Wage Differentials -

Wage differentials bear a direct relationship to the diversity in

occupation and industries that exist in the economic sphere of
activity in a country.
A certain job requiring a certain skill is paid more or less
than another job requiring a different skill either in the
same or some other industry.
Wage differential refers to differences in wage rates due to the
location of company, hours of work, working conditions,
type of product manufactured, or other factors.
It may be the difference in wages between workers with
different skills working in the same industry or workers with
similar skills working in different industries or regions.
Wage Differentials – Types
Wages differ in different employments or occupations,
industries and localities, and also between persons in the same
employment or grade. One therefore comes across such terms as
occupational wage differentials, inter-industry, inter-firm, inter-
area or geographical differentials and personal differentials.
Type # 1. Occupational Differentials:
These indicate that since different occupations require different
qualifications, different wages of skill and carry different
degrees of responsibility, wages are usually fixed on the basis of
the differences in occupations and various degrees of skills.
Reasons for Pay Differences:
 ● Encouraging Tough Jobs: Higher pay can encourage
people to take jobs that are harder, more dangerous, or
less pleasant. It can also be a way to compensate for
jobs where there's a higher risk of not having steady
work or where earnings can vary a lot.
● Motivation for Training and Skills: Paying more for
certain jobs can motivate young people to invest in
education and training. This is because they know that
this can lead to better-paying jobs in the future.
● Social Status: The amount of money people earn can
also influence their social status. Jobs that pay more
are often seen as having higher status in society.
In short, wages vary to reflect the different demands and
importance of various jobs, to motivate people to train for
skilled positions, and to help define social status based on what
job someone has.
Type # 2. Inter-Firm Differentials:
Inter-firm differentials reflect the relative wage levels of
workers in different plants in the same area and occupation.
The main causes of inter-firm wage differentials are:
(a) Difference in the quality of labour employed by different
firms;
(b) Imperfections in the labour market; and
(c) Differences in the efficiency of equipment, supervision and
other non-labour factors.
Type # 3. Inter-Area or Regional Differentials:
Such differentials arise when workers in the same industry and
the same occupational group, but living in different
geographical areas, are paid different wages.
Reasons for These Differences:
● Living Conditions: If one area has tough living
conditions, like harsh weather, isolation, or poor
housing, workers there might get paid more.
● Cost of Living: In places where it's more expensive to
live, wages might be higher to help workers afford the
cost of living there.
● Availability of Workers: If there are not enough
workers in a particular region, employers might pay
more to attract them.
Impact on Workers' Movement:
● These wage differences can influence where people
choose to work. If one region pays more, workers
might move there for the job.
● Sometimes, these differentials are used on purpose to
encourage workers to move to places where they are
needed more.
In summary, workers in the same job might be paid differently
based on where they live and work, due to factors like living
conditions, cost of living, and worker availability. This can also
affect where people decide to work.
Type # 4. Inter-Industry Differentials:
These differentials arise when workers in the same occupation
and the same area but in different industries are paid different
wages.
 Inter-industry differentials reflect skill differentials. The
industries paying higher wages have mostly been industries
with a large number of skilled workers, while those paying
less have been industries with a large proportion of unskilled
and semi-skilled workers.
Other factors influencing inter-industry differentials are the
extent of unionisation, the structure of product markets, the
ability to pay, labour-capital ratio, and the stage of development
of an industry.
Type # 5. Personal Wage Differentials:
These arise because of differences in the personal characteristics
(age or sex) of workers who work in the same plant and the
same occupation.
The Principle: Organizations like the International
Labour Organization (I.L.O.) and various labor courts
and committees believe that everyone should get the same
pay for doing the same work.
Reality is Different: Despite this principle, it's not always
followed in real life. For example, in jobs that require a lot
of physical strength, women who do the same job as men
often get paid less.
Reasons for Pay Gap:
● Less Organization Among Women: Women workers
might not be as well-organized in unions or groups to
fight for higher pay.
● Less Mobility: Women might not move around as
much for work, which can affect their job
opportunities and wages.
 ● Lower Basic Needs: It's sometimes assumed that
women need less money to live on, which can lead to
lower pay.
● Perceived Physical Differences: There’s a belief that
women might not be as physically strong as men,
which is used to justify lower pay in physically
demanding jobs.
In short, while the idea is to pay men and women equally for the

same work, this doesn't always happen due to various reasons,

including social and physical perceptions about women in the

workforce.

