Globally strategic compensation:

Transnational development, critical issues

and pay as integration

Allen D. Engle

Eastern Kentucky University

215 Combs Classroom Building

Richmond, KY 40475-3111

(606) 622-6549

(606) 622-2359 (Fax)


Compensation and Benefits


This paper investigates the relationship between global strategies and compensation practices, presents critical pay issues and outlines the role of compensation and organizational design in the integration of activities for global firms. The evolution of international, multidomestic, global and transnational strategies are presented. Issues in organizational design and appropriate pay practices associated with each of the four strategies are discussed. Critical issues in pay and the relationship between pay systems and organizational design as forms of control are then delineated. The paper concludes with a discussion of the particular issues critical to transnational strategies.


The development of global strategies has been a topic of interest for some 40 years. Organizations can choose among the four basic approaches of international, multidomestic, multinational or transnational strategies as they develop global operations (Adler & Ghadar, 1992; Jones, 1995).

In this paper we will review these four strategies, their cultural consequences and the structures appropriate to the various strategies. We will then present the role of compensation practices in assisting the implementation of these strategies. Next, we will delineate important issues for these strategies and point out the key role compensation plays in resolving these issues. The paper will conclude with a series of observations on the critical position of human resources in general and compensation practices in particular for firms pursuing the transnational strategy.

Global Strategic Development

Most organizations which go through an international development process begin with an "international" strategy, selling and producing abroad a product or service only marginally adapted from a standardized domestic good or service, to meet the requirements of the new markets and customers. The unique characteristics of the product are deemed to give the seller a technological advantage that must be exploited abroad (Adler & Ghadar, 1992).

As a consequence of these advantages, the culture of the firm values the home country way as the best way and members of the firm develop a sense of "ethnocentrism". These newly-global firms convert their domestic organizational designs to global geographic structures, a move that allows them to take advantage of the distribution and marketing efficiencies inherent in this structure (Bartlett & Ghoshal, 1995).

As more competitors enter the international market and the market matures, unique product capabilities wane and strategists must customize product/service delivery to each of the international markets. In this second phase a "multidomestic" strategy emphasizes local production, marketing and service for customized products in an increasing number of self-contained national or regional markets. Naturally, this adaptation to local needs and conditions develops a local best way and a cultural sense of "polycentrism" (Adler & Ghadar, 1992). Organizations applying this strategy tend to restructure operations into global product groups, a structure based on product competitiveness unique to local conditions (Jones, 1995).

In the third stage of international development, products and services become saturated in international markets, the technological innovation that drove operations overseas dwindles, prices drop and cost containment becomes a key to success in these "multinational" strategies. Reductions in cost, through rationalization of operations to sites where the factor costs of activities are globally minimized create a culture of global "cost-centrism" (Adler & Ghadr, 1992). Organizations applying this strategy tend to continue using global product group structures with reductions in operations to regionally low cost factor locations (Jones, 1995).

The final stage of international development, the "transnational" strategy, is characterized by a combination of minimal global costs and significant customization of products and services to meet the demands of a wide range of increasingly sophisticated customer groups around the world. Research and development costs grow and manufacturing and distribution are based on balancing costs and differentiation for local markets - so called "mass customization" (Jones, 1995).

This balance between the cost control of international and multinational strategies and the local customization of the multidomestic strategy is not accomplished by structural control. Rather, control is achieved by "geocentric" culture, a strong international culture characterized by tightly integrated cadres of flexible global managers.

It is this unique set of globally-balanced values and perspectives held by managers - the product of careful selection, in-depth career development activities and experiences and studied compensation practices - which creates the socialized "mind matrix" that allows the transnational strategy to function (Bartlett & Ghoshal, 1993). Structures under transnational strategies may be functional, global geographic, global product, matrix structures or heterarchies (Bartlett & Ghoshal, 1995; Pucik, 1993). Structure takes a second place to culture and human resource (HR) issues as the dominant forms of coordination and control have become internalized into the global managers (Bailey, 1995).

One can readily see the expanding role of HR and particularly compensation as organizations rush to develop transnational capabilities (Taylor, Beechler & Napier, 1996). Compensation can contribute to global control both as a source of control and as an artifact communicating the values and cultures of transnational organizations (Lawler, 1990; Milkovich & Newman, 1995).

With the cost and customization advantages of the transnational strategy, firms' executives are increasingly motivated to incorporate these global HR practices into their new control systems (Phatak, 1995; Taylor, Beechler & Napier, 1996). We will now review compensation practices and those critical pay issues firms face as they move through each of these four phases of internationalization.

