Purpose and principles:

Multinational companies recognize that human resources play an important role in developing and sustaining a competitive advantage in today’s highly competitive global business environment. As a result, Multinational companies increasingly use expatriates on short-term and long-term international job assignments for a variety of purposes, such as to acquire and transfer knowledge, to manage a foreign subsidiary, to fill a staffing need, to maintain communication, coordination, and control between subsidiaries and corporate headquarters, and to develop global leadership competence. Given this, successful expatriate assignments are indispensable to Multinational companies for both developmental and functional reasons.

Training:

An expatriate’s success in the host country is largely determined by his or her cross-cultural adjustment to the host country. While immersed in the new culture, expatriates are ‘removed from the comfortable environment of their parental culture and placed in a less familiar culture’ and are susceptible to adjustment problems because of numerous challenges that inhibit their cross-cultural adjustment like the need to speak the foreign language, to cope with culture shock, to understand different laws and customs, and to interact with local nationals. Scholarly research that has been conducted in recent years suggests that expatriates who are not prepared to confront the challenges (e.g., to cope with culture shock) find it difficult to adjust and hence incur, and impose on others, costly implications. For example, expatriates who are unable to adjust are more likely to perform poorly. Poor performance on the assignment has costly implications for expatriates (such as low self-esteem, self-confidence, and loss of prestige among co-workers), for the parent firm (such as lost business opportunities), and for the host company (such as damaged company image). Thus, improving cross-cultural adjustment has been the focus of many international HR interventions. Since cross-cultural adjustment can be facilitated if the expatriate has an awareness of the norms and behaviors that are appropriate in the host country, many Multinational companies offer cross-cultural training to teach their expatriates the host country’s appropriate norms and behaviors. Cross-cultural training is defined as any planned intervention designed to increase the knowledge and skills of expatriates to live and work effectively and achieve general life satisfaction in an unfamiliar host culture. For more than 20 years, CCT has been advocated as a means of facilitating effective cross-cultural interactions and cross-cultural adjustment. There has been a positive trajectory of growth with respect to Multinational companies who are offering Cross cultural training.

The type of global assignment should be taken into consideration when designing CCT programs. There are different types of global assignments – and expatriate practices, such as selection, cross-cultural training, and repatriation will differ depending on the type of global assignment being managed. Based on the performance goals for expatriate assignments, Caligiuri (forthcoming) describes a classification of global assignments into four categories:
1 Technical
2 Functional/tactical
3 Developmental/high potential
4 Strategic/executive

The technical assignment is similar in content to the assignee’s domestic position. Technical assignees are in an organizational setting fairly typical of the setting of the home country. Many of the global assignees on technical assignments describe their work experience as ‘quite similar’ to what they were doing back home. When technical skills do not exist in one geographic region, a global assignment may be necessary to fill a technical need. It is not expected that these global assignees will have significant interactions with the host nationals working at the subsidiary location – and those interactions that inevitably will occur, will not greatly affect the outcome of the assignment. In other words, the person is being sent for his or her technical skills. It is those technical skills that will determine the outcome of the assignment. These assignments include technicians on an oil refinery, systems engineers on continuation client sites, systems analysts interfacing with a computer system, and the like.
The functional/tactical assignment is similar to the technical assignment with one distinct difference – significant interactions with host nationals are necessary in order for the assignment to be deemed successful. As with the technical assignments, functional assignees are sent to fill technical or managerial gaps in host countries. Unlike technical assignees, functional assignees will need to interact with host nationals in order for the assignment to be deemed successful. Given their interaction with host nationals, cross-cultural skills are needed in order for functional assignees to be successful. This type of global assignment is the most common global assignment.
For some MNCs, sending expatriates abroad on a developmental/high potential assignment is consistent with their overall strategic human resource plan. Most organizations which utilize this type of global assignment do so within the context of their managerial development program.
These programs are often rotational – with one of the rotations being in another country. While on this type of assignment, the goal is individual development. Strategic/executive assignees tend to be high profile (e.g., general managers, vice-presidents) and very senior in the organizational hierarchy. Unlike the more junior developmental assignees, the executive assignments are viewed as both developmental and strategic. These strategic assignees are the core
‘critical’ group of assignees and considered a competitive resource for the organization. They may have the task of entering a new market, developing a country’s market base, being the general manager of a joint venture, and the like.

