Compensation Process Approaches Research Paper

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Christelle Tornikoski

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Article Details

  • Title of the Article: Fostering expatriate affective commitment: a total reward perspective.
  • Author: Christelle Tornikoski (the University of Vaasa, Finland, and EMLYON Business School, Lyon, France).
  • Title of Journal: Cross-Cultural Management: An International Journal.
  • Volume Number: 18 No. 2,2011.
  • Page Numbers: 214 – 235.

Introduction

The expatriation is a fairly complicated process and often requires sufficient effort from an HR employee. Besides, it usually puts the expatriate in a stressful and otherwise disadvantageous situation. For this reason, the process requires sufficient compensation to maintain a healthy workplace environment and preserve the employee’s commitment and loyalty. As a result, the expatriate compensation is considered one of the most costly incentives faced by the companies, and certain approaches were considered to assess and control the compensation process so that the employers are able to predict the reaction of employees.

However, several studies point to inconsistencies in the assessment methods and prediction techniques. The research by Christelle Tornikoski tries to determine the related factors of the compensation package and thus provide the insight for organizations regarding the ways of a cost-efficient and clearly effective way of fostering employee satisfaction. The paper compares two new approaches to the compensation process – the total reward approach and the concept of the state of the psychological contract (SPC) to determine whether the factors such as tangible universal rewards (TURs) and intangible particularistic rewards (IPRs) play any role in fostering the affective commitment.

Literature Review

The body of research studying employee compensation and its effect on personal commitment and loyalty is challenging. Up to the late 1990s the common way to view it was what is now named the traditional approach. It was rooted in the agency theory, suggested by Adam Smith. Its central basis is the conflict of interests. According to the concept, the employer seeks to secure the employee’s (agent’s) performance in accordance with his interests and goals.

To ensure this, he needs to either invest in informing the agent of the benefits of his productivity or provide him with financial rewards. The reward needs to be systematic and consistent with the achievement of goals and objectives determined by the employer. Once new objectives arise, they are included in the list for an employee to pursue. The reward may be outcome-based, also known as a variable, or behavior-based, or fixed. Besides, expatriate compensation will most likely include benefits and allowances.

The traditional approach suggests two possible policies. The home-country policy provides the expatriates with the salary and allowances identical to those they would have at home. The allowances, such as education, housing, cost-of-living, transport, and others, are used to eliminate any additional costs the expatriate will face as a result of the move. As a result, the employee will be able to maintain the lifestyle he was used to at home, but will most likely depend on the level of life in the country as well as certain secondary factors, such as taxation compensation.

Besides, such a policy usually produces inequity between expatriates and local staff, which in turn leads to disruptions in corporate governance. Finally, in the case when the company deals with expatriates from several countries, the situation becomes more complex with each new country involved.

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The host-country policy suggests treating expatriates as local employees in terms of salaries. Such an approach is much simpler and does not create inequity between expatriates and local workers which may be beneficial for the company as it will likely cut the costs of compensation, but at the same time will not suit well to the expatriates.

As each of the two policies may be unfavorable to one of the sides, several attempts were made to address the issue by making the hybrid policies of the two. These are mostly aimed at equalizing the differences and providing simpler and more fair compensation.

The described traditional approach is focused almost entirely on financial compensation. While it offers a straightforward solution, it does not guarantee the loyalty of the staff or the satisfaction with the job. In fact, recent research has shown that even the expatriates of the banking sector, who have one of the more competitive total compensation packages were expressing almost common dissatisfaction with their jobs (Pate & Scullion, 2010).

Besides, while the HR managers usually put stronger importance on the volume of financial incentives, stressing the high salaries, the employees tend to value the social benefits provided by the company as well as the content of their work. Other notable factors include career opportunities and a higher level of independence. In other words, the staff is not motivated solely by the financial side of the compensation. As soon as the incomplete nature of the agency theory became apparent, new models were suggested to account for all the factors in play.

The one that is currently the most widely recognized is the total reward approach. It addresses the shortcomings of the traditional approach by including all the factors that influence an employee’s job satisfaction. According to the total reward, the compensation package includes not only the salary and various allowances but all the benefits of his current work, including non-financial rewards and opportunities provided by the employer directly or indirectly.

It is based on the two-factor theory, which suggests the existence of hygiene factors, responsible for the elimination of dissatisfaction among employees, and motivator factors, which motivate them and make them satisfied with the job. The previous include workplace climate, interaction with co-workers, and the majority of the financial incentives, while the latter consists of the perception of the job’s importance and meaning, recognition, and responsibility.

Armstrong (2007) suggests different categorizations: relational, which are financial in nature and thus tangible, and transactional, which include opportunities for development, experience, and personal growth, and are thus intangible. Finally, by determining the connection of the employee’s behavior as either individual (internal) or external, the factors can be classified as intrinsic or extrinsic, respectively.

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The most obvious difference from the traditional approach is thus the presence of the non-financial factors. The gradually greater emphasis on them has prompted the creation of a two-dimensional scale by Foa and Foa (1974): the concreteness characterizes the employee relations as either concrete or symbolic while particularism measures the level of involvement of a particular person. All of the mentioned categories are treating the matter somewhat differently but can be organized as characterizing either tangible (non-particularistic, extrinsic, hygiene, financial) or intangible (particularistic, intrinsic, motivator, non-financial) factors. The former was almost entirely presented in the traditional approach, while the latter required the new theory.

The most widely agreed-upon way to view the intangible factors is the psychological contract (PC) concept. The psychological contract is a subjective set of beliefs that covers the responsibilities of the chosen party. The PC is not voiced by either side, so each party may form its own contract while negotiating terms. The beliefs that form such a contract result mainly from the promises. This origin sets it apart from other subjective thoughts.

Thus, the PC concept adds the factor of perception of the company’s responsibilities in addition to their honest value. Several researchers tackled the role of the psychological contract in the expatriates’ productivity. Chen and Chiu (2009) explored their influence on the adjustment process and traced the correlation between more favorable PCs and lower turnover rates. Guzzo, Noonan, and Elron (1994) described its part in the formation of organizational commitment. Thus, the current understanding of the matter suggests that HR managerial practices help to raise effective commitment as a component of job satisfaction among employees.

By extension, the psychological contract is an essential part of the total reward package and may enhance our understanding of the differences that the previous researchers indicated. As of now, no attempt was made to evaluate the effectiveness of HR practices and isolate the roles played by the tangible and intangible rewards by applying the concept of the psychological contract to the total reward package.

Research Aims and Objectives

The research by Christelle Tornikoski aims at determining the degree of influence of various types of rewards on the affective commitment of expatriates, both assigned and self-initiated. As a basis for the study, Tornikoski takes two approaches: the one that views HR practices as influencing the formation of the psychological contract which then motivates an employee, and the one that states HR practices are used to communicate with employees and raise certain behaviors.

The research utilizes the total reward perspective, which is mostly oriented at tangible universal rewards (but accounts for both the intrinsic and extrinsic sides of each point thus recognizing the intangible ones as well), and the concept of the psychological contract as means of evaluating the difference between the compensation package the expatriate receives and the one he was counting upon as the result of subjective explanation of the promises by HR managers, known as the state of psychological contract (SPC).

The expectation is that the complete picture of the affective commitment formation cannot be drawn unless both the delivery of the compensation package and the perception of the delivery by the expatriate is taken into consideration. The hypothesis is thus as follows: depending on the rewards as being viewed from the traditional approach or the total reward perspective the expectations by the expatriate will differ and will correlate to the commitment. The research is done in the form of a quantitative analysis of the sample of 263 assigned and self-initiated Finnish expatriates.

Discussion

By conducting the statistical analysis, the researcher was able to determine the predicted correlation between the rewards and the affective commitment. However, the relation was minimal between the traditional compensation package in the form of tangible universal rewards. This result confirms the study by Pate and Scullion (2010) which illustrated the possibility of the scenario where the low satisfaction with the job was possible despite the high financial incentives.

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At the same time, the combination of TURs and the intangible particularistic rewards (IPRs) defined through the positive state of the psychological contract, showed strong positive relation. This result fills the gap in understanding of the facilitation of the affective commitment. The study introduces the measurement means for the SPC concept, in relation to the total reward package of the expatriates. The evaluation-oriented measure suggested by Tornikoski can be used to assess the states of fulfillment and over-fulfillment which are currently under-researched and should be viewed in separation from the breach relating to the compensation package.

Besides, it allows indicating the correlation between the HR managerial practices and the behavior and personal attitudes of the expatriates. The results also suggest the presence of other factors defining the affective commitment formation, as the results were different within the same HR managerial practices involved. In this particular study, the observed effective commitment of the subjects was uneven across the compensation package and could be correlated to its different constituting elements. The implementation of the two-dimensional framework by Foa and Foa (1974) also made it possible to measure the total reward package in terms of particularism and concreteness. The study thus concluded that the SPC of expatriates relating to compensation is mainly driven by the perception of the “delivery” of IPR (Tornikoski, 2011).

