16 - 1
Chapter
16
International Pay Systems
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Learning Objectives
After studying Chapter 16, students should be able to:
1.
2.
3.
4.
Realize that studying international compensation
enhances their understanding of compensation within
their own country.
Understand how changes in political and economic
conditions affect pay in every country.
Recognize the danger of making generalizations about
systems in a country.
Discuss how compensation in every country must deal
with the objectives of efficiency, fairness, and
compliance.
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Understanding international
compensation begins with
recognizing variations
(differences and
similarities) and figuring
out how best to manage
them.
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Managing Variations
! How people get paid around the world depends
on differences (and similarities) in the following
general factors:
! Economic
! Institutional
! Organizational
! Employee
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Guide to International Compensation
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Social Contract: Government, Organizations, & Employees
Organizations
Individuals
Employment Relationship
Government
Individuals
Organizations
• Unions
• Union Federations
• Individual Employers
• Employer Consortium
Social Contract
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Social Contracts and Pay Setting
SOCIAL CONTRACT
Highly
Centralized
Localized
Argentina
Brazil
Canada
France
Hong Kong
Mexico
Singapore
U.K.
U.S.A.
Local
Systems
Czech Republic
Germany
India
Israel
Japan
Korea
Slovakia
Slovenia
Sector/Industrywide Systems
Austria
Belgium
Cuba
Hungary
Poland
Sweden
Nationwide
Systems
PAY SETTING SYSTEMS
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Culture
! Culture is often defined as shared mental
programming.
! Culture is acquired knowledge that people use to
interpret experience and generate social behavior.
! It is rooted in the values, beliefs, and assumptions
shared in common by a group of people.
! It influences how information is processed.
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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.
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Hofstede’s Cultural Dimensions
! Power Distance
! Uncertainty Avoidance
! Individualism – Collectivism
! Masculinity – Femininity
! Long-term – Short-term
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Trompenaar’s Cultural Dimensions and
Human Resource Management
Universal –
Particular
Everyone is the same
Depends on the culture
Individual –
Collective
Self
Group
Neutral –
Affective
Detailed policies and procedures
Flexible guidelines
Achievement –
Ascriptive
Pay-for-performance system
Rewards based on seniority
Internal –
External
Internal promotions
External hiring and promotions
Synchronic –
Sequential
Job descriptions
Process descriptions
Past–Present –
Future
Loyalty and tenure
Contract workforce
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Employment Practices Differ Among Nations:
Time and the Clock
AVERAGE HOURS WORKED
(per employee, annually)
JOBLESS RATE
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%
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Employment Practices Differ Among Nations:
The Cost of an Employee
The hourly cost of a
production worker in
manufacturing . . .
. . . is made up from
the salary paid
directly to the worker
before deductions . . .
. . . and what an
employer pays in
social insurance and
labor taxes.
What those extra
costs are as a
percentage of salary.
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%
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Strategic Similarities and Differences:
An Illustrated Comparison
Japan
Objectives
Internal
Alignment
United States
Germany
Long-term focus
High commitment
Egalitarian – internal
fairness
Flexible workforce
Control cash flow with
bonuses
Short / intermediate focus
High commitment
Performance – market –
meritocratic
Flexible workforce
Cost control; varies with
performance
Long term
High commitment
Egalitarian – fairness
Person based: age,
ability, performance
determines base pay
Many levels
Small pay differences
Work based: jobs, skills,
accountabilities
Work based: jobs and
experience
Fewer levels
Larger pay differences
Many levels
Small pay differences
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Highly trained
Cost control through
tariff negotiations
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Strategic Similarities and Differences:
An Illustrated Comparison (continued)
Japan
External
Competitiveness
Employee
Contribution
United States
Germany
Monitor age – pay
charts
Consistent with
competitors
Market determined
Tariff based
Compare on variable and
performance-based pay
Same as competitors
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
Tariff negotiated
bonuses
Increases based on
individual, unit, and
corporate performance
Smaller performance
bonuses for managers
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Strategic Similarities and Differences:
An Illustrated Comparison (continued)
Japan
Advantages
Disadvantages
United States
Supports commitment
and security
Greater predictability
for companies and
employees
Flexibility – person
based
Supports performance –
competitor focus
Costs vary with
performance
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
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Focus on short-term
payoffs (speed to market)
Germany
Supports commitment
and security
Greater predictability for
companies and
employees
Companies do not
compete with pay
Inflexible; bureaucratic
High social and benefit
costs
Not a strategic tool
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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.
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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.
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Strategic Market Mindset (continued)
! Globalizer: “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.
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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.
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Objectives of Compensation and Benefits
for Expatriates
! Attraction and retention of employees who are
qualified for foreign assignments
! Providing an incentive to leave the home country
for a foreign assignment
! Maintaining 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
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Elements of Expatriate Compensation
Salary
Housing
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Taxes
Allowances
and
Premiums
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Common Allowances in Expatriate Pay Packages
Financial Allowances
Social Adjustment Assistance
Family Support
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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.
! The 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
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Balance Sheet Approach
Home Country Currency
Equivalent Salary and Allowances,
Host Country
$10,200
Relocation
Bonus
$1,500
Home Country Salary
$7,000
Taxes
$2,000
Housing
$2,000
Goods and
Services
$2,000
Reserve
$1,000
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Taxes
$1,000
Allowances,
paid by
company
Housing
$700
Goods and
Services
Reserve
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Other Approaches to Compensation
for Expatriates
!Negotiation
!Localization
!Lump Sum
!Cafeteria Plan
!Regional Systems
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Tax Strategies for Expatriate Income
!Laissez faire
!Tax equalization
!Tax protection
!Ad hoc
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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
! Time the assignment to take advantage of
residency laws
! Take advantage of incentives offered in the host
country
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Issues in Designing a Compensation
Strategy for Multinationals
! Establishing a worldwide compensation system
! Compensation of third-country nationals
! International benefits and related taxes
! Pension plans
! Stock ownership plans
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Summary
! 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.
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Review Questions
1.
Rank the factors in the global guide according to your
belief in their importance for understanding and
managing compensation.
a.
b.
c.
2.
3.
How do your ranks differ from your peers?
From international peers?
Discuss how the rankings may change over time.
Distinguish between nationwide and industry-wide pay
determination. How do they compare to a business
strategy-market approach?
Develop arguments for and against “typical” Japanese
style, German style, and U.S. style approaches to pay.
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Review Questions (continued)
4.
5.
6.
Distinguish between global, expatriates, local
nationals, and third-country nationals.
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.
What is meant by “the full house” or “variations within
a nation”? Evaluate its importance in understanding
and managing global total compensation.
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