Compensation and Benefits from an International Perspective
A collection of international flags.
After reading this chapter, you will be able to:
Understand how globalization and international competition influence
compensation and benefits practices.
Differentiate among expatriates, host-country nationals, and third-country
nationals in terms of pay practices.
Identify the different types of international compensation relationships and
the procedures used by companies in setting pay levels.
Discuss base pay and benefits in relation to international compensation.
Discuss the impact of organizational size in the context of international
Consider the following quotes:
A global economy is characterized not only by the free movement of goods and
services but, more important, by the free movement of ideas and of capital.—
George Soros, business magnate, chairman of Soros Fund Management
My guiding principle is that prosperity can be shared. We can create wealth
together. The global economy is not a zero-sum game.—Julia Gillard, former prime
minister of Australia
Instead of saying that globalization is a fact, that it’s inevitable, we’ve also
got to demonstrate that while the growing interdependence of the world economy
is indeed a fact, it’s not uncontrollable.—Peter Mandelson, British Labour Party
Now consider the following:
Many cars assembled in the United States are made using parts produced in
other countries, such as Japan, Germany, or Korea.
Many of the American flags for sale in the United States were manufactured
McDonald’s® Corporation operates restaurants in over 100 different
It is possible to travel from Chicago to Hong Kong, a distance of 7,793
miles, in just 15.5 hours.
A common theme among these quotes and facts is that the world is continuing to
become more interconnected. It is no longer a time of working and living in the
same area you were born with people who are the same as you in terms of
appearance, values, personalities, and so on. Even if you yourself do not travel
to another country or region, others you interact with have. While geography
remains the same (although more quickly traversed), the gaps between countries
and regions are getting smaller and smaller. Therefore, the world is becoming
more accessible to both individuals and businesses. As aptly said in the Disney
song, “It’s a small world after all.”
The physical space available for living and working has increased due to the
advent of technologies such as improved building and farming techniques as well
as air conditioning and heating to counter climate extremes. Improved
transportation and safety have opened up areas that were previously inaccessible
or very difficult, even dangerous, to access. These improvements have also
decreased the time needed to travel between locations. More importantly,
improved communications have linked various locations, even remote ones,
throughout the world in ways not seen before. This connectivity is causing
companies to have to make adjustments in how they conduct themselves. Even
companies that are not international in scope must deal with customers,
suppliers, and competitors that are. What this means is that, for both good and
ill, the modern workplace is truly international. As a result, globalization
must be considered when designing compensation and benefit programs and
policies. As an example, consider the modern cruise ship industry. Administering
a cruise ship involves issues of international compensation, language
differences, and the employment of individuals of many different nationalities.
In this chapter we will begin with a discussion of globalization and the global
economy, including cultural, economic, and language differences across
countries. This foundational information will then set up our discussion of
types of international compensation arrangements, different roles employees can
play in international assignments, techniques for setting base pay, and how
international assignments affect the provision of employee benefits.
10.1 The Global Economy
As we mentioned in Chapter 8, globalization is the process of opening
communication, business, and culture between nations. This integration and
exchange of ideas and cultures has helped produce a substantial global economy,
which is composed of the overall economic output of the world as a whole. The
global economy deals with the interconnected nature of the modern economy such
that economic and workplace issues are influenced by international, and not just
local, issues. Currency conversion, tariffs, embargos, sanctions, politics, and
cultural differences all play a role in influencing the global economy.
The global economy takes into account all countries and is composed of national
economies, companies, and individuals. While all economic activity contributes
in some form to the global economy, there are certain countries, companies, and
individuals that account for a substantial share. See Figure 10.1 for a list of
the world’s largest economies as of 2013.
Figure 10.1: World’s largest economies as of 2013
In some reports, the United States accounts for one-fifth of global gross
domestic product (GDP), making it the world’s largest economy.
A bar graph that shows the largest economies based on percentage of world GDP.
The United States has the highest percentage at 19.31%, followed by China at
15.4%; the rest have much smaller percentages, near 5%.
The United States currently has the world’s largest economy. Some estimates
indicate that the United States alone accounts for almost one-fifth of global
gross domestic product (global GDP) , or the value of all goods and services
produced in the world.
This number, of course, has changed over time, with different countries and
geographic regions contributing varying amounts to global economic activities.
Figure 10.2 illustrates the changing relationship among the major economies from
the early 1800s to modern day.
Figure 10.2: Changing top economies over time
The relationship among economies from the 1800s to today has seen dramatic
A line graph that plots the changes in the economies of India; China; the United
Kingdom, France, and Germany; Japan; and the United States. The United States
experienced growth until 1950 and since then has been steadily declining. China
has experienced a sharp decline and then rise.
As can be seen in the figure, there have been drastic changes in which country
or region had the top economy throughout the years. The most dramatic are the
sharp decline and then rise of China and the ascent and drop of the United
States (even though the United States is still the largest economy in the
Correspondingly, the largest companies in the world are predominantly based in
the countries with the largest economies. The United States and China are home
to the greatest number of the world’s largest companies in addition to having
the top two economies. Not surprisingly, the largest companies in terms of
revenue also tend to have a large number of employees (see Table 10.1).
Table 10.1: Largest companies in the world, as of fiscal year 2015
Revenue ($ billions)
Employees (in thousands)
Oil and gas
Royal Dutch Shell
Oil and gas
The Hague; Netherlands
China National Petroleum
Oil and gas
Oil and gas
Oil and gas
State Grid Corporation of China
Based on Fortune: Global 500—2015, http://fortune.com/global500
The largest company in the world, Walmart, employs over 2 million workers. Three
Chinese companies—Sinopec Group, China National Petroleum, and State Grid
Corporation of China—are among the top ten largest employers of the world.
Turning to individuals, as of 2015, there are almost 2,000 billionaires in the
world. Many of these billionaires acquired or inherited their wealth through
business affiliations, often as the founder. Walmart, for example, is
responsible for the wealth of four of the top 12 richest people in the world
(see Table 10.2).
Table 10.2: Top 12 richest people in the world
Source of wealth
Carlos Slim Helu
S. Robson Walton
Based on “Forbes Billionaires: Full List of the 500 Richest People in the World
2015,” March 2, 2015 by Chase Peterson-Wlthorn
As with the largest companies, most of the world’s richest people are from the
countries with the largest economies (only three of the top 12 are from outside
the United States). Consider, however, that Carlos Slim Helu (#2 on the list) is
from Mexico, a country that is not one of the wealthiest nations nor home to
many of the most prosperous companies. Despite this, he has been able to obtain
the wealth that he has. He achieved this because of the global economy and
interdependence across national borders. He has been able to capitalize on
globalization and benefited greatly from it—landing in the number-two spot on
What all of this information indicates is that the world is more economically
related than ever before. As Mann (2011) details in his book 1493, this is a
process that has been building since antiquity, but technological and societal
advancements have accelerated integration.
Globalization is the result of this integration, and today, events in one
country or company around the world may, and often do, have an impact in other
areas—even when the direct connection between events is not immediately obvious.
In science, this can be explained utilizing chaos theory. Chaos theory proposes
that nonlinear relationships exist such that seemingly random events are
actually predictable when considering deterministic causes (Gleick, 1987). In
other words, seemingly unconnected events often have similar causes. In terms of
the global economy, the process by which these relationships spread is via
increased trade in conjunction with a reduction in limits on the transportation
of goods, services, and individuals across geographic and political borders.
What does it mean when we talk about a global economy?
As a result, companies and individuals are able to sell their products and
services in virtually any market across the world. Correspondingly, individuals,
companies, and governments have access to a larger and more diverse variety of
merchandise. All of this variety and interconnectedness results in advantages
Advantages of a Global Economy
The positive benefits of a global economy revolve around connections and
competition. With a global economy, goods and services can be transported more
easily, which promotes an increase in both the quantity and quality of those
goods and services, although this doesn’t necessarily occur at the same time.
Local manufacturers are forced to compete with a broader range of competitors
and must adapt their business strategies accordingly. This can result in higher
quality or lower price but rarely both together. Some consumers will value
quality while others will prioritize price. The key to capitalizing on consumer
desires is to develop a clearly defined strategy that results in performing up
to the expectations of customers. Competition means that if an organization
fails to deliver, there is probably another company that will happily sell to
any disappointed clients. This means companies must constantly stay “on their
toes” and be in tune with the global environment and its ever-changing aspects.
An advantage to a global economy is increased growth opportunities. A larger
market of potential customers means that there are more potential outlets to
sell a product or service. Building on the strategy considerations mentioned
earlier in the book, this allows companies to develop a niche or area of
recognized expertise in which to do business. Compensation practices can then be
designed to promote employee behavior that supports this strategy.
Global competition also leads to standardization in terms of production and
pricing. For example, you can order from any McDonald’s- restaurant anywhere in
the world and expect similarities in price and menu. While regional preferences,
expectations, and economic considerations will modify specific offerings, an
international company will provide a more similar experience than will a
competitor that is only local. People crave predictability, so globalization
makes it easier to achieve that through set standards for goods and services.
This also facilitates trade and reduces the exploitation of workers and
resources in less developed areas by holding larger and more advanced countries
to a common standard of working arrangements. (Exploitation does—and in all
likelihood will continue to—occur, but to a lesser than degree than before, with
the hope that it will eventually be eliminated).
