Host Country National Reactions to Expatriate Pay Policies: A Model and Implications

HOST COUNTRY NATIONAL REACTIONSTO EXPATRIATE PAY POLICIES:A MODEL AND IMPLICATIONS

SOO MIN TOHUniversity of Toronto

ANGELO S. DENISITexas A&M University

We examine the referent selection process of host country national (HCN) employees.We outline the conditions under which they are more likely to select expatriatecolleagues as comparative referents and suggest that, when this occurs, they arelikely to experience relative deprivation. We also highlight the role of national culturein the process. Our model shifts the focus of overseas assignments research from theexpatriate to the HCN, and it also has important practical implications for multina-tional enterprises sending employees overseas.

Research in international human resourcemanagement (IHRM) has tended to focus on is-sues primarily surrounding expatriation (Aycan& Kanungo, 1997). In the past decades we haveseen a plethora of solutions—in the form of ex-patriate policies—offered for maximizing theprobability of expatriate success and for com-bating failure (e.g., Black, Gregersen, Menden-hall, & Stroh, 1998; Tung, 1987). One such propo-sition has been to provide expatriates attractivereward packages for taking up the assignment.Even though this research has shed light onmanaging overseas assignments, scholars havenot clearly considered the effects these policiesmight have on the local colleagues of the expa-triate, also known as host country nationals(HCNs). This is unfortunate, since HCNs arevaluable socializing agents, sources of socialsupport, assistance, and friendship to fledglingexpatriates (Black, Mendenhall, & Oddou, 1991;Caligiuri & Cascio, 1998). Expatriates are morelikely to adjust when HCNs engage in these“extrarole” behaviors (Caligiuri, 2000; Menden-hall & Oddou, 1985) than when HCNs are unco-operative or antagonistic. Clearly, HCNs havean important role to play in the adjustment pro-cess. Yet researchers, at present, have over-

looked this important organizational stake-holder. Hence, some have called for greaterattention to be given to the HCNs’ perspective(Aycan & Kanungo, 1997; Sinangil & Ones, 1997).

This paper is intended to stimulate researchthat focuses on HCNs. We propose a model thatoutlines the conditions under which HCN em-ployees are more likely to compare their pay tothat of the expatriates within the host unit, aswell as their reactions to this particular socialcomparison. That is, we investigate conditionsthat might prompt HCNs to choose expatriatesas their “referent others” in deciding whetherrewards are justly allocated by the organization.We use extant literature to formulate and pro-pose organizational, social, and psychologicalfactors that influence the choice of expatriatereferents and the possible outcomes of this com-parison. We also propose the moderating role ofcultural values on the relationship betweenchoosing expatriate referents and the possibleoutcomes of this comparison.

Our model builds on existing theorizing aboutthe referent selection process (e.g., Kulik & Am-brose, 1992). In their model, Kulik and Ambrosepropose the mediating role of information avail-ability and referent relevance between anteced-ent variables and referent choice. They alsodelineate the situational and personal charac-teristics that influence the cognitive and psy-chological processes leading to the mediatingvariables. In addition to applying their model inthe multinational enterprise (MNE) context, our

We are grateful to Blake Ashforth, Paula Caligiuri, Ran-dall Schuler, Arup Varma, and the anonymous AMR review-ers for their valuable comments on earlier drafts of themanuscript. We also thank Ed Conlon for his guidance andsuggestions during the review process.

� Academy of Management Review2003, Vol. 28, No. 4, 606–621.

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model extends theirs primarily by incorporatingthe role of social identification in determiningreferent choice and the interrelationshipsamong salience of the social outgroup, informa-tion availability, and referent relevance.

Even though Kulik and Ambrose (1992) implythe effects of identity salience in their model, weemphasize social identity salience here andpresent it as a main factor influencing referentchoice. This is because our context of interestinvolves a unique social dynamic where em-ployees can be distinguished by their nationalsocial identities. We put forward the character-istics of the host unit context that act as potentforces that may cause national identities toheighten and drive social behaviors consistentwith one’s membership to the social group. Also,the present context allows us to highlight therole of national cultures in the social compari-son process and to outline their influence onpotential outcomes.

We also draw upon relative deprivation (RD)theory (Runciman, 1966) to predict the potentialcognitive, psychological, and behavioral impli-cations of the suggested social comparison. Akey aspect of our model is determining the con-ditions under which HCNs perceive and experi-ence RD. We propose that understanding HCNs’justice evaluation is imperative, because thehelping behaviors directed at the expatriate canfacilitate expatriate success (Black et al., 1998).Much of the literature on extrarole behaviorshas identified perceived justice as a key predic-tor (e.g., Moorman, 1991). Hence, our model elu-cidates the potential effects of expatriate paypolicies on HCNs’ perceptions and behaviorsand their ultimate influence on expatriate suc-cess. In the process, we highlight a dilemmathat many MNEs face: maintaining some form ofinternal equity while providing sufficient incen-tive to attract and motivate overseas assignees(Torbiorn, 1982).

UNANTICIPATED EFFECTS OF EXPATRIATECOMPENSATION POLICIES

Extant research has shown little concernabout the unanticipated effects on HCNs of paypolicies that tend to place expatriates in a rela-tively advantageous position. A survey of So-ciety of Human Resource Management In-ternational (SHRMI) members reports paydiscrepancies between HCNs and expatriates

as a very significant problem, with headquar-ters (HQ) expatriates consistently receiving rel-atively preferential treatment (Harvey, 1993).This scenario is further supported by anecdotalevidence (e.g., Beamish, 1998). People engage insocial comparisons to evaluate their positions ina social structure (Ofshe, 1972). If HCNs observeexpatriates getting paid far more for similar re-sponsibilities, they may become resentful (Glad-win & Walter, 1980). Any potential feelings ofinjustice may lead to serious, negative, job-related outcomes (Scholl, Cooper, & McKenna,1987) and may, in turn, negatively affect the suc-cess of expatriates, as well as the host and homeorganizations (Leung, Smith, Wang, & Sun, 1996).However, it is clear that these problems willarise if and only if HCNs choose to and are ableto compare their pay with that of expatriates.

