positions financially compensation based on a global transpatriate
more or less attractive. For those that are less market rate becomes the same amount. This
attractive, a global transpatriate market rate occurs in an evolutionary way in an iterative
might have to be applied. That rate would be process as the market for transpatriate talent
one that is sufficient to attract the kind of reacts to supply and demand. As foreign duty
candidate that is desirable, including host becomes the norm, increased supply of
country nationals. However, once the qualified employees willing to be posted to
paradigm shift occurs, the use of other than foreign duty will reduce overall
predominantly local labor rates would likely compensation rates to, or near, host country
be substantially diminished. The reason for levels. Not only will the supply of potential
this is the expectation among transpatriates employees increase, but the capabilities of
that a successful career requires mobility those employees will also likely increase as
into multiple positions in multiple locations they gain more experience and truly become
with differential compensation rates. It is a mobile workforce. This is similar to the
[ 472 ]
Larry Phillips and Mark A. Fox strategy discussed by Milkovich and Bloom and staff-intensive decision as opposed to
Compensation strategy in (1998). They, we contend, believe that global multiple calculations for multiple balance
transnational corporations competition will drive compensation sheet allowances. The issue of the definition
Management Decision strategies to deal with a global market for of keeping one ``whole'' is no longer viable
41/5 [2003] 465-476
worker talent, creating the ability to and the continuing controversies and
standardize to some extent compensation arguments surrounding the proper sum for
offerings worldwide. The strategies are each of the allowances are eliminated.
driven by alignment with overall business Compensation decisions under this new
strategies and organizational culture rather paradigm for the corporation become similar
than issues of local culture and practice. to those used domestically except that local
Milkovish and Bloom (1998, p. 13) observe laws, cultural characteristics and
that: compensation practices must be considered.
Business strategies and markets are more For example, the corporation may wish to
appropriate than countries as the unit of reduce total compensation and provide
analysis for globalizing compensation. housing because it is more cost-effective both
The compensation strategy challenge for the corporation and the transpatriate
becomes one of developing compensation from a tax standpoint to do so. The types and
systems that are consistent and facilitate the mix of incentives offered may have to be
achievement of organizational goals yet adjusted based on tax laws or cultural
include considerable flexibility to deal with perspectives as to justice (Graham and
specific issues and initiatives in a global Trevor, 2000). For example, Kates and
environment. Increasingly, international Spielman (1995) provide an excellent
trade and tax agreements will facilitate discussion of the tax implications of
establishment of global compensation compensation in terms of altering the
strategies without the impediments of character, sourcing and timing of
national tax or employment regulations. compensation in the host country while
In addition, this movement to a largely balancing those strategies against the
host country based compensation policy exclusion and credits that may be available
eliminates the traditional expatriate under US Internal Revenue code. While the
compensation issue of perceived inequity in discussion of these strategies is beyond the
relation to local host country or third scope of this article, any transpatriate
country national employees performing the compensation strategy must be flexible
same or similar responsibilities (Dwyer, enough to allow for customization. For
1999). The transpatriate compensation example, it may be beneficial to substitute
strategy creates one pay range for anyone cash bonuses, which can be used for
encumbering the position and eliminates the purchase of stock should the transpatriate
large number of differential allowances wish to do so, for stock options in some
typically provided to other than host country countries if those options are taxed as normal
employees. Because of these allowances, income or it may be more tax beneficial to
expatriates have traditionally been perceived actually provide housing and to reduce
as being overpaid in relation to their host overall compensation by the fair market
country counterparts and often in relation to value thereof.
third country nationals stationed in the host The decision for the transpatriate becomes
country. one of evaluating the compensation
The cumbersome, staff-intensive process of potentially available for the particular
determining the proper allowance amounts position in terms of a total compensation
associated with a balance sheet approach are perspective. Variables in this analysis would
eliminated. Crandall and Phelps (1991) include, but not be limited to, the
discuss the issue of inaccuracy of data upon compensation package, impact of the package
which expatriate and third country national on spendable income, desirability of the job
pay and allowances are based. The in terms of career progression and challenge,
determination of salary becomes much and quality and quantity of life in the foreign
simpler and similar to the domestic process location.
in that the relative worth of the position is Compensation for transpatriates, based on
established and the wage is determined by local wage rates, should also be paid in local
comparison with the appropriate labor currency. Any volatility in the currency or
market. The appropriate market may be economy will be reflected in local salary
local, product, or global, depending upon surveys and would be accounted for.
availability of data and the requirements to One caveat with respect to strategy
benchmark compensation sufficient to formulation is that transpatriate
attract a competitive pool of candidates. In compensation must be a separate and distinct
any event, this becomes a much less difficult system from that used to compensate
[ 473 ]
Larry Phillips and Mark A. Fox non-transpatriate employees. Transpatriates employee, one that embraces a global career,
Compensation strategy in should be subject to a separate set of policies is sensitive to cultural differences and
transnational corporations and rules with respect to compensation possesses a facility with languages.
