International Compensation

Learning Objectives Identify the four general factors in the global guide to 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

Employment Relationship The Social Contract Organizations Individuals Employment Relationship Government See exhibit 16.3, page 538 Individuals Unions Union Federations Organizations Individual Employers Employer Consortium Social Contract

Social Contracts and Pay Setting Sector/Industry-wide Systems Highly Centralized Austria Belgium Cuba Hungary Poland Sweden Czech Republic Germany India Israel Japan Korea Slovakia Slovenia Argentina Brazil Canada France Hong Kong Mexico Singapore U.K. U.S.A. SOCIAL CONTRACT See Exhibit 16.4, page 539 Localized Local Systems Sector/Industry-wide Systems Nationwide Systems PAY SETTING SYSTEMS

Characteristics of Culture Often defined as shared mental programming Involves acquiring knowledge that people use to interpret experience and generate social behavior Rooted in values, beliefs, and assumptions shared in common by a group of people Influences how information is processed

Culture and Managing International Pay 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 Job of a global manager Search for national characteristics whose influence is assumed to be critical in managing international pay systems

Hofstede’s Cultural Dimensions Power Distance Uncertainty Avoidance Individualism – Collectivism Masculinity – Femininity Long-term – Short-term

Employment Practices Differ Among Nations: The Cost of an Employee 14.8% $2.00 $13.47 Britain $15.47 17.3% $2.85 $16.52 Japan $19.37 27.2% $3.90 $14.34 United States $18.24 35.1% $7.34 $20.94 Germany $28.28 45.4% $5.61 $12.36 France $17.97 What those extra costs are as a percentage of salary. . . . and what an employer pays in social insurance and labor taxes. . . . is made up from the salary paid directly to the worker before deductions . . . The hourly cost of a production worker in manufacturing . . . See Exhibit 16.7 (continued) on page 545

Factors Affecting International Pay Ownership and capital markets Managers’ autonomy

Comparing Costs Factors affecting wage comparisons Standard of living costs Purchasing power The Hamburger Standard

Strategic Similarities and Differences: An Illustrated Comparison Japan United States Germany Objectives Long-term focus High commitment Egalitarian – internal fairness Flexible workforce Control cash flow with bonuses Short / intermediate focus Performance – market – meritocratic Cost control; varies with performance Long term Egalitarian – fairness Highly trained Cost control through tariff negotiations Internal Alignment Person based: age, ability, performance determines base pay Many levels Small pay differences Work based: jobs, skills, accountabilities Fewer levels Larger pay differences Work based: jobs and experience See Exhibit 16.14 page 561

Strategic Similarities and Differences: An Illustrated Comparison Japan United States Germany External Competitiveness Monitor age – pay charts Consistent with competitors Market determined Compare on variable and performance-based pay Tariff based Same as competitors Employee Contribution 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 Increases based on individual, unit, and corporate performance Tariff negotiated bonuses Smaller performance bonuses for managers See Exhibit 16.14 page 561

Strategic Similarities and Differences: An Illustrated Comparison Japan United States Germany Advantages Supports commitment and security Greater predictability for companies and employees Flexibility – person based Supports performance – competitor focus Costs vary with performance Focus on short-term payoffs (speed to market) Companies do not compete with pay 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 Inflexible; bureaucratic High social and benefit costs Not a strategic tool See Exhibit 16.14 page 561

Strategic Market Mind-Set 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 corporate headquarters

Strategic Market Mind-Set (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

Strategic Market Mind-Set (continued) Globalizer: “Think and Act Globally and Locally” Seek a common system to be used as part of “glue” to support consistency across all global locations Headquarters and 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 business

Shift in Strategic Global Focus Focus of strategic global approaches – Avoid matching national systems Involves aligning the total pay system with the global business strategy Challenges Managers must rethink international compensation in the face of global competition Align global pay with the way business is aligned

Types of Expatriates Expats - Individuals whose citizenship is that of employer’s base country Third country nationals (TCNs) - Individuals whose citizenship is neither employer’s base country nor location of subsidiary Local country nationals (LCNs) - Individuals who are citizens of country in which subsidiary is located Advantages of hiring LCNs Advantages of bringing in expats or TCNs

Objectives of Compensation and Benefits for Expatriates Attract and retain employees who are qualified for foreign assignments Provide an incentive to leave the home country for a foreign assignment Maintain a given standard of living Take into consideration expatriates’ career and family needs Facilitate reentry into the home country at the end of a foreign assignment

Elements of Expatriate Compensation Salary Taxes Allowances and Premiums Housing

Common Allowances in Expatriate Pay Packages Financial Allowances Social Adjustment Assistance Family Support

Balance Sheet Approach Premise – Employees on overseas assignments should have same spending power as they would in their home country Home country is standard for all payments Objectives Ensure cost effective mobility of people to global assignments Ensure expatriates neither gain nor lose financially Minimize adjustments required of expatriates

Exhibit 16.14: Balance Sheet Approach Equivalent salary and allowances, host country $10,200 Relocation Bonus $1,500 Taxes Base-country salary $7,000 Allowances paid by company $1,000 Base-country currency Taxes $2,000 Housing See Exhibit 16.17, page 569 and text discussion pages 568 - 570 Housing $2,000 $700 Goods and Services $2,000 Goods and Services Reserve $1,000 Reserve

Other Approaches: Compensation for Expatriates Negotiation Localization Modified balance sheet Decrease allowances Lump-sum/cafeteria plan