National Wage Policy:

At present no national wage policy exists in India.
However, the efforts made in this direction are worth
consideration:

1. National Commission on Labour (1969):

The commission did not go beyond recognizing the need for a
national wage policy in these words.
“The wage policy has to be framed taking into account such
factors as the
price level (they need to think about what prices for goods and
services can be supported by these wages.)which can be
sustained,
the employment level(The policy should aim for a certain level
of employment, meaning it should help create jobs or keep a
good number of people employed.) to be aimed at,
requirement of social justice,(The wages should be fair and help
reduce inequalities in society.) and
capital formation need for growth.”(he policy should support
economic growth, meaning it should help in building and
expanding businesses, which can lead to more jobs and better
economy.)
In simple terms, the commission is saying that when deciding
how much people should be paid, it's important to think
about how it affects the cost of living, job creation, fairness,
and the overall growth of the country's economy.
2. Chakraborty Committee (1974):
Recognising the need for uniformity in wage payments across
regions, industries, and occupations the committee suggested
that a National Wage Commission and a National Wage Board
be set up to evaluate all jobs, work out a grade structure based
on skill differentials and fix wages for each grade.
3. Bhoothalingam Study Group (1978):
This Group opined that the determination of a homogeneous
national wage structure is very difficult. Here's a simpler
explanation:
Challenge of a National Wage System: The group believes it's
really tough to make a single wage system that works the same
for everyone in the country.
History Affects the Present: We can't start from scratch
because there's a lot of history that influences how things
are now. The way people have been paid in the past affects
current decisions.
Existing Problems: There are already differences, mistakes,
and parts of the wage system that don't make sense. Over
time, people have started to accept these issues as normal,
even though they're not fair.
Further, there is no reasonable method of determining what
should be the absolute level of wage for each category of
workers and what is a right differential between one category of
workers and another. Even if a national wage structure is
determined, which is doubtful, or the historically determined
structure accepted, which is improbable, several adjustments in
wages or are required from time to time.
Problems with Current Wages:
● Wages often go up just because of time, not because the
work or skills have changed.
● There needs to be a way to protect wages from losing value
when money becomes worth less over time.
 ● The wages of different types of workers need to be
adjusted, especially when comparing workers with different
skills and job difficulties.
● Pay should reflect changes in how productive workers are.
● There are big differences in pay within the same types of
jobs that need fixing.
● There needs to be a way to make wages more equal across
different industries and within the same industry.

The Group tried to provide appropriate guidelines and

principles:
Suggestions for Improvement:
● They suggest using collective bargaining (negotiations
between employers and groups of employees) to make
these adjustments.
● They want to reduce wage differences and increase pay in
areas where wages are very low.
● They recommend that any extra pay for the high cost of
living should be based on a standard method.
The Group recommended that future dearness allowance should
be linked to the cost of living on a uniform basis. It further said
that the present system of bonus payment in the country which
was related to profit is not suitable for organisations which do
not have the profit motive, e.g. government, railways, posts and
telegraphs, etc.
But these views were opposed by trade unions. They argued that
the D.A. payment linked to wage slabs and bonus payment
linked to allocable surplus had been customarily accepted and
legally sanctified and any change in these methods would be
disadvantageous to the workers. The report was therefore
shelved by the government.
In the ultimate analysis it may be said that despite a number of
practical difficulties there is need for a rational wage policy in
the country which may:
i. Link reared to effort;
ii. Encourage need-based educational system and skill-
formation;
iii. Promote modern managerial practices to improve
productivity;
iv. Apportion the gains of improved productivity between
management, workers, and consumers, and
v. Develop an inbuilt mechanism to control wages, incomes and
prices.
Wage Boards -
The wage boards are tripartite having representatives of
workers, employers, and independent members participate
and finalize the recommendations. The utility of such boards
in the present context is debatable.
A wage board is a statutory body established by the government
to tackle the disputes relating to the employers or the employees.
Wage Boards – Growth and Development in India
The history of wage boards in India dates back to the 1930’s.
The Royal Commission on Labour recommended the setting up
of tripartite boards in Indian industries. It said: we would call
attention to certain cardinal points in the setting of (wage-
fixing) machinery of this kind.
The main principle is the association of representatives of
both employers and workers in the constitution of the
machinery.
Such representatives would be included as equal members, with
an independent element, chosen as far as possible in agreement
with or, after consultation with, the representatives of both
parties. Take decisions regarding wage adjustments or on
reference from parties or the government.
No action was taken during that plan period. However, the
Second Plan emphasized the need to determine wages through
industrial wage boards. It observed the existing machinery for
the settlement of wage disputes has not given satisfaction to the
parties concerned.

