Having a global compensation strategy is necessary for ensuring employees in all countries are paid fairly while also keeping salary and benefit costs within budget. Whether you are looking to retool an existing strategy or create one from scratch, it’s important to understand all of the elements and considerations that are necessary for success.
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What is global compensation?
Global compensation refers to any compensation given to employees, either working at home or abroad. This could mean domestic employees on a temporary international assignment, full-time international employees, and international contractors. It includes both payments made directly to employees for hours worked and indirect compensation such as health insurance and paid time off.
A global compensation strategy allows human resources (HR) departments to take a high-level view of how they pay employees, rather than siloing them by country. Some human resources information systems (HRISs) provide modules that help the HR team figure out compensation management. There are also payroll software tools, such as Remote and Ramco, that allow businesses to run payroll for a global workforce.
Why is a global compensation strategy important?
Having a global compensation strategy is important for several reasons. For starters, it helps your company stay compliant with both domestic and international labor laws and avoid penalties and legal fees that could result from running afoul of them. It also means international workers are given the same considerations as domestic employees and treated like they are fully part of the company.
Furthermore, having a global compensation strategy supports diversity and equity goals by ensuring employees are paid fairly regardless of race, gender, or where they live. And it promotes employee morale and retention by ensuring they are well-compensated for their work.
Elements of a global compensation strategy
There are five main elements to consider when it comes to strategizing compensation for international employees: base pay, variable and incentive compensation, premiums and allowances, international benefits, and training.
Base pay
Employers can calculate base pay for international employees based on the employee’s home country, host country, headquarters location, and the balance sheet approach.
- Home Country Approach: Employees are paid a wage equivalent to what they would be making in their home country. This is often used for temporary expatriates to ensure employees do not suffer financially if they are assigned to work in a country with a much lower cost of living.
- Host Country Approach: Compensation is based on local or national rates and the cost of living. This approach is often used for permanent relocations and hiring local employees who already reside in the country.
- Headquarters Approach: Employees are paid as if they are working in the country where the business is headquartered, regardless of their actual location. Note that many countries mandate a minimum wage, so you need to make sure to abide by all local laws when using this method.
- Balance Sheet Approach: This method starts with a home country approach and adds allowances, deductions, and reimbursements to ensure employees receive equitable compensation as well as all necessary international benefits.
Variable and incentive compensation
Variable pay, sometimes called incentive pay, refers to compensation that is linked to performance and/or employee tenure. This type of compensation covers performance bonuses, stock options, and restricted share grants.
Premiums and allowances
Premiums and allowances are added to the base salary. These additional payments allow international employees to maintain their standard of living and cover costs associated with international moves. Potential premiums and allowances include hardship or hazard pay, cost of living adjustments, educational assistance, housing assistance, and home leave.
Benefits
Benefits are any perks or compensation included besides base salary and other monetary payments. Some of the most common international benefits and compensation include paid time off, health insurance, retirement plans, and spouse or partner assistance. Each country has different laws that dictate what benefits must be provided to employees residing within national borders, and some make specific exceptions for foreign nationals.
Training
While not as popular as the other elements listed here, some companies provide cross-cultural training and language lessons to ease the transition to a new country. They may also provide assistance with repatriation or reassignment after the international posting ends.
How to create a global compensation strategy
Whether your business is embarking on an international expansion or the time has come to revise an established strategy, following the steps below will set you up for success.
1. Establish goals
When creating or revising a global compensation strategy, you need to identify your primary goals, so they can guide your decisions throughout the process. For instance, hiring your first international employee naturally comes with different priorities than trying to establish pay equity among hundreds of employees around the world. Setting these goals before you do anything else will make sure your global compensation is effectively addressing the issues that are top of mind.
2. Research legal and cultural considerations
The next step is familiarizing yourself with local labor laws and customs that will influence your compensation package decisions. Of course, this encompasses laws about minimum wage and required benefits, but it extends beyond that as well. For example, offering a company car may not be beneficial if an employee won’t be getting a driver’s license in the new country or if driving there is impractical.
3. Conduct competitor analysis
Whether you are putting together an international or domestic compensation package, you’ll want to research what compensation your direct competitors in that country are offering. A stellar global benefits package may be enough to cause a potential hire to choose one company or another, so you want to make sure your benefits are on par or better than your competitors in all the countries where you are hiring.
4. Create a budget
Next, it’s time to set your total compensation budget. Be sure to account for base pay and benefits, plus currency exchange rates and administration costs. These expenses might include extra payroll software fees and staffing costs for additional in-house HR employees. Use this budget to determine what benefits you can afford to offer to your employees and what staff or tools you can afford to support your international hiring efforts.
5. Categorize your employees
Depending on attributes like experience, seniority, and responsibilities, some employees may receive different compensation packages regardless of their location. Practices like position control and salary banding can help determine fair compensation packages based on each employee’s contributions. In addition to promoting transparency and pay equity, this will further inform your budgeting and workforce planning efforts.
6. Consider partnering with on-site experts
Paying employees in other countries presents a host of unique challenges, especially with maintaining compliance with local labor laws. In some cases, it may be more practical to partner with an employer of record (EOR) to take care of the logistical hassles for your business.
EORs are mediators that serve as local business entities in the countries where you want to hire people. They handle payroll, benefits administration, and compliance while you handle all of the other workforce management needs.
It’s important to note that working with an EOR can be expensive for bigger teams, which is why some companies opt to do their own payroll instead. Alternatively, some companies begin using an EOR to establish or grow an international presence and then move to their own in-house team once their international workforce is big enough to justify it.
7. Execute and review the strategy
With these strategic decisions in place, the process of actually paying employees should be relatively simple, whether you do it in-house or through an EOR. We recommend revising your global compensation strategy at least once a year as you prepare your annual budget. You may want to revisit your annual budget sooner if you are planning a significant expansion or experiencing a lot of labor force changes.
Global payroll software can help
Establishing a global compensation strategy and paying international employees can be an ambitious task without well-defined processes in place. Thankfully, the right software tools can make things easier for your HR and finance teams.
Check out our recommendations in our Top Global Payroll Software roundup to find the best solution for your business.