Fundamentally, getting paid is one of the main reasons we all go to work, which is why effective compensation management is so important in organizations.
Getting compensation right is easier said than done, especially at a global level, so I’ve put together this guide to help you understand global compensation and how you can approach it.
What Is Global Compensation?
Global compensation refers to the total rewards, including salary, benefits, and incentives, offered to employees working in different countries.
It takes into account local labor laws, tax regulations, cost of living, and cultural expectations to ensure fair and competitive pay across global regions.
What Is A Global Compensation Strategy And Why Is It Important?
A global compensation strategy is a structured approach to managing compensation in a multinational organization.
Having a strategy in place is important because it ensures consistency, fairness, and compliance with local laws and international labor laws while aligning with the company's overall business goals.
The aim is to help attract and retain top talent, enhance employee satisfaction, and support international business expansion by maintaining competitiveness and equity across jurisdictions.
5 Elements Of A Global Compensation Strategy
Base pay
A global compensation strategy typically begins with base pay, which forms the foundation of an employee's earnings and is determined by the local market, job role, and company policies.
It's important for organizations to ensure that base pay is competitive and aligned with the cost of living and labor market standards in each country where they operate.
As Liam points out in his excellent article on global HRM, you can 1) Choose to ignore differences between countries and pay what you feel the role is worth to you or 2) Localize using benchmarking.
Variable and incentive compensation
Next is variable and incentive compensation (performance-based compensation), which includes performance-based bonuses, commissions, and other forms of financial rewards tied to individual, team, or company performance.
This component helps motivate employees and aligns their goals with organizational success, though the structure and size of these incentives may vary depending on regional practices and regulations.
Premiums and allowances
Premiums and allowances often account for additional payments made to compensate for specific working conditions or costs, such as worker relocation expenses, hardship conditions, or cost-of-living adjustments for expatriates.
These payments are usually tied to roles that require employees to work in different or less desirable locations.
Benefits
Employee benefits are non-cash compensations such as healthcare, PTO, retirement plans, and insurance, which vary greatly depending on local laws and cultural expectations.
Global companies are challenged with creating a consistent global benefits framework with the flexibility to adapt to local requirements and customs.
Training
Training and development are integral to a global strategy, as they ensure that employees in different regions have access to skill-building opportunities that align with global standards.
This investment supports career development and helps maintain a high level of performance across geographies.
Repatriation support
Finally, repatriation support ensures that employees returning from international assignments are well supported in transitioning back to their home country or into new roles.
This aspect of compensation strategy can include financial assistance, career counseling, and reintegration programs designed to retain talent and make transitions smoother.
How To Create A Global Compensation Strategy
So far so simple, right? This is where things get interesting!
Global HRM isn’t easy and compensation is one of the trickier aspects. It’s one of the reasons why comp & bens specialists are in such high demand these days.
Here’s how to create a global compensation strategy:
1. Create a compensation philosophy
If you haven’t already, the first step is to put together a compensation philosophy that outlines your organization's approach to rewarding employees for their work and how work should be done.
Your comp philosophy acts as a framework for making compensation decisions around salaries, bonuses/commissions, equity, and benefits.
For example, the government of Canada is known for paying below the market median but offering generous perks and voluntary benefits that are unheard of elsewhere in the country e.g. paid vacation time and PTO, generous pension plans, reduced work hours, average performance expectations, and unionized environments.
We’ll look at this in 3 sections: salary, benefits, and variable pay (bonus, commissions, equity) and how you can approach them in a global organization.
2. Establish pay structures
Whichever approach you choose, the next step is to decide how to approach building a pay structure.
There are 2 basic approaches for this and then you need to decide how you “globalize” that.
Approach 1: Job leveling or salary bands
Job leveling/salary banding is a system that defines a range of pay for a specific job role or level within an organization based on factors like skills, experience, and market rates.
This is very common, borderline standard, in bluechip organizations and there are many organizations, such as WilsonTowers Watson, providing frameworks and salary data to support these job levels.
A very basic example of this could be:
- Level 6 - CEO (leads the company)
- Level 5 - Executive Management Team (reports to the CEO, leads a function)
- Level 4 - Head of Department / Senior Expert - (Leads a large team or brings expertise that supports business-critical activity)
- Level 3 - Team Lead / Expert - (Leads a small team or senior individual contributor)
- Level 2 - Individual contributor
- Level 1 - Entry level role
This makes it easy to place a new role into a band, although some roles within a band might be higher or lower than the average. It’s also easy to attach certain benefits such as a company car or a bonus structure to a band.
Approach 2: Role by role basis
Two disadvantages of approach 1 are a lack of flexibility and politics. The onus can be to put a role into a certain band to achieve a pay rise or promotion, so the system is subject to politics and, in large organizations, this can be quite prevalent.