More acceptable machinery for settling wage disputes will be

the one which gives the parties themselves a more responsible
role in reaching decisions.
An authority like a tripartite wage board, consisting of an equal
number of representatives of employers and workers and an
independent chairman, will probably ensure more acceptable
decisions.
Such wage boards should be instituted for individual industries
in different areas. This recommendation was subsequently
reiterated by the Indian Labour Conference in 1957 and various
industrial committees. The government's decision to set up the
first wage board in the cotton textile and sugar industries in
1957 was also influenced by the Report of the ILO.
The appointment of a wage board often results from the
demands for labour unions. It has been reported: The formation
of wage boards in all industries has been the result of demands
and pressures on the part of trade unions.
In their efforts to secure the appointment of wage boards, trade
unions have to re-pressurize not only the government but also
the employers whose formal or informal consent to their
establishment must be obtained.
In India, the Bombay Industrial Relations (Amendment) Act
of 1948 may be regarded as perhaps the earliest legislation
that included a provision for the establishment of wage
boards in any industry covered by the act.
Accordingly, the first wage board was set up in Bombay for the
cotton textile industry. The principal purpose of starting wage
boards was to relieve the Industrial Courts and Labour Courts of
a part of their adjudication work.
Wage Boards – 8 Important Objectives
To achieve the following objectives the Wage Board was set-up:
1. To align the wage settlements with the social and economic
policies of the Government.
2. To represent consumers/public the interests.
3. To standardise wage structure throughout the industry
concerned.
4. To provide better climate for industrial relations.
5. To work out wage structure based on the principles of fair
wages as formulated by the Committee on Fair Wages,
6. To work out a system of payment by results.
7. To evolve a wage structure based on the requirements of
social justice.
8. To evolve a wage structure based on the need for adjusting
wage differentials in a manner to provide incentives to workers
for advancing their skill.
The wage boards while determining the wage structure for a
particular industry, uses the following factors:
(i) Need-based minimum wage
(ii) Industry’s capacity to pay
(iii) Productivity of labour
(iv) Prevailing rates of wages
(v) Level of national income and its distribution
(vi) Place of industry in the economy of the country
(vii) Needs of industry in developing economy
(viii) Requirements of social justice; and
(ix) Adjustment of wage differentials in such a manner as to
provide incentives for skill formation.
Pay Commissions -

The Pay Commission is an essential institutional mechanism that

plays a pivotal role in determining the salaries, allowances,
and benefits of millions of central government employees. As
a critical component of the country's administrative setup, the
commission periodically evaluates the prevailing economic
conditions and recommends appropriate revisions in pay
scales to ensure fair remuneration for the public sector
workforce.

What is Pay Commission?

■ The Pay Commission is a body set up by the Central
Government that reviews and recommends changes
to the salary structure of employees.
■ The composition of the Pay Commission comes
under the Department of Expenditure (Ministry of
Finance).
■ Pay commissions are usually constituted every 10
years and the first pay commission was set up in
1946. Since Independence, a total of seven pay
commissions have been formed.
■ The latest pay commission was set up in 2014 and its
recommendations came into effect in 2016. Currently,
central government employees and pensioners get
salaries based on the recommendations of the 7th
pay commission.
■ It is not mandatory for the government to accept the
recommendations of the pay commission. The
government may choose to accept or reject the
recommendations.
Why is Pay Commission Required?
■ Salary Revisions: The Pay Commission periodically
assesses the existing pay scales, allowances, and other
benefits for government employees. It considers
various factors like inflation, economic conditions,
the cost of living, and prevailing market rates while
recommending revisions.
○ These revisions ensure that government
employees receive fair and competitive
salaries, in line with the changing economic
landscape.
■ Impact on Public Finances: The recommendations of
the Pay Commission have a significant impact on the
government's financial expenditure, as the salaries
and allowances of a large number of employees are
affected.
■ Ripple Effect on Other Sectors: The
recommendations of the Pay Commission often
influence salary structures in the private sector and
 various state government organisations. Many state
governments and private companies also use the
Central Pay Commission's recommendations as a
reference point while revising their own salary
structures.
■ Social Equality: The Pay Commission also addresses
the issue of pay parity and social justice. By ensuring
that government employees receive fair and competitive
wages, it helps reduce income disparities between
different sections of society.
■ Reviewing Allowances and Perks: Apart from basic
pay, the Pay Commission also reviews and
recommends changes to various allowances and
perks provided to government employees, such as
housing allowances, medical benefits, and travel
allowances.