In the host unit context, expatriates are a po-tential comparative referent for HCNs. Perhaps,in the past, there was not much opportunity forHCNs to seriously choose expatriates as refer-ents because of the vast differences betweenHCNs and expatriates in terms of their skillsand experiences, their economic opportunities,and the level of positions typically held byHCNs and expatriates in the host unit. But theworld in which global businesses operate ischanging. Host countries are now more ad-vanced economically and socially, and theirworkers are becoming progressively moreskilled and qualified to hold higher-level posi-tions that would have required HQ expertisein the past (Hailey, 1996; Harvey, Speier, & Nov-icevic, 2001).

Although this trend might imply that fewerexpatriates are deployed, this is not the case.MNEs increasingly value international experi-ence in their human capital (Carpenter, Sand-ers, & Gregersen, 2001). They send managerialand nonmanagerial employees (e.g., profession-als and engineers) overseas for varying periodsof time to expose them to different cultural en-vironments (Black & Gregersen, 1999; Solomon,1995). Assignments are meant more often now asdevelopmental experiences for the expatriatesthan for filling staffing gaps (Solomon, 1995).“Double staffing” with HQ personnel and HCNs,especially in international joint ventures, is alsooften carried out to ensure adequate control ofthe host unit, coordination of strategic activities,and transfer of knowledge gained at the hostcountry back to HQ (Torbiorn, 1994). Thus, we

2003 607Toh and DeNisi

increasingly encounter situations where HCNshold similar-level positions, or even similarjobs, as the expatriates at the host unit (Hailey,1996). When HCNs observe that they are paidless than their expatriate counterparts for per-forming similar jobs, they are likely to experi-ence injustice.

To determine if HCNs experience injustice, wemust first outline the conditions that increasethe likelihood HCNs will choose expatriate ref-erents. We therefore begin our survey of thisconcern with a brief overview of the issue ofreferent choice.

REFERENT SELECTION: COMPARISONTO WHOM?

The issue of referent choice when evaluatingpay is important for anyone interested in reac-tions to pay policies (Kulik & Ambrose, 1992;Summers & DeNisi, 1990). Only if a focal personnotices a pay differential might he or she reactto that differential. In the present context, ifHCNs do not choose expatriates as referents,they will be unlikely to notice and react to anypay differentials.

Research suggests a range of possible refer-ents when judging the fairness of outcomes.Goodman (1974) classifies potential referentsinto other, system, and self. The referent “other,”the most commonly studied class of referents,may either belong to the same (internal) or dif-ferent (external) organization as the focal per-son. An internal other may be anyone within thesame organization who performs similar or sub-stantially different jobs, whereas an externalother is someone employed by another organi-zation (e.g., others of the same occupation orprofession, family, friends, or neighbors). Poten-tial referents also may be “generalized others,”where the referents are not specifically inside oroutside the organization but are similar to thefocal person in some attribute, such as abilitiesor training (Berger, Zelditch, Anderson, & Cohen,1972). Individuals may choose to compare them-selves as well against certain groups of individ-uals, rather than just certain individuals. Forexample, a female secretary may choose to com-pare his or her pay package with that receivedby the male secretaries in the company, insteadof anyone who is also a secretary in the com-pany. Next, rather than other individuals, a ref-erent may be the “system” or simply what was

contracted (either implicitly or explicitly) be-tween the individual and his or her employer(Summers & DeNisi, 1990). Finally, a referentmay be internal, such as the input/outcome ratioof a past job (Goodman, 1974), a personal eval-uation of one’s self-worth (Scholl et al., 1987), ora future goal (Kulik & Ambrose, 1992).

Referents also may be “similar” or “dissimi-lar” to the focal individual. Whether similar ordissimilar referents are preferred is still open totheoretical debate (Brown & Haeger, 1999). Sim-ilar referents are chosen because they are easilyaccessible and often provide a relevant basis forfocal individuals to compare themselvesagainst. A dissimilar referent may be preferredif the individual perceives the referent as atleast relevant (or attractive) in some way andhas access to information about that referent(Kulik & Ambrose, 1992). This is also true even ifthe comparison is unfavorable (Berger et al.,1972). However, determining who is or is notsimilar is a rather complex issue (Atkinson,1986). Clearly, people may be similar and dis-similar in almost infinite ways. Individuals (aswell as researchers) may not even be aware ofwhat all these dimensions are or accurately con-sider the relevant ones in any given situation(Austin, 1977). Hence, depending on the view-point taken, a referent may, in fact, be both sim-ilar or dissimilar.

There is much evidence that points to a highlikelihood that people tend to use more than oneof these possible referents at any given timewhen making fairness evaluations (Hills, 1980;Scholl et al., 1987). Goodman (1974), for example,found that the majority of the respondents in hissample combined pay referents from multiplereferent classes in various ways (77 percent) andthat only a minority used one pay referent.Hence, even if HCNs choose expatriate refer-ents, they are likely to also compare their paypackages with other referents and combine mul-tiple referent groups in order to determine thefairness of their outcomes.

Although the above discussion suggests thatthere are a number of potential referents thatHCNs can choose from and that, most often,more than one referent is selected, it also makesclear that the expatriate is one such potentialreferent. Thus, we examine the conditions thatcause HCNs to select expatriate referents andthe outcomes of such a comparison. We now

608 OctoberAcademy of Management Review

present our model, as well as a series of re-search propositions that follow from the model.