International Strategies and Compensation

International strategies are characterized by essentially extending domestic activities - marketing and distributing abroad what is produced at home. A growing number of expatriates are sent as sales people to facilitate contacts. At this stage compensation practices may take one of two basic forms. With few employees abroad it is possible to create unique, so-called "negotiated" compensation packages (Briscoe, 1995). These negotiated systems have the advantages of flexibility while operating in unknown environments as well as having minimal impact - no precedents set -on the more significant domestic pay system (Briscoe, 1995; Phatak, 1995).

Alternately, if more expatriates are called for, compensation practices shift to the "balance sheet" approach. This is an extension and standardization of a pattern of the previously negotiated pay outcomes. Home base salary, benefits etc. are adjusted by incentives (for housing, unfamiliar or uncomfortable surroundings, relocation costs, training allowances) and equalization adjustments (COLAS, tax equalization allowances, benefit adjustments) to create a foreign compensation package (Briscoe, 1995). The goal of this package is to keep the expatriate economically whole while providing incentives for career risk taking abroad (Briscoe, 1995).

The underlying "ethnocentric" assumption under these two approaches is that home is better than abroad and only gradual adjustments to the equitable domestic system must be made. Maintaining home country lifestyle is still the primary focus.

Critical Issues

The critical issues in compensation at this first stage focus exclusively on home country national expatriates. Issues revolve around careful negotiations - give too many premiums and incentives and you create an international stampede and unrest in the domestic pay system. Give too few incentives and you can not influence people to risk foreign assignments. Issues also include uncovering, sometimes by trial and error, the components and adjustments to domestic pay which comprise the accounts in the "balance sheet". This stumbling to a "balance sheet" approach has comprised much of the case-oriented research in expatriate issues. Information on the cost of living, transportation options, children's education, housing costs and other incentives is facilitated by consulting firms and patterns of cost relationships are gradually standardized for the "balance sheet" (Briscoe, 1995). Here the rapidly internationalizing firm is adjusting to the new environments, but always on its own (domestic) terms.

Integration Mechanisms for International Firms

Human resource practices are primary integrating mechanisms at this stage. Structural redesign of firms is minimal as global operations mimic domestic structures in global geographic structures (Bartlett & Ghoshal, 1995; Jones, 1995). By providing incentives for risk taking via negotiation and the development of "balance sheets" the firm is able to motivate expatriates out into a largely unknown environment. This incentive system, when effective, is what Milkovich would call "success sharing" rather than "risk sharing" partnership (Milkovich & Newman, 1996, p. 343).

Incentives, added to the integrated orientation, training and development of expatriate families, combine to maximize the probability of performance abroad at a minimum risk (Dowling, Schuler & Welch, 1994). This reduction in risk and the consequent willingness and ability to perform abroad are the result of successful integration for international firms.

Multidomestic Strategies and Compensation

As firms expand their operations and move more activities and functions to the global marketplace, domestic sources of labor for international operations (so-called Parent Country Nationals, or PCN's) become exhausted. Firms must look to local (Host Country Nationals, or HCN's) or other (Third Country Nationals, or TCN's) sources of labor to augment domestic sources and provide much-needed local knowledge (Marquard & Engel, 1993). Multidomestic strategies are associated with "polycentric" cultures and compensation practices under this strategy can become quite diverse (Adler and Ghadar, 1992). It is dangerous to predict the direction all this diverse bubbling may take, but a few trends appear evident.

First, the "balance sheet" approach continues well into this strategic phase. The weights and values of incentives and adjustments are more finely tuned for PCN's while more locally-driven salary and benefit categories are determined for host country nationals. Third country nationals (TCN's) are paid by way of a "citizenship salary system", based upon the standard for their country of native residence or citizenship along with appropriate native to host differentials (Phatak, 1995). In essence, three sets of balance sheets are set up, making adjustments for PCN's and TCN's but little adjustment for HCN's.

A second practice also appears at this stage. With "localization" strategies, PCN ". . . expatriates (usually individuals early in their careers and who are being assigned overseas for long term assignments) are paid comparably to local nationals" (Briscoe, 1995, p. 119). Localization captures most completely the "polycentric" culture and the need to understand your customers by immersion in local conditions. Pay becomes an extreme form of in-country global acculturalization and orientation (Marquardt & Engel, 1993).

