International Pay Systems16-2 Learning Objectives After studying Chapter 16, students should be able to: 1, Realize that studying international compensation enhances their understanding of compensation within their own country. 2. Understand how changes in political and economic conditions affect pay in every country. 3. Recognize the danger of making generalizations about systems in a country. 4. Discuss how compensation in every country must deal with the objectives of efficiency, fairness, and compliance. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-3 Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them. Cee mn McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-4 Managing ations »How people get paid around the world depends on differences (and similarities) in the following general factors: Economic Institutional Organizational Employee McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16- Guide to International Compensation cmap tnt McGraw-Hilllirwin © 2002 by The McGraw-Hill Companies, Inc.All rights reserved.16-6 Social Contract: Government, Organizations, & Employees Organizations Individuals Employment Relationship Government ees Cr ea + Individual Employers + Unions + Employer Consortium * Union Federations Social Contract McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.Highly Centralized 5 Czech Republic é Germany ‘Argentina India 8 Brazil Israel Zz Canada Japan 8 France Korea a Hong Kong Slovakia Mexico Slovenia Singapore UK. USA. Localized Local Sector/industry- Systems wide Systems PAY SETTING SYSTEMS 16-7 Social Contracts and Pay Setting Austria Belgium Cuba Hungary Poland ‘Sweden Nationwide Systems McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-8 »Culture is often defined as shared mental programming. Culture is acquired knowledge that people use to interpret experience and generate social behavior. yIt is rooted in the values, beliefs, and assumptions shared in common by a group of people. yIt influences how information is processed. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16- Culture and Managing International Pay The 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. The job of a global manager is to search for national characteristics whose influence is assumed to be critical in managing international pay systems. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-10 Hofstede’s Cultural Dimensions » Power Distance y Uncertainty Avoidance “Individualism — Collectivism yMasculinity — Femininity yLong-term — Short-term McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-11 Trompenaar’s Cultural Dimensions an Human Resource Management Universal - Everyone is the same Particular Depends on the culture Individual — Self Collective Group Neutral — Detailed policies and procedures Affective Flexible guidelines Achievement - Pay-for-performance system Ascriptive Rewards based on seniority Internal - Internal promotions External External hiring and promotions Synchronic - Job descriptions Sequential Process descriptions Past-Present - Loyalty and tenure Future Contract workforce ‘MeGraw-Hillirwin (© 2002 by The McGraw-Hill Companies, Inc.All rights reserved.16-12 Employment Practices Differ A g Nation: ime and the Clock AVERAGE HOURS WORKED | JOBLESS RATE (per employee, annually) UNITED STATES (1997) 1,966 hours 4.3% JAPAN (1995) 1,899 hours 4.9% BRITAIN (1997) 1,731 hours 5.9% FRANCE (1997) 1,656 hours 11.1% GERMANY (1997) 1,574 hours 9.1% ‘McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc.All rights reserved.Employment Practices ler Among Nai The Cost of an Employee The hourly cost ofa ...ismadeupfrom ... and what an What those extra production worker in the salary paid employer pays in costs are as a manufacturing... directly to the worker social insurance and _ percentage of salary. before deductions... labor taxes. 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% McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-14 Strategic Similarities and Differences: An Illustrated Comparison Japan United States Germany Objectives Long-term focus Short / intermediate focus | Long term. High commitment High commitment High commitment Egalitarian internal | Performance -market- | Egalitarian - fairness fairness meritocratic Flexible workforce Flexible workforce Highly trained Control cash flow with | Cost control; varies with Cost control through bonuses performance tariff negotiations Internal Person based: age, Work based: jabs, skills, ‘Work based: jobs and Alignment ability, performance | accountabilities experience determines base pay Many levels Fewer levels Many levels Small pay differences | Larger pay differences Small pay differences McGraw-Hilllirwin © 2002 by The McGraw-Hill Companies, Inc.All rights reserved.16-15 Strategic Similarities and Differences: An Illustrated Comparison (continued) Japan United States Germany External Monitor age - pay Market determined Tariff based Competitiveness | charts Consistent with Compare on variable and | Same as competitors competitors performance-based pay Employee Bonuses vary with Bonuses an increasing Tariff negotiated Contribution performance only at | percentage of total pay —_‘| bonuses higher levels in organization Performance appraisal influences promotions and small portion of pay increases Increases based on individual, unit, and corporate performance: ‘Smaller performance bonuses for managers McGraw-Hilllirwin © 2002 by The McGraw-Hill Companies, Inc.All rights reserved.16-16 Strategic Similarities and Differences: An Illustrated Comparison (continued) Japan United States Germany ‘Advantages Supports commitment | Supports performance- | Supports commitment and security competitor focus and security Greater predictability | Costs vary with Greater predictability for for companies and —_| performance companies and employees employees Flexibility- person —_| Focus on short-term Companies do not based payoffs (speed to market) | compete with pay Disadvantages | High cost of aging Skeptical workers, less inflexible; bureaucratic work force security Discourages unique | Fosters “What's initfor | High social and benefit contributors me?” coe Discourages women | No reward for investing in| Not a strategic tool and younger. long-term projects employees McGraw-Hilllirwin © 2002 by The McGraw-Hill Companies, Inc.All rights reserved.16-17 Strategic Market Mindset » Localizer: “Think Global, Act Local” Designs pay systems to be consistent with local conditions. Business strategy is to seek competitive advantage by providing products and services tailored to local customers. Operate independently of the corporate headquarters. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-18 Strategic Market Mindset (continued) » Exporter: “One Size Fits All” Basic total pay system designed at headquarters and is “exported” world-wide for implementation at all locations. Exporting a basic system makes it easier to move managers and professionals among locations. One plan from headquarters gives all managers around the world a common vocabulary and a clear message what the leadership values. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-19 Strategic Market Mindset (continued) yGlobalizer: “Think and Act Globally and Locally” Seek a common system that can be used as part of the “glue” to support consistency across all global locations. Headquarters and the operating units are heavily networked to shared ideas and knowledge. Performance is measured where it makes sense for the business. Pay structures are designed to support the business. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-20 Shift in Strategic Global Focus »Focus of strategic global approaches is no longer on matching national systems. Shift to aligning the total pay system with the global business strategy. The challenge is for managers to rethink international compensation in the face of global competition. The challenge is to align global pay with the way the business is aligned. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-21 Objectives of Compensation and Benefits for Expatriates y Attraction and retention of employees who are qualified for foreign assignments Providing an incentive to leave the home country for a foreign assignment yMaintaining a given standard of living Taking into consideration expatriates’ career and family needs “Facilitating reentry into the home country at the end of the foreign assignments McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-22 a Mem Cer te LM Orel elUuet liegt) Allowances and Premiums Housing McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AUl rights reserved.16-23 Common Allowances in Expatriate Pay Packages Eller Vole lale a) Family Support McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-24 The Balance Sheet Approach Based on the premise that employees on overseas assignments should have the same spending power as they would in their home country. yThe home country is the standard for all payments. The objective is to: Ensure cost effective mobility of people to global assignments Ensure that expatriates neither gain nor lose financially Minimize adjustments required of expatriates McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.Home Country Currency Balance Sheet Approach Equivalent Salary and Allowances, Host Country $10,200 Relocation Bonus “ $1,500 Home Country Salary i Toes 3 $1,000 Housing Housing ee $2,000 ee og $700 Goods and Goods and Services Services $2,000 Feces |e Re $1,000 16-25 Allowances, aid by company McGraw-Hilllirwin © 2002 by The McGraw-Hill Companies, Inc.All rights reserved.16-26 Other Approaches to Compensation for Expatriates yNegotiation »Localization yLump Sum »Cafeteria Plan yRegional Systems McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-27 Tax Strategies for Expatriate Income yLaissez faire yTax equalization yTax protection »Ad hoc s McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-28 Save the Global Bottom Line »Provide employees with assistance that doesn’t show up as income Provide some of the income in the home country Provide part of the compensation before or after the assignment yTime the assignment to take advantage of residency laws Take advantage of incentives offered in the host country McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-29 Issues in Designing a Compensation Strategy for Multinationals » Establishing a worldwide compensation system » Compensation of third-country nationals y International benefits and related taxes Pension plans y Stock ownership plans McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-30 » Anyone interested in compensation needs to adopt a global perspective. » The globalization of businesses, financial markets, trade agreements, and labor markets is affecting every workplace and every employment relationship. » Employee compensation is embedded in the different political-socioeconomic arrangements found around the world. » Compensation systems have a profound impact on individual behavior, organizational success, and social well-being. This holds true within and across all national boundaries. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-31 Review Ques bt} 1, Rank the factors in the global guide according to your belief in their importance for understanding and managing compensation. a. How do your ranks differ from your peers? b. From international peers? c. Discuss how the rankings may change over time. 2. Distinguish between nationwide and industry-wide pay determination. How do they compare to a business strategy-market approach? 3. Develop arguments for and against “typical” Japanese style, German style, and U.S. style approaches to pay. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.16-32 Review Questions (continued) 4, Distinguish between global, expatriates, local nationals, and third-country nationals. 5. Under the balance sheet approach to paying expatriates, most of total compensation is linked to costs of living. Some argue that expatriate pay resembles a traditional Japanese pay system. Evaluate this argument. 6. What is meant by “the full house” or “variations within a nation”? Evaluate its importance in understanding and managing global total compensation. McGraw-Hilllirwin (© 2002 by The McGraw-Hill Companies, Inc. AU rights reserved.