Adjustment of Expatriates & Compensation Issues

Abstract:Expatriate compensation has been commonly said to be a very

complex and challenging issue both for expatriates and for companies. As a
result, dissatisfaction with compensation is reported to be very high among
expatriates. In the light of this, the present study provides new evidence of
recent compensation practices and are sources of satisfaction and
dissatisfaction with the reported practices. The results indicate that the most
difficult issues were found are availability of information about local cost
level/standard of living, currency rate risks, social security and pension
issues, as well as spouse-related issues. In contrast to earlier reported
findings, the majority of the expatriates were satisfied or even very satisfied
with their treatment. The major sources of satisfaction were the higher total
salary level and allowances and differentiated compensation. Furthermore, in
the majority of the cases the expatriates reported that the companies had
clear compensation principles, that they had enough prior information to
negotiate and thus the contract-making situation was not perceived to be
very difficult. The reported redesign needs regarding existing compensation
packages were found to vary a lot from case to case, but the most common
issue was a too low total salary level. In conclusion, some advice is given to
future expatriates and international companies.

Keywords:

 Expatriates
 Compensation disparity
 Organizational justice
 Firm performance
 Expatriate managers
 Incentives

Introduction:

An expatriate is an employee sent by his or her employer to work in a foreign country. The firm
is normally referred to as the parent company, while the country of employment is known as the
host country.

Many corporations are sending expatriates to their overseas operations. In fact, expatriates have
and the need for internationally competent managers is expected to rise as more and more firms
face global competition. Organizations need to understand the dynamic relationships between
staffing and outcomes, and how these relationships change over time.
Expatriates provide a number of benefits for companies, including greater parent control and
particular expertise. International experience is also seen as providing opportunities for personal
and professional development and career advancement. Expatriates are very expensive, however,
and this can discourage extensive use of expatriates. Many companies have also experienced
relatively high failure rates, with failure often being attributed to the family's inability to adapt.

Surprisingly, give the high costs, and likelihood of failure, companies often make these
expensive commitments with little or no preparation for the need for cross-cultural transition.
Expatriate success and job performance is closely related to intercultural adjustment and the
same is true of families.

From an organizational perspective, thinking about expatriation often starts with thinking about
expatriate compensation. Compensation packages should attract, retain and motivate employees,
while at the same time balancing these costs with the expected returns for the organization,
which is not an easy task.

Although different situational factors such as the attractiveness of the assignment destination and
the number of potential candidates require flexibility in compensation practices, some general
guidelines and methods exist.

However, no matter which compensation approach is used, e.g. going rate approach or balance
sheet approach, the certain basic needs of expatriates should be still met. Organizations should
not forget about the daily life challenges faced by employees in a foreign country, and hence
there is a need for extra attention to security, medical care, housing, education of children,
spouse matters and home trips.

In the end, it is important to consider the concept of ‘wholeness’ with regard to the goals of
compensation packages. The concept refers to the organization’s desire to ensure that the
expatriate does not experience an overt gain or loss when all elements of the compensation
package are combined. While finding a balance between the organization’s and expatriates’
perceptions of ‘wholeness’ can sometimes be difficult, the intentions of ‘keeping the employee as
a whole’ by not letting expatriates experience drastic lifestyle changes are paramount.
Literature Review:

The gap of compensation between the expatriates and the local employees is a result of
globalized businesses in which the expatriates working in a foreign country are paid same as the
home country rate. The local employees are paid according to the local (e.g., China) labor market
in which the rate is comparatively lower than the parent company country (e.g., U.S.) where the
expatriates come from, pay difference between the expatriates and the local employees becomes
noticeable (Paik, Parboteeah, & Shim, 2007; Toh&Denisi, 2003). A study of Chen et al.
(2002)reports that the income of American expatriate was up to several times greater than local
Chinese counterparts.

Prior studies reported vicious results of such significant compensation gap among the local
employees, including reduced job satisfaction, low organizational commitment, poor
performance, increased turnover, and destroyed interpersonal relationships (Choi & Chen, 2007;
Leung et al., 1996, 2011a,b; Toh& Denisi,2003). Compensation is directly linked to employee
performance.

With the reference to equity theory (Adams, 1965), the motivation effect of pay partly relies on
comparison of the focal person’s outcome–input ratio with a referent in the organization.
Dissimilarity of the ratio causes the feeling of unfairness and leads to dissatisfaction about the
pay. When people find inequity in the pay system, they may choose to repair the imbalanced
situation by means of adjusting their input or influence the outcome until the ratio is comparable
with that of the referent.

The large compensation gap between locals and expatriates in developing countries is associated
with a number of negative reactions on the part of the former. Consistent with the sense-making
perspective, a stronger inclusive climate for locals is related to a less negative relationship
between disapproval of the compensation gap and reactions to expatriates, whereas better firm
performance is related to a more negative relationship between that disapproval and reactions
toward the organization.