WHEN HCNS SELECT EXPATRIATEREFERENTS: A MODEL

Our model (Figure 1) draws on more recentwork that specifies the conditions under which aparticular referent is more likely to be chosen(e.g., Kawakami & Dion, 1993; Kulik & Ambrose,1992). We propose that the salience of socialgroup identities (expatriate versus HCN) is animportant condition that influences the likeli-hood certain referent groups are selected. In ad-dition, following recent theorizations, our modelshows that the availability of information aboutexpatriates and expatriates’ relevance as refer-ents (e.g., Kulik & Ambrose, 1992) affect the like-lihood of choosing expatriate referents.

The following sections highlight how theunique contextual factors present at the hostunit influence HCNs’ selection of expatriate ref-erents. The model may be viewed in two parts:(1) the antecedents of HCNs’ choice of expatriatereferents and (2) the outcomes or reactions to thecomparison.

Salience of National Identity

It would seem fairly common in host units thatHCNs would perceive expatriates as a salientsocial outgroup. Social categorization—the“segmentation of the world so as to impose anorder on the environment and provide a locus ofidentification for the self” (Taylor & Moghaddam,1987: 73)—pervades organizational life and stemsfrom our tendencies to simplify our environment(Tajfel, 1981). Individuals bifurcate perceived at-tributes, creating cognitive boundaries betweentheir own social group (ingroup) and outgroups(Atkinson, 1986). In general, social categoriza-tion theorists argue that categories are formedwhen a social category gains salience (Pratt,1998). When an identity gains salience, theawareness of that identity influences the indi-vidual’s subsequent perceptions and behaviors(Cota & Dion, 1986; Kawakami & Dion, 1993), in-cluding the choice of referent others.

The kinds of social comparison differ, depend-ing on which identity is relatively salient to theindividual (Brickson & Brewer, 2001). When per-sonal or individual identity is relatively salientvis-a-vis social identity, the individual is more

likely to engage in interindividual or intragroupcomparisons; when group self-identity is sa-lient, the focus is directed at intergroup compar-isons (Kawakami & Dion, 1993). Hogg and Terrystate:

When a specific social identity becomes the sa-lient basis for self-regulation in a particular con-text, self-perception and conduct become ingroupstereotypical and normative, perceptions of rele-vant outgroup members become outgroup stereo-typical, and intergroup behavior acquires, tovarying degrees depending on the nature of rela-tions between the groups, competitive and dis-criminatory properties (2001: 3).

In the context of a host unit, a potential sourceof social identity may be nationality. The hostunit poses a situation in which more than onenational group is present. According to socialcategorization theory (SCT), when the nationalidentity of HCNs gains salience, so does thepresence of other national groups, such as thenon-HCNs or, in this case, the expatriates. Thismay invoke a degree of “us versus them” men-tality among HCNs about expatriates, causingthe expatriate outgroup to form a potential ref-erent comparison group (Hogg & Terry, 2001) forHCNs, thus increasing the likelihood that socialcomparisons cross national lines (Brickson &Brewer, 2001). Hence, in the present context, weexpect that if national identities gain salience,HCNs are more likely to select the expatriateoutgroup as a comparative referent and evalu-ate the fairness of the treatment they receivefrom the organization.

Proposition 1: Increased salience ofthe expatriate outgroup increases thesalience of expatriates as a potentialcomparison group and, thus, increasesthe likelihood that HCNs will chooseexpatriate referents.

But, as noted, HCNs will not always chooseexpatriates as referent others, and therefore it isclear that the development of a national identityamong HCNs is not a foregone conclusion. It isimportant, then, to specify some conditionswhere the salience of national identity amongHCNs is most likely to increase. In extant re-search scholars forward several factors (e.g.,Ashforth & Johnson, 2001; Atkinson, 1986;Kawakami & Dion, 1993; Wharton, 1992). SCTtheorists suggest that situational factors, includ-ing organization-created categories that differ-


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entiate individuals based on certain attributes,category size, and composition may signifi-cantly affect the salience of social identities.These factors, in turn, increase the likelihoodthat social comparisons are made across groupsinstead of across individuals. In the host unitcontext, several differentiating organizationalfactors and social characteristics that createcategories (both informal and formal) may in-crease the salience of the HCNs’ national iden-tity and the likelihood they will compare theirpay packages against the expatriate outgroup.We discuss these factors next.

Differentiating Organizational and SocialFactors in the Host Unit

Differentiating effects of expatriate pay poli-cies. Expatriate pay can follow one or a mix ofseveral basic approaches. The most popular ap-proach among U.S. MNEs is the balance sheet orhome country– based approach (Gould, 1999).This approach aims to maintain a standard ofliving for the expatriate in the host country com-parable to that in the home country (Black et al.,1998). Incentives, allowances, and perquisitesare also often provided. Among these are for-eign service premiums for accepting the over-seas assignment and “hardship” allowances forbearing the inconveniences that may accom-pany the assignment (Leung et al., 1996).

If expatriates originate from a relatively de-veloped country, these premiums and salary ad-justments are likely to be quite high, ceding ahuge advantage to the expatriates relative tothe HCNs for a given job or position (Harvey,1993). Furthermore, many HR practices tend to beculture specific (Mueller & Clarke, 1998; Schuler& Rogovsky, 1998). MNEs, thus, may be com-pelled to adopt a different set of HR practices tocater to the expatriates’ expectations and toavoid negative job-related outcomes (e.g., turn-over; Birdseye & Hill, 1995; Ryan, McFarland,Baron, & Page, 1999). Doing so may result in evenlarger differences between expatriates andHCNs in terms of pay, promotion, and develop-ment opportunities (Gladwin & Walter, 1980).

