16 -1 Chapter 16 Mc Graw-Hill International Pay

16 -1 Chapter 16 Mc. Graw-Hill International Pay Systems © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Learning Objectives 16 -2 After discussing Chapter 16, students should be able to: 1. Identify the four general factors in the global guide to 2. 3. 4. 5. international compensation and be able to apply the global guide to increase understanding of the variations in international pay practices. Explain how certain key factors in the global guide – social contract, culture, trade unions, ownership and capital markets, managers’ autonomy – impact international pay systems. Understand the key strategic differences among the pay systems of Japan, Germany and the U. S. using the total compensation model. Discuss the three general compensation strategies used by companies with worldwide operations. Describe the key features of expatriate pay systems. Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -3 Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them. Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -4 Managing Variations u. How people get paid around the world depends on differences (and similarities) in the following general factors Ø Economic Ø Institutional Ø Organizational Ø Employee u. Exhibit 16. 1: Guide to International Compensation u. Exhibit Mc. Graw-Hill 16. 2: Applying the Global Guide © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Exh. 16. 1: Guide to International Compensation Mc. Graw-Hill 16 -5 © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -6 The Social Contract Organizations Individuals Employment Relationship Government Individuals Organizations • Unions • Union Federations • Individual Employers • Employer Consortium Social Contract Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -7 Exh. 16. 3: Social Contracts and Pay Setting SOCIAL CONTRACT Highly Centralized Localized Mc. Graw-Hill Argentina Brazil Canada France Hong Kong Mexico Singapore U. K. U. S. A. Local Systems Czech Republic Germany India Israel Japan Korea Slovakia Slovenia Sector/Industrywide Systems PAY SETTING SYSTEMS Austria Belgium Cuba Hungary Poland Sweden Nationwide Systems © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -8 Characteristics of Culture u. Often defined as shared mental programming u. Involves acquiring knowledge that people use to interpret experience and generate social behavior u. Rooted in values, beliefs, and assumptions shared in common by a group of people u. Influences Mc. Graw-Hill how information is processed © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -9 Culture and Managing International Pay u. Assumption that pay systems must be designed to fit different national cultures is based on the belief that most of a country’s inhabitants share a national character u. Job of a global manager Ø Search for national characteristics whose influence is assumed to be critical in managing international pay systems Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -10 Hofstede’s Cultural Dimensions u. Power Distance u. Uncertainty Avoidance u. Individualism u. Masculinity u. Long-term Mc. Graw-Hill – Collectivism – Femininity – Short-term © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -11 Trade Unions and Employee Involvement u. Exhibit 16. 5: Union Density u. Exhibit 16. 7: Employment Practices Differ Among Nations Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -12 Exhibit 16. 5: Union Density Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Exhibit 16. 6: Employment Practices Differ Among Nations: The Cost of an Employee The hourly cost of a production worker in manufacturing. . . is made up from the salary paid directly to the worker before deductions. . . and what an employer pays in social insurance and labor taxes. 16 -13 What those extra costs are as a percentage of salary. France $17. 97 $12. 36 $5. 61 45. 4% Germany $28. 28 $20. 94 $7. 34 35. 1% United States $18. 24 $14. 34 $3. 90 27. 2% Japan $19. 37 $16. 52 $2. 85 17. 3% Britain $15. 47 $13. 47 $2. 00 14. 8% Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -14 Factors Affecting International Pay u. Ownership u. Managers’ Mc. Graw-Hill and capital markets autonomy © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -15 Comparing Costs u Factors affecting wage comparisons Ø Standard of living costs Ø Purchasing power u Exhibit Mc. Graw-Hill 16. 7: The Hamburger Standard © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Exhibit 16. 11: Strategic Similarities and Differences: An Illustrated Comparison Japan Objectives Internal Alignment Mc. Graw-Hill United States 16 -16 Germany Long-term focus High commitment Egalitarian – internal fairness Flexible workforce Control cash flow with bonuses Short / intermediate focus High commitment Performance – market – meritocratic Flexible workforce Cost control; varies with performance Long term High commitment Egalitarian – fairness Person based: age, ability, performance determines base pay Many levels Small pay differences Work based: jobs, skills, accountabilities Work based: jobs and experience Fewer levels Larger pay differences Many levels Small pay differences Highly trained Cost control through tariff negotiations © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Exhibit 16. 