1. International Compensation

2. 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.

3. Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them.

4. Guide to International Compensation

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. Factors Affecting International Pay
Ownership and capital markets
Managers’ autonomy

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

13. 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 page 561

14. 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 page 561

15. 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 page 561

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Elements of Expatriate Compensation
Salary
Taxes
Allowances and Premiums
Housing

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

24. 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

25. 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
Housing $2,000
$700
Goods and Services $2,000
Goods and Services
Reserve
$1,000
Reserve

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