A third alternative, reacting to constraints in the accounts of a highly developed balance sheet, is to determine a total cap on individual compensation. This "lump sum" approach " . . . then lets the expatriate determine how to spend it, for example, on housing, transportation, travel, home visits, and so forth" (Briscoe, 1995, p. 119). In this pay practice we again see the local decision bias of the "polycentric" culture. Let the PCN on location determine what is best and decide how homelike or local he or she wants to become.

Finally, "regional" pay systems may develop which seek to maintain equity within a contained geographic area, i.e. Western Europe, where expatriate assignments rotate within the region. The mounting costs of overlocalization of pay systems may explain this practice.

Critical Issues

At this second phase, critical compensation issues revolve around the long term effects of PCN expatriation, the growing power of HCN's and TCN's and the complexities of three balance sheets that are patterned in increasingly different ways. Resolving these differences as PCN's, HCN's and TCN's are called upon to work closer together while they learn more about each other (and inevitably their pay) increasingly takes compensation planners' attention.

The treatment of Third Country Nationals becomes a significant issue at this point. They are neither local nor parent and yet they may have the critical skills and competencies needed to support this phase and, more importantly, future phases of global development. Phatak et al. (1987) present five alternatives to dealing with this critical resource:

First, the company may negotiate a deal with each TCN at each location. This becomes impractical if the number of TCN's is large. Second, the company may pay host-country rates and keep the TCN "economically whole" vis-a-vis local peers. Third, the corporation may compensate expatriates and TCN's equally. This method provides the easiest and probably the most practical approach, especially from the administrative and equity points of view. Fourth, TCN's compensation packages may be tied to each individual's home country. Fifth, a modified "balance sheet" approach may be employed for TCN's compensation package. Each nationality attracts different premiums and different nonspendable portions of income, but the same spendable portion is paid to all expatriates and TCN's in the same work location. (p. 325) Note the wide range of options. TCN's may be seen as independent of host country, treated like Host Country Nationals or gravitate toward Parent Country National treatment.

Resentment by more educated and trained HCN's is a second issue at this phase. Stories of employee turnover, moving to local competitors or global corporate competitors, due to inequities with PCN's and/or TCN's abound in case reports (Dowling, Schuler & Welch, 1994; Vernon-Wertzel & Wertzel, 1997). Dissatisfaction with treatment by HCN's and TCN's is understood by pay planners. The struggle at this phase is for solutions (Harvey, 1993).

At this stage the global firm learns the reciprocal nature of international operations. The organization learns about the host, but the host also learns about the organization. This two-way street, "closing the loop" and bringing knowledge full circle back to the parent firm, is first introduced as a critical issue at this phase. (Bartlett & Ghoshal, 1995; Hitt et al., 1997).

The final compensation issue dominating this stage has to do with the successful repatriation of PCN's and the economic disequilibrium the repatriation process may create. In a review of findings from 95 firms engaged in significant and growing international operations, Harvey (1993) reports that 56% of respondents identified significant compensation/benefit problems for expatriates upon reentry into the parent country operations. Base salaries are reviewed and COLAs tax equalization allowances and international incentives are not unnaturally eliminated upon return. The communication seems to be the value of your international assignment ended when you returned home, so let's get back to the way it was before.

Integration Mechanisms for Multidomestic Firms

Most integration of activities at this phase is done by organizational redesign. Task forces, teams, integrating roles and telecommunication systems combine with global product group structures to provide coordination (Jones, 1995). In the area of compensation, balance sheets become more complex and sophisticated and contracting provides more forms of incentives associated with sales growth. Host and Third Country Nationals are increasingly considered and the effect of successful integration is a balance of parent company perspectives with the newer local perspectives.

Multinational Strategies and Compensation

Recall that the critical strategic issues under multinational strategies revolve around global cost containment and the rationalization of activities and processes necessary to compete with maturing products and services in increasingly competitive, even saturated, markets. Top level executives in the multinational firm seek to produce at regional hubs, distribute by way of low cost channels and sell high volumes at low prices. By adding value only at times and places where highest returns are possible, the firm's specific competitive advantages are maximized (Adler & Ghadar, 1992).

Compensation practices at this third phase deviate significantly from previous practices. At the very least the balance sheet is maintained, but incentives and premiums are reviewed and reduced or eliminated for PCN's (Briscoe, 1995). Costs may be further reduced by replacing more expensive PCN's with HCN's and TCN's from cheaper labor markets.

Consolidation of operations, from nations to regional hubs, is paralleled by the growth of "regional" pay systems introduced earlier. Here the regional system is used to replace higher paid HCN's with TCN's, or, as the case may be, higher paid TCN's with HCN's within a certain region.

