International Pay Systems

Understanding international

compensation begins with recognizing

variations (differences and similarities) and

figuring out how best to manage them.

Managing Variations

How people get paid around the world depends on differences (and similarities) in the following general factors

Economic

Institutional

Organizational

Employee

Guide to International Compensation

Variation in International Pay Practices Social contracts Cultures Trade unions Ownership and financial markets Managers’ autonomy

The Social Contract Viewed as part of the social contract

Employment relationship is more than an exchange between an individual and an employer

It includes○ The government○ All enterprise owners ○ All employees

Relationships and expectations of these parties form the social contract

Social Contracts and Pay Setting

Culture

Shared mental programming 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

Culture Matters, but So Does Cultural Diversity How useful is the notion of a national

culture when managing international pay?Only a starting pointCan be thought of as the “average”Provides some information about what kinds

of pay attitudes and beliefs you are likely to find in an area

Over reliance on the “average” can seriously mislead

Culture Matters, but So Does Cultural Diversity (cont.) Interplay among various conditions

within each nation or region, taken as a whole, form distinct contexts for determining compensationEconomicInstitutionalOrganizationalIndividual

Factors Affecting International Pay

Ownership and capital markets

Managers’ autonomy

Comparing Costs Factors affecting wage comparisons

Standard of livingcosts

Purchasing power

Working time required

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 (cont.)

Exporter: “Headquarters Knows Best”

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 (cont.)

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

Types of Expatriates Expatriates - 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

Why Expatriates Are Selected

Common Allowances in Expatriate Pay Packages

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

Balance Sheet Approach

Other Approaches: Compensation for Expatriates Negotiation

Localization

Modified balance sheet

Decrease allowances

Lump-sum/cafeteria plan

Expatriate Systems → Objectives? How the expatriate pay system affects

competitive advantage, customer satisfaction, quality, or other performance concerns

Lack of attention to aligning expatriate pay with organization objectives

Employee Preferences

Borderless World--Borderless Pay? Corporations attempting to become “globally Corporations attempting to become “globally

integrated enterprises,” are creating cadres of integrated enterprises,” are creating cadres of globalists: globalists: – Managers who operate anywhere in the world in a Managers who operate anywhere in the world in a

borderless mannerborderless manner

To support a global flow of ideas and people, To support a global flow of ideas and people, companies are also designing borderless, or at companies are also designing borderless, or at least regionalized, pay systemsleast regionalized, pay systems– Testing ground for this approach - European UnionTesting ground for this approach - European Union