What are the Recommendations of the Seventh Central Pay

Commission?
■ Minimum Pay: Based on the Aykroyd formula, the
minimum pay in government is recommended to be set
at ₹18,000 per month.
■ Maximum Pay: ₹2,25,000 per month for Apex Scale
and ₹2,50,000 per month for Cabinet Secretary and
others presently at the same pay level.
■ New Pay Structure: Considering the issues raised
regarding the Grade Pay structure and with a view to
bringing in greater transparency, the present system of
pay bands and grade pay has been dispensed with
and a new pay matrix has been designed.
○ Grade Pay has been subsumed in the pay
matrix. The status of the employee,
determined by grade pay, will now be
determined by the level in the pay matrix.
■ New Pension System: The Commission received many
grievances relating to New Pension System (NPS). It
has recommended a number of steps to improve the
functioning of NPS. It has also recommended the
 establishment of a strong grievance redressal
mechanism.
■ Annual Increment: The rate of annual increment is
retained at 3%.
■ Dearness Allowance (DA): The rate of Dearness
Allowance (DA) is currently decided on the
recommendation of the 7th Pay Commission.

What is the 8th Pay Commission?

The appointment of the 8th Central Pay Commission was
announced in 2020 to revise the salary, allowances, and the
pensionary benefits for all Central Government employees. The
8th CPC implements the revision of five-year wage plan of
central government employees, which was earlier expected to
take effect from 1 January 2021.

8th CPC Salary Increase

For all Central Government employees, the 8th Pay Commission
is expected to suggest a revision in the basic salary, which may
fall between approximately 25% to 35%. The 8th Pay
Commission will also suggest a significant increment in the
retirement benefits of up to 30%.

8th Pay Commission Date

The announcement of the 8th Pay Commission is expected to
take place before the general election in 2024. The pay
commission is expected to be into effect from 1 January 2026
that will benefit all the central and state government employees,
pensioners, and family pensioners.

What are the Challenges Faced by the Pay Commission?

■ Economic Conditions: Economic fluctuations and
uncertainties impact the government's ability to allocate
funds for salary hikes. If the economy is not growing
at a healthy rate, it can limit the resources available
for implementing significant pay revisions.
■ Fiscal Constraints: The government has to balance its
fiscal responsibilities, including managing budget
deficits and controlling public debt. Meeting the
demands of higher pay for government employees
without compromising fiscal stability can be a
troublesome task.
■ Inflation and Cost of Living: High inflation rates and
rising costs of living affect the purchasing power of
individuals. The Pay Commission needs to consider
these factors to ensure that government employees'
salaries are sufficient to maintain a reasonable standard
of living.
■ Income Disparities: Addressing income disparities
between different levels of government employees
can be challenging. Balancing the need for pay hikes
while maintaining a fair and just salary structure is a
complex task.
■ Demands of Various Sectors: Different sectors of the
economy have unique pay and benefits requirements.
 The Pay Commission must cater to the diverse needs
of employees in various fields, such as defense,
education, healthcare, and public administration.
■ Global Economic Factors: Global economic
conditions can also influence India's economic growth
and fiscal position, affecting the government's capacity
to implement significant pay revisions.
■ Pension and Retirement Benefits: The Pay
Commission must also address pension-related issues
and recommend measures to ensure financial
security for retired government employees.

Dearness Allowance (DA)

■ DA is paid by the government to its employees as
well as pensioners to offset the impact of inflation.
The effective salary of government employees requires
constant enhancement to help them cope with
increasing prices.
 ■ As the impact of inflation varies according to the
location of the employee, the DA is calculated
accordingly. Thus, DA varies from employee to
employee based on their presence in the urban,
semi-urban or rural sectors.
■ It is calculated based on the All-India Consumer
Price Index for the past 12 months.