It also lacks flexibility and can slow change down. That said, it is a great way to handle complex large organizations fairly.
The alternative is to approach pay on a role-by-role basis which maximizes flexibility at the expense of scalability. You can adopt some kind of loose bandings but each role has its own salary band and benefits/bonus attached.
So then the challenge is how you take a salary range (either a band or an individual role) and globalize that.
Globalizing salaries
Most organizations will choose to localize when it comes to base pay, so this is where you need to take some time to research local market rates and then adjust depending on your strategy per role (lag-, match-, or lead-the-market).
Of course, you also need to take into account local regulations including minimum wage laws, overtime regulations, tax implications, and benefits mandates.
If you lack the resources to undertake this sort of analysis for every role in every country, then you can always adjust based on the cost of living. This might also be relevant for countries where you don’t have many roles.
For example, let’s say you have your main engineering hub in the United Kingdom and there you pay the following:
- Head of Engineering - £120000 to £170000
- Lead Engineer - £80000 to £110000
- Software engineer - £50000 to £80000
You’ve identified some available talent in Kenya and want to hire on a freelance basis.
- Take a country’s cost of living from the International Cost of Living Calculator.
- Create 3 tiers of countries (you can have as many of you like) and adjust salaries
- Tier 1 = 100%, Tier 2 = 80% and Tier 3 = 60%. You can adjust this according to your requirements.
- I’ve given a 5% uplift to nonpermanent but you can shift this.
- Use the Google Sheet below to automate the calculation in real-time with the latest FX rates (I’ve only included USD, EUR, and GBP but adding more currencies is easy).
- Instructions for using the sheet:
- Add high and low benchmarks as annual salary amounts in B3 and B4
- Add country tier (1 2 or 3 in this example) in B5
- Choose in B7, B9, and B10 the type of employment you want a calculation for, the currency, and whether you want to see it monthly or annually
- The calculation appears in B12 and B13.
Tool can be accessed here (make a copy for editing).
In our example, if you wanted to recruit an Engineer in Kenya on a monthly freelance basis that would give you a rough guide of $3443 to $5508/month.
This tool doesn’t account for local factors other than the cost of living, but it’s an easy way of bringing some basic objective data into the conversation.
There are also some compensation management solutions that can help with global salary benchmarking.
3. Setting global vs localized benefits
Offering a consistent global benefits package is challenging and you can easily end up offering the “high water” mark for everything, which is neither effective nor efficient.
So, in terms of benefits, I highly recommend looking at certain benefits that can be global:
- Wellbeing allowances
- Holiday allowances
- Hardware provision
- Life assurance
- Minimum standard for healthcare and parental leaves.
Agreeing this globally allows local teams to have flexibility in building competitive packages that still have a local flavor.
For example, there’s no point in setting out a benefits framework where you don’t offer healthcare if your main employee base is in the US, and equally no point in offering best-in-class healthcare if most of your employees are in wealthy northern European countries with excellent public healthcare systems.
So let's start by looking at how to approach benefits globally first
When it comes to benefits, it’s worthwhile considering what your minimum benefits offering is and then testing each of those against standard practice and expectations.
This gives you an excellent way to talk about your overall benefits package as part of your employer value proposition (EVP).
For instance, having a set of guiding principles such as these:
- Parental leaves of a minimum of one month for men and three months for women AND at least 10% above the statutory minimum
- Life assurance for all roles above grade X
- A well-being allowance of $500 per year
- A personal training allowance of $500 per year
- A minimum of 20 days paid leave plus public holidays AND at least 10% above the statutory minimum.
- All roles offer a minimum of one day a week working from home.
Would allow you to talk in global terms about an organization that:
- Cares about offering enhanced parental leaves
- Gives you security of life assurance
- Focused on employee wellbeing
- Focused on developing employee skills in the way they choose
- Allows employees to rest properly by offering enhanced PTO/leave
- Offer a hybrid work setup for all roles.
The advantages of this are clarity around global EVP and fairness across the organization, because there will always be differences.
If you want to approach benefits on a purely localized basis, that’s fairly straightforward. My recommendation here is:
- Understand how important attracting and retaining talent is in that market (higher importance = better benefits)
- Understand what the minimum standard is for that location and work up from there
- Find a range of suppliers that can support your requirements.
The advantages of this approach are flexibility and efficiency. You can be who you need to be in each market and not have to offer unnecessary benefits just because you offer them elsewhere.
The disadvantages are potential disparity between locations and the impacts that can have of the organization, as well as making it harder to have a clearly defined global EVP.
4. Variable pay (bonus, commissions, equity)
With benefits and salary banding/benchmarks the focus is very much on where the role is based, but when we think about variable pay we need to focus much more on what the role does.