A cross-cultural training needs analysis is conducted across three levels:
1 The organizational level, to determine the organizational context for CCT;
2 The individual (or expatriate) level, to determine any special needs that have to be addressed in CCT for a given person; and
3 The assignment level, to determine the cross-cultural knowledge and skills required to effectively complete the given assignment.
Organizational analysis considers the role of CCT within the context of the organization’s (e.g., headquarter and/or subsidiary) culture, politics, structure, and strategy. This analysis considers how CCT can assist both the headquarters and the subsidiary in supporting its global strategy. In addition, organizational analysis considers the availability of training resources, such as trainers and equipment required to effectively design and offer CCT. To illustrate, organizations with a higher proportion of strategic or developmental assignees are more likely to need higher CCT budgets, are more likely to use professional cross-cultural trainers, and are more likely to conduct CCT, compared to organizations with more of their expatriates on technical assignments.
Finally, organizational analysis should determine the expected cost and the expected benefit of a CCT program. Based upon this organizational assessment, HR decisions are made as to whether an organization is ready, able, and willing to offer effective CCT.
The individual expatriate analysis examines the level of the individuals who are on the receiving end of the CCT, the expatriates themselves. The expatriate analysis examines the extent of the individual’s prior international experience, their experiences with earlier CCT and their existing levels of cross-cultural knowledge and skills. In addition, the expatriate analysis examines how expatriates perceive the issues the CCT program is designed to address
(e.g., expatriates may be opposed to CCT or may be opposed to a specific CCT method such as role playing), and their intercultural communication style (e.g. they may have specific problems in communicating with individuals from cultures other than their own). Finally, this analysis examines the needs of the expatriate’s entire family. Recent research has shown that a maladjusted spouse is an important reason why expatriates do not succeed on global assignments.
Assignment analysis identifies the important tasks required on the global assignment, and the type of cross-cultural knowledge and skills needed to perform those tasks effectively. As far as the assignment analysis of each type of global assignment is concerned, Caligiuri (forthcoming) provides a broad range of tasks that are carried out by each type of assignee and identifies the general level of cross-cultural knowledge and skills required to successfully complete the assignment. Given that a global assignment is a job context (and not a job description) there are numerous position-specific competencies which could be included in CCT as needed.

Compensation:
An organization’s compensation system is the usual means by which employee rewards are planned and administered. Increasingly, the importance of international compensation strategy in the implementation of organizational strategy is being acknowledged. International compensation can be defined as 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. Its broad HRM purpose is to attract, retain and motivate those personnel required throughout the MNC currently and in the future. Job evaluation is the means by which internal relativities and compensable factors, those elements such as skills, physical and mental demands and responsibilities that comprise an individual’s work role in the MNC and contribute to its performance, are determined (Cascio, 1991). From the perspective of employees, in particular, compensation is one of the most visible aspects of strategic international human resource management. Indeed, Kessler and Purcell have demonstrated ‘the centrality of pay to the structure and operation of the employment relationship’ (1995: 17).
There has been relatively little theory applied to explanations of international compensation. However, contingency, resource-based and agency theories offer some insight. An influential management theory, the contingency approach, suggests there are variables that impact on compensation policies and practices to make them more or less appropriate and effective (for a review in relation to compensation, see Balkin and Gomez-Mejia, 1987). Its contribution to international compensation strategy is implicit in the rationale for enduring expatriate compensation practices such as the Balance Sheet approach, and in more recent, global models of international compensation such as that proposed by Milkovich and Bloom (1998) discussed later in this chapter. Both developments incorporate the need to consider particular contingencies or situations, such as host country preferences, when devising and implementing international compensation.

Recently, two additional theories, Resource-based theory and Agency theory, have been applied to explain and predict particular aspects of international compensation. Resource-based theory analyses conditions in which organizations can gain positions of competitive advantage through having human resources which are valuable, rare, and difficult to imitate or replace (such as employees with knowledge gained through specific international experience and organizational experience). Possession of such a resource can be seen to contribute to the organization’s sustainable competitive advantage and therefore add value to the organization.
In human resource terms, value creation for the MNC resides in competent, or knowledgeable and skilled employees. According to Resource-based theory, international compensation that effectively applies appropriate rewards to maintain and retain such employees throughout the MNC can serve to protect this source of sustainable competitive advantage.
The principal–agent relationship proposed in Agency theory translates as the MNC headquarters–subsidiary relationship, where the headquarters is the principal and the subsidiary is the agency to which work and responsibilities are delegated. Given that the headquarters does not have all the unique knowledge of the subsidiaries, not all decisions in the MNC can be made by headquarters. It must depend on the subsidiaries, as their agents, and an ‘agency problem’ arises if the goals of the headquarters and subsidiary managers are not aligned. International compensation strategy, therefore, must include those elements that motivate appropriate behaviours to implement the MNC strategy.
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 administered to employees. Extending the equity principle to international compensation has been a significant challenge.
Relativities are much more difficult to establish within the complex organization of an MNC, due to its geographic and cultural spread, and its workforce mix of home, host and third country nationals. Sparrow (1999: 111) notes the contemporary shift away from job-based HRM systems to personbased approaches. He suggests that this transition has ‘immense’ implications for international compensation, concluding that the assumption of the job as the essential differentiator of wage or salary in an organization is increasingly being challenged.
Within MNCs, international compensation requires very high involvement of the HRM activity. 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 organization’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. Thus, the scope is greater, with different policies and practices

traditionally developed for headquarters staff and international staff transfers, including expatriation.
A broader perspective is required in order to achieve global consistency in compensating employees throughout the MNC while allowing for variations in accordance with workforce characteristics and local preferences and requirements.
In the case of international staff transfers, international compensation has included elements not usually explicit in compensation, such as allowances for housing and children’s education, resulting in greater involvement of the human resource management (HRM) function in the personal lives of employees. The level of risk associated with international compensation is greater in two related ways. First, risk is increased by the complexities of operating within multiple diverse economic, employment and taxation regimes. Second, the imperative for global consistency in international compensation can increase risk through direct and indirect cost inefficiencies associated with international staff transfers, and also with the implementation of an international compensation strategy. For example, recent research has identified a proliferation of employee ownership, or equity based schemes such as stock options in international compensation. It concluded that unless MNCs pay due diligence to adapting to local conditions, such schemes can result in employee dissatisfaction, failure of international compensation to meet its objectives and cost inefficiencies through inappropriately over-rewarding some employees

Within the internal environment, the goal orientation is reflected in the mission and goals of the MNC. Goals may be viewed as MNCs’ images of their future states, which may or may not be realized. Manufacturing and service MNCs producing and supplying commodities to outsiders for profit have economic goals. Cultural rather than economic goals are reflected by organizations such as international non-government organizations seeking to make a difference to the human condition by institutionalizing and preserving desired values. Compare the late 1990s goal orientations of World Vision Australia,
‘Fighting poverty by empowering people to transform their worlds’ and Broken
Hill Petroleum, ‘To enter the 21st century as a billion dollar a year international oil and gas company’ (O’Connor, 1996: 1; World Vision Australia, 1998: 1).
The mission and goals will frame the way the role of international compensation is defined. For instance, in the UK-based foam manufacturer
Zotefoam, where equality is a key aspect of HRM in the company’s mission, the

‘only perks that differentiate executives from other workers are private health insurance and a car allowance’ (Donkin, 1998: 8). The Managing Director of
Zotefoam sees the internationalizing firm as one with minimal status differences between levels in the organization hierarchy.
An MNC’s capacity to pay affects both the levels and types of international compensation. Thus, international compensation strategy must reflect consideration of cost constraints on the enterprise. The competitive strategy of the MNC will most likely influence the nature of international compensation through its IHRM strategy, the aspect of MNC that is aimed at sustaining competitive advantage through human resources. If, for example, as part of the
MNC competitive strategy, the IHRM strategy is to be a market leader in employee compensation in order to compete for the most competent candidates, then the levels of compensation might well be higher than if the competitive strategy is based on, say, the provision of secure employment.
Attitudes, values and beliefs about the relative value of employee contributions and international compensation elements such as cash compensation, benefits, perquisites and employee ownership plans across the MNC are inherent in the organizational culture. The latter also influences the degree to which