Linking wages with productivity - Productivity-linked wage

system - PLWS

Gaps in the economic growth and standard of living among

various nations can occur due to employee productivity. We
need to consider that a country’s ability to improve quality of
life over time relies on its ability to improve the output of
employees. Furthermore, it is widely acknowledged that
productivity and wages will increase when the nation becomes
more competitive and developed. Therefore, employees must
acquire substantial gains from increased employee productivity
to achieve a standard of living through the increase in given
wages.

PLWS is a flexible and competitive wage system that allocates

wealth created based on employers and employees performance
as well as productivity to enhance the firm’s shared prosperity
and competitiveness.

Moreover, the adoption of PLWS was pinpointed as a priority

under the Shared Prosperity Vision 2030 to increase
compensation and establish a future workforce. The PLWS
aligns organizational policies, inspires employees, and boosts
job satisfaction. It also enables skills-related specialisations, and
professional career advancements and forms equitable
interactions between employers and employees.
Therefore enterprises that embrace the PLWS experience
improve teamwork and build a healthier workforce with a
stronger sense of belonging to the firm among employees.
Consequently, flexibility in the employees’ remuneration
systems and workers’ positivity results in employee-employer
engagements as well as harmonious industrial relations.

Phases of PLWS Implementation

Enterprises should adopt the following five (5) steps to succeed

in their PLWS implementation journey.

● Raising awareness on the PLWS

● Formulation of measurement tools
● Switching to a new system
● Adoption of PLWS
● Constant evaluation and enhancement of existing
PLWS
Generally, an organisation’s management board is responsible
for thoroughly explaining the system’s advantages to the union
and employees.
In addition, bilateral meetings and discussions need to be held
regularly to acquire feedback and ideas from the members.

Furthermore, an internal committee designated by employees

from every department must be established to develop a
performance measurement system that is fair, easy to
understand, and mutually agreed upon by both parties.

The transition to a new system is a complex process. Therefore,

distinctions between the existing and the new system must be
grasped.

Additionally, some flexibility should be given during the

adoption period of the new system to enable employees to
acquire essential information on any development and provide
recommendations for improvement.

Lastly, selecting the implementation process relies on the type of

industry and the contract between the employer and employees
or trade union.
However, this system should be reassessed in light of present
economic conditions, organisational performance and individual
productivity rate.

Objectives of PLWS Implementation

Economic development, greater productivity, and creating

suitable employment levels have historically been vital
aspects of macroeconomic objectives for policymakers.
In developing countries in particular, economic development has
consistently been the top priority.

Accordingly, PLWS strives to strengthen a connection between

wages and productivity to boost competitiveness and assure job
resilience.

This is done by enabling employers to form a more

comprehensive and systematic approach to enhancing
productivity and wages via active participation and
collaboration.

Lastly, this system allows employees to receive a fair share of

gains from productivity advancement, encouraging equity and
social unity.

Simultaneously, it enhances life quality while developing

professional career advancement opportunities and job
satisfaction.
Benefits of PLWS Adoption

The PLWS benefits both employers and employees by assuring

that both sides acquire a fair share of gains from productivity
and performance advancement.

Unfortunately, despite the positive findings, PLWS

implementation rates remains low.

The primary reason is a lack of awareness of the advantages and

importance of this system for the organization’s members.
However, the following factors are known as the major benefits
of implementing PLWS.
 1. First, the wage payments will be modified according to
economic performance, minimizing the adverse effects on
employers and employees.
2. Second, it assures employment security and reduces the
likelihood of layoffs during an economic recession.
3. Thirdly, it forms a win-win condition for both parties.
4. Fourthly, it enables organisations to adapt their policies in
response to the current economic circumstances.
5. Lastly, it boosts job specialisation according to competence
and advances employees’ professional careers by
increasing their motivation and job satisfaction.
PLWS Models

In general, the PLWS can be based on three (3) different

models, known as profitability, productivity, and integrated
models.

The profitability model comprises a fixed component

integrated with a variable component determined by a profit-
sharing formula.
In addition, the variable component will be paid when the profits
gained by the organisation surpass a pre-agreed level. Hence,
this profit level can be determined using return on investment
and average profits obtained over the years.

Next, the second model is the productivity model, which

contains a fixed component and a variable component defined
by a productivity-sharing formula.

In addition, the formula is T = A + P, where T = total wage

increase, A = annual increment and P = variable productivity
payment.

In this case, productivity can be measured as worker

performance, production efficiency, total factor productivity, or
a total average of numerous key performance indicators.