One caveat, however, is that bonuses and equity can be subject to different tax structures depending on location, making it an inefficient part of your compensation package in some jurisdictions.
You can always adjust the base vs variable proportions for some countries where the taxation is higher for bonuses rather than basic.
There are some places where taxation on equity is negligible and this can make living there very attractive for those with a potential payout.
Being flexible on these items can help make your package very attractive in different circumstances.
As you decide on variable pay here are some of the key things to focus on:
Type of variable pay | Reason to add it | Example roles |
---|---|---|
Overtime (additional payment for additional hours worked). | Those roles that work shifts or very timebound roles in manufacturing or retail. | Customer support, factory and shop workers, etc. |
Performance bonus (given to individuals for hitting key targets like personal, department, or company goals). | To reward and incentivize high performance in an individual performance. | Any role can be relevant but roles that are senior, revenue impacting, or have clear KPIs and deliverables are all suitable. |
Commission (contractual agreement to reward sales). | Incentivizing sales to generate more revenue. | Sales, account management. |
Company-wide bonus (given to everyone for company goals being achieved). | To reward and incentivize company goals/targets. | All roles. |
Equity (giving shares in the company - often pre-IPO/sale). | To reward and incentivize company growth. | Senior management roles, roles in start-ups. |
Share purchase scheme (allowing employees to buy shares in the company at a discounted rate). | To reward and incentivize share price growth and encourage ownership. | All roles (company needs to be listed on a stock market). |
Share scheme (Grant employees shares in the company, can be subject to similar rules as Performance or Company-wide bonus but paid in shares rather than cash). | To reward and incentivize share price growth and encourage ownership. | All roles (company needs to be listed on a stock market). |
Using job levels means you can easily link variable pay elements to particular roles or levels in a fair and clear way.
If you’re not using job levels, you can attribute certain variable pay elements to groups of roles and also retain the flexibility of being able to tailor the package to suit the individual role.
However, that is more work and can lead to unfairness and inconsistency—it’s a balancing act you have to make.
5. Communicate your compensation strategy
Bonuses, eligibility for equity, shares, commission levels, etc—and who gets them and how—can be some of the trickiest decisions to make in HR.
They can also lead to unfairness and can become highly political within your organization as most employees will want to earn as much money as possible and this is a key way to increase earnings.
Having everything set out clearly and well communicated so people can understand their overall package is critical.
Clearly communicate the rationale behind your compensation strategy to workers, especially when dealing with different pay levels or structures between regions.
Ensure that local managers are aware of the strategy and are well-trained in understanding and have compensation discussions with team members.
Factors Influencing Global Compensation
Here are some key factors to take into account when approaching global compensation.
- Cost of living and market conditions: Compensation is normally adjusted based on local cost of living, with higher salaries or other benefits offered in more expensive areas.
- Exchange rates and currency fluctuations: Salary value can be impacted by exchange rate changes, especially for expatriates. Companies generally use exchange rate adjustments or split payments to mitigate currency risk and protect employees from volatility.
- Local labor laws and employment practices: Compensation must comply with local regulations on wages, taxes, benefits, and working hours. Packages are normally tailored to meet mandatory benefits, like pensions and healthcare, that vary by country.
- Competitive positioning and industry standards: Salaries are set to match local industry benchmarks and desired talent. Companies must balance competitive pay with cost-efficiency, avoiding wage inflation while staying relevant in the market.
- Assignment specifics and hardship factors: Compensation is adjusted for global assignments based on the location and assignment type. Hardship allowances and benefits like housing or healthcare are added for challenging destinations.
Tying It All Together
Having looked at pay, benefits, and variable compensation, you should be well equipped to approach how to approach these in your organization. Let’s recap the key steps:
- Decide on your approach to pay: Do you want clear levels and bandings across the organization or approach it role by role?
- Look at your benefits: Do you want them to have a global feel where they meet minimum standards in each country or go for a completely localized approach?
- Variable pay: Think how you want to handle this. You can operate many different variable pay schemes within an organization, the key is ensuring they’re manageable, drive the right behaviors, and align with company aims e.g. are you looking for growth/profit/market penetration?
How An Employer Of Record Can Help
Employer of record (EOR) services use their local knowledge to ensure that compensation packages are competitive and legally compliant, adjusting for factors like cost of living, exchange rates, and mandatory benefits in each country.
They also take on full employment responsibilities and handle payroll and benefits administration, making international expansion easier.
For more, check out our shortlist of the best employer of record services.
Subscribe To The People Managing People Newsletter
For more on compensation management and global strategy, subscribe to our weekly newsletter for HR and business leaders. You’ll receive all our latest content to help you grow in your career and make greater impact in your organization.