We suggest that, in some cases, the existingexpatriate pay policies themselves can increasethe likelihood HCNs will engage in intergroupcomparisons with the expatriates by increasingthe salience of national identities. Substantialdifferences in pay often clearly differentiate the

expatriates from the HCNs. They accentuate thepresence of the two subgroups, emphasizingany intergroup differences and intragroup sim-ilarities. When structural categories—in thiscase, pay differentials—are in line with a sa-lient social category, the category is reinforcedand the identity attains greater salience (Ash-forth & Johnson, 2001). Hence, in the present con-text, pay levels among HCNs and expatriatesmay cause social categories based on national-ity to gain salience. With group identities sa-lient, group members are more likely to thinkand act in terms of their group identities and,more important, to engage in intergroup com-parisons with outgroups (Kawakami & Dion,1993). Therefore, if national identities becomesalient, we expect that HCNs will be more likelyto engage in intergroup behaviors, comparingtheir pay against the expatriate referent out-group. Here, the object of comparison is, at thesame time, a feature of the social situation thatdeepens social demarcations and increases thelikelihood social comparisons will occur alongthese lines.

Proposition 1a: Expatriate pay prac-tices that differentiate HCNs and ex-patriates increase the salience of na-tional identities and, thus, increasethe likelihood that HCNs will chooseexpatriate referents.

Clearly, expatriate pay policies that do notplace HCNs at such a clear disadvantage or thatweaken the perception of any such disadvan-tage will reduce the likelihood that nationalidentities will become salient and the likelihoodthat HCNs will choose expatriate referents.MNEs may pay expatriates according to hostcountry rates, thus reducing the differentiationbetween the HCNs and the expatriates or induc-ing comparisons with the local pay market ratesthat may be lower instead and less likely tocause feelings of RD.

Differentiating social characteristics. In addi-tion to differentiating pay packages, the sa-lience of the expatriates as a referent outgroupmay be further increased by the social charac-teristics and the social dynamics present inthe host unit. Distinctiveness theorists (e.g.,McGuire, 1984) posit that social categories orsocial groups are most often formed based ontheir most salient attribute within a given socialcontext. Salient social characteristics and the


salience of a distinctive outgroup may cedeprominence to the corresponding social identity(Mehra, Kilduff, & Brass, 1998; Turner, 1981). As aresult, social groups are often formed aroundbasic demographics, such as gender, age, eth-nicity, and nationality. These are often charac-teristics immediately apparent to individuals(Wharton, 1992), and they are familiar and easilyaccessible in any given social situation (Atkin-son, 1986). It is conceivable that if the HCNs andexpatriates are distinctive in appearance (dif-ferent hair and/or skin color, physical build, lan-guage, cultural values and assumptions), na-tional identity differences will be salient (Major& Deaux, 1982). In the context of the host unit,physical, attitudinal, and behavioral differencesare likely to be salient, especially if the expatri-ates are from a culturally distant country.

Next, the relative proportion of expatriates toHCNs in the host unit might cause expatriates tobe a distinctive outgroup. Expatriates may bepresent as a token or as a more balanced coun-terpart in terms of numbers. This usually de-pends on the staffing approach of the MNE. Apolycentric staffing approach would minimizethe number of expatriates in the host unit andalso not place expatriates only at key positions,whereas a more global staffing approach wouldassign expatriates at multiple levels of the or-ganization and use expatriates from countriesother than the HQ country. In these situations,categorization based on nationalities wouldless likely occur and expatriates would lesslikely be perceived as members of an outgroup,because the expatriate outgroup might be lessdistinct. If, however, an ethnocentric approachor one that placed only parent country expatri-ates in managerial positions were adopted, itwould cause expatriates to stand out from theother organizational members. In addition, ex-patriates might distinguish themselves furtherby isolating themselves in an expatriate life-style and relying on expatriate contacts, ratherthan working to establish local networks, thusdivorcing themselves socially from HCNs (cf.Black et al., 1991; Caligiuri, 2000; Hailey, 1996).This might further reinforce the distinctivenessof the expatriates as a separate group.

Proposition 1b: The differentiating ef-fects of the social characteristicswithin the host unit increase the sa-lience of national identities and, thus,

raise the likelihood that HCNs willchoose expatriate referents.

Again, we do not suggest that national groupidentification is inevitable. Clearly, social cate-gorization based on nationality will be lesslikely to occur if nationality is not the most sa-lient feature distinguishing groups of employ-ees (Ashforth & Johnson, 2001). Such a situationcould arise if cultural distances were small, de-spite differences in nationalities, or if othersources of social identity (such as age, gender,or ethnicity) were more salient.

So far, we have argued that salience of theexpatriate as a comparative outgroup stemsfrom the processes of categorization and identi-fication that the HCNs undergo with respect totheir national identities. But, in addition to thesalience of the expatriates as an outgroup, thereare other factors suggested in the referentchoice literature that can be important in influ-encing the choice of an expatriate referent:availability of information about expatriatesand the relevance of expatriates as referents.

Availability of Information About Expatriates

As noted earlier, researchers have proposedthat the choice of a referent is also a function ofthe availability of information about the referent(Goodman, 1974; Levine & Moreland, 1987). Ac-cording to Kulik and Ambrose (1992), availabilityof information is often highly influential in thereferent selection process, resulting in compar-ers’ choosing dissimilar and even self-deprecat-ing referents. In the present case, we argue thatthe availability of information about expatriatesis chiefly dependent on the proximity of expatri-ates to HCNs in the organization.