Finally, the last model is the integrated or combined model,

which combines profitability and productivity.
CASE STUDY

PLWS Success Story from a Malaysian Company

Bumi Emas Services (BES) is a secretarial service company that

provides a broad range of services such as company registration,
business licensing, accounting, and book-keeping, which records
the company’s financial transactions into structured accounts
daily.

The company was founded in March 2009 in Miri, Sarawak, by

Siti Rahimah, who also became the company secretary and
Chief Executive Officer (BES, 2022).
The company is one of Sarawak’s foremost providers of
corporate secretarial services. BES strives to be competitive in
aligning with the government’s goals of delivering quality and
successful entrepreneurs.

One of the significant effects of adopting PLWS in BES was

enhancing morals and ethics among employees and encouraging
them to be more productive. Since the company was small the
need to retain talent was a big priority. The PLWS has also
broadened the scope of work, reinforced teamwork, stimulated
collaboration and strengthened unity.

Moreover, the PLWS also formed a win-win situation for both

management and staff in the company, as the productivity and
effectiveness of employees was increased, leading to customer
satisfaction and retention. According to BES, the constant
support by the top management provided the assistance required
to build PLWS within the company, and BES has enhanced its
productivity by 30% since its introduction (BES, 2022).
On the other hand, the Malaysia Productivity Corporation
(MPC) has engaged in strengthening efforts to raise awareness
of PLWS and e-Shared Prosperity Organisation (eSPO)
Acknowledgement Certificate.

Another excellent example of PLWS implementation is for KPJ

Healthcare, due to it obtaining the eSPO Acknowledgement
Certificate. Indeed, PLWS has been a critical component of its
talent management, resulting in solid relationships among the
staff and client satisfaction, as well as the hospital’s profitability
and growth. The hospital and staff prospered and continue to
develop together by acquiring mutual benefits from the adoption
of PLWS (Bernamamrem, 2021).

Overall Discussion

In response to the rapid changes brought by globalisation,

implementing the PLWS will improve Malaysia’s industrial
productivity and competitiveness. The PLWS is enforced by the
government to foster a work culture based on performance and
productivity. Further, this system benefits employers and
employees while also contributing to the development of the
economy and stabilisation of the nation to compete in an
aggressive global market.

Accordingly, as of June 2021, the director-general (Datuk Abdul

Latif Abu Seman) declared that over 2,500 enterprises had been
designated as ’shared prosperity organisations’, including
numerous sectors such as manufacturing, services, construction,
agriculture, mining as well as quarrying, to inspire SMEs to be
identified for their resilience during the Covid-19 pandemic and
for contributing to the nation’s economic recovery (StarNews,
2021).

Nonetheless, multiple factors primarily contribute to the

successful adoption of this system. Firstly, the commitment of
top management is required to guarantee that the system is
successfully enforced at every level of management throughout
the organisation. Secondly, accurate information exchange is
essential to instil trust and prevent suspicion among employees
or trade unions. Thirdly, a fair and transparent performance
inspection mechanism must be developed to avoid doubts and
mistrust. Finally, establishing a communication channel between
employees and employers is crucial to keep employees updated
on the progress of the PLWS implementation.

International Compensation Management

Designing and developing a better compensation package for

HR professionals for the international assignments requires
knowledge of taxation, employment laws, and foreign currency
fluctuation by the HR professionals. Moreover, the socio-
economic conditions of the country have to be taken into
consideration while developing a compensation package. It is
easy to develop the compensation package for the parent country
national but difficult to manage the host and third country
nationals. When a firm develops international compensation
policies, it tries to fulfills some broad objectives:

1. The compensation policy should be in line with the

structure, business needs and overall strategy of the
organization.
 2. The policy should aim at attracting and retaining the best
talent.
3. It should enhance employee satisfaction.
4. It should be clear in terms of understanding of the
employees and also convenient to administer.

The employee also has a number of objectives that he wishes to

achieve from the compensation policy of the firm

● He expects proper compensation against his competency

and performance level.
● He expects substantial financial gain for his own comfort
and for his family also.
● He expects his present and future needs to be taken care of
including children’s education, medical protection and
housing facilities.
● The policy should be progressive in nature.

Major Components in an International Compensation

Package
International Compensation is an internal rate of return
(monetary or non monetary rewards / package) including base
salary, benefits, perquisites and long term & short term
incentives that valued by employee’s in accordance with their
relative contributions to performance towards achieving the
desired goal of an organization.

