International Compensation
Learning Objectives 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.
Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them.
Guide to International Compensation
The Social Contract Organizations Individuals Employment Relationship Government Individuals Organizations • Unions • Union Federations • Individual Employers • Employer Consortium Social Contract
Social Contracts and Pay Setting SOCIAL CONTRACT Highly Centralized Localized 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
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 how information is processed
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
Hofstede’s Cultural Dimensions u. Power Distance u. Uncertainty Avoidance u. Individualism u. Masculinity u. Long-term – Collectivism – Femininity – Short-term
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. 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%
Factors Affecting International Pay u. Ownership u. Managers’ and capital markets autonomy
Comparing Costs u Factors affecting wage comparisons Ø Standard of living costs Ø Purchasing power u The Hamburger Standard
Strategic Similarities and Differences: An Illustrated Comparison Japan Objectives Internal Alignment United States 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
Strategic Similarities and Differences: An Illustrated Comparison Japan External Competitiveness Employee Contribution United States 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
Strategic Similarities and Differences: An Illustrated Comparison Japan United States Advantages Supports commitment and security Greater predictability for companies and employees Flexibility – person based Supports performance – competitor focus Costs vary with performance Disadvantages 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 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
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
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
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
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
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
Objectives of Compensation and Benefits for Expatriates 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
Elements of Expatriate Compensation Salary Housing Taxes Allowances and Premiums
Common Allowances in Expatriate Pay Packages Financial Allowances Social Adjustment Assistance Family Support
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 adjustments required of expatriates
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 Reserve Allowances paid by company
Other Approaches: Compensation for Expatriates u Negotiation u Localization u Modified balance sheet u Decrease allowances u Lump-sum/cafeteria plan
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