(such as employees with knowledge gained through specific international
experience and organizational experience). Possession of such a resource can be
seen to contribute to the organization’s sustainable competitive advantage and
therefore add value to the organization (see Bonache and Fernández, 1997, for
an explanation of these concepts in the context of international compensation).
In human resource terms, value creation for the MNC resides in competent, or
knowledgeable and skilled employees. According to Resource-based theory,
international compensation that effectively applies appropriate rewards to
maintain and retain such employees throughout the MNC can serve to protect
this source of sustainable competitive advantage.
The principal–agent relationship proposed in Agency theory (Eisenhardt,
1989) translates as the MNC headquarters–subsidiary relationship, where the
headquarters is the principal and the subsidiary is the agency to which work
and responsibilities are delegated. Given that the headquarters does not have
all the unique knowledge of the subsidiaries, not all decisions in the MNC can
be made by headquarters. It must depend on the subsidiaries, as their agents,
and an ‘agency problem’ arises if the goals of the headquarters and subsidiary
managers are not aligned (Roth and O’Donnell, 1996). International compen-
sation strategy, therefore, must include those elements that motivate appropriate
behaviours to implement the MNC strategy (O’Donnell, 1999).
In practice, international compensation strategy must facilitate equity
and the movement of staff throughout the MNC. Equity is a fundamental
principle of compensation. In human resource management terms, the basis
of equity is the definition of relativities between work performed by employ-
ees, usually determined by the job evaluation activity, and expressed via the
different rates of compensation administered to employees. Extending the
equity principle to international compensation has been a significant chal-
lenge. Relativities are much more difficult to establish within the complex
organization of an MNC, due to its geographic and cultural spread, and its
workforce mix of home, host and third country nationals. Sparrow (1999: 111)
notes the contemporary shift away from job-based HRM systems to person-
based approaches. He suggests that this transition has ‘immense’ implications
for international compensation, concluding that the assumption of the job as
the essential differentiator of wage or salary in an organization is increasingly
being challenged.
Within MNCs, international compensation requires very high involve-
ment of the HRM activity (Reynolds, 1997). Drawing from Dowling (1988) and
Dowling et al. (1999), the key differences for HRM in MNCs lie in the increased
scope, perspective and level of involvement required in employees’ lives as well
as the level of risk. For example, the fundamental principles of compensation
strategy are to balance the organization’s capacity to pay with the provision of
fair and equitable compensation. In MNCs, achieving this balance in practice
is much more complex as it involves multiple international contexts and
employee groups. Thus, the scope is greater, with different policies and practices
International Compensation and Performance Management 309