11: Strategic Similarities and Differences: An Illustrated Comparison Japan External Competitiveness Employee Contribution Mc. Graw-Hill United States 16 -17 Germany Monitor age – pay charts Consistent with competitors Market determined Tariff based Compare on variable and performance-based pay Same as competitors Bonuses vary with performance only at higher levels in organization Performance appraisal influences promotions and small portion of pay increases Bonuses an increasing percentage of total pay Tariff negotiated bonuses Increases based on individual, unit, and corporate performance Smaller performance bonuses for managers © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Exhibit 16. 11: Strategic Similarities and Differences: An Illustrated Comparison Japan United States Advantages Supports commitment and security Greater predictability for companies and employees Flexibility – person based High cost of aging work force Discourages unique contributors Discourages women and younger employees Skeptical workers, less security Fosters “What’s in it for me? ” No reward for investing in long-term projects Germany Supports performance – competitor focus Costs vary with performance Disadvantages 16 -18 Mc. Graw-Hill Supports commitment and security Greater predictability for companies and employees Focus on short-term payoffs Companies do not compete with pay (speed to market) Inflexible; bureaucratic High social and benefit costs Not a strategic tool © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -19 Strategic Market Mind-Set Localizer: “Think Global, Act Local” ØDesigns pay systems to be consistent with local conditions ØBusiness strategy is to seek competitive advantage by providing products and services tailored to local customers ØOperate independently of corporate headquarters Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -20 Strategic Market Mind-Set (continued) Exporter: “One Size Fits All” ØBasic total pay system designed at headquarters and is “exported” world-wide for implementation at all locations ØExporting a basic system makes it easier to move managers and professionals among locations ØOne plan from headquarters gives all managers around the world a common vocabulary and a clear message what the leadership values Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -21 Strategic Market Mind-Set (continued) Globalizer: “Think and Act Globally and Locally” ØSeek a common system to be used as part of “glue” to support consistency across all global locations ØHeadquarters and operating units are heavily networked to shared ideas and knowledge ØPerformance is measured where it makes sense for the business ØPay structures are designed to support business Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -22 Shift in Strategic Global Focus u. Focus of strategic global approaches – Avoid matching national systems u. Involves aligning the total pay system with the global business strategy u. Challenges Ø Managers must rethink international compensation in the face of global competition Ø Align global pay with the way business is aligned Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -23 Types of Expatriates u Expats - Individuals whose citizenship is that of employer’s base country u Third country nationals ( TCNs) - Individuals whose citizenship is neither employer’s base country nor location of subsidiary u Local country nationals ( LCNs) - Individuals who are citizens of country in which subsidiary is located u Advantages hiring LCNs of u Advantages bringing in expats or TCNs of Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Objectives of Compensation and Benefits for Expatriates 16 -24 u. Attract and retain employees who are qualified foreign assignments u. Provide an incentive to leave the home country for a foreign assignment u. Maintain a given standard of living u. Take into consideration expatriates’ career and family needs u. Facilitate reentry into the home country at the end of a foreign assignment Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -25 Elements of Expatriate Compensation Salary Housing Mc. Graw-Hill Taxes Allowances and Premiums © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Common Allowances in Expatriate Pay Packages 16 -26 Financial Allowances Social Adjustment Assistance Family Support Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -27 Balance Sheet Approach u. Premise – Employees on overseas assignments should have same spending power as they would in their home country u. Home countryis standard for all payments u. Objectives Ø Ensure cost effective mobility of people to global assignments Ø Ensure expatriates neither gain nor lose financially Ø Minimize Mc. Graw-Hill adjustments required of expatriates © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -28 Exhibit 16. 14: Balance Sheet Approach Base-country currency Equivalent salary and allowances, host country $10, 200 Relocation Bonus $1, 500 Base-country salary $7, 000 Taxes $2, 000 Housing $2, 000 Taxes $1, 000 Housing $700 Goods and Services $2, 000 Goods and Services Reserve $1, 000 Mc. Graw-Hill Allowances paid by company Reserve © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

Other Approaches: Compensation for Expatriates u Negotiation u Localization u Modified balance sheet - regional u Decrease allowances over time u 16 -29 Lump-sum/cafeteria plan Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.

16 -30 Borderless World--Borderless Pay? Mc. Graw-Hill © 2005 The Mc. Graw-Hill Companies, Inc. All rights reserved.