International Organizational Behavior 2e Chapter 8 Page 1
CHAPTER 8
EVALUATING AND COMPENSATING
INTERNATIONAL EMPLOYEES
Multinational companies whose employees move from country to country face
predictable but widespread and daunting compensation challenges.
—Mercer Worldwide Consulting
EMPLOYEE PERFORMANCE APPRAISAL: THE GLOBAL CHALLENGE
Managing employee performance is always challenging, but for multinationals the difficulty is
compounded by having employees scattered all around the world—many of whom embrace
different cultural values and localized practices for performance management. There is no doubt
that employee performance evaluations cost more and are more complex for a multinational than
for firms with single-country operations. It is important to keep in mind the core questions facing
multinationals when it comes to managing and appraising employee performance:
• Should the firm rely on a standardized set of policies, procedures, and practices for
appraising employee performance worldwide?
A key is to keep the global workforce focused on company goals, and executing the firm’s
strategy and performance appraisal systems are is an important mechanism for doing that.
Imagine you have six employees reporting to you in your firm’s London headquarters. Your job
as a manager is to determine how well they do their jobs and give them performance appraisals
I. Multinationals and Performance Evaluation for Expatriates
Research shows that, regardless of their roots, when multinationals tailor performance
Many multinationals take a blended approach, insisting on some common practices
everywhere while also allowing for considerable tailoring in local units. The goals of
gaining additional skills and a more global perspective are among the key reasons
why multinationals send expatriates. At least one study showed that expatriation
There are three important questions about performance appraisal for expatriates: 1)
Who should evaluate their performance? 2) When or how often should they be
evaluated? 3) What aspects of performance should be evaluated?
II. Who Should Evaluate Expatriate Performance?
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Multinationals have a variety of options for evaluating expatriates. Evaluations can be
conducted in the host country, the home country, or both. Research shows that in
practice a mix of home- and host-country personnel is commonly used to conduct the
evaluation process. While expatriate evaluations frequently follow the outlines of
A. Evaluations by host country professionals
Having host-country professionals involved in expatriate evaluation is a popular
option (about 71% of firms report doing so), and is more common among bigger
Relying on host-country managers to evaluate expatriate performance is not
without drawbacks. While local professionals are knowledgeable about their
environment, they also bring their own cultural frames of reference to the table,
Differences in criteria may be subtle and not directly related to performance per
se—instead reflecting differences in interaction norms. As a result, even if a
multinational uses the same performance appraisal system everywhere, the results
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B. Evaluations by home-country professionals
There are clear advantages to having home-country professionals evaluate
expatriates. These managers are usually more familiar with expatriates’
Using home-country professionals to evaluate expatriates can also have its
shortcomings. Distance can be an impediment. Consequently, a major challenge
for home-country professionals is gaining access to information they need to
make a quality evaluation. Studies show that most expatriates have relatively little
“quality” contact with home-office personnel during their overseas assignment,
including their direct home-country supervisor.
III. When Should Expatriate Performance Be Evaluated?
American firms have historically evaluated employees—domestic and international—
once or twice a year. Experts, however, have argued that this is too infrequent and
forces evaluators to rely on shaky memories or the most recent events. They suggest
that evaluations be completed more often, taking into consideration features such as
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evaluations, particularly those done locally. The best time to evaluate expatriates
depends on what is “right” given the nature of the overseas assignment.
IV. What Should Be Evaluated? Context Variables that Impact Expatriate Evaluations
One of the thorniest questions about evaluating expatriates is what areas or criteria
should be considered. There are at least three important features about the context of
A. Environmental variables. The extent to which the employee’s work environment presents
special challenges should be taken into account when determining performance criteria.
The full impact of environmental variables is difficult to appreciate from a distance.
Even if a firm has considered these three important constraints on performance overseas,
V. General Guidelines for Expatriate Evaluation
A. Rate the assignment difficulty
A firm might consider conducting a thorough assessment of how difficult specific
foreign assignments will be (alternatively, assessments can be purchased from
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One contributing factor to assignment difficulty is the extent of necessary language
adjustment. The degree of cultural toughness can also affect the difficulty of an
B. Additional suggestions
While many experts recommend involving multiple home- and host-country
evaluators in expatriate assessment, a common suggestion is to place greater weight
If host-country personnel have primary responsibility for conducting expatriate
evaluations, they should seek input from the home office before sharing feedback
Often overlooked in the evaluation process are the expatriates themselves. Regardless
of how performance is going to be evaluated, it is important that multinationals:
• communicate early on with expatriates about the performance criteria likely to
be used by host- and home-country managers—and what defines success
challenges of expatriate assignments, with an early delay for adjustment.
VI. Evaluating Foreign-Born Employees
Parent-country expatriates are not the only employees who need to be managed
successfully. There also is a need to manage foreign nationals in the parent country
evolving. As countries develop economically, they seem to move more toward
Western-style approaches to performance evaluation and feedback. There are many
variations in speed of adoption across both countries and companies. Table 8.2
REWARDS AND COMPENSATION IN THE MULTINATIONAL FIRM
the whole range of human resource practices that exist across the locations where they do
business and have employees. Firms must also deal with the special compensation challenges
associated with sending expatriates abroad. Compensation systems used by multinationals are
typically designed and implemented with several key goals in mind, including to:
• attract and retain the best people to staff positions worldwide
Meeting these goals is a task that confronts managers in most industries, and is central to
employee life in and out of the workplace. This complex process has great need for
communication and coordination.
I. The Meaning of Compensation
Compensation in the U.S. is often seen as a swap—employees provide effort and
output while receiving wages and benefits in return. This “exchange” model of
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II. Employee Pay across Borders
Multinational firms are keenly aware of the differences in amounts and types of
compensation across borders, and may in part be responsible for an increase in the
outsourcing of professional service jobs and others. Between 2003 and 2013, an
estimated 4.2 million “offshored” service jobs were created globally. Most were in
low-wage countries such as India, Hungary, and the Philippines.
Average wage data are not very precise if companies are trying to understand
compensation patterns in specific industries. Even within countries, large differences
in rates exist. Estimates vary about true wage differences across countries—e.g., there
is a commonly observed custom in Mexico of paying a Christmas bonus amounting to
III. Senior Executive Compensation across Countries
Cross-national differences also emerge in the compensation of executives of U.S.
firms relative to their peers in foreign companies. The U.S. has earned a reputation
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A. Perks and other compensation
Although typically not large enough to make up for the compensation lead
enjoyed by executives in American companies, foreign companies often provide a
variety of perks to help offset the bite taken by taxes. Perks are typically non-
monetary forms of compensation given to executives in recognition of their status
or performance.
B. Vacation time: less in the U.S., more in Europe
Workers in the U.S. and Canada have among the fewest paid days off of any
country in the world. Table 8.4 shows that many countries offer their experienced
employees 30–40 paid days off (combining paid vacation days and paid public
holidays) compared to the 25 days workers in similar positions enjoy at large
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Years of government efforts to inculcate a national sense of urgency regarding the
IV. Explaining Compensation Differences across Countries
A working understanding of a specific country’s laws and customs is needed to fully
grasp the compensation costs associated with doing business there. Some evidence
suggests there is increasing similarity in compensation practices among countries
with similar cultures. One study found that cultural grouping (e.g., Asian, Latin, and
European) explained compensation practices much better than did country-level
customs and laws.
Table 8.5 summarizes many of the compensation system differences referenced
throughout the chapter by presenting how cultural values in specific countries are
linked to their compensation practices. This does not, however, capture all the
THE CHALLENGES OF EXPATRIATE COMPENSATION
A complicated and important issue for multinationals is how to construct compensation and
benefit packages for a key group of employees—expatriates.