Martin (1981) suggests that dissimilar butproximal others are more likely chosen as refer-ents, even though more similar but relativelydistant others are present. Proximity works in atleast two ways. First, proximal outgroups, suchas those the employee primarily works or liveswith, tend to be more salient to a comparer, thuscausing the employee to more likely identifywith his or her particular social group (Tyler,Boekmann, Smith, & Huo, 1997) and, as alludedto earlier, thus leading to intergroup compari-sons. Second, information about proximal othersis more readily or easily accessible and avail-able than information about distal others, thus


making the comparison process easier (Austin,1977). Hence, proximal outgroups may be no-ticed and selected as comparative referents,even though they may be more dissimilar than amember of the comparer’s ingroup (Kulik & Am-brose, 1992).

If HCNs increasingly work intimately along-side expatriates (Hailey, 1996), either as cowork-ers, subordinates, or, in many instances, evensuperiors, they are often in a good position toevaluate the expatriates’ deservingness on thebasis of the expatriates’ qualifications and per-formance, as well as their shortcomings andinadequacies (Gladwin & Walter, 1980; Leung &Morris, 2000). Hence, even though expatriatesmay be identified as a social outgroup, if inter-actions occur between the HCN and expatriates,information about the expatriates’ abilities andwork performance may be easily observable be-cause of close work relationships. Informationabout the expatriates’ pay packages may alsobe available informally through observation orthrough conversation. Thus, comparisons maystill occur (e.g., Hailey, 1996). However, if expa-triates are assigned as a group to the host unitto work on specialized projects and have littlecontact with HCNs within the organization, theninformation about the expatriates may be lessforthcoming to the HCNs, making comparisonswith expatriates more difficult.

Proposition 2: The closer the proximityof HCNs to expatriates, the greater theavailability of information about theexpatriates and, hence, the greaterthe likelihood that HCNs will chooseexpatriate referents.

The Relevance of Expatriates As Referents

It has also long been suggested that the rele-vance of a particular referent class influencesits use (Adams, 1963). Goodman suggests thatrelevance or attractiveness is a “function of itsinstrumentality in satisfying certain needs”(1974: 175). Instrumentality is, in turn, influencedby the ease of making the comparison and theappropriateness of the referent to satisfy theneed for things such as self-esteem, feedback,and recognition (Goodman, 1974). Hence, forHCNs to choose expatriate referents, they needto first view expatriates as a relevant referentother that will help satisfy certain needs.

Again, there are several organizational andsocial factors present in the host unit that mightinfluence the relevance of the expatriate refer-ent, which, in turn, will influence the likelihoodthat expatriates will be chosen as referents. Ku-lik and Ambrose (1992) propose that individualsin more integrated fields will make more com-parisons that transcend demographic differ-ences as compared to individuals in situationswhere segregation of occupations occurs. This isbecause if more individuals from other socialgroups (i.e., male and female, white and black)are substantially represented in a particular oc-cupation, the chances are greater that a memberof an outgroup will be a relevant comparisonand that the availability of information aboutthat referent will be higher.

In a host unit context, segregation betweenHCNs and expatriates may occur to varying ex-tents and may influence the relevance of theexpatriate referent. Once more, the staffing ori-entation of the MNE can influence the likelihoodthat an expatriate referent will be chosen. If thestaffing orientation is one that balances the useof HCNs and expatriates in multiple positionsand levels of the organization, the likelihood ofcomparison with an expatriate increases. If,however, the positions are segregated, with ex-patriates holding perhaps higher positions, as isusually the case in more ethnocentric orienta-tions, expatriates may be viewed as less appro-priate referents, and information about their in-puts/outcomes ratios may also be less available.For example, if HCNs consistently hold low-level shop floor positions, the expatriate man-ager or executive will not be an appropriatereferent or have any relevant basis for compar-ison. If, however, HCNs and expatriates holdsimilar positions or positions close to eachother, expatriates more likely will be viewed asrelevant referents.

In addition to staffing orientation, other socialfactors may influence the relevance of expatri-ate referents through the integration of expatri-ates and HCNs within the organization. The dif-ferences in economic development of the hostcountry and the expatriate’s home country mayalso cause segregation within the organization.If the economic status of the HCNs and that ofthe expatriates are vastly different, occupa-tional status within the host unit may differalong national lines. Again, HCNs may likelyhold lower-level positions, whereas the expatri-


ates may occupy the strategic positions. In thissituation, expatriates are less relevant referentsfor HCNs. However, if the economic develop-ment of both the host country and the expatri-ates’ home country is similar, it is likely that thehigher-level positions within the host unit pre-viously dominated by the expatriates will befilled by more HCNs. Hence, with more HCNs insimilar positions as expatriates, it is more likelythat expatriates will be relevant referents for theHCNs (Hailey, 1996).

Finally, making comparisons with expatriatesrelative to pay should help HCNs meet theirbasic needs for feedback about their perfor-mance, value to the organization, and recogni-tion. By comparing themselves with others hold-ing similar positions, HCNs have a logical basisfor evaluating how much the organization val-ues their contribution. Thus, if expatriates holdsimilar positions as HCNs, they are potentiallyrelevant referents for HCNs.

Proposition 3: The more integrated theHCNs and expatriates are within thehost unit, the greater the relevance ofexpatriate referents and, hence, thegreater the likelihood that HCNs willchoose expatriate referents.

We have outlined the factors and conditionsthat could increase the probability that HCNswill choose expatriates as referent others. How-ever, these conditions are also interdependent(Kulik & Ambrose, 1992). Figure 1 suggests thatall three conditions may have indirect as well asdirect influences on referent choice. When infor-mation about expatriate pay and inputs is eas-ily accessible, as noted, it may cause nationalidentities to become salient, and because expa-triates as an outgroup are now salient to HCNs,they may become a relevant referent. At thesame time, when national identities become sa-lient and expatriates are viewed as potentiallyrelevant referents, HCNs may more activelyseek out information about expatriates (Kulik &Ambrose, 1992). Consequently, HCNs are morelikely to choose expatriate referents. However, itis clear that even when the expatriate outgroupis salient, if information about them is unavail-able, or if HCNs cannot establish the outgroupas a relevant referent, the comparison is un-likely to be made. Similarly, if pay informationis available and expatriates are indeed relevant

referents, but their presence is not salient to HCNs,expatriates may not be chosen as referents.

