5 Challenges of Managing Global Compensation

Global Compensation

Last Updated on January 21, 2024 by Umer Malik

Hiring global talent from across the world is a prevalent practice in the corporate world. Post-pandemic, employers have been putting more effort into creating international teams since remote or hybrid working models are the new trend everywhere. 

In a remote working model, employees can choose to work from their preferred location without worrying about regularly going to physical offices. This saves commute time for employees, and it also helps employers cut costs of maintaining a vast office space. Hence, organizations are developing functional remote/hybrid work infrastructure to support their global workforce in attaining optimal productivity and flexibility. 

However, hiring global talent comes with a fair share of challenges. A Remote survey of 1,528 respondents of IT divisions of small and medium-sized American and British organizations has revealed that 30% of them face challenges while complying with local taxation and labor laws in the remote work model. Both are closely related to managing international compensation, a major challenge most employers face as their workforce gradually becomes more diverse and global. 

Major Challenges of Managing Global Compensation

Compensation management is more than offering a paycheck, covering the necessary living costs. Most corporations gauge employee performance in terms of organizational goals, which serve as a basis for compensation. HR departments meet challenges with ineffectual compensation management due to the integration of newer tech tools, changing evaluation metrics, changes in labor laws across countries, etc. Naturally, planning and implementing global employee compensation is highly challenging for companies trying to maintain consistency and flexibility across borders.

A comprehensive understanding of the political, cultural, and social environments along with the company’s financial requirements is critical for designing an effective compensation plan for global teams. While benefits and compensation act as a reward system to motivate employees, they solely are not sufficient enough to attract and retain talents. Instead, multinational corporations must devise an international compensation strategy matching the industry standards. 

To create a competitive compensation policy for a global workforce, organizations should first collect data on global markets. Accordingly, they can devise the different aspects of their international compensation policy. However, they might face some challenges during the planning phase:

Determining pay level

At the fundamental level, targeting relevant compensation payscales for local recruits across international borders is a hassle for HR teams. Pay levels vary accordingly across nations due to multiple factors, including market factors, industry norms, and workplace values. Due to the pandemic, most companies have layoff employees and clubbed responsibilities, creating new positions in the process. However, organizations find it challenging to apprehend their true market values of the latest roles, hire for these positions, set up new office spaces in foreign locations, and determine the proper pay structure for employees in multiple locations. 

Trade unions

Unions play a vital role in determining employee compensation policy in many organizations. For instance, in European nations, unionizing is an industry-standard across all sectors. In countries like France, team agreements also determine how much compensation employers should pay even if there’s no employee union.

With the rising trend of unionization among employees, even in countries like the USA, employers are compelled to factor in the influence of trade unions while creating their compensation budget. Studies show that unions have been capable of raising compensation, including both wages and benefits. Unions often help stabilize a certain pay standard that influences non-unionized companies to adopt for employee retention. 

Social contract and culture

Though being an abstract and more of a collective concept, culture and social contract play their parts in the global compensation structure. An employment relationship isn’t merely restricted between an employer and their employees but also includes external factors like the government and law administration. The expectations formed out of this relationship are known as the social contract. Different professionals have different salary standards based on this social contract. Thus, employers must understand the unspoken social contract of a country to set up an appropriate compensation policy. 

This overlaps with how culture affects compensation structure in different nations. Employees from different cultural backgrounds have a set of views and beliefs regarding the compensation system. This cultural aspect affects the variables of the established compensation system. For example, while countries like America and Japan share equity customs among employees, it may be different in other nations. Hence, corporate leaders must understand the controlling cultural context of employees when setting up an international compensation system. 

Market practices worldwide

Companies with a globally dispersed workforce must know the market trends, employment laws, payroll structure, workplace ethics, etc., of all countries where their employees are based. Hence, finding common ground between local and international market practices is a pressing concern for every corporation. 

Benefits, bonuses, rewards, merit policies, and perks and allowances must be planned in compliance with the local laws and regulations of specific countries. Contrarily, there might be a need for adaptability and flexibility for local compensation practices and labor contracts. Centralized systems offer greater insights into performance reviews and compensation structures while maintaining adequate budget control. As a result, an audit trail might be necessary to ensure compliance with the mandatory regulations. 

Regulations and governance

Periodically, governments of different nations eliminate outdated regulations and implement new changes in the country’s laws. This requires employers to stay updated about the international laws and country-specific rules on trade and employment – basically anything that affects the compensation structure directly or indirectly. However, merely learning about these changes won’t help. Companies must restructure and rethink their compensation plans to reflect and comply with the ever-evolving regulations and laws. 

The same applies to the company governance structure. Often, large corporates face the dilemma of deciding who will design the pay structure and supervise the payroll process. This calls for an enhanced alignment on the senior management level to ensure that the payscales, incentives, allowances, etc., sync well with the company’s international compensation structure. 

To conclude,

Creating and managing the international compensation plan is a complex and challenging task for most multinational corporations with a global workforce. The most befitting solution to tackling this issue is incorporating a payroll software system within the compensation structure. A global payroll software management system can automate and standardize employee payroll while adhering to the local laws of different countries. 

Bu automating this aspect of workforce management, business leaders can shift their focus towards more important matters like business expansion planning, product diversification, brand marketing, and remodeling value proposition, among other things.

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