I. Grappling with Expatriate Costs . . . and Employee Comparisons
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In addition to issues such as differences in laws and compensation practices,
multinationals also need to ensure that employees feel they have been fairly treated
when assigned overseas. Firms know their expatriates will engage in comparisons of
Multinationals should first focus on creating a consistent and comprehensive
compensation and benefits policy that will help educate and inform all employees
not “profit” more by going to one place rather than another. An effective
compensation plan for expatriates will likely include the following:
• Some form of incentive to accept an expatriate assignment (e.g., money, benefits,
career mobility/advancement);
METHODS FOR COMPENSATING EXPATRIATES
mutually exclusive and, depending on the circumstances, multinationals may use all of them in
different situations. In choosing between these methods, multinationals should factor in concerns
such as how long the assignment will last, where and why the expatriate is going, and the
expatriate’s level within the firm.
I. The Ad Hoc Approach
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This method has serious drawbacks, especially for larger multinationals with many
expatriates. It tends to be used more by smaller or emerging multinationals with little
experience overseas who must often send an expatriate to “fix problems” abroad.
That can mean doing a quick search and then paying whatever is necessary to entice
an employee to go. In operation, the ad hoc method is simple—the company and its
expatriates negotiate on a case-by-case basis to cover the costs inherent in a foreign
assignment.
II. The Localization Method
This more systematic method involves paying the expatriate essentially the same as
local employees in similar positions. Localization may be especially useful when
Localization is much easier to apply when the expatriate moves to a country with a
higher standard of living. However, it is rarely used in its entirety or in only this way.
Variations of this approach, with adjustments (e.g., to base pay, allowances,
There are complexities associated with localization, e.g., foreigners often cannot
participate in local pension plans or the versions of social security programs found in
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III. The Balance Sheet Model
A. The model
The most common approach to expatriate compensation is the balance sheet
model. Nearly three quarters of firms who responded to a recent global survey
said that they use this approach. The key aim of the model is that expatriates
should not suffer a loss as a result of an international assignment—any loss
1. housing
2. income taxes
Typically, expatriates would receive allowances to cover the increased taxes,
more expensive housing, and higher living costs encountered abroad. More often
than not, multinationals engage consulting firms such as AIRINC or Mercer to
B. Foreign service premiums, hardship and danger pay
The balance sheet approach does not impact the expatriate’s base salary. Using
this method, salary would be determined in the same way as for domestic
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however, the balance sheet can have a profound impact on expatriates’ overall
compensation abroad if multinationals are offering one or more of the following
incentives: foreign service premiums, hardship, and/or danger pay.
C. Ensuring similar purchasing power
The main goal of the balance sheet method is to smooth out expenses and protect
this graphically.
D. Housing costs
In the U.S., it is common to expect housing costs to be about 30% of take-home
pay. Internationally, housing alone may account for 50% of the total additional
According to one survey, over 80% of multinationals provide free expatriate
housing or a location-specific housing allowance with some expected contribution
by the expatriate. The same survey showed that Asian, Latin American, and
E. Tax expenses
A major category of expenses addressed by the balance sheet method is income
taxes (see Figure 8.1). The goal is to tie expatriates’ tax burdens to their home
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laws and rates vary considerably from country to country and are in flux. Dealing
with tax issues is probably the most complex aspect of the balance sheet method.
Agreements across countries that allow for tax equalization or the avoidance of
double taxation for citizens posted to foreign countries can help reduce
expatriates’ tax exposure. The U.S. has such tax agreements with over 65
countries. These provide Americans with exemptions or lower rates from foreign
F. Goods, services, and the balance sheet
Besides housing, no other piece of the expatriate compensation package causes
more consternation for employees than allowances for goods and services.
Multinationals—or the consultants that work for them—construct allowances by
Product prices are continually fluctuating, and currency swings can play havoc
with goods and services differentials—swelling the value of differentials when
local currencies drop significantly and shrinking them when those currencies soar.