Disadvantages of a Global Economy
The disadvantages of a global economy deal with inequity. The more affluent
members of society are typically better positioned to take advantage of
opportunities presented via globalization. This can lead to growing income
inequality and sharp divisions in standards of living and growth opportunities
across socioeconomic classes.
As an example, outsourcing involves moving labor from one country to another
country where the cost of labor is cheaper. The economic benefits to companies
Compensation and Benefits in The Real World: Kerr Group
Not all outsourcing is from the United States to other countries. The Kerr Group
operates textile mills throughout Asia, yet it opened a cotton-processing plant
in South Carolina. Labor costs in China are rising with the growth of its middle
class at the same time that costs have decreased in parts of the United States.
By having a global perspective and not being tied to a local geographic area,
the company is able to locate its operations in the place that offers the
greatest benefit. With global conditions continually changing, the discussion of
outsourcing is not as simple as it used to be.
For more information on the Kerr Group’s outsourcing to the United States, see
http://www .nytimes.com/2015/08/03/business/chinese-textile-mills-are-nowhiring-in-places-where -cotton-was-king.html?ref=international&_r=1.
Companies will announce when building a facility in a different country that one
of the goals of the move is to provide economic and employment opportunities to
local workers. This may be the case, and business investment can alleviate
unemployment as well as represent an economic windfall for individuals and
localities. Local workers, however, often do not receive this benefit directly
because wages are kept low since companies are following a fundamental business
goal of minimizing expenses while maximizing profit. When is this practice
exploitation of workers and when is it simply good business sense?
Communication, perception, and intentions all play a role in answering this
What are the advantages and disadvantages of a global economy?
Globalization has the potential to improve the lives of workers and promote
business success. Potential downsides, however, must be taken into account and a
well-defined and -thought-out business strategy, including compensation and
benefits practices, needs to be in place to maximize positive outcomes and
minimize potential negative ones. Knowledge of the characteristics of and
projected changes in the global workforce can help in developing this strategy.
10.2 A Global Workforce
In addition to the economic, social, and technological changes related to
globalization, it is also necessary to consider the increasing diversity
inherent in the workplace (see House, Hanges, Javidan, Dorfman, & Gupta, 2004;
O’Leary & Weathington, 2006) when designing a compensation and benefits plan.
The workforce of today is quite different from that throughout much of history.
Consider these key findings from a white paper by the Economist Intelligence
Unit and sponsored by the Society for Human Resource Management (2015, pp. 5–6):
The boost in global trade and the expansion of transnational companies have
resulted in cross-cultural workforces.
Global interdependencies increase exposure to risks.
The global workforce is aging and becoming both gender- and ethnically
Skilled workers from emerging countries will improve productivity while
seeking higher wages across borders.
Remote and temporary workers increase flexibility to meet labor needs but
increase demands on management.
Organizations struggle to balance societal culture and their corporate
Cultural differences affect management styles and employee development.
Cultural diversity contributes to success.
Corporate social responsibility helps manage risk while boosting the bottom
A common theme, which we will reiterate again here, is that change has the
potential to either benefit or harm both organizations and individuals. We must
be aware of these changes and how they will impact business practices. This is
especially true when dealing with cultural and geographic differences. As the
saying goes, you must be careful about trying to compare apples to oranges.
For example, as we discussed in Chapter 9, it is a common refrain that corporate
CEOs are overpaid. Applied from a global standpoint, the CEOs of United States–
based firms look to be particularly overcompensated. However, when you look
beyond the base numbers, there is an identifiable reason for this difference
that suggests that U.S. CEOs are not overpaid in comparison to other CEOs:
Namely, these CEOs are more likely to have their compensation tied to corporate
performance (Fernandes, Ferreira, Matos, & Murphy, 2013). This performance-based
compensation is usually paid via stock options, which can lead to lucrative
payoffs, as we’ve discussed in previous chapters. Therefore, this is not
necessarily a case of one country arbitrarily paying its CEOs more; rather, it’s
a case of different practices—in this case, pay practices—causing different
results. Additionally, compensation practices and overall level of pay for
international firms are becoming more similar to those of U.S.–based companies
(Fernandes et al., 2013). That’s why it’s critical to have an understanding of
the environment, including the business, strategy, goals, practices, and so on,
in which a company operates. We must also be careful when accepting common
perceptions and gut instinct as truth. Everyone has biases and preconceptions
that influence perceptions and behavior. Having an awareness of how culture
plays into those perceptions can result in better decision making.
Culturally different businesspeople in a conference.
Hofstede has data on 76 countries and how they can be compared based on six
One of the most commonly utilized frameworks for understanding cultural
differences is the cultures and values identified by Hofstede (1983a, 2001).
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