The compensation gap between locals and expatriates may be just because of a two-tier wage
system. Traditionally, a two-tier wage system refers to the arrangement in which new employees
are put under a compensation scheme that is substantially lower than the scheme for existing
employees (Lee & Martin, 1991; Martin & Peterson, 1987).
A justice perspective is able to shed light on this extreme form of a two-tier pay system. Equity
theory posits that people compare their rewards with similar others. Fairness is perceived when
the ratio of inputs and outcomes are similar across individuals (Adams, 1965). Based on equity
theory, Lawler (1981) proposed a pay satisfaction model, in which perceived pay of referent
others is able to influence pay satisfaction.

Previous research has shown that locals indeed compare with expatriates and report a high level
of distributive injustice (e.g., Chen et al., 2002; Leung,Wang, & Smith, 2001)

In the justice literature, disapproval (or a low acceptance level) of decisions, including salary
decisions, is typically viewed as a direct consequence of perceived injustice (e.g., Folger and
Konovsky, 1989; Lind and Tyler, 1988,

It is difficult to raise the salary of locals drastically to reduce the injustice associated with the
compensation disparity between them and the expatriates. Justice theories and research are able
to point to some directions for attenuating the injustice associated with the compensation
disparity in multinationals in developing nations.

Two types of variables have received a great deal of attention in justice research. Relational
variables are concerned with the relationship between social actors, probably because of the
prominence of group value model (Lind & Tyler, 1988) and the relational model of authority

It is well established that the trustworthiness of an authority plays a moderating role in justice
perception. If an authority is seen as trustworthy, perceived procedural fairness shows a weaker
effect on people’s reactions (van den Bos, van Schie, &Colenberg,
2002; van den Bos, Wilke, & Lind, 1998).

Specifically, in a survey of local employees of foreign multinationals in China, Chen et al. (2002)
found that if expatriates were seen as interpersonally sensitive, such as being kind,
helpful, and respectful of locals, the negative impact of the compensation disparity on locals’
perceived compensation fairness was mitigated.

An inclusive climate initiated by expatriates is defined as local employees' shared perceptions of

the discretionary practices implemented by expatriates that provide them with the opportunity to
participate in decision-making processes. An inclusive climate is particularly relevant to our
context because of the existence of two well-defined groups based on compensation levels,
namely, locals and expatriates, which makes inclusion across group boundaries a salient issue.
Following the logic that leadership behavior is a group-level construct (Liao and Chuang, 2007).

If the expatriates of an MNC as a group involve local employees in decision-making processes,

then the sense-making logic suggests that this organization-wide discretionary practice is likely
to be interpreted by local employees as a strong signal that the expatriates trust and are
committed to them and lack an exploitive motive.

Despite the well-recognized negative effect of compensation gap (e.g., Chen et al., 2002; Leung
et al., 2009) in expatriate context, it may not be easy to remove the gap in a short term because of
the strategic reliance on expatriates and the related human resource facilitation in response to the
globally imbalanced economic development. Therefore, it is meaningful to examine the
contextual factors that can reduce the negative effect of compensation gap. Prior studies found
moderating effect of trust in situations of unfairness (van den Bos, Lind, &Wilke, 2001).

Trust is defined as the willingness of a person ‘‘to be vulnerable to the actions of another party
based on the expectation that the other will perform a particular action important to the trustor,
irrespective of the ability to monitor or control that other party’’ (Mayer, Davis, &Schoorman,
1995, p. 712). When trust is used to depict interpersonal relationship, it is usually classified into
cognitive trust and affective trust (McAllister, 1995). Cognitive trust is based on rational
perceptions and evaluation about the competence or trustworthiness of trustees. Affective trust
derives from affective exchanges between trustors and trustees and it is evaluated according to
the emotional evaluation of trustworthiness.

In this study, instead of focusing on the one-to-one interpersonal trust, we examined trust climate
as a contingent factor in the relationship between perceived compensation gap and creativity.
Herein by ‘‘trust climate’’ we mean the collective perception of local employees about the
trustworthiness of expatriates in their work settings. In practice, due to the relatively high cost of
expatriation, expatriates often work at supervisory or managerial positions (Elenkov&Manev,
2009). A stream of leadership studies showed that leaders’ influence on the followers’ workplace
attitude and behaviors often take the form of collective consensus because leaders influence the
followers in the similar way (e.g.,Chen&Bliese, 2002; Costigan, Insinga, Berman, Kranas, &
Kureshov, 2011).It is well-documented that firm performance is related to positive employee
reactions. For instance, Schneider et al. (2003) found that employee perceptions of financial and
market performance positively predicted such attitudes as job satisfaction. Agleet al. (2006)
reported similar results.

Firm Performance International Human Resource Management (IHRM) decisions regarding the
use of expatriate managers must take into account the costs of such assignments. Total
compensation of expatriate managers often exceeds six to seven times that of home –based
salaries and benefits. Extremely costly locations such as China can be even higher.

