HBR CASE stUDY Ina World enareScuioy, te head of hi infonotheroficewindon a ing ats the Statgat ill andthe tren Saas omer pth Sm the th foot of Typware’s head hare Iwas ae sternon andthe gathering nuit ay over the il rundereods meeting the disance Tose cuts ook Hk el she thought Aout to us he walled back toe ek and st don nthe oleae charg at the telephone. The poem she aed vs is ge kota every tine She tea to unavel the kn gre tiger Hngen Mehr, Types Esropean neat of marketing, had stele to Tone hi dpa aout 9 posse tren bie =the voy sand he had most favored. Anne Prevost was the director of marketing at an Ameri- can software company, Xon Technolo- fies, that had lately been making in- roads into many of Typware’s worlwide markets. As the brains behind Xon's 2002 advertising campaign, Anne had engineered a huge uptick in sales nearly single-handedly, much to Typware'sdis: ‘may. Now she vas ready to jump ship, provided the German software giant made her a good offer. She would be, without a doubt, a briliant catch. But when Jirgen heard what the com> pany was considering offering her, he lost his temper. "Renate, €244,000 is simply exorbitant! he spat.“Its almost asmuch as! make. Tisisnt fair and it’s hhumiatng, What isit with these eigen niteige Amerikaner, anyway? Selish bil- lionaite CEOs. Big armies. Economic of Pay by Bronwyn Fryer She's an American superstar who wants to work in Europe. He's the CEO of a German company who wants her pizzazz. But can Typware AG pay Anne Prevost anything like what she expects? hegemony. Do they think they're en- titled to everything? I will speak to Thomas Gutschein about this” Renate took a deep breath, bracing herself for an argument."Jirgen, please; she began. “Think about this. She al- ready has another offer from that start: up Seistrand Systems. It includes alot of stock options. 'm sure she would rather ‘come with us, but we have to take that into account. Our global head of mar- keting’s eager to hire her, and I think Thomas will say that we should consider what she's worth to our business~and how costly it would be to have her goto 4 competitor. You're the one who said that this is a critical role, Anne is the best possible candidate for it” Te was true. Jirgen ~like every other senior executive ~ had been very im- pressed with Anne, She demonstrated LHEBR's cases, which are fictional, present common managerial dilemmas and offer concrete solutions from experts. Novestmen 2003 3HBR CASE STUDY © Ina Worle of Pay finesse and a deep understanding of the slobal software industry. An intelligent, careful strategist, Anne had made her mark working in the cutthroat ERP soft- ‘ware business, eventually reporting to 4 famously tough CEO. Along the way, she had garnered armloads of accolades, not only for her marketing creativity ‘but abso for her division's performance under brutal economic conditions. She spoke excellent German, having studied In Hamburg during her junior year abroad and worked fora German mult national in the early 1990s. During a dinner on the evening before Anne de- parted for the United States, Thomas, the CEO, had told Renate and Jurgen that Anne would be a fine addition to the company. L know she is good,” Jrgen contin- ued, sighing into the receiver. "But this salary is too high” “We're trying to match the value of the stock options that Seistrand is of fering’ Renate explained.“ The amount is not so out of line when you consider the costofliving difference. Things are much more expensive in Europe than they are in the US. Is ita fair market price for someone with her experience? 1s difficult to say. But I tell you, she's 1 real professional. She knows what she's doing” Jurgen was silent. Ever mindful of “Typware’s shifting bottom line, he was notoriously conservative about sala- ries, particularly in international nego- tiations. Renate secretly believed that ‘Anne's stipulations were on the auda- cious side, but she also believed in fol- lowing the CEO's direction. “understand your concerns? Renate continued.I have trouble approving it rmyselE” There was a long pause. “Still, ‘you know our strategy isto increase our international revenues by 10%. This po- sition is strategic. Thomas will say we hhave to pay what it takes?” mind me why she is so interested in joining us?” jargen grumbled, “Xon can't promote her. She says there's no more upward mobility for her at the company, and she's not satisfied Bronwyn Eryer isa senior editor at HBR. 2 with the lateral postion she has been of fered, Seistrand wants her, but the com- pany is small and its stock is highly leveraged, so that presents risks. And she's very interested in the idea of ras ing her sons in Europe. Wonderful edu: cational opportunity and so on.” “And