Module: 3
Executive Compensation &
International Compensation
Syllabus
Introduction, Principle-Agent theory and executive compensation, components of executive
compensation. International Compensation: Forms of compensation and factors that influence
compensation policy, Objectives and key components of international compensation, Approaches to
compensation management in international context, Compensation practices of different countries
including India.
Principle-Agent theory
Principle-Agent theory
• The Principal Agent Theory (PAT) offers a distinctive perspective for delving into the intricacies of the procurement framework and its
foundational tenets. PAT has found applications spanning fields like economics, accounting, marketing, and various other social
disciplines (Eisenhardt, 1989; Yukins, 2010).
• The theory springs from the foundational principles of agency theory, which predominantly zeroes in on the broad agency relationship
where one entity, termed the "Principal," delegates tasks to another, known as the "Agent," for execution. Within the confines of agency
theory, a contract symbolizes the bond between the principal and the agent.
• PAT finds relevance in contexts like procurement (encompassing buyer-supplier dynamics) and other analogous agency relationships,
for instance, the bonds between lawyers and their clients or employers and their employees (Eisenhardt, 1989).
• At its core, the theory seeks to pinpoint the quintessential contract while deciphering the behavioral patterns and resultant outcomes in
the principal-agent dynamic. This theoretical framework can be superimposed on the exchanges and interconnections between
organizations and their vendor base during the procurement cycle.
Executive Compensation
•Executive compensation or executive pay is composed
of the financial compensation and other non-financial
awards received by an executive from their firm for
their service to the organization.
•It is typically a mixture of salary, bonuses, shares of or
call options on the company stock, benefits, and
perquisites, ideally configured to take into account
government regulations, tax law, the desires of the
organization and the executive, and rewards for
performance
Executive Compensation
•The compensation program serves three main purposes.
• It must attract executives with the skills, experiences, and behavioral
profile necessary to succeed in the position.
• It must be sufficient to retain these individuals, so they do not leave
for alternative employment.
• It must motivate them to perform in a manner consistent with the
strategy and risk-profile of the organization and discourage self-
interested behavior.
Components of Executive Compensation
• Base Pay - Executives earn increases based on individual performance, internal equity and competitive market rates for comparable
positions. The percentage of total compensation made up by base pay is inversely proportional to the executive’s ranking in the organization.
• Non-Discretionary Cash Bonuses - These bonuses are usually based on performance within a fiscal year. The shorter time frame for
measuring and rewarding performance is consistent with short-term (quarterly and annual) shareholder expectations.
• Discretionary Cash Bonuses - These bonuses are not linked to specific performance measurements or targets. Discretionary bonuses may
be appropriate where company performance is weak, thresholds for non-discretionary cash bonuses have not been met and where there is a
need to provide additional compensation to key executives for retention purposes.
• Stock Options - A stock option program provides an executive with the option to buy shares — typically at the Fair Market Value (FMV) of
the stock as of the day the option grant is issued. Some companies have begun to price options above the FMV so that the options will not
have any value unless the stock price attains a stipulated increase in value.
• Stock Appreciation Rights - These are like stock options, except that the recipient does not actually have to buy and then sell the shares
vested. Stock appreciation rights involve notional stock. They have the advantage of providing cash compensation if the share price
increases, but not diluting shareholder equity.
Components of Executive Compensation
• Share Unit Plans – Under stock option and stock appreciation rights plans, executives are compensated only on the
increase in the value of the shares over the option price. Under share unit plans, executives receive the full cash value of
each share unit granted rather than just the appreciation of the share price.
• Restricted Share Units: These units vest under a predetermined schedule, typically at the end of a specified period such as
three years.
• Performance Share Units: These are increasing rapidly in popularity as an alternative or complement to traditional stock
options. Performance share units vest depending upon the achievement of certain predefined and time-bound performance
objectives.
• Deferred Share Units: With these units payment is deferred until the executive’s employment with the company ends.
They direct executives’ attention to the long-term performance of the organization. An unintended consequence of deferred
share units may be to encourage executives to leave if they anticipate a significant reduction in share price.
Components of Executive Compensation
•Golden Handcuff is a form of employee benefits or executive
compensation, in which a (substantial) bonus is built into an
executive's contract, subject to continuous employment for a certain
number of years.
•In case of leaving the employment premature there would be substantial
financial penalties or the entire amount may have to be repaid.
Components of Executive Compensation
•Golden Handshake is a form of employee benefits or
executive compensation, wherein a large
•payment made by a company to a senior executive is
done upon termination of employment (retirement)
before his/her contract ends.
Components of Executive Compensation
•Golden Hello is a form of employee benefits or executive
compensation, wherein a signing bonus is given to an executive to
induce him to leave a previous employment in order to take up a new
employment by the payment of a large sum of money or other
considerable remuneration.
•Such welcome arrangement could be in cash or in shares or in
options.
Components of Executive Compensation
•Golden Parachute is a form of employee benefits or executive
compensation, wherein the executive is provided with a lucrative
severance
•package in the event of job termination, for example in case of a
takeover by an acquiring company. A GP may include a continuation of
salary, bonus and/or certain benefits and perquisites, as well as
accelerated vesting of stock options.