Even with such high costs, U.S. companies in particular have poor records of expatriate success
when compared with other countries’ expatriates. Survey shows that U.S. multinationals often
have failure rates for managers in overseas assignments ranging from 10 to 40 percent
(Tung,1988).
Typical reasons for U.S. expatriates failure include the following:
i) Spouse fails to adapt to local culture or environment.
ii) Manager fails to adapt to local culture or environment.
iii) Other problems with the family.
iv) Personality of the manager.
v) Excess or difficult responsibilities of international assignment.
vi) Lack of technical proficiency.
vii) No motivation for international assignment.

Harvey (1993) said that a firm seeks to satisfy several objectives when developing international
compensation policies. First, the policy should be consistent with the overall strategy, structure,
and business needs of the multinational. Second, the policy must work to attract and retain
expatriate managers in the areas where the multinational has the greatest needs and opportunities.
Thus, the policy must be competitive and recognize factors such as incentive for Foreign Service,
tax equalization, and reimbursement for reasonable costs. Third, the policy should facilitate the
transfer of international employees into most cost effective manger for the firm. Fourth, the
policy must give due consideration to equity and ease of administration. Harzing (1998) said that
the international employee will have a number of objectives that needs to be achieved from the
firm’s compensation policy. First, the employee will expect that the policy offers financial
protection in terms of benefits, social security, and living costs in the foreign location. Second,
the employee will expect that a foreign assignment will offer opportunities for financial
advancement through income and/or savings. Third, the employee will expect that issues such as
housing, education of children, and recreation will be taken care of. So, all these things must be
addressed in the policy.

Key Components of an International Compensation Program

The key components of an international compensation program are as follows:
i) Base Salary,
ii) Foreign Services Inducement/Hardship premium,
iii) Allowances, and
iv) Benefits.

Approaches of International Compensation

There are two main approaches of international compensation, such as follows:
i) The Going Rate Approach, and
ii) The Balance-Sheet Approach
References
Chen, C. C., Choi, J., & Chi, S. C. (2002). Making justice sense of local-
expatriate
compensation disparity: Mitigation by local referents, ideological
explanations,
and interpersonal sensitivity in China-foreign joint ventures. Academy of
Management Journal, 45: 807–817.

Paik, Y., Parboteeah, K. P., & Shim, W. (2007). The relationship between
perceived
compensation, organizational commitment and job satisfaction: The case of
Mexican workers in the Korean Maquiladoras. The International Journal of
Human
Resource Management, 18: 1768–1780.

Choi, J., & Chen, C. C. (2007). The relationships of distributive justice and
compensation
system fairness to employee attitudes in international joint ventures. Journal
of
Organizational Behavior, 28: 687–703.

Adams, J. S. (1965). Inequity in social exchange. In Berkowitz, L. (Ed.).

Advances in
experimental social psychology (Vol. 2, pp. 267–299). New York: Academic.

Lee, R. T., & Martin, J. E. (1991). Internal and external referents as predictors
of pay satisfaction among employees in a two-tier wage setting. Journal
of Occupational Psychology, 64: 57–66.

Lawler, E. E. (1981). Pay and organizational development. Massachusetts:

Addison-Wesley.

Folger, R., Konovsky, M., 1989. Effects of procedural and distributive justice
on reactions to pay raise decisions. Academy of Management Journal 32 (1),
115–130.
Fryxell, G.E., Buttler, J., Choi, A., 2004. Successful localization programs in
China: an important element in strategy implementation. Journal of World
Business 39
(3), 268–286.

van den Bos, K., van Schie, E. C. M., & Colenberg, S. E. (2002). Parents’
reactions to child day care organizations: The influence of perceptions
of procedures and the role of organizations’ trustworthiness. Social
Justice Research, 15: 53–62.

Liao, H., Chuang, A., 2007. Transforming service employees and climate: a
multilevel, multisource examination of transformational leadership in
building longterm service relationships. Journal of Applied Psychology 92,
1006–1019.

Mayer, R. C., Davis, J. H., & Schoorman, F. D. (1995). An integrative model of

organizational trust. Academy of Management Review, 20: 709–734.

McAllister, D. J. (1995). Affect- and cognition-based trust as foundations for

interpersonal cooperation in organizations. Academy of Management Journal,
38: 24–59.

Elenkov, D. S., & Manev, I. M. (2009). Senior expatriate leadership’s effects

on innovation and the role of cultural intelligence. Journal of World Business,
44: 357–369.

Chen, C. C., Choi, J., & Chi, S. C. (2002). Making justice sense of local-
expatriate
compensation disparity: Mitigation by local referents, ideological
explanations,
and interpersonal sensitivity in China-foreign joint ventures. Academy of
Management Journal, 45: 807–817.

Tung, R. L. (1998). American expatriates abroad: From neophytes to

cosmopolitans. Journal of World Business, 33: 125–144.

Harvey, M. (1993). Empirical evidence of recurring international

compensation problems. Journal of International Business Studies, 24: 785–
799.