InternationalCompensation

1. 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.

2. Explain how certain key factors in the global guide – social contract, culture, trade unions, ownership and capital markets, managers’ autonomy – impact international pay systems.

3. Understand the key strategic differences among the pay systems of Japan, Germany and the U.S. using the total compensation model.

4. Discuss the three general compensation strategies used by companies with worldwide operations.

5. Describe the key features of expatriate pay systems.

Learning Objectives

Understanding international

compensation begins with recognizing

variations (differences and similarities) and

figuring out how best to manage them.

Guide toInternational Compensation

Employment Relationship

Organizations Individuals

Social Contract

Organizations• Individual Employers• Employer Consortium

Individuals• Unions• Union Federations

Government

The Social Contract

Social ContractsSocial Contractsand Pay Settingand Pay Setting

Localized

Highly Centralized

SO

CIA

L

CO

NTR

AC

T

Local System

s

Nationwide Systems

Sector/Industry-wide

Systems

Argentina Brazil Canada France Hong Kong Mexico Singapore U.K. U.S.A.

Czech Republic Germany India Israel Japan Korea Slovakia Slovenia

PAY SETTING SYSTEMS

Austria Belgium Cuba Hungary Poland Sweden

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$13.47Britain $15.47

17.3%$2.85$16.52Japan $19.37

27.2%$3.90$14.34United States $18.24

35.1%$7.34$20.94Germany $28.28

45.4%$5.61$12.36France $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 . . .

Factors Affecting International Pay

Ownership and capital markets

Managers’ autonomy

Comparing Costs

Factors affecting wage comparisons

Standard of livingcosts

Purchasing power

The Hamburger Standard

Strategic Similarities and Differences: An Illustrated

Comparison

Japan United States Germany

Objectives Long-term focusHigh commitmentEgalitarian – internal fairnessFlexible workforceControl cash flow with bonuses

Short / intermediate focusHigh commitmentPerformance – market – meritocraticFlexible workforceCost control; varies with performance

Long termHigh commitmentEgalitarian – fairness

Highly trainedCost control through tariff negotiations

Internal

Alignment

Person based: age, ability, performance determines base payMany levelsSmall pay differences

Work based: jobs, skills, accountabilities

Fewer levelsLarger pay differences

Work based: jobs and experience

Many levelsSmall pay differences

Japan United States Germany

External

Competitiveness

Monitor age – pay chartsConsistent 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 organizationPerformance 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

Strategic Similarities and Differences: An Illustrated

Comparison

Japan United States Germany

Advantages Supports commitment and securityGreater predictability for companies and employeesFlexibility – person based

Supports performance – competitor focusCosts vary with performance

Focus on short-term payoffs (speed to market)

Supports commitment and securityGreater predictability for companies and employeesCompanies do not compete with pay

Disadvantages High cost of aging work forceDiscourages unique contributorsDiscourages women and younger employees

Skeptical workers, less securityFosters “What’s in it for me?”No reward for investing in long-term projects

Inflexible; bureaucratic

High social and benefit costsNot a strategic tool

Strategic Similarities and Differences: An Illustrated

Comparison

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 andAct 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

ChallengesManagers 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 LCNsAdvantages of bringing in expats or TCNs

Objectives of Compensationand 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

Salary Taxes

HousingAllowances

and Premiums

Elements of Expatriate Compensation

Common Allowances in Expatriate Pay Packages

Financial AllowancesFinancial Allowances

Social Adjustment AssistanceSocial Adjustment Assistance

Family SupportFamily 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

ObjectivesEnsure cost effective mobility of people to

global assignments

Ensure expatriates neither gain nor lose financially

Minimize adjustments required of expatriates

Bas

e-co

untr

y cu

rren

cy

Reserve

$1,000Reserve

Goods and Services

$2,000

Goods and Services

$700

Housing

Housing $2,000

$1,000

Taxes

Taxes $2,000

$1,500

Relocation Bonus

Allowances paid by company

Base-country salary $7,000

Equivalent salary and allowances, host country

$10,200

Exhibit 16.14: Balance Sheet Exhibit 16.14: Balance Sheet ApproachApproach

Other Approaches:Compensation for Expatriates

Negotiation

Localization

Modified balance sheet

Decrease allowances

Lump-sum/cafeteria plan