Management Decision issues and have a separate compensation, Recruitment strategies must make the
41/5 [2003] 465-476
benefit and incentive system. The system transition from an ethnocentric to geocentric
should be centrally administered rather than perspective. Orientation and training and
being controlled by the administrative development strategies must be changed.
function in the country where the While the nature of these changes is beyond
transpatriate is stationed. This is the scope of this article, to propose a sea
particularly important in countries that have change in compensation strategy without at
equal opportunity laws that prohibit least indicating the magnitude or
discrimination based on national origin. In interconnected program impact would be
the USA, for example, transnational inappropriate.
corporations may be able to argue that In addition, such a change in compensation
differential pay for non-US citizens may not philosophy might result in substantial
come under the purview of title VII of the impacts to currently assigned expatriates. As
Civil Rights Act of 1964 because the pay is with any new compensation system
based on citizenship, not national origin. implementation, more covered employees
However, this strategy is not clearly will likely be off scale than on (so-called red
established in the judicial system. Therefore, and green circle rates). However, this is an
a separate compensation system for issue dealt with frequently in compensation
transpatriates, not integrated with other management and traditional strategies apply.
systems, is recommended (Carmell, 2001). In The conversion to a transpatriate system
addition, some disparity in compensation must be gradual and in phases. Those whose
based on country of origin may be allowed in total compensation levels are red circled
countries where there exist Treaties of should be gradually moved into the
Friendship, Commerce, and Navigation (FCN appropriate range, while those who are green
Treaties) or other types or relationships such circled should be brought into the range as
as the European Union. soon as practical.
The final outcome of a transpatriate
compensation strategy becomes a system ± a
global pay scale with grades representing the Implications for further research
relative worth of the position to the firm and
a rather broad wage range around the As we have stated previously, compensation
midpoint to accommodate wide variations in systems must support and facilitate the
host country salary data. While this is not achievement of organizational goals. We
going to occur in the near future, we believe propose that future research can usefully
that this is a realistic future state. The expand upon the ideas contained in this
transpatriate compensation strategy paper by investigating the relationship of a
becomes somewhat similar to the system firm's compensation strategy with respect to
theorized by the ANKH organization for the its overseas employees and certain outcomes.
European community (Anderson, 1990) but A framework for this investigation is
with the wage range based on labor market contained in Figure 1.
survey data rather than on deviations from Such an investigation could center on four
the midpoint based on a leveling of net pay. important linkages between compensation
While the initial wage ranges will be very strategy and organizational goals. The first
broad, the effect should diminish as more and area of interest is that of the impact of the
more countries act collaboratively to reduce compensation strategy on those most directly
restrictions on global trade which would not affected ± employees. Does a paradigm shift
only include removal of tariffs and other from an expatriate to a transpatriate pay
trade restrictions, but also various strategy impact on the organization's ability
agreements on the free movement of labor to retain these types of employees?
and reciprocity agreements with respect Second, does a globalized, largely host
income and social taxes. country based, compensation system impact
The new compensation strategy cannot on compensation costs for employees posted
stand alone and must be in alignment with in foreign countries? Is this impact
allied programs and with the cultural change significant?
inherent in the concept. Obviously, Third, is there a relationship between an
interdependent human resource organization's compensation strategy and the
management programs must change achievement of organizational strategic
accordingly. Recruitment strategies, for goals? Do organizations that pursue a
example, must recruit a new type of transpatriate vice expatriate compensation
[ 474 ]
Larry Phillips and Mark A. Fox strategy report higher levels of goal employees is no longer appropriate and must
Compensation strategy in achievement? be replaced by a globalized transpatriate
transnational corporations Finally, are there differences in compensation system, based largely on host
Management Decision organizational performance (profitability, country levels and traditions but influenced
41/5 [2003] 465-476
ROI, stock performance) that are clearly by a global market for transnational
linked to their compensation strategies and employees. The cumbersome and staff
overall cultural perspective with respect to intensive system of multiple allowances is
employees assigned to foreign posts of duty? substituted for a basic salary plus
performance incentives that reflect the
market value of the position and is sufficient
Summary and conclusion to attract, retain and motivate qualified
transpatriates who can assist in the
It is clear that the current strategic direction achievement of organizational goals.
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