Costs are also contained by the use of "cafeteria" choices of benefits, replacing cash payments with benefits and perquisites which provide more utility for the employee at significant tax savings for both the employee and the organization (Briscoe, 1995). This recentralization of benefits such as company-provided housing, company cars and insurance allows firms to more efficiently direct compensation to those areas that provide the most incentive value while maximizing newly acquired knowledge about local tax codes.

Finally, performance based incentives begin to replace environmental incentives at this third phase. Financial control becomes increasingly developed under the multinational strategy and with these developments incentives for foreign assignment (a proxy for job performance) are replaced with more direct measures of economic performance (Phatak, 1995). Determining what components of economic performance are attributable to individual, group or divisional discretion is an issue now. Transfer pricing activities directed at avoiding taxes or shifting costs make the accurate assessment of performance more problematic (Lassard, 1997).

Critical Issues

As presented above, the cost containment culture of the multinational focuses compensation on the rationalization of benefit programs that provide incentives while minimizing taxes for both the employee and the firm. Much literature is devoted to these complex tax issues and how to best apply global benefits (Briscoe, 1995).

Second, incentives based on economic performance replace incentives based upon local versus home country living conditions. Economic risk gradually replaces the home-based entitlement incentives created to compensate for the hardships of working abroad.

Third, PCN, HCN and TCN issues come to a head at this third phase of globalization. Either PCN's are systematically replaced with lower cost HCN's and/or TCN's or all three have to face the economic realities of highly competitive global markets through global pay reclassification efforts (Adler & Ghandar, 1992; Phatak, 1995).

Fourth, a pay issue particular to this phase has to do with "Bandits", expatriates in long term assignments with significant incentive packages. As Briscoe (1995) explains:

Often these individuals occupy important positions within the foreign operations of the firm, are located in highly desirable locations, such as Switzerland, and refuse to be reclassified as locals. Obviously this can be very expensive for the MNE and, thus, must be dealt with in a way that hopefully holds on to the expertise of the employee while reducing costs. Many firms are now establishing a policy that requires such "bandits" to reclassify after some period of years, say, six or eight, to local status. (pp. 127-128) Here is the critical issue for firms at the multinational phase; how do we impose rigorous cost containment without losing the irreplaceable resources (be they Parent, Host or Third Country Nationals) we have worked so hard to develop?

Integrating Mechanisms for Multinationals

Structural integration, via task forces, liaison roles and global product group design, continues as the primary mechanism for coordination even in this cost sensitive stage. Information systems develop to assist coordination as financial controls dominate. Pay systems enhance integration by job/pay reclassification to lower price levels, reducing differentials between PCN's, HCN's and TCN's to reflect the expanded use of the latter two categories of employees. The performance based incentives created are "risk sharing" incentives, such that if financial performance is not forthcoming, the employee shares in the shortfall as well (Milkovich & Newman, 1995, p. 343). Even successful integration of the multinational leaves the firm only partially fulfilled. Costs may be contained, but at the price of decreased sensitivity to diverse customer needs and the potential loss of markets. Discomfort with the dissatisfying standardization and subsequent loss of markets has driven many multinationals to alternatively evaluate the transnational strategy as a matter of survival (Adler & Ghadar, 1992; Jones, 1995).

Transnational Strategies and Compensation

As presented in the section on strategic development, the transnational strategy combines cost containment with customization of products and services to local demands (Bartlett & Ghoshal, 1995). The success of any transnational strategy has less to do with structural innovations - though matrix structures have been associated with the strategy - than developing an often radically different organizational culture (Bartlett & Ghoshal, 1995; Jones, 1995; Lawler, 1990). The new culture calls on decision makers to simultaneously balance functional, product and geographic/cultural concerns in all activities - the "mind matrix" of internalized control (Bartlett & Ghoshal, 1993; Tichy, 1993).

As structural forms of control defer to social control the HR process takes on primary significance in transnational firms (Bird & Beecher, 1995). Compensation systems now have the potential to act at the forefront of these newly-critical HR processes. The "geocentric" culture of the transnational firm requires a cadre of managers with career experiences that allow them to combine technical functionality, detailed product knowledge and wide-ranging cultural insights (Barham & Oates, 1991).

Compensation systems at this phase must " . . . replace the traditional cost of living concerns with a quality of life or quality of career focus" (Briscoe, 1995, p. 120). Separate balance sheets for PCN's, HCN's and TCN's are replaced with a more uniform, world wide system (Phatak, et al., 1987). Base pay is based on global rather than parent or host systems.