employees are compensated on the basis of seniority, in contrast to personal connections or performance.
Workforce characteristics such as age, education level, qualifications and experience, along with workforce tastes and preferences, and labour relations factors such as the nature of the employment relationship, for instance the level of trade union involvement within MNCs, will result in different international compensation approaches. Finally, if the strategic role of each subsidiary varies, then this is likely to influence international compensation strategy.
In addition to the internal environmental variables, the external environment also influences the nature of international compensation in MNCs.
Relevant external elements include the nationality of the parent country, in terms of culturally determined values and attitudes towards compensation policy and practices. Local culture influences international compensation strategy through the dominant societal values, norms, attitudes and beliefs concerning, for example, bases for compensation differences (for example, performance, family connections, gender), degrees of compensation differences between managerial and non-managerial employees, and the propensity for using particular types of compensation (such as pay incentives and benefits). Other influences include labour market characteristics of supply and demand, and the education and skill levels, ages and experience of those in the labour market.
The roles of home and host country governments in labour relations will also affect the level of government regulation of the labour market and the employment relationship, including compensation of the workforce.
Referring to Porter’s (1986) typology, O’Donnell (1999) has recently concluded that international compensation strategy will vary according to industry type. For example, she cites evidence from two global industries, scientific measuring and medical instruments, that MNCs competing in a global industry may be more likely to allocate rewards based on corporate and regional performance, rather than on subsidiary performance, as favoured by MNCs competing in a multidomestic industry (see Chapter 2 for a discussion of these different industry types). Further, different industry sectors also have different norms and practices for international compensation. For example, service-sector and high technology
MNCs have been more likely than manufacturers to incorporate equity-based options in their international compensation strategies (Butler, 2001).
Competitors’ strategies will influence international compensation strategy.
Even if the MNC is not seeking to be a market leader in international compensation, it generally cannot afford to fall behind market rates across its locations, as it will risk losing valuable employees to competitors.
As indicated in Figure 12.1, the internal and external environments of
MNCs will largely determine the staffing orientations they adopt. As discussed in Chapter 10, MNCs commonly adopt ethnocentric, polycentric, regiocentric, geocentric or a mixture of these staffing orientations (Dowling et al., 1999).
Traditionally, these orientations referred to staffing senior management positions in MNCs (Heenan and Perlmutter, 1979). The nature of international
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compensation will vary in accordance with the staffing orientation. For example, an ethnocentric orientation, expatriating senior management from headquarters to positions in international subsidiaries, has usually been associated with an approach based on compensating the manager and his or her family for relocating outside their home country through a number of allowances
(Harvey, 1993). In contrast, MNCs with a predominantly geocentric approach might more readily adopt a global compensation strategy. Such an approach, according to Milkovich and Bloom (1998) moves away from relying on stereotypical ideas of cross-cultural, cross-national differences toward understanding and leveraging cross-cultural and cross-national differences. These approaches will be discussed further later in this chapter.

Until recently, international compensation research and practice has been firmly focused on expatriation. This focus is understandable given the reported high direct costs of such assignments. Take, for instance, the following example.

Expatriate compensation comprises various allowances for international relocation. Some common allowances are:
• Foreign service premiums – most common for employees on long-term assignments
(over one year), as an incentive to take the assignment. More often paid to parent country nationals (PCNs) than to third country nationals (TCNs).
• Hardship – in consideration of isolation, crime, natural hazards, political violence, based on government data upon which rates can be provided by consulting organizations such as International SOS, a global medical and security assistance company.
• Relocation – compensation for costs such as transport, storage, temporary accommodation, purchases of appliances and vehicles, associated with moving to the host country.
• Education – for assignees’ children. This may involve compensation for language classes, books, and school fees. Home country boarding school fees may also be involved for assignees who opt not to take their children to isolated and or politically violent locations.
• Home leave – provision for the assignee and family to return home periodically during the length of the assignment. (Dowling et al., 1999; Stanley,
2001)
Phil Stanley, the South East Asia Director of Organization Resources Counselors
(ORC), reported recently on trends in expatriate allowances. Recent research in
650 MNCs world-wide by ORC suggests that foreign service premiums are increasingly being paid in lump sums rather than as ongoing salary payments, and that even in longer-term assignments the premium payment continues.
Housing allowances are increasingly being made as ‘benefit-in-kind’ rather than in cash. Over 80 per cent of respondents use tax equalization, a hypothetical tax deduction based on the usual compensation, excluding expatriate allowances, withheld by the MNC with the host country taxation liabilities fully paid by the MNC (Stanley, 2001).
The basis for expatriate compensation is maintaining relativities with parent country national colleagues and preserving parity of purchasing power; that is, ensuring that the expatriate maintains the same standard of living that he or she enjoyed at home. This has been most commonly achieved through applying the
Balance Sheet approach (Dowling et al., 1999; Stanley, 2001). It comprises the payment of a base salary consistent with home country rates, plus cost of living and housing allowances reflecting home country standards, and provision for tax equalization or tax protection and a reserve of, say, savings, social security and investments. Costs incurred by the international assignee that exceed equivalent costs in the home country are met by both the MNC and the assignee proportional to preserving the assignee’s home country equivalent purchasing power.