The author implies two practical suggestions based on these results. First, the TUR, which is acceptable for attracting expatriates and negotiating their working conditions, is relatively ineffective for retaining them later. Instead, Tornikoski recommends paying more attention to social exchange relationships (one form of IPR). Another important conclusion is the challenged purported efficiency of the HRM practices focused on the financial side of the compensation.

Paper Managerial Implications within UAE

The paper is valuable for HR managers for two reasons. First, it enhances the understanding of the ways the managerial practices can boost the affective commitment. The expatriate compensation process remains among the most costly parts of reward programs in organizations. The reasons for this are the increasing complexities of pay, including the issue of incentive centralization balance, the growing need for standardized performance metrics accounting for the cost-sensitive environment, among others. At the same time, some of the widely accepted practices have proven to fail at securing the employee loyalty despite the tangible component being of superior quality and resulting in the low retention and loss of qualified (and heavily invested into) employees.

The intangible particularistic reward, as has been shown by the study, has a much better effect on satisfaction and commitment. While the current understanding has leaned toward this suggestion before, the research was able to demonstrate the effect and provide evidence of its validity. Second, the evaluation-oriented measure, as well as the two-dimensional framework of particularism and concreteness used by the researcher allows the HR managers to effectively measure the current state of commitment as well as the volume of the intangible rewards and adjust their practices to avoid the human resource loss. This is especially valuable for the situation in the UAE.

The country’s rapid economic growth already triggered the steady flow of the self-initiated expatriates, who are now employed on multiple levels in business and public sectors. To win the loyalty of valuable specialists, the HR managers need to consider the importance of IPR. Besides, the current direction taken by the country’s economy is external, targeting the global markets and seeking international partners. Thus, the UAE companies are in need of effective assigned expatriate management techniques to secure the effective functioning of organizations in other countries.

Despite the high costs, the AE, especially the parent-country nationals, usually guarantee the productivity and efficiency of subsidiaries. Besides, given the dynamic pace, the drawbacks in functioning are unacceptable and will cause an immediate slowdown or even a step back. Thus the effective practices that can ensure the loyalty and productivity of the employees, especially those requiring firm-specific competencies.

In this light, assigned expatriates may be viewed as a crucial component for the current direction in the foreign policy of UAE, and the research in question as a tool of choice for fostering their commitment by focusing on the IPR instead of the financial emphasis, controlling retention rate by applying a two-dimensional framework, and relying on the psychological contract as a central component of the total reward package to improve the employee attitudes across the HR practices.

Conclusion

The expatriates are an important part of the organization’s function. The nature of their positions requires tough compensation. Currently, the general agreement among scholars leaned towards the total reward perspective, which accounted for the intangible rewards in addition to the financial ones. However, the lack of direct evidence of the validity of the declaration and the lack of means of measurement and evaluation of the components of the total reward package made the task of HR managers somewhat unclear and difficult to assess.

With the implementation of the suggested two-dimensional approach and the application of the construct of the state of psychological contract to the total reward concept, new possibilities are presented to the HR managers for both assessment of the insufficient loyalty and affective commitment and providing necessary changes on social and emotional levels.

References

Armstrong, M. (2007). Handbook of employee reward management and practice. London: Kogan Page.

Chen, H. F., & Chiu, Y. H. (2009). The influence of psychological contracts on the adjustment and organisational commitment among expatriates: An empirical study in Taiwan. International Journal of Manpower, 30(8), 797-814.

Foa, U. G., & Foa, E. B. (1974). Societal structures of the mind. Springfield, IL: Thomas.

Guzzo, R. A., Noonan, K. A., & Elron, E. (1994). Expatriate managers and the psychological contract. Journal of Applied Psychology, 79(4), 617–626.

Pate, J. & Scullion, H. (2010). The changing nature of the traditional expatriate psychological contract. Employee Relations, 32(1), 56–73.

Tornikoski, C. (2011). Fostering expatriate affective commitment: a total reward perspective. Cross Cultural Management: An International Journal, 18(2), 214-235.

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IvyPanda. 2022. "Compensation Process Approaches." May 6, 2022. https://ivypanda.com/essays/total-reward-perspective/.

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