Barring this universal, "world wide" approach, a two tier system may be developed. A set of "international" occupations, set to a global uniformed system, and a separate "local" classification system, for lower level technical or operational occupations, are presented as an option (Briscoe, 1995; Harvey, 1993).

Notice in the last sentence in the paragraph above, the reference is to the term occupation, rather than job, to describe this two tier system. Transnational firms may find the combined emphasis on functional, product and cultural knowledge as well as interest in long term career development are facilitated by knowledge based pay systems. Rather than paying for jobs, the firm compensates individuals for obtaining and applying competencies in these three critical areas (Lawler, 1990; Prahalad, 1993). This pay system reinforces the mind matrix, explicitly ties career development and rewards and assists the growth of a global cadre of flexible leaders within the firm (Bartlett & Ghoshal, 1995, Chapter 8; Kets de Vries & Mead, 1993).

Both of these approaches, global unified systems as well as competency based systems, are more customized to the needs and capabilities of the transnational system. In a sense we see in the transnational phase a compensation system that looks closer to the "negotiated" systems of the international strategy than the pay systems associated with multidomestic or multinational strategies. Now HR strategies in combination with structural innovations implement the strategy. At the very least the interaction between the compensation system and the employee is more tightly coupled and interactive.

A major difference from the earlier international pay system is that under the transnational strategy the frame of reference is a unified global perspective. Gone is the old, parochial parent nation's value system as the driver of pay comparisons and incentive allocations.

Critical Issues

Global benefits administration becomes a very complex topic for pay strategist in the transnational firm. Diversity in health care systems, insurance policies, pension regulation, family legislation and employee ownership options, as well as the portability of all of the above, contribute to this complexity (Briscoe, 1995). Many firms respond by outsourcing activities to consulting firms or by relying on local experts and coordinating as best they can (Briscoe, 1995; Dowling, Schuler & Welch, 1994).

A second issue relates to the compensation of employee groups involved in various forms of strategic alliances, be they joint ventures, minority ownership or joint research and development efforts (Bartlett & Ghoshal, 1995; Tallman & Shenkar, 1997). Although such alliances are by no means unique to transnational firms, they are a primary method by which the twin goals of cost containment and a fast learning curve - always critical issues in transnational strategies - are achieved (Jones, 1995; Parkhe, 1997). Both parties to such an alliance must overcome the limitations of their historical pay traditions and forge in a new pay system a workable synthesis that fosters long term relationships (Bartlett & Ghoshal, 1995).

The need to develop and maintain a system of useful information that contributes to pay decisions is an overriding concern for transnational firms. Information may be gathered from consultants, government agencies, alliance partners or by increasingly sophisticated human resource information systems (HRIS)(Briscoe, 1995; Kavanaugh et al., 1990; Walker, 1993). Wage market information, benefit comparisons, legal wage and hour requirements, labor legislation and perquisite tastes are just a few topics that must be processed in the transnational firm.

Integrating Mechanisms for Transnational Firms

Human resource practices dominate as integration mechanisms for the transnational firm. A strong global culture, tightly woven compensation and develop programs for the cadre of administrative leaders and a sophisticated HRIS - communications network are the mechanisms to coordinate transnational firms. It remains to be seen whether or not these capabilities may be mastered by a significant number of those firms now facing the transnational challenge.


Compensation practices must be attuned to resolving the critical issues at each of the four phases of global strategic development. Only in this way may compensation contribute to the dual tasks of changing "individual attitudes and mentalities" as well as "interpersonal relationships and processes" to set the stage for "formal structures and responsibilities (anatomy) " in the firm (Bartlett & Ghoshal, 1995, pp. 484-487). A more complete integration of strategy, structure, culture and compensation holds the promise for successful transnational activity. Pay systems must both drive and accommodate these other forms of coordination and control.

Unresolved issues abound. In the long term transnational pay systems either bifurcate into a global system for executives and key administrative groups on the one hand and a parallel developed nations/undeveloped nations local grouping for managerial and technical employees, or standardize to one global system for all occupational groups (Briscoe, 1995; Phatak, 1995). How and why one direction or the other may dominate is not known.

Developments in information and communication systems hold great promise in globally coordinating activities to help develop the cadre of global managers as well as respond to cost containment issues (O'Connell, 1997). How best to realize this promise is also incompletely understood.

Finally, the increasingly significant role of compensation in the various forms of strategic alliances has yet to be clarified. Transnational strategies are not the ultimate solution to global competitiveness. As new strategies evolve compensation practices will continue to be critical mechanisms for successful implementation and control.


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