Understanding Compensation Practice

Variations Across Firms: The Impact of

National Culture

Submitted by: Submitted to:

M Umair Riaz Sipra Safa Riaz
Issues of HRM under research in the paper:
The main purpose of this research is to find out the how Multi-National Companies
in different countries differ with respect to their HR compensation practices and
policies due to the difference in national cultures.
The researcher has taken the simplified national culture (national value system)
provided by Hofstede (1980, 1984, 1993)

The dimensionalize national culture provided by Hofstede are:

1. Power Distance (large vs. small),

indicates the extent to which the fact that power is distributed unequally is
accepted in the society by those who do and do not possess power. In a
culture with small Power Distance, it is a common belief that inequality
within an organization (as well as within society) should be minimized.
2. Uncertainty Avoidance
is defined as the degree to which uncertainty and unpredictability
are tolerated in a society (as well as within an organization). In societies
with a high degree of Uncertainty Avoidance, people feel uncomfortable in
unstructured or risky situations. Rules and procedures are more necessary for
employees in cultures with high uncertainty avoidance
3. Individualism vs Collectivism
is the degree to which people in a society value an individual's opinion, and
put their individual interests and the interests of their immediate family
above those of others. In individualistic societies, such as those in the United
States, United Kingdom, Australia, and Canada, people take care of
themselves and their immediate families before anyone else. Here,
individual responsibility for results and individual level rewards are
consistent. On the other hand, in collectivist societies, such as Taiwan
(Province of China), Republic of Korea, Singapore, and Hong Kong, people
distinguish between "in-groups" and "outgroups." They expect their in-
groups (clan, work team, organization, community, country) to look after
them in exchange for absolute loyalty to the group
4. Masculinity vs Femininity.
Is the degree to which the dominant values in societies, such as those of
Japan or the United States, are “masculine” i.e. have Characteristics such as
assertiveness, and are in favor of the acquisition of money and material
goods (doing and acquiring) Here, performance-contingent rewards merit
pay and management by objectives are practices consistent with the culture.
However, in societies, such as those in Denmark, Norway, and Sweden, the
dominant values are "feminine," i.e. they place a high value on the quality of
life and caring for others (thinking and observing)

Compensation practices that were taken,

1. seniority-based pay system
2. pay-for-performance
3. skill-based pay system
4. flexible benefits
5. focus on individual performance
6. employee share options/stock ownership,
7. individual bonus/commission
8. workplace childcare
9. career-break scheme (time off to attend to family responsibilities)
10.maternity leave

Purpose of Research:
In this article researchers explored a number of relationships between the cultural
dimensions suggested by Hofstede (Power Distance, Uncertainty Avoidance,
Individualism-Collectivism, and Masculinity-Femininity) and specific
compensation practices. The results suggest that national culture provides as
important explanation for the variance in the utilization of different compensation
practices in different countries.

Solution Proposed
• First, they suggest that MNCs operating in countries with high levels of
Uncertainty Avoidance may be advised to offer more certainty in compensation
systems.
• Individual incentive compensation practices have a better fit in countries with
higher levels of Individualism.
• Countries with higher levels of Masculinity there is less use of flexible benefits,
workplace child-care programs, career-break schemes, and maternity leave
programs.
• Share options and stock-ownership plans may be more congruent in countries
with higher levels of Individualism, and lower levels of Uncertainty Avoidance
and Power Distance.

Recommendation:

1. Due to data availability constraints, researchers were able to test only a small
number of compensation practices in a limited number of countries. This study
does not guarantee the generalization of the findings for the rest of the world.
2. One technique (Kendall correlation) used by researchers does not allow them to
control for other important macro-level social, legal, economic, political, and
historical variables. This will becomes the reason that results here may
understate the real impact of national culture on specific HR practices.
3. The findings presented in this research would underestimate the real
relationships between HR practices in firms and the dimensions of national
culture. Researchers looked only at a number of specific HR compensation
practices for staffing, appraisal, and compensation rather than a bundle of them.
4. There is a need to build models and research programs internationally that
would try to bundle several different HR practices, and then examine the
relationship between different cultural dimensions and those bundles of HR
practices.
5. In this article researchers examined the relationship between dimensions of
national culture and specific HR (compensation) practices, but did not control
for a number of important factors that might explain certain amount of variance
in the use of particular practices due to the data limitations. These factors
include industry, ownership, company size, employee occupation etc. Further
research is needed to show how substantial the effect of national culture is if we
control for these factors. remuneration based on performance, rather than team
remuneration based on performance.