her husband? Is he being trans- ferred here?” firgen asked, “No husband” Renate let it stand at that, as she imagined Jargen's eyebrows sing. “allright, Renate? Jargen said finally. “Lstill intend to speak to Thomas about this. And I can’t say 1 support this deci- sion, even given this woman's creden- tials? He hung up with a loud click. The View from the Top Renate massaged her forehead, then pushed her hand through her thick hair. She rose and reached again for the tele- phone receiver, its earpiece still warm. She called Thomas's assistant andl asked whether he was available for coffee that afternoon, He wasnt, the assistant re- plied. But his lunch appointment the next day had just cancelled, Precisely at noon, Renate and Thomas stepped from their building and walked tothe Kénigstra8e, the upscale retail dis trict in the center of the city. The long, colorful stret, closed to traffic and lined with a row of emerald-eafed trees, was crowded with shoppers, students, and people out for a long Mittagspaus Guided to a table at the back of a com- fortable Spanish restaurant, Thomas and Renate sat down—Renate frst glanc- ing around to make sure no other Typ ware employees were there. *You want to talk with me about the American hire— Anne Prevost" Thomas, began. Renate nodded. “Jirgen spoke with you?” she asked, ‘Thomas responded with a curt nod of his own. told him would consider hiscomments.1 also pointed out that we have been looking for the right person to fill this position for a very long time, We can't wait much longer. understand, she is getting impatient. And I know that she needs to be compensated cor: rectly if we are to relocate her here” “True? said Renate. “But this salary request is for nearly as much as Jirgen himself makes. If we pay a person who is just coming into the company that much, it will make others who have been with usfora long time feel that we don't care about them” ‘Well, Renate, in this case, there is much to consider? Thomas explained. “Prevost is probably trying to figure in differences in tax rates, inflation, bene fits floating currencies, nc! other items. She probably has stock options and a bonus package that she would give up to come here, And, as you know, the United States does not have subsidized health care or educational support ‘That's why they have very high salary expectations” “Yes, Thomas? Renate said impa- tiently, “I understand. But am con- cerned that too many people are al- ready asking for much more than the job warrants. I've told you before that ‘our salary system is really out of order. Everyone should be paid the same for doing equal work, don't you think?" she paused, having introduced the real sub- ject she wanted to discuss “know you feel strongly about that?” ‘Thomas replied calmly.“And in theory, Ws true enough. But certain jobs are just not ever going to follow the rules, especially ata company in our position” He paused. "Vd like you to do some re search, Renate. Come up with a salary and benefits recommendation that you think you~ and this woman ~can both live with” Sensing she would get no further, Renate allowed the conversation to drift. She reported on other personnel matters of interest to Thomas. Only after lunch, when they were parting. ways at the office, did Thomas return to the Prevost matter. And even then it was ‘merely to remind Renate of his request. He thanked her for her company and said, Tl expect your recommendation by tomorrow afternoon.” What’s Fair? Back at her desk, Renate pulled out her Anne Prevost file and glanced over the notes she had jotted down during herphone call with Jirgen the day before. Ie struck her suddenly how similar his complaints were to ones she had heard six months earlier, when the company's German CIO stormed into her office, threatening to quit. “I just found out what the C1O in Japan makes," he had announced. "It's twice as much as what make, but we both do the same work. This is completely unfair! Im going to speak to Thomas” Renate had privately agreed with hhim. But despite her discomfort, she did her best to explain that Typware had no choice but to pay market rates for labor. “You've been to Tokyo} she noted. “Acup of coffee there costsdouble what it does in Stuttgart. Four times what it costs in Chicago!” Even so, it took some time to calm him down; in the end, he gota 10% raise. NovEMBER 2003 Ina World of Pay » HBR CASE STUDY “Things were never this complicated at Lesom,” she thought. Her previous employer had had a very strict, albelt generous, pay grade system; salaries ddd not vary substantially from country to country. There was never any debate about what the market supposedly paid or which geographical regions were ‘most expensive. If an employee was