International Pay systems
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V. Extending the System 16. International Pay Systems
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International Pay Systems Chapter Outline
Chapter Sixteen
German National System Strategic Comparisons: Japan, Germany, United States
Strategic Market Mind-Set Localizer: “Think Global, Act Local” Exporter: “One Size Fits All” Globalizer: “Think and Act Globally and Locally”
Expatriate Pay Elements of Expatriate Compensation The Balance Sheet Approach Expatriate Systems → Objectives? Quel dommage!
Borderless World → Borderless Pay? Globalists
Your Turn: Back to Classic Coke
Managing Variations: The Global Guide
The Social Contract
Culture Culture Matters, but So Does Cultural Diversity
Trade Unions and Employee Involvement
Ownership and Financial Markets
Managerial Autonomy
Comparing Costs Standard of Living: Basket of Goods versus Big Mac
Comparing Systems The Total Pay Model: Strategic Choices
National Systems-Comparative Mind-Set Japanese National System
Around the world, global competitive forces have changed the way people work and how they get paid. Toyota dismantled its seniority-based pay system for managers and re- placed it with a merit-based system.1 Toshiba offers stock awards, which were not even legal in Japan only a few years ago.2 Deutsche Bank, Nokia, Seimens, and other Euro- pean companies are experimenting with variable pay and performance-based (rather than personality-based) appraisal in their search for ways to improve productivity and control labor costs.3 Global acquisitions of former competitors change pay systems. As part of its
1A. Harney, “Toyota Plans Pay Based on Merit,” Financial Times, July 8, 1999, p. 20. 2Interviews with Toshiba managers, included in G. Milkovich, M. Bloom, and A. Mitra, “Research Report: Rethinking Global Reward Systems,” working paper, Cornell University, 2000. 3Also see Pay in Europe 2003, Remuneration Policy and Practices (Surrey, England: Federation of European Employers, 2003), and the FEE’s website at www.euen.cok.uk; Zhong-Ming Wang, presentation to Cornell University Global HRM Distance Learning seminar, Shanghai, China, March 2000; Conference Board, “Organizing for Global Competitiveness—Headquarters Design Report,” No. 123399RR, and “The Country Subsidiary Design Report,” No. 1180–97RR (New York: Conference Board, 1999).
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takeover and restructuring of Tungsram Electric in Poland, General Electric changed the pay system from a rigid seniority-based one to a more flexible one with broad bands, market-based wage rates, and performance bonuses.
Sometimes the changes in pay are directly tied to cataclysmic sociopolitical change, as in China, Russia, and eastern Europe.4 Central and government authorities had dictated pay rates in these communist command-and-control economies. Now these companies face the challenge of devising pay systems responsive to business and market pressures while maintaining a sense of social justice among the people. The Chinese situation is ex- traordinarily complex.5 State-owned enterprises are being asked to become profitable. The only hope of profitability is to cut the massively bloated head count. Yet an army of unemployed people without social support threatens stability and even government sur- vival. Some state-owned enterprises, such as Bao Gang, the country’s largest steelmaker, have moved to more “market- and performance-based” systems, even though labor mar- kets are just emerging in China. Shanghai Shenyingwanguo Security Company and Shanghai Bank have implemented job-based structures to help them retain key employees and increase pay satisfaction. Privatized enterprises, start-ups, and joint ventures with for- eign firms use a variety of approaches. Most surprising of all is that some town-owned enterprises are using stock ownership as part of their employee compensation.6 China may still be striving to become a worker’s paradise, but the experimentation with com- pensation approaches might already qualify it as a pay pundit’s paradise.
However, too much change and experimentation can have a dark side that threatens social unrest. There are reports from the Ukraine, Romania, and Russia of people going unpaid for months, without legal recourse.7 In Russia, a friend maintains that “the most effective pay delivery system is a brown bag under the table.”
4A. Puffer and S. Shekshnia, “Compensating Local Employees in Post-Communist Russia,” Compensation and Benefits Journal, September–October 1994, pp. 35–42; D. Soskice, “Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries,” Oxford Review of Economic Policy 6(4), pp. 36–61; D. Vaughan Whitehead, ed., Paying the Price: Crisis in Central and Eastern Europe (Geneva: ILO, 1999); L. Bajzikova, “Transition Process of HRM in the Slovak Republic,” Journal of International Human Resource Management, no. 2, 2001; N. Zupan, “HRM in Slovenian Transitional Companies,” presentation at CAHRS international conference, Berlin, June 2002. 5D. Dong, K. Goodall, and M. Warner, “The End of the Iron Rice Bowl,” International Journal of Human Resource Management, April 2, 2000, pp. 217–236. 6Zhong-Ming Wang, presentation to Cornell University Global HRM Distance Learning seminar, Shanghai, China, March 2000; comments by Ningyu Tang, instructor in Shanghai for Global HRM Distance Learning seminar; Peter Nolan, “China and the Global Business Revolution, Cambridge Journal of Economics 26 (2002), pp. 119–137; Jing Zhou and J. J. Martocchio “Chinese and American Managers’ Compensation Award Decisions,” Personnel Psychology 54 (Spring 2001), pp. 115–145; National Bureau of Statistics, People’s Republic of China, 2003; J. T. Landry, “Review of `The New Chinese Empire and What It Means for the United States’ by R. Terrill,” Harvard Business Review 81 (7) (July 3, 2003); Zaohui Zhao, “Earnings Differentials between State and Non-State Enterprises in Urban China,” Pacific Economic Review 7(1) (2002), pp. 181–197. 7G. T. Khulikov, “Ukraine Wage Decentralization in a Nonpayment Crisis,” chap. 11 in Pay the Price (Geneva: ILO, 2000); R. Yokovlev, “Wage Distortions in Russia,” chap. 9 in Pay the Price (Geneva: ILO, 2000); Muneto Ozocki, ed. Negotiating Flexibility: The Role of the Social Partners and the State (Geneva: ILO, 1999).
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So it is a time of unprecedented global change. Or is it? Let’s step back to gain some historical perspective:
There is hardly a village or town anywhere on the globe whose wages are not influenced by distant foreign markets, whose infrastructure is not financed by foreign capital, whose engineering, manufacturing, and even business skills are not imported from abroad, or whose labor markets are not influenced by the absence of those who had emigrated or by the presence of strangers who had immigrated.8
This is not a description of the 21st century. Rather, it is from 100 years ago. In the late 1800s, trade barriers were being reduced, free trade was being promoted, and mass mi- gration of people was underway. Thanks to transoceanic telegraphic cables, the speed of communication had increased dramatically, and investment capital flowed among na- tions. Yet by 1917 these global links had been replaced with a global war. Citizens be- came uncomfortable with the greater risks and uncertainty of globalization. Nations began to raise tariffs to protect domestic companies hurt by foreign competitors. Immi- grants were accused of “robbing jobs.” Historians conclude that “globalization is neither unique nor irreversible; it has and can again sow seeds of its own destruction.”9
MANAGING VARIATIONS: THE GLOBAL GUIDE
Understanding international compensation begins with recognizing differences and simi- larities and figuring out how best to manage them. How people get paid around the world depends on variations in the factors in the global guide depicted in Exhibit 16.1. Four general ones are listed: economic, institutional, organizational, and employee, with sub- factors. These factors have been discussed throughout the book; now they can be applied globally. But once we shift from a domestic to an international perspective, additional factors become important, too. Institutional factors, such as cultural traditions and politi- cal structures, and economic factors, such as differences in ownership of enterprises and the development of capital and labor markets, come into play. Further, social contracts and the role of trade unions must be considered. An example using the global guide illus- trates its usefulness.
Consider the DaimlerChrysler situation discussed in Chapter 2. Prior to Daimler’s ac- quisition of Chrysler, the pay for the top 10 Daimler executives equaled the pay of Chrysler’s CEO alone. As little as 25 percent of Chrysler managers’ total compensation was in the form of base pay, whereas Daimler managers’ base pay accounted for up to 60 percent of their total compensation. The merged DaimlerChrysler adopted a Chrysler- like approach to executive compensation. Some have even claimed that the attractive pay was the reason Daimler executives were eager to acquire Chrysler!
Chapter 16 International Pay Systems 499
8Kevin O’Rourke and J. G. Williamson, Globalization and History: The Evolution of a 19th Century Atlantic Economy (Cambridge, MA: MIT Press, 1999), p. 2. 9Kevin O’Rourke and J. G. Williamson, Globalization and History: The Evolution of a 19th Century Atlantic Economy (Cambridge, MA: MIT Press, 1999), chap. 14. Also see D. Rodrik, “Has Globalization Gone Too Far?” California Management Review 39(3) (Spring 1997); W. Keller, L. Pauly, and S. Reich, The Myth of the Global Corporation (Princeton, NJ: Princeton University Press, 1998); B. Kogut, “What Makes a Company Global?” Harvard Business Review, January–February 1999, pp. 165–170.
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The Daimler and Chrysler managerial pay systems are contrasted in Exhibit 16.2, using the factors in our global guide (Exhibit 16.1). At Daimler, the roots of today’s pay system reach back to postwar Germany and efforts to rebuild an economy devastated by two world wars. Rather than companies’ engaging in aggressive wage competition that risked inflation, trade union federations, employer associations, government agencies, and financial institutions participated in centralized negotiations. The result was industry- wide negotiated pay systems called tariff agreements. They included predictable annual increases, government-provided social welfare programs, and well-defined internal struc-
EXHIBIT 16.1 Guide to International Compensation
Competitive dynamics/ marketsSocial
contract
Culture/ politics
Capital flows/ ownership
Taxes
Demographics
Knowledge/ skills
Attitudes/ preferences
Strategic intent
Technology Innovation Work roles
Autonomy
Information flows
Trade unions
Employer federations
IN TE
RNATIONAL
Organization Success and Fair Treatment of Employees
C O
M PENSATION SY
ST EM
S
IN ST
IT UT
IO NA
L OR
GA NI
ZA TI
O N
A L
EM PLOYEE
ECONOM IC
© George T. Milkovich.
Milkovich−Newman: Compensation, Eighth Edition
V. Extending the System 16. International Pay Systems
© The McGraw−Hill Companies, 2004
tures. All companies competing in the same product markets (e.g., Daimler, Volkswagen, and Opel) used the same pay structures. Daimler could pay above these negotiated rates but had little reason to do so. Instead, it competed for employees based on its reputation as a place to work, its quality of training, and the like. As a result, managers were less likely to consider pay as an instrument of strategy. Instead, pay was a constraint deter- mined outside the organization.
German tax policies and labor regulations supported this approach. A typical Daimler employee’s marginal tax rate (percent tax on each additional euro earned) is 30 percent higher than a Chrysler employee’s tax rate on an additional dollar’s pay in the United States. As a result, the financial returns for working longer and harder in order to
Chapter 16 International Pay Systems 501
Pressures Daimler Chrysler
Economic
Competitive markets Moderately competitive Highly competitive Capital/ownership Few shareholders Many shareholders Taxes High taxes Moderate taxes
Institutional
Culture/politics Centralized process Decentralized process Regulations Strong government/ Limited government involvement
trade union involvement Trade union/ Tripartite-based social contract Individual/employer-based social employer federations contract
Organizational
Strategic intent High margins/high-end vehicles Lower-margin passenger vehicles, higher-margin SUVs, mini vans
Autonomy Lower autonomy Moderate autonomy Work roles Defined roles More flexible roles
Employee
Skill/knowledge Continuous learning On-the-job Attitudes/behaviors High commitment Committed but contentious Demographics Older, experienced Older, experienced
Total pay system
Sensitive to social contract; Aligned with strategy, sensitive to hierarchical; well-defined jobs competitive markets Base and benefits; annual increase Base/performance bonuses, stock
ownership Focus on commitment and Focus on performance and cost control continuous learning
EXHIBIT 16.2 Applying the Global Guide
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receive performance bonuses are significantly smaller at Daimler. Until very recently, broad-based stock options for employees were illegal. Daimler changed its plan in 2003 to award stock rather than options. Nevertheless, base salary and across-the-board pay in- creases (rather than performance bonuses and stock) remain the most common pay forms. In exchange for their higher taxes, Daimler employees receive generous welfare and un- employment payments, plus subsidized college and apprenticeship programs. As Exhibit 16.2 shows, centralized wage setting with predictable annual pay increases, concentrated financial ownership, and high taxes that support a wide social safety net still provide the context for the pay system at DaimlerChrysler’s German locations.10
Now let us apply the global guide to Chrysler. Chrysler reflects the competitive dynamics in U.S. labor and product markets as well as the social contract in the United States, which places high value on individual choice. Pay setting is highly decentralized. Government’s in- volvement is limited to ensuring conformance with minimum wage, tax, and discrimination laws. Chrysler’s managerial pay system is arguably aligned with its business strategy, is sen- sitive to market conditions, and includes significant performance bonuses and stock owner- ship. The U.S. tax code supports the use of stock options. The pay system is considered a strategic tool intended to competitively attract, retain, and motivate managers and also sup- port customer satisfaction and improve shareholder value (sound familiar?).
So the global guide serves as a tool kit. By examining each of the factors, we can in- crease our understanding of the variation in international pay practices. Five factors are particularly salient. These are variations in (1) social contracts, (2) cultures, (3) trade unions, (4) ownership and capital markets, and (5) managers’ autonomy. While we sepa- rate the factors to clarify our discussion, they do not separate so easily in reality. Instead, they overlap and interact.
THE SOCIAL CONTRACT
Viewed as part of the social contract, the employment relationship is more than an ex- change between an individual and an employer. It includes the government, all enterprise owners (sometimes acting individually and sometimes collectively through owner associ- ations), and all employees (sometimes acting individually and sometimes in trade unions). The relationships and expectations of these parties form the social contract. As you think about how people get paid around the world, it will be clear that different peo- ple in different countries hold differing beliefs about the role of government, employees, unions, and employers. Understanding how to manage employee compensation in any country requires an understanding of the social contract in that country. Efforts to change employee compensation systems—for example, to make them more responsive to cus- tomers, encourage innovative and quality service, or control costs—require changing the expectations of parties to the social contract.
10Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive? (Ithaca, NY: Cornell University Press, 1998); Hugh Williamson, “IGMetall Is the Trend-Setter: What Happened in the Strike Will Have Far-Reaching Implications,” Financial Times, July 2, 2003, p. 11; G. Thomas Sims and Christoper Rhoads, “Tough Times Humble German Labor,” Wall Street Journal, July 1, 2003, p. A9; NCEO “Global Employee Ownership Plans Continue to Grow,” Employee Ownership Report 22(2) (2002); Uta Harnischfeger, “DaimlerChrysler Mulls Removal of Options,” Financial Times, July 10, 2003, p. 17.
Milkovich−Newman: Compensation, Eighth Edition
V. Extending the System 16. International Pay Systems
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Centralized-Localized Decision Making Perhaps the most striking example of the social contract’s effects on pay systems is in Ex- hibit 16.3, which contrasts the degree of centralization of pay setting among countries.11
The United States, United Kingdom, Canada, Hong Kong, and Brazil use highly decentral- ized approaches with little government involvement. Japan, Singapore, Germany, Bel- gium, and Slovakia are moderately centralized by industry sector. Sweden, Denmark, and Austria use highly centralized approaches that create a national pay system.
CULTURE
Culture is defined as shared mental programming which is rooted in the values, beliefs, and assumptions held in common by a group of people and which influences how infor- mation is processed.12 How critical is culture in managing international pay? Very impor- tant, according to some. The assumption that pay systems must be designed to fit differ- ent national cultures is based on the belief that most of a country’s inhabitants share a
Chapter 16 International Pay Systems 503
Highly Centralized
Argentina Brazil Canada France Hong Kong Mexico Singapore U.K. U.S.A.
Local Systems
Sector/Industrywide Systems
PAY-SETTING SYSTEMS
Nationwide Systems
Czech Republic Germany India Israel Japan Korea Slovakia Slovenia
Austria Belgium Cuba Hungary Poland Sweden
SO C
IA L
C O
N T
R A
C T
Localized
EXHIBIT 16.3 Social Contracts and Pay Setting
11Linda Bell and R. Freeman, “The Incentive for Working Hard: Explaining Hours Worked Differences in the US and Germany,” NBER paper, 2000; R. Freeman and L. F. Katz, Differences and Changes in Wage Structures (Chicago: University of Chicago Press, 1994); Income Data Services, Employment Europe 2000 (monthly newsletter). 12F. Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1995); H. C. Triandis, “Cross-Cultural Industrial and Organizational Psychology,” in Handbook of Industrial and Organizational Psychology, eds. M. D. Dunnette and L. M. Hough (Palo Alto, CA: Consulting Psychologists Press, 1994), pp. 103–172; H. C. Triandis, Individualism and Collectivism (Boulder, CO: Westview Press, 1995).
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national character. Therefore, the job of the global manager is to define the national char- acteristics that influence pay systems.
Typical of this thinking is the widely used list of national cultural attributes proposed by Hofstede (power distance, individualism–collectivism, uncertainty avoidance, and masculinity–femininity).13 Advocates of this view believe that “it is crucial that compa- nies adjust their compensation practices to the cultural specifics of a particular host coun- try.”14 Accordingly, in nations where the culture emphasizes respect for status and hierar- chy (high power distance, attributed to Malaysia and Mexico), hierarchical pay structures are appropriate. In low-power-distance nations (Australia and the Netherlands), egalitari- anism is called for.15
Advice can get even more specific. Companies operating in nations with “collectivis- tic” cultures, such as Singapore, Japan, Israel, and Korea, should use egalitarian pay structures, equal pay increases, and group-based rather than individual-based perfor- mance incentives. Employers in the more “individualistic” national cultures, such as the United States, United Kingdom, and Hong Kong, should use individual-based pay and performance-based increases.
But such thinking risks stereotyping.16 The question is not, What are the cultural dif- ferences among nations. Rather, the question is, Whose culture matters?17 Any group of people may exhibit a shared set of beliefs. Look around your college or workplace; engi- neers, lawyers, accountants, and technicians may each share some beliefs and values. Employees of organizations may, too. Your school’s “culture” probably differs from Mi- crosoft’s, Toshiba’s, or the London Symphony Orchestra’s. You may even have chosen your school because of its culture. However, you are likely part of many cultures. You
13G. Hofstede, “Cultural Constraints in Management Theories,” International Review of Strategic Management 5 (1994), pp. 27–51. 14R. Schuler and N. Rogovsky, “Understanding Compensation Practice Variations across Firms: The Impact of National Culture,” Journal of International Business Studies 29 (1998), pp. 159–178. 15L. R. Gomez-Mejia and T. Welbourne, “Compensation Strategies in a Global Context,” Human Resource Planning 14 (1994), pp. 29–41; Sunny C. L. Fong and Margaret A. Shaffer, “The Dimensionality and Determinants of Pay Satisfaction: A Cross-Cultural Investigation of a Group Incentive Plan,” International Journal of Human Resource Management 14(4), (June 2003), pp. 559–580. 16G. Milkovich and M. Bloom, “Rethinking International Compensation: From Expatriates and National Cultures to Strategic Flexibility,” Compensation and Benefits Review, April 1998; L. Markoczy, “Us and Them,” Across the Board, February 1998, pp. 44–48. 17F. Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1995); M. Bloom, G. Milkovich, and A. Mitra, “International Compensation: Learning from How Managers Respond to Variations in Local Host Contexts,” International Journal of Human Resource Management special issue, 2003; Allen D. Engle, Sr., and Mark Mendenhall “Transnational Roles and Transnational Rewards: Global Integration in Executive Compensation,” presentation at international HR conference, Limerick, Ireland, June 2003; Paul Evans, Vlado Pucik, and Jean-Louis Barsoux, The Global Challenge (New York: McGraw-Hill, 2002); G. Hundley and J. Kim, “National Culture and the Factors Affecting Perceptions of Pay Fairness in Korea and the U.S.,” International Journal of Organization Analysis 5(4) (October 1997), pp. 325–341; L. Kim and G. Yi, “Transformation of Employment Practices in Korean Business,” International Studies of Management and Organizations 28(4) (1998–99), pp. 73–83; G. Hofstede, “Cultural Constraints in Management Theories,” International Review of Strategic Management 5 (1994), pp. 27–51; P. C. Earley and C. B. Gibson, “Taking Stock in our Progress on Individualism–Collectivism: 100 Years of Solidarity and Community,” Journal of Management 24 (1998), pp. 265–304; David Landes, Culture Matters: How Values Shape Human Progress (New York: Basic Books, 2001).
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are not only part of your university but also part of your family, your social/political/ interest groups, your region of the state or country, and so on. Cultures may be similar or different among all these categories.
Culture Matters, but So Does Cultural Diversity Culture classifiers consider the United States a country of risk takers who rank high on the individualistic (rather than collectivistic) scale. In contrast, the country of Slovenia has been classified as more collectivistic and security-conscious (as opposed to risk taking).18
Slovenia was the first country to break off from the former Yugoslavia. (How is that for taking a risk?) It has a population of less than 3 million and by most standards would be considered very homogeneous. So you would expect Slovenian managers to be very dif- ferent from U.S. managers. However, a study found that Slovenian managers tended, on average, to be more risk taking and individualistic than U.S. managers. The most striking finding, as shown in Exhibit 16.4, was that the degree of variation among managers on cultural dimensions was virtually the same in both the Slovenian and the U.S. data. Thus, one can find risk-averse collectivists and risk-taking individualists in both nations.
So how useful is the notion of a national culture? In the absence of better data on varia- tions such as those in Exhibit 16.4, it may offer a starting point. However, it is only a starting point. National culture can be thought of as the “average” in Exhibit 16.4. It provides some information about what kinds of pay attitudes and beliefs you are likely to find in an area. But overreliance on the “average” can seriously mislead. This point is critical for managing international pay. As the paleobiologist Stephen Jay Gould noted, “Failure to consider the ‘full house’ of cases plunges us into serious error again and again.”19 While Gould may not
Chapter 16 International Pay Systems 505
18M. Bloom, G. Milkovich, and N. Zupan, “Contrasting Slovenian and U.S. Employment Relations: The Links between Social Contracts and Psychological Contracts” CEMS Business Review no. 2 (1997), pp. S95–S109. 19Stephen Jay Gould, Full House: The Spread of Excellence from Plato to Darwin (New York: Three Rivers Press, 1996).
Risk avoiding
U.S. MBAs Slovenian MBAs
Risk takingXU.S. XSlovenia
EXHIBIT 16.4 Understanding the “Full House” of Variation within a Culture
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have been talking about compensation, we can still extend his point to global pay. To claim that all organizations and people within Germany or within China use the same shared mind- set ignores variations and differences within each nation. Considerable diversity among com- panies and people within any country exists. So keep in mind our basic premise in this chap- ter: The interplay among economic, institutional, organizational, and individual conditions within each nation or region, taken as a whole, forms distinct approaches to total compar- isons. Understanding these factors in the global guide is useful for managing employee com- pensation. However, do not assume uniformity (the average) within a country. Understand- ing the full range of individuals within nations is important to managing international pay.
TRADE UNIONS AND EMPLOYEE INVOLVEMENT
As Exhibit 16.5 shows, Europe remains highly unionized: In Sweden, 91 percent of the work force belongs to unions; in the United Kingdom, 33 percent; and in Italy, 44 percent. Asia is less heavily unionized. Japan’s unionization rate is 24 percent, and South Korea’s is almost 13 percent. Although the exhibit might cause you to conclude that union power is declining, caution is in order. In some countries, workers’ pay is set by collective agreements even though the workers may not be union members. In France, for example, 90 percent of work- ers are covered by collective agreements, but only 9 percent are union members.20
In addition to having higher rates of unionization, Belgium, Germany, and the Euro- pean Union (EU) require the establishment of worker councils that must be involved in any changes to a pay plan. The European Union is trying to provide common labor stan- dards in all its member countries. The purpose of standards is to avoid “social dumping,” or the relocation of a business in a country with lower standards and labor costs. At pres- ent, hourly labor costs and productivity vary substantially among the EU countries. Often the higher labor costs are offset by greater productivity.21
Social legislation varies among European countries, as shown in Exhibit 16.6. Britain specifies the fewest requirements, with no minimum wage, no maximum hours, and no for- mal methods for employee participation. France and Germany have the most generous so- cial insurance. Some writers predict the eventual “Europeanization” of pay determination.22
20H. Katz and Owen Darbishire, Converging Divergences: Worldwide Changes in Employment Systems (Ithaca, NY: Cornell University Press, 2000); George Boyer “Review Symposium: Converging Divergences: Worldwide Changes in Employment System,” Industrial and Labor Relations Review 54 (2001). 21Christopher L. Erickson and Sarosh Kuruvilla, “Labor Costs and the Social Dumping Debate in the European Union,” Industrial and Labor Relations Review, October 1994, pp. 28–47; K. Schwab, M. Porter, J. Sachs, A. Warner, and M. Levison, The Global Competitiveness Report 2000, World Economic Forum (Cambridge, MA: Harvard University Press, 2000). 22Chris Brewster and Hilary Harris, International HRM: Contemporary Issues in Europe (London: Routledge Press, 1999); P. Dowling and R. Schuler, International Dimensions of Human Resource Management (Boston: PWS Kent, 2000); Matthew F. Davis, “Global Compensation in the New Economy,” International HR Journal 9(3) (Fall 2000), pp. 45–50; Mark Fenton-O’Creevy, “HR Practices: Vive La Difference; Part 7: Mastering People Management,” Financial Times, November 26, 2001; Paul R. Sparrow, “International Rewards System: To Converge or Not To Converge?” in International HRM: Contemporary Issues in Europe, ed. Chris Brewster and Hilary Harris (London: Routledge Press, 1999).
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507
0% 20% 40% 60% 80% 100%
Sweden
Denmark
Finland
Norway
Italy
Austria
U.K.
Germany
Netherlands
Portugal
Greece
New Zealand
Japan
Spain
U.S.
South Korea
France
91%
80%
79%
57%
44%
41%
33%
29%
26%
26%
24%
24%
24%
19%
14%
13%
9%
EXHIBIT 16.5 Union Density
For an employer, the cost of social insurance as a percentage of salary is higher in France than in some other places.
*Former West Germany
The hourly cost of a production worker in manufacturing . . .
France
United States
Japan
Britain
Germany*
$17.97
$18.24
$19.37
$15.47
$28.28
$5.61
$3.90
$2.85
$2.00
$7.34
45.4%
27.2%
17.3%
14.8%
35.1%
. . . 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 per- centage of salary.
The Cost of an Employee
$12.36
$20.94
$14.34
$16.52
$13.47
EXHIBIT 16.6 Employment Practices Differ among Nations
Source: Bureau of Labor Statistics; International Labor Office.
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OWNERSHIP AND FINANCIAL MARKETS
Ownership and financing of companies differ widely around the world. These differ- ences are important to understanding and managing international pay. In the United States, corporate ownership and access to capital is far less concentrated than in most other countries. Fifty percent of American households own stock in companies either di- rectly or indirectly through mutual funds and pension funds.23 Direct stock ownership is only a few mouse clicks away. In Korea, six conglomerates control a significant portion of the Korean economy, and the six are closely linked with specific families.24 In Ger- many, the national Bundesbank and a small number of other influential banks have own- ership interests in most major companies. These patterns of ownership make certain types of pay systems almost nonsensical. For example, linking performance bonuses to increased shareholder value or offering stock options to employees makes little sense in the large conglomerates in Germany, Korea, and Japan. However, ownership in small start-ups in the nations is outside the traditional channels, so these firms do offer stock options to attract new employees.25 Recent tax law changes in these countries have made options more attractive, but the ownership of the major employers is slow to change.
The most vivid illustrations of the importance of ownership occur in China and in eastern Europe (Poland, Hungary, Slovenia, Czech Republic, and Slovakia), where a vari- ety of forms are emerging. While state-owned enterprises still employ two-thirds of all workers in China, township enterprises, wholly privately owned enterprises, joint ven- tures with foreign companies, and wholly owned foreign enterprises (WOFEs) account for 50 percent of the profits. Chinese employees switching from government-owned en- terprises to these newer organizations find that both the pay and the employer expecta- tions (i.e., the social contract) are substantially different.26 Individuals attracted to work in these various enterprises have different values and expectations. One study found that
23The website of the National Center for Employee Ownership (NCEO) has information and referrals concerning employee stock ownership plans (ESOPs) and other forms of employee ownership: www.esop.org. Worker Ownership around the world is discussed at www.activistnet.org. 24G. R. Ungson, R. J. Steers, and S. H. Park, Korean Enterprises: The Quest for Globalization (Boston: Harvard Business School Press, 1997). 25Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive? (Ithaca, NY: Cornell University Press, 1998); D. Soskice, “Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries,” Oxford Review of Economic Policy 6(4), pp. 36–61; Wolfgang Streeck, Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Capitalist Economies (London: Sage, 1992). 26G. Breton, H. Lan, and Yuan Lu, “China’s Township and Village Enterprises,” American Management Executive 14(1) (February 2000), pp. 19–30; W. Van Honacher, “Entering China: An Unconventional Approach,” Harvard Business Review, March–April 1992, pp. 130–140; Wei He, Chao C. Chen, and Lihua Zhang, “Rewards Allocation Preferences in Chinese State-Owned Enterprises: A Revisit after a Decade’s Radical Reform,” Organization Science Special Issue: Corporate Transformation in the People’s Republic of China, in press; Helen Blair, Nigel Culkin, and Keith Randle, “From London to Los Angeles: A Comparison of Local Labour Market Processes in the US and UK Film Industries,” International Journal of Human Resource Management 14(4) (June 2003), pp. 619–633; Marshall Meyer, Yuan Lu, Hailin Lan, and Xiaohui Lu, “Decentralized Enterprise Reform: Notes on the Transformation of State-Owned Enterprises,” in The Management of Enterprises in the People’s Republic of China, eds. Anne S. Tsui and Chung-Ming Lau (Boston: Kluwer Academic, 2002).
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27Jing Zhou and J. J. Martocchio, “Chinese and American Managers’ Compensation Award Decisions,” Personnel Psychology 54 (Spring 2001), pp. 115–145. 28Giuseppe Fajertag, ed., Collective Bargaining in Europe 1998–1999 (Brussels: European Trade Union Institute, 2000). The European Trade Union Institute’s website is at www.etuc.org/etui/default.cf. 29Hesan Ahmed Quazi and Sophia Lee, “A Study of Compensation Strategies of Organizations Operating in Singapore,” Nanyang Business School, May 2003. 30K. Roth and S. O’Donnell, “Foreign Subsidiary Compensation Strategy: An Agency Theory Perspective,” Academy of Management Journal 39(3) (1996), pp. 678–703; Ingmar Bjorkman and Patrick Furu, “Determinants of Variable Pay for Top Managers of Foreign Subsidiaries in Finland,” International Journal of Human Resource Management 11(4) (August 2000), pp. 698–713; Paola Bradley, Chris Hendley, and Stephen Perkins, “Global or Multi-Local: The Significance of International Values in Reward Strategy,” in International HRM: Contemporary Issues in Europe ed. C. Brewster and H. Harris (London: Routledge Press, 1999; J. Abowd and Michael Bognanno, “International Differences in Executive and Managerial Compensation,” working paper, ILR School, Cornell University, Ithaca NY.
those working for local or town-owned enterprises prefer more performance-based pay than those working in federal-owned enterprises.27 Many families find it makes sense to have one wage earner working at a safe but low-paying government enterprise and an- other wage earner working at a private enterprise where expectations and pay are high. So it is clear that ownership differences may influence what forms of pay make sense. It is very misleading to assume that every place is like home.
MANAGERIAL AUTONOMY
Managerial autonomy, an organizational factor in the global guide in Exhibit 16.1, refers to the degree of discretion managers have to make total compensation a strategic tool. It is inversely related to the degree of centralization discussed earlier. Thus, most U.S.- and U.K.-based organizations have relatively greater freedom to change employee pay prac- tices than do most European companies. As already noted, the centralized pay setting found in European Union countries limits organizations’ autonomy to align pay to busi- ness strategies and changing market conditions.28 In contrast, in Singapore the National Wage Council issues voluntary guidelines (e.g., “Wage freezes for most companies,” “Emphasize variable and performance-based pay”). Most government organizations ad- here to these guides, while private organizations do so in varying degrees.29
Cybercomp A good source of free information on labor laws throughout the world is the NATLEX database produced by the International Labor Organization (ILO): natlex.ilo.org.
Governments and trade unions are not the only institutions to limit managerial auton- omy. Corporate policies often do so as well.30 Compensation decisions made in the home-country corporate offices and exported to subunits around the world may align with the corporate strategy but discount local economic and social conditions. While IBM cor- porate in Armonk, New York, expects all its worldwide operations to “differentiate peo- ple on performance” with total compensation, some IBM units in Tokyo remain con- vinced that Japanese IBMers in Japan prefer more egalitarian practices. Nevertheless, managers are expected to comply with Armonk. Is IBM trying to attract the people in
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Japan who are seeking more performance-based pay and signal to others that IBM has a performance-based culture around the world? (Sounds like a research project to us.)
In sum, as the global guide depicts, international compensation is influenced by eco- nomic, institutional, organizational, and individual conditions.31 Globalization really means that these conditions are changing—hence international pay systems are changing as well.
COMPARING COSTS
In Chapter 8 we discussed the importance of obtaining accurate information on what competitors pay in domestic markets. Similar comparisons of total compensation among nations can be very misleading. Even if wage rates appear the same, expenses for health care, living costs, and other employer-provided allowances complicate the picture. Out- side the United States, many nations offer some form of national health care. An organi- zation may pay for it indirectly through payroll taxes, but since all people in a nation share similar coverage, its value as part of total compensation is diminished. Conse- quently, comparing data in global and local markets around the world is a major chal- lenge. Comparisons between a specific U.S. firm and a specific foreign competitor may be even more misleading. Accurate data are usually difficult to obtain. While consulting firms are improving their global data collection, much of their data is still from U.S. com- panies’ operations in global locations. Other foreign and local-national companies’ data are often not available. Thus, international data may be biased toward U.S. companies’ practices.
Standard of Living: Basket of Goods versus Big Mac If comparing total compensation is difficult, comparing living costs and standards is even more complex. The Bank of Switzerland uses a uniform basket of goods based on Euro- pean consumer habits; the basket includes the prices of 137 items from clothing to trans- portation to personal care.32 A woman shopping for a summer dress, jacket, skirt, shoes, and stockings will find Tokyo the most expensive place to shop ($1,760), whereas Manila ($130) and Bombay ($120) are best buys. Tokyo is equally expensive for a man. If he wants a blazer, shirt, jeans, socks, and shoes, he will need to come up with $1,050 to pay for a medium-priced outfit.
If your tastes don’t run to summer dresses and blazers, the Economist takes a “Big Mac approach.” Rather than pricing a complex basket of goods and services, the maga- zine uses the price of a Big Mac in different locations.33 According to Exhibit 16.7, the average price of a Big Mac in the United States is $2.71 (average of four cities); in China, 9.90 yuan (US$1.20); in Canada, $3.20 (US$2.21); and in South Korea, 3,300 won (US$2.71).
31Christopher Brown-Humes, “Welcome to the Ways of the Market,” Financial Times, November 12, 1999, p. 10. 32Daniel Kalt and Manfred Gutmann, eds., Prices and Earnings around the Globe (Zurich: Union Bank of Switzerland, 2000). 33”Big Mac Currencies,” Economist, April 24, 2003.
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So what does a Big Mac have to do with compensation? Companies use cost compar- isons in adjusting pay for employees who transfer among countries. The objective is to maintain the same level of purchasing power.34
There are several ways to calculate purchasing power. A common approach is to di- vide hourly wages by the cost of a standard basket of goods and services. Another way is to calculate the working time required to buy a common item such as a 1-kilogram loaf of
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Big Mac Price
In Local Currency In Dollars
United States $2.71 2.71 Argentina Peso 4.10 1.43 Australia A$3.00 1.86 Brazil Real 4.55 1.48 Britain £1.99 3.14 Canada C$3.20 2.21 Chile Peso 1,400 1.95 China Yuan 9.90 1.20 Czech Rep. Koruna 56.57 1.96 Denmark Dkr27.75 4.10 Egypt Pound 8.00 1.35 Euro area £2.71 2.97 Hong Kong HK$11.50 1.47 Hungary Forint 490 2.18 Indonesia Rupiah 16,100 1.84 Japan ¥262 2.19 Malaysia M$5.04 1.33 Mexico Peso 23.00 2.18 New Zealand NZ$3.95 2.21 Peru New Sol 7.90 2.29 Philippines Peso 65.00 1.24 Poland Zloty 6.30 1.62 Russia Rouble 41.00 1.32 Singapore S$3.30 1.86 South Africa Rand 13.95 1.84 South Korea Won 3,300 2.71 Sweden SKr30.00 3.60 Switzerland SFr6.30 4.59 Taiwan NT$70.00 2.01 Thailand Baht 59.00 1.38 Turkey Lira 3,750,000 2.34 Venezuela Bolivar 3,700 2.32
EXHIBIT 16.7 The Hamburger Standard
Source: “Big Mac Currencies,” Economist April 23, 2003
34J. Abowd and M. Bognanno, “International Differences in Executive and Managerial Compensation,” in Differences and Changes in Wage Structures, R. B. Freeman and L. Katz, eds. (Chicago: NBER, 1995), pp. 67–103.
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bread: 7 minutes in London, 15 minutes in Tokyo, 27 minutes in Montreal, and 12 min- utes in Chicago. Or to buy a Big Mac: 14 minutes in Chicago, 36 minutes in London, and 90 minutes in Mexico City. The Big Mac (plus fries) attains luxury status in Nairobi, Caracas, and Lagos; an employed person must toil three hours (Nairobi), four hours (Caracas), or almost two days (Lagos) to afford it. (Hold the fries.)
COMPARING SYSTEMS
We have made the points that pay systems differ around the globe and that the differ- ences relate to variations in economic pressures, sociopolitical institutions, and the diver- sity of organizations and employees. In this section we compare several compensation systems. The caution about stereotyping raised earlier applies here as well. Even in na- tions described by some as homogeneous, pay systems differ from business to business. For example, two well-known Japanese companies, Toyota and Toshiba, have designed different pay systems. Toyota places greater emphasis on external market rates, uses far fewer levels in its structure, and places greater emphasis on individual-based merit and performance pay than does Toshiba. So as we discuss “typical” systems, remember that differences exist and that change in these systems is occurring everywhere.
The Total Pay Model: Strategic Choices The total pay model used throughout the book guides our discussion of pay systems in different countries. You will recognize the basic choices, which seem universal:
• Objectives of pay systems
• External competitiveness
• Internal alignment
• Employee contributions
• Management
While the choices are universal, the results are not. We have noted that each nation has its own laws regulating pay determination.
NATIONAL SYSTEMS: COMPARATIVE MIND-SET
A national system mind-set assumes that most employers in a country adopt similar pay practices. Understanding and managing international compensation then consists mainly of comparing the Japanese to the German to the U.S. or other national systems.35 This method may be useful in nations with centralized approaches (see Exhibit 16.4) or where homogeneous economic and cultural conditions exist (e.g., Sweden). Some even apply it
35Hugh Williamson, “IGMetall Is the Trend-Setter: What Happened in the Strike Will Have Far-Reaching Implications,” Financial Times, July 2, 2003, p. 11; Bertrand Benoit, “German Executives May Be Forced to Publish Salaries,” Financial Times, May 20, 2003, p. 6; Christopher Rhoads, “In Deep Crisis, Germany Starts to Revamp Vast Welfare State,” Wall Street Journal, July 10, 2003, pp. 1, A5.
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to regional systems, as in the “European Way,” the “Asian Way,” or the “North Ameri- can Way.”36 We describe the Japanese and German national systems below. But please read this information with caution: The national or regional mind-set overlooks variations among organizations within each nation.
Japanese National System Traditionally, Japan’s employment relationships were supported by “three pillars”:
1. Lifetime security within the company.
2. Seniority-based pay and promotion systems.
3. Enterprise unions (decentralized unions that represent workers within a single company).
Japanese pay systems tend to emphasize the person rather than the job; seniority and skills possessed rather than job or work performed; promotions based on supervisory evaluation of trainability, skill/ability levels, and performance rather than on performance alone; internal alignment over competitors’ market rates; and employment security based on the performance of the organization and the individual (formerly lifetime security).
Japanese pay systems can be described in terms of three basic components: base pay, bonuses, and allowances/benefits.37
Base Pay Base pay accounts for 60 to 80 percent of an employee’s monthly pay, depending on the individual’s rank in the organization. Base pay is not based on job evaluation or market pricing (as predominates in North America), nor is it attached to specific job titles. Rather, it is based on a combination of employee characteristics: career category, years of service, and skill/performance level.
Career Five career categories prevail in Japan: (1) general administration, (2) engineer/ scientific, (3) secretary/office, (4) technician/blue-collar job, and (5) contingent.
Years of Service Seniority remains a major factor in determining base pay. Manage- ment creates a matrix of pay and years of service for each career category. Exhibit 16.8 shows a matrix for general administration work. Companies meet periodically to compare their matrixes, a practice that accounts for the similarity among companies. In general, salary increases with age until workers are 50 years old, when it is reduced. Employees can expect annual increases no matter what their performance level until age 50, although the amount of increase varies according to individual skills and performance.
Skills and Performance Each skill is defined by its class (usually 7 to 13) and rank (1 to 9) within the class. Exhibit 16.9 illustrates a skill salary chart for the general administration ca- reer category. Classes 1 and 2 typically include associate (entry) and senior associate work;
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36Duncan Brown, “The Third Way: The Future of Pay and Rewards in Europe,” WorldatWork Journal, Second Quarter 2000, pp. 15–25. 37M. Yashiro, Human Resource Management in Japanese Companies in the Future (New York: Organization Resource Counselors, 1996); International Benefit Guidelines (New York: Mercer, 2000); H. Shibata “The Transformation of the Wage and Performance Appraisal System in a Japanese Firm,” International Journal of Human Resource Management, no. 11, 2000, pp. 294–313; Toyo Keizai, Japan Company Handbook, Tokyo: Japan Labour Bureau, Summer 2001.
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2, 3, and 4, supervisor and managerial; 5, 6, and 7, managerial, general director, and so on. Employees advance in rank as a result of their supervisor’s evaluation of their:
• Effort (e.g., enthusiasm, participation, responsiveness).
• Skills required for the work (e.g., analytical, decision making, leadership, planning, process improvement, teamwork).
• Performance (typical MBO-style ratings).
To illustrate how the system works, let us consider a graduate fresh from college who enters at class 1, rank 1. After one year, this new salaryman and all those hired at the same time are evaluated by their supervisors on their effort, abilities, and performance. Early in the career (the first three years) effort is more important; in later years abilities and performance receive more emphasis. The number of ranks an employee moves each year (and therefore the increase in base pay) depends on this supervisory rating (e.g., re-
Age* Salary† Age Salary Age Salary Age Salary
31 $1,900 41 $2,900 51 $3,800 22 $1,000 32 2,000 42 3,000 52 3,700 23 1,100 33 2,100 43 3,100 53 3,600 24 1,200 34 2,200 44 3,200 54 3,500 25 1,300 35 2,300 45 3,300 55 3,400 26 1,400 36 2,400 46 3,400 56 3,300 27 1,500 37 2,500 47 3,500 57 3,200 28 1,600 38 2,600 48 3,600 58 3,100 29 1,700 39 2,700 49 3,700 59 3,000 30 1,800 40 2,800 50 3,800 60 2,900
EXHIBIT 16.8 Salary and Age Matrix for General Administration Work in a Japanese Company
*Age 22 is typical entry with college degree. †Monthly salary, converted to dollars.
Associate Senior Associate Supervisor Manager General Director
Class 1 Class 2 Class 3 Class 4 Class 5 Class 6 Class 7
Rank 1 $ 600 $1,600 $2,600 $3,100 $3,600 $4,500 $5,500 Rank 2 700 1,700 2,650 3,150 3,750 4,700 6,000 Rank 3 800 1,800 2,700 3,200 3,800 4,900 Rank 4 900 1,900 2,750 3,250 3,900 5,100 Rank 5 1,000 2,000 2,800 3,300 4,000 Rank 6 1,100 2,100 2,850 3,350 4,100 Rank 7 1,200 2,200 2,900 3,400 Rank 8 1,300 2,300 2,950 3,450 Rank 9 1,400 2,400 3,000 3,500
EXHIBIT 16.9 Skill Chart for General Administration Work
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38T. Kato, “The End of Lifetime Employment in Japan? Evidence from National Surveys and Field Research,” Journal of the Japanese and International Economies 15 (