International Compensation
• In international context, the compensation should be arrived at after examining all
the factors like economic, political, social and legal factors prevailing in the host
country.
• In MNCs, the employees accepts foreign assignments in different countries, take
up the risk, bear inconveniences and discomforts mostly because of compensation
package paid or expected to be paid in future.
• Some employees also leave their families behind in the home country and agree to
foreign assignments in order to make good money in a short time.
• Hence, compensation management plays a significant role in international human
resource management as the employees agree to accept the challenges in foreign
countries to earn more and for better future prospects.
Forms of International Compensation
• Direct Compensation - Direct compensation refers to monetary
compensation provided to employees in returns of their services to
the organization. Like TA, HRA . Special Allowances, Bonus etc.
• Indirect Compensation - Indirect compensation refers to non-
monetary compensation provided to employees in return of their
services to the organization. Like Leave Policy, Medical Benefits,
Insurance etc.
Factors that influence Compensation Policy
• MNC’S Internal Environment - Goal orientation, Capacity to pay,
Competitive strategy, Organization culture, Workforce characteristics,
Workforce characteristics
• MNC’S External Environment - Parent Country, Labor Market
Characteristics, Role of home and host country government, Industry
type, Competitive Strategy
Objectives of International Compensation Policy
1.The compensation policy should be consistent with the overall strategy, structure and business
needs of the multi-national companies.
2. The compensation policy must work to attract and retain staff in the areas where the
multinational has the greatest needs and opportunities.
3. The compensation policy must be competitive and recognize factors such as incentive for
Foreign Service, tax equalization and reimbursement for reasonable costs.
4. The compensation policy should facilitate the transfer of international employees in the most
cost-effective manner for the firm.
5. The compensation policy should must give due consideration to equity and ease of
administration. 6. The compensation policy should give financial protection in terms of benefits,
social security and living costs in the foreign location.
7. Compensation should give to the expatriate some opportunities in terms of financial
advancement through income and or/ savings.
8. The compensation should meet the issues such as employees housing, education of children and
recreation needs.
Key Components of International Compensation
• The international compensation is complex primarily because multi-nationals must cater
to three categories of employees: Parent Country Nationals (PCN), Third Country
Nationals (TCN), and Host Country Nationals (HCN)
• Base Salary
• Foreign Service Inducement or Hardship Premium
• Allowances- Cost of living allowance, Housing allowance, Home leave allowance,
Education allowances, Relocation allowances, Spouse Assistance
• Benefits: Whether or not to maintain expatriates in home-country programs particularly if
the firm does not receive a tax deduction for it.
➢ Whether firms have the option of enrolling expatriates in host-country benefits programs
and or making up any difference in coverage.
➢ Whether expatriates should receive home-country or host-country social security benefits.
Approaches to compensation management in
international context
• Two main approaches adopts by the MNCs in fixing compensation for
their employees are:
1. Going Rate Approach
2. Balance sheet Approach
Approaches to compensation management in international
context
• Going Rate Approach In this approach salary has been fixed based on the local market rates. The local market rates are decided based on
survey conducted in comparing compensation of local nationals (Host country Nationals (HCNs), expatriates of the same nationality and
expatriates of all nationalities. The selected survey comparison the base pay and benefits offered. Advantages
➢ Compensation paid with equality with local nationals
➢ This method of compensation is easy to calculate
➢ Compensation decided in identification with host country
➢ Equity is maintained amongst different country nationals Disadvantages
➢ Variation in compensation is exist between assignments for the same employee ➢ Variations between expatriates of the same nationality in
different countries
➢ Due to this method of compensation re-entry problems will come in future
Approaches to compensation management in international
context
• Balance sheet Approach:
• The balance sheet approach aims to develop a salary structure that equalizes
purchasing power across countries so expatriates have the same standard of living in
their foreign assignment as they had at home.
• There are three common methods implementing the balance sheet compensation plan.
• Home based Method- sets compensation based on the salary of a comparable job in
his or her home city.
• Headquarters based Method set salary in terms of the salary of a comparable job in
the city where the MNCs has its headquarters and
• Host Based Method- bases compensation on the prevailing pay scales in the locale of
the foreign assignment, plus foreign-service premiums, extraordinary allowances,
home country benefits, and taxation compensation.
Approaches to compensation management in international
context
• Advantages
➢ This method gives advantage in terms of equity between assignments
and between expatriates of the same nationality
➢ This approach facilitates expatriate re-entry
➢ In this approach it is easy to communicate to employees
Disadvantages
➢ This approach of compensation can result in great disparities between
the expatriates of different nationalities and between expatriates and
local nationals
➢ This approach of compensation can be complex to administer
Compensation practices of different countries including
India
Students can be assigned the following countries and be informed to do
class presentations in groups as a part of class participation activity.
• India
• USA
• Canada
• Australia
• Germany
• Japan
• China
•Thank You!