not satisfied, he or she simply got a job elsewhere. ‘Typware was the opposite. Pay was not rationalized at all, and Renate had noticed increasingly troublesome salary nd benefit disparities among the man- agerial ranks. She had also discovered that female and minority employees ‘made less than their white male coun- terparts. Was that also to be explained by market forces? While Thomas had agreed to rectify the most glaring dis parities, he had seemed uninterested in stabilizing salaries in general. Typware’s market was much too competitive, and gaining a strong tochold in interna- tional markets too important, he had argued, to apply any kind of monolithic pay scale. Besides, in his experie! such systems just didn’t work, Renate swiveled around to her com puterjentered aseries of passwords, and pulled up Typware’s HR information, OF the company’s 4,800 employees, 85% were in Germany and were paid according to fairly well understood mar. kot rates, But since 1996, Typware had ventured aggressively intointemational ‘markets ~ not only in France, Spain, Britain, and the Netherlands, but in North and South America, China, India, Russia, Australia, and Japan. The con: sultants that had helped to negotiate 33HBR CASE STUDY « Ina World of Pay salaries and benefits for overseas em: ployees had recommended a variable set of standards depending on the em- ployee’s location. Most expatriates re- ceived the equivalent of theit German salary plus enrollment in local health care programs, as well as contributions to their German social security and re- tirement plans. in most cases the salary had been more than sufficient, given Germany's high cost of living. Nevertheless, individual expatriate packages had become increasingly com- plicated over the years. Per diem ex- penses varied according to country; each ease was “special Two years be: fore, Colombia's country manager had insisted on a 15% “danger pay” salary increase after learning of a kidnapping attempt on an expatriate acquaintance. He had also wanted more money for a German-Spanish private school and around-the-clock bodyguard protection for histwins He made the case for more household help, given the level of re- quired athome entertaining. And he pointed out that, after two years, his base salary increases were not keeping pace with Colombian inflation. Renate had tried to hold firm, but Thomas ~ ccager to retain experienced managers and Typware's hard-won global advan- tage had given in Since then, it seemed that exce for expatriates had spiraled out of con- trol, despite Renate's efforts to apply 4 modicum of consistency. Moscow's ‘manager of operations had insisted on a chauffeur. The Chicago regional di rector required college tuition fees for his son, making the argument that uni- versities were paid for in Germany. The manager based in India complained that health care there was insufficient ‘compared with German standards and wanted compensation for premium care. ‘Asa result of these exceptions, ome ex: patriates had boosted their total salary and benefits by more than 30%, while ‘others had seen their compensation fall, behind, “Now this American will complicate things further” Renate worried, as she continued scanning various managers! salary files M All Good Questions ‘Typware had never hited a foreign ex- ecutive to work at headquarters. With no history to guide her, Renate felt com pletely at a Joss. She had not used a re- cruiting consultancy to assist with this hire, so she had no help from that quar- ter. Now, hoping her past business would have earned her a favor, she picked up the phone and called Rainer Barth, her contact atthe consulting firm she routinely engaged. “Hier it Barth,” he answered, Rainer” Renate began, “I would be very grateful for some advice” she de- scribed the situation. Rainer listened, then started asking questions. "What kind of retirement plan does she have in the US.2" {don't know)"Renate replied.“Amer- ‘can social security, of course. And Xon probably contributes toa plan’? “She will not be able to contribute to her US. social security if she comes here," Rainer mused. “And she may not qualify for a German social security plan. So you will want to offer her a pension plan that allows her to gener- ate an equally meaningful benefit” He then asked, “Is Anne married? Does she have any children?” “She is divorced and has two sons. Seven and 117 Renate said. *And they will enroll ina German school?” assume 50. Unless they go toa pri vate German-American school.” “te would be free if they enrolled in German school. ifshe prefers private school, or if they go to college in the USS., she may want you to contribute something to their tuition. Does she have other family obligations ~ older