The following are the major components of an international

compensation package.

1. Base Salary

the "base salary" is the main part of a person's pay. In a domestic

context, it's the amount of money someone earns before any
bonuses or extra benefits. For example, if someone earns
$50,000 per year as their base salary, that's the main part of their
pay.

However, in an international context, especially for people

working abroad (expatriates), the base salary becomes even
more important. It's still the main part of their pay, but it's also
used as a starting point for calculating other allowances and
benefits they might receive, like bonuses, housing allowances,
or pension contributions. So, the base salary is like the
foundation of their entire compensation package when they
work overseas.
2. Foreign Service Inducement Premium - "hardship
premium" is extra money given to employees who take on jobs
in foreign countries. This extra pay is meant to compensate them
for any difficulties they might face while working abroad. These
difficulties could include things like living in a different culture,
dealing with language barriers, or being away from family and
friends.

The amount of hardship premium can vary depending on factors

like how long the employee will be working overseas and the
nature of the job. Usually, it's calculated as a percentage of the
employee's salary. Sometimes, additional payments might be
given for things like longer work hours in the host country
compared to the home country. Overall, the goal of hardship
premium is to make sure employees feel fairly compensated for
the challenges of working in a foreign country.
3. Allowances - "Cost of Living Allowance" (COLA) is extra
money given to employees working in different countries to
make up for differences in the cost of living. For example, if it's
more expensive to buy groceries or rent an apartment in the
country where they're working compared to their home country,
they might get a COLA to help cover those costs.

COLA can also include payments for things like housing,

utilities, and even personal income tax. Additionally, other
allowances are often given to make sure employees and their
families feel comfortable living in the new country. These
allowances might include money for things like:

● Going back home to visit family

● Paying for children's education
● Helping with moving expenses
● Compensating for a spouse's lost income if they can't work
in the new country.
Overall, these allowances are meant to encourage employees to
take on international assignments and help them adjust to living
in a new place.

4. Benefits- dealing with employee benefits, like pension plans

and medical coverage, can be tricky when employees work in
different countries. Each country has its own rules and practices
for these benefits, so it's hard for companies to offer the same
benefits everywhere.

One big question companies have to figure out is whether

employees working abroad should get benefits from their home
country or the country they're working in. For example, many
American employees continue to get benefits from the United
States, even if they're working overseas.

Other benefits that might be offered include things like vacation

time, special leave for emergencies, and support for things like
family illnesses or deaths. However, the specific benefits offered
can vary depending on the rules and regulations of the country
where the employee is working.

5. Incentives- some multinational companies (MNCs) have

started using special incentive programs to keep their employees
motivated when working abroad. Instead of giving them a
regular bonus for their overseas assignment, they now give them
a one-time lump-sum payment.

This lump-sum payment has a few advantages. First, employees

know they'll only get this payment once, when they accept the
overseas assignment. So, it keeps them motivated to do well in
their new role. Second, it's cheaper for the company because
they only have to make one payment instead of regular bonuses
over time. Finally, since the incentive payment is separate from
regular pay, employees can decide whether to save or spend it
however they want.
6. Taxes - when it comes to taxes for employees working
abroad, multinational companies (MNCs) usually use one of two
approaches:

Tax equalization: The company withholds an amount of

money equal to what the employee would owe in taxes in
their home country, and then pays all the taxes in the
country where the employee is working.
Tax protection: The employee pays taxes as if they were still
working in their home country. If the taxes in the foreign
country end up being less than what they would have paid
at home, the employee gets to keep the extra money. This
way, they're protected from paying more in taxes than they
would have back home.

7. Long Term Benefits or Stock Benefits

Employee Stock Option Schemes (ESOS) are benefits offered

by multinational companies (MNCs) to their employees for the
long term. These schemes allow employees to buy company
stock at a future date or at a discounted price.

Here are some common types of stock option schemes:

Employee Stock Option Plan (ESOP): In this plan, a certain

number of company shares are set aside for key employees
to purchase at a later date. These shares act as an incentive
for employees to help grow the company's value over time.
Restricted Stock Unit (RSU): This plan gives employees
units of company stock, but with restrictions on when they
can be sold or exercised. Usually, these restrictions lift after
3-5 years, allowing employees to benefit from the stock's
value.
Employee Stock Purchase Plan (ESPP): In this plan,
employees can buy company shares at a discounted price.
The company deducts the purchase price from the
employee's salary each month, making it easier for
employees to become shareholders.
Expatriate pay - 1. Expatriate Compensation Package
An expatriate compensation package is the basic level of
compensation offered by MNC companies.

Although there are different levels in this package as well, the

basic outline of an expatriate compensation package is cash
salary, benefits, and tax.

Every MNC offers different types of expatriate compensation

packages.

Some may offer these packages at the beginning of the

appointment, or at the start of travelling for an overseas project.

However, it is safe to say that no two MNC companies are alike

and offer various expatriate compensation packages.

As mentioned above, the 3 main aspects of an expatriate

compensation package is basic cash salary, benefits, and tax.

Depending on how the employee is recruited and if he or she is

appointed directly overseas for a project this expatriate
compensation package can take effect.
The expatriate compensation package can be offered to an
employee from an overseas or international MNC asking them
to relocate to work.

Some employees work at their local MNC branch and are later
asked to travel overseas for a new project.

Following which they are offered this expatriate compensation

package as an incentive to travel for the company.

2. Basic Cash Salary

This category refers to the basic cash salary an employee is paid
to do the job.

Salaries are often determined by the level or responsibilities of

the job, capability and qualification of the candidate as well as
the level of their previous work experience.

Also, salaries are also pitched according to the hierarchy of the

MNC Company.
Moreover, if the MNC Company is looking for the employee to
travel for an overseas project then the salary will also depend on
the economic conditions and job level in the host country.

3. Benefits
The term ‘benefits’, refers to the other added benefits that the
employee is given apart from the basic salary.

Be it for local or international work, MNC companies are

applauded for providing benefits to their employees.

These benefits depend on which position the employee is

positioned at within the hierarchy and level of management.

Therefore, the term benefits can include something as basic as

insured health care to in house meals and even stretch to
providing housing and transportation facilities.

4. Relocation and Housing Benefits

Several MNC companies provide employees who have been
recruited to travel overseas for a project with relocation and
housing benefits.
In a nutshell, everything from moving to and settling down
in the host country will be looked after.

The MNC Company will pay for or cover the expenses for all
the travelling, finding temporary accommodation and finding a
home in the host country.

However there are a also companies that only cover housing and
accommodation costs.

Settling into a new country can be challenging, especially if you

have travelled with a family.

Therefore the MNC Company provides an agency or assistance

within the host country to help the new employee settle down.

5. Education Benefits
Many reputed MNC companies also provide educational
benefits to their employees to further their academic graph or
complete post graduate education.

MNC are known for helping employees grow in their career and
providing growth opportunities.
Hence, depending on the expatriate compensation package the
MNC will offer educational benefits to their employees.

Other MNC firms also cover educational expenses for the family
and children of certain executive expatriates or employees.

Several executive expatriates or employees who travel with

family relocate from one place to another because the companies
cover educational expenses as incentives.

6. Health Insurance Coverage

This type of employee benefit is a basic yet important aspect.

It is a more common benefit that most employees get to use

when they join a reputed MNC corporation.

Most MNC companies provide health insurance and coverage

across varying degrees of the management hierarchy.

The MNC will arrange for host country health care and
insurance partners to assist the employee with obtaining quality
health care and coverage.
Mostly, the health insurance is incredibly helpful in the face of
sudden accidents and third party liabilities.

7. Automobile and Transport Benefits

Locally as well as internationally, MNC companies provide
organized transportation for employees travelling to and from
work.

However, when employees travel overseas for an international

project, transportation costs are either covered by the company
or a vehicle and fuel is provided for.

Depending on the host country and its infrastructure, the

company will provide the necessary transportation benefits.

8. Tax as expatriate compensation packages

when employees work overseas for multinational companies
(MNCs), they often have to deal with different tax systems and
regulations. This means they might have to pay taxes both in
their home country and in the country where they're working.
Tax equalization or assistance is a benefit that many employees
appreciate because it helps them manage their taxes more easily.
With tax equalization, the company helps employees by making
sure they pay the same amount of taxes as they would if they
were working at home. This can be a big relief for employees, as
it ensures they don't end up paying more taxes just because
they're working abroad.

Overall, tax benefits are a great incentive for employees who

travel overseas for work, as it helps them navigate the
complexities of international taxation more smoothly.