We emphasize that the factors we propose donot make such comparisons inevitable and thatexpatriates are not the only and most likely ref-erents from which HCNs can choose. Whenthese comparisons occur, however, it is likelythat the HCNs will perceive the pay discrepan-cies or RD that almost surely exists. As notedearlier, objective deprivation of HCNs is causedby the favorable expatriate packages offeredto expatriate employees for taking on theassignment.

Proposition 4: When expatriate refer-ents are chosen, HCNs will perceiveRD created by differentiating expatri-ate pay policies.

Yet even when expatriates are chosen as ref-erent others and when objective pay deprivationis perceived, feelings of injustice are not alwaysinvoked. If RD is not experienced or felt, actionsto resolve the injustice are unlikely (Martin,1986). There is a series of conditions and circum-stances that make it more likely that disadvan-taged members will experience feelings of RD.We turn now to the second part of our model: aconsideration of those factors and the potentialoutcomes of these feelings.

HCN REACTIONS TO PAY COMPARISONS

In objective terms, HCNs are likely to be rela-tively deprived compared to their expatriatecounterparts. Yet the justice and RD researchhave shown that the presence or even the per-ception of these differences does not alwayslead to feelings of RD and subsequent actions(Martin, 1986; Tajfel, 1982). We have discussedone critical condition for RD—the choice of ex-patriate as the referent other—and presentedsome ideas about when this choice is morelikely. But there are also other conditions thatmust exist before RD is experienced, one ofwhich is that the outcome in question should beone that is desired (Tyler et al., 1997). Anothercondition that must be satisfied is that the indi-vidual should feel that he or she deserves or isentitled to the outcome (Crosby, 1984; Lansberg,1989). Finally, the individual must also feel thatthe deprivation is not the result of some legiti-mate consideration.


We suggest that, in the present context, if allof these conditions are met, HCNs are morelikely to experience feelings of RD. Thus, ifHCNs select expatriates as one of their pay ref-erents, if they value pay (whereby more pay isalmost always favored), and if they feel entitledto at least similar compensation as their expa-triate counterparts for performing the same jobs,they are more likely to experience feelings of RD.

Furthermore, HCNs may also feel that expatri-ates do not deserve the higher rewards. HCNsoften perceive expatriates as lacking necessaryskills and experience and as being unable tocommunicate knowledge to local staff or toadapt to local practices (Hailey, 1996). The per-formance of expatriates in overseas assign-ments has long been noted to fall short of expec-tations (e.g., Tung, 1987). If HCNs perceiveexpatriates as not necessarily performing betteror as deserving higher pay, but see them astreated more favorably by nature of their nation-ality (Harvey, 1993), they are more likely to ex-perience RD.

Proposition 5: When HCNs perceivepay discrepancies, they are also likelyto feel relatively deprived.

Cultural Effects on Experiencing RD

We propose that the national culture of HCNshas a pervasive influence on various stages ofour model, particularly as a moderator of therelationship between comparing one’s position/pay with that of expatriates and experiencingRD. We discuss in this section how culture influ-ences both the meaning and importance of jus-tice (Tyler et al., 1997). We also indicate for eachaspect how culture influences justice percep-tions and the experience of RD among HCNs.

Individuals differ in the extent to which theyperceive and respond to RD. In other words, the“perceptual threshold for the violation of justicenorms” (Schmitt & Dorfel, 1999: 452)—that is, jus-tice sensitivity—tends to differ by individual.Justice sensitivity influences the likelihood ofdetecting unfair distributions, the probability ofreacting to the unfairness, and the kinds of jus-tice restoration efforts that the individual willadopt (Schmitt & Dorfel, 1999). Individuals highin justice sensitivity tend to react with greaterresentment to deprivation of desired outcomesthan individuals low in justice sensitivity. So

far, we have assumed that “Western” notions ofjustice motivate the HCNs in our conceptualmodel. Even though justice is, in fact, a “univer-sal human concern” (Leung & Morris, 2000: 349),many scholars have rejected the assumptionthat all people have a common conception ofand react to injustice similarly (see Farh, Earley,& Lin, 1997; Leung & Morris, 2000; and Tyler et al.,1997).

Researchers have found that different culturesvary in terms of justice sensitivity (Major &Deux, 1982; McFarlin & Sweeney, 2000). Evidencesuggests that cultures have similar concerns forjustice, but the meaning of the term may differ(McFarlin & Sweeney, 2000). In certain culturesjustice may not be defined in terms of pay. Forexample, in feminine and collectivist cultures,justice is deemed as served if moral duties andinterpersonal responsibilities are met. Hence,rewards such as recognition, status, and socialsupport (see Tyler et al., 1997) may be of greatervalue to recipients than pay (Morris & Leung,2000). Benefits, for example, may be seen asmore desirable than pay in high-inflation na-tions, such as Russia, where currency has verylittle value and where employees value suchthings as food and consumables more thanmoney. In such situations, HCNs may be lessconcerned with pay discrepancies and are un-likely to experience RD as long as the otherbenefits they receive meet their needs (Deutsch,1985).

Similarly, the principles of justice, for exam-ple, may be culture specific (Leung et al., 1996).In collectivist cultures justice is deemed servedif people are treated equally and rewards aredistributed based on need. This is unlike indi-vidualistic cultures, where justice is based onthe principle of equity (see McFarlin & Sweeney,2000).

Whether or not injustice is felt or experiencedas a result of RD also depends on what the focalperson views as a legitimate input in the justicecalculation. In collectivist societies, for exam-ple, an important input is a person’s seniority inthe organization, since it indicates his or hercommitment and loyalty to a group or organiza-tion; in high power distance societies, statusand position may tend to be regarded as credi-ble (Komorita & Leung, 1985). In ascription cul-tures, where status is attributed based on who orwhat a person is (Parsons & Shils, 1951), at-tributes such as social class and race may be


regarded as legitimate inputs, whereas inachievement cultures, where status is accordedbased on performance, individual accomplish-ments are primarily considered (Leung & Morris,2000). In our model, HCNs may not necessarilyview the greater individual contributions of ex-patriates as legitimate inputs worthy of greaterrewards. Instead, things such as organizationaltenure, loyalty, and social status may be givenmore weight. Thus, even if expatriates’ perfor-mance and qualifications might deserve higherpay, HCNs may not necessarily perceive this tobe so, and feelings of RD may follow.

Next, there is evidence that indicates that theimportance of pay justice, or the extent to whichit affects people’s thoughts, feelings (e.g., anger;Leung & Morris, 2000), and behaviors (e.g., citi-zenship behaviors; Farh et al., 1997), variesacross cultural groups. In high power distanceand collectivist cultures, moral obligations andinterpersonal responsibilities may be more im-portant than justice considerations of individualrights. In addition, in low masculinity (high fem-ininity) societies, material achievement and,hence, pay justice tend to be less important thanthings such as quality of life and quality ofsocial interactions. Thus, calculations of payjustice among HCNs from such societies mayoccupy less of their cognitive resources.

The extent to which RD is accepted by thesociety also influences, first, whether or not up-ward comparisons are made and, second,whether pay disadvantages are salient. In highpower distance societies, younger or lower-status employees are less likely to make socialcomparisons with older, higher-status workersin the organization, whereas in low power dis-tance or egalitarian societies, employees aremore likely to make social comparisons withothers in higher-status dominant groups (Morris& Leung, 2000). Thus, if HCNs are from a highpower distance culture, where large pay differ-ences between high- and low-status employeesare taken for granted and the high-status expa-triate employees are seen as too different fromthem to have any basis for comparison, HCNsare less likely to compare their pay packageswith expatriates (Leung et al., 1996). Hence, thepay discrepancy would be less distressing tothem.

In sum, our model suggests a significant roleof national cultures in the relationship betweenactual pay deprivation and HCNs’ experience of

RD about the pay differentials between them-selves and their expatriate counterparts. Wepropose that culture influences how sensitiveHCNs are toward injustice.

Proposition 6: The national culture ofthe HCNs moderates the relationshipbetween the perception of actual paydiscrepancies and the experience ofRD resulting from choosing expatriatereferents.

Potential Behavioral Outcomes

Finally, we come to the proposed behavioralconsequences of this perceived RD. When HCNsperceive pay disparity, they can always appealto top management for redress, but this is un-likely to be successful in the short run. Ethno-centric compensation systems, still very muchpervasive today, are unlikely to supply HCNswith the same rewards given to expatriates,even if they hold the same position in the or-ganization and are similarly qualified. Further-more, these differences in compensation ariselargely because the expatriate is put on assign-ment and less so for any contributions renderedbeyond what a HCN can provide. Hence, even ifHCNs match performance or input levels of ex-patriates with the hopes of increasing their ownrewards, it is unlikely that the MNE will supplythem with a similar pay package.

Instead, we predict that HCNs are more likelyto react to RD and attempt to restore equity byreducing their inputs in a variety of ways. Theseattempts are most likely to manifest themselvesin a series of “withdrawal” behaviors, as HCNsattempt to remove themselves from the distress-ing situation. Specifically, HCNs may individu-ally or collectively become unwilling to cooper-ate with expatriates, act contentiously anddiscriminate against expatriates, withhold citi-zenship behaviors, and increase absencesand/or turnover (Scholl et al., 1987; Skarlicki,Folger, & Tesluk, 1999).

In any case, as noted by Black et al. (1998),when expatriates enjoy relatively high wagesand standards of living, the perceived injusticeby host country managers and employees canhurt an expatriate’s ability to work effectivelywith the local staff. Adjustment to the host coun-try situation is hindered if HCNs do not welcomethe expatriate’s presence and make little at-


tempt to befriend the expatriate or to go out oftheir way to help the expatriate, as is oftenneeded initially (Florkowski & Fogel, 1999). TheHCNs’ friendship is vital in the expatriate’s ad-justment to the job and the organization, as wellas his or her adjustment to the new host countryenvironment. In addition, other extrarole behav-iors, such as HCNs’ cooperation and support andprovision of needed information and cultural in-sights, are key to helping the expatriate adjustto the job and the organization (Black, 1990; Krai-mer, Wayne, & Jarworski, 2001). Hence, the with-drawal of HCNs may ultimately adversely affectexpatriates’ speed of adjustment and their abil-ity to perform their jobs effectively.

Proposition 7: When HCNs experienceRD, they are likely to exhibit with-drawal behaviors, and, thus, expatri-ates are less able to adjust to the hostcountry situation and perform theirjobs effectively.

THE NEED FOR A HOST COUNTRYPERSPECTIVE

This model has several potential contribu-tions to both management practice and researchon overseas assignments and social compari-son. Incorporating social identity theories withsocial comparison theories adds to the existingunderstanding of the process of referent selec-tion and its consequences. Our model also rep-resents an initial attempt to integrate domesticresearch in these areas in a multinational con-text. Such an integrative approach may be ap-plied fruitfully to any organizational context ofinterest, not only in a host unit context.

Existing IHRM studies have neglected theHCNs’ role in the success of expatriate assign-ees, placing the burden largely on the expatri-ate. In many cases the expatriate is not solely oralways at fault for failed assignments. Ourmodel holds that expatriate HR practices (e.g.,pay, staffing) may inadvertently create prob-lems for the expatriate and the MNE by impact-ing HCNs’ perceptions of pay justice. Clearly,the most obvious solution is to remove the dis-tressing pay differential. A 1998 survey showedthat many MNEs are “localizing” expatriates’pay to establish pay equity and good relationsbetween expatriates and HCNs (Latta & Cummins,1999). However, such a strategy is not always fea-

sible, particularly when the host country is far lessdeveloped and the local pay structure too low toprovide any incentive for the expatriate to acceptthe assignment (Harvey, 1993).

Fortunately, existing research provides a fewplausible alternative solutions. First, MNEs cantry to reduce the salience of expatriates as areferent other. As noted, HCNs are unlikely toexperience RD if the dissenting comparison isnot made or is unimportant. Second, pay satis-faction is influenced by multiple comparisons(Scholl et al., 1987); MNEs can emphasize (byproviding access to information) the advantageHCNs may have over other potential referents,such as other HCNs in local firms, other MNEs,or the pay that they received previously. Third,MNEs can convince HCNs that the expatriates’pay packages were fairly determined and thatHCNs are not deliberately or onerously mis-treated. Even when the outcomes the HCNs re-ceive are low, if the HCNs perceive the proce-dures used to arrive at those outcomes as fair,they may be less inclined to react negatively toRD (Brockner & Wiesenfeld, 1996; Greenberg,1990). Hence, any negative feelings that mayarise from perceiving deprivation relative to ex-patriates may be minimized. In addition, per-ceived procedural justice also leads to otherbenefits for the organization (e.g., loyalty, per-formance of citizenship behaviors; Moorman,1991). Hence, MNEs would do well to manage thejustice perceptions of HCNs carefully.

LIMITATIONS AND FUTURE RESEARCH

As noted by several researchers, the utility ofRD and equity theories to predict behavioralreactions is still somewhat questionable (e.g.,Martin, Brickman, & Murray, 1984; Taylor &Moghaddam, 1987). Research findings about thereactions to injustice have been somewhat in-conclusive. Hence, our model is limited by thestate of the theories, and it will require modifi-cation as new findings and new theories cometo light. Also, in this paper we have only dis-cussed individual reactions to injustice per-ceived at a group level. Existing research hasshown that collective action is probable whengroup identity is strong (Kawakami & Dion, 1993)and when individuals perceive that the ingroupas a whole is being treated unfairly (Vanneman& Pettigrew, 1972). Further, Leung and Stephan(1998) have suggested that culture influences the


kinds of response to injustice, whether behav-ioral, psychological, formal/informal, or at theindividual or group level. Thus, there is a needfor more work that considers other reactions toinjustice.

Our model focuses only on expatriates as po-tential comparative referents, but it is clear thatpeople tend to engage in multiple pay compar-isons with different referents (Goodman, 1974;Ronen, 1986). In addition, our model includesonly two groups of employees of MNEs: HCNsand expatriates. We do not incorporate thirdcountry nationals or other sources of personnelinto the model. We would expect that if morethird country nationals of various nationalitieswere found in the host unit, the likelihood ofgroup categorization in terms of national originwould be less severe, since national group dis-tinctions would be less clear. There is clearly aneed for further research to expand the set ofplayers involved in the MNE.

Finally, our model assumes that expatriatepay packages place expatriates in a signifi-cantly favorable position relative to HCNs. Thismay not always be the case. Even though sur-veys indicate that most U.S.-based MNEs con-tinue to adopt ethnocentric expatriate pay prac-tices, research on how different compensationapproaches may influence the suggested pro-cesses and outcomes is needed.

CONCLUSION

The social, political, and economic environ-ment in which international business exists haschanged considerably. As a result, the problemsof how to best assure the success of expatriateassignments have become more complicated.Specifically, in the modern world, HCNs aremore and more likely to be well trained and welleducated, and more likely to believe that theyshould be treated the same as an expatriate. Yetmost research has continued to focus on policiesand procedures designed to help attract expa-triate assignees and compensate them for their“hardships.” Unfortunately, many of these poli-cies have the side effect of placing HCNs in adisadvantageous position relative to the expa-triate. HCNs who become aware of this positionand are sensitive to the differences and issuesare likely to perceive inequity. Their reactions tothat inequity (by exhibiting a variety of with-

drawal behaviors), in turn, are likely to reducethe effectiveness of expatriates.

We offer a model of HCNs’ reactions to expa-triate pay policies that attempts to make MNEsmore aware of these issues. It is critical thatglobal managers understand that some of thevery practices they implement to help ensurethe success of expatriates might actually workagainst these interests in the long run. It is clearthat MNEs will require the cooperation and thecommitment of a reliable cadre of local employ-ees in order to succeed. But, until these organi-zations become truly global and design HR sys-tems that do not violate the justice norms oflocal and foreign employees, these MNEs mayhave trouble obtaining the cooperation theyneed. We hope that our model and paper willhelp these firms to view HCNs as critical stake-holders in the organization and will help themto evaluate their practices in light of their im-pact on these stakeholders.

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Soo Min Toh is an assistant professor of organizational behavior at the University ofToronto. She is currently completing a Ph.D. in management from Texas A&M Univer-sity. Her research interests include the performance and adjustment of expatriatesand foreign employees, cross-cultural knowledge transfer, contextual performance,and human resource systems.

Angelo S. DeNisi is the Paul and Rosalie Robertson Chair in Business Administrationand head of the Department of Management at Texas A&M University. He received hisPh.D. from Purdue University. His current research interests include contextual per-formance, performance appraisal and performance management, and the adjustmentof expatriates.


Host Country National Reactions to Expatriate Pay Policies: A Model and Implications

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