parents, for example? If she pays for a retirement oF rest home, you must con- sider that, too; it costs very little here She may want some help for that Renate groaned.And what else?" “She probably has executive medical coverage,” Rainer added, "which we do not have here. Find out whether any- fone in the family has a special health condition, U.S. medical care is generally superior to what we offer here. ifthere is a condition, you may want to com pensate additionally tor care” Rainer Renate said, “There's a bi problem with all of this. I understand that she wants to be paid fairly to keep up with German salaries, but these ex tra things will mean she is paid more in the end than her peers and perhaps ‘even than her boss. We do not want re sentment, Some managers are already complaining” Rainer thought for a minute."Yes, itis complicated” He paused,“Can you con- tact this woman tonight?" “oF course” “Call her and find out her answers to my questions. [will do some researchon ‘what my other clients have done. We'll talk in the morning, and you will have your report done by the afternoon.” “Danke schon, Rainet” “Bitte sehr, Renate, Don't worry. We can make this work Past the Eleventh Hour ‘At midnight, Renate phoned Anne in New York, hoping she would be home from work by then. One of Anne’s sons picked up. "Maaawm,’ he shouted so loudly that Renate winced and pulled the receiver from her ear, “Some lady ‘with an accent is on the phone!” ‘When Anne came on, Renate imme- diately remembered why she had been. so impressed. There was something, calming, genteel - almost European = in her voice. Not like that son, Renate thought. Renate explained that she was work: ingon a compensation package for Anne and ran through the questions that Rainer had given her. Anne said she had assumed her children would attend a German gymnasium. Renate breathed a silent sigh of relief; at least there ‘would be no additional education costs for now, But Anne added that she was paying the bulk of the $3,000-permonth fee for an assisted living facility for her ‘mother and was concerned about re ceiving good health care for her seven: year-old son, who suffered from asthma, ‘and various allergies, Renate tried tobe conciliatory."Anne, you know we are very interested in hiting you, but you understand that devel: ‘oping a compensation package is quite complicated," she said. “We hope that you will be willing to compromise on ‘some issues and to be patient for alittle while longer” ‘Anne's voice remained pleasant but took on a firmer tone. “Yes, of course” she replied. “But I have another very good offer and can’t keep them wait forever. You understand. When do you think I can expect to hear from you?” “Soon; Renate demurred.“Sometime this week” ‘Anne thanked Renate for calling, and Renate hung up, exhausted. "Meine Gite,” she thought as she headed up to bed, “this is not getting any easier” No Easy Answers As promised, Rainer called the next ‘morning. But the information he had ‘was not very helpful. “It seems no one here has come up with a solution to the exact situation you are facing?” he sald apologetically.“So Lam pulling together a quick benchmark analysis on your broader issue, which my assistant will ‘email to you later this morning. Of the five largest multinationals based here, three have uniform pay scale systems like the one you had at Lesom. A fourth currently hasits international salary sys- tem under review, so 1 was not able to discover anything very specific about its Policies. [am till hopeful of getting in- formation about the last one” Renate sighed. “Well, thank you for tying, Rainer’ she sai."It looks asf V1) have tosort this out myself” wish I could be of more help; Rainer sald. He sounded as though he were anxious to get off the phone. The ‘thought occurred to Renate that,asa cli- ent, Typware might be more trouble than it was worth.*T'llkeep researching this problem if you want” “No, thank you’ Renate said.“I need to get this report to the CEO very soon. Tl figure something out, Pm sure” What kind of international compensation should Typware offer? « Four commentators offer expert advice. NovEMBER 2003 MY LONG-TERM GAME PLAN FOR THE SHORT-TERM WORLD. The market is volatile, Consumer confilence is fickle. And you've gor a business (0 run, Cleaey, you need business systems that help you plan accordingly: SAP has more than 30 years’ experience help companies stun more efficiently, with everything from analytical cools that help you take decisive action to an open e-business platiorm chat helps you get more value out of the systems you've already invested in, So no matter what sie company you are, we have a long-term plan for you. Visit sap.com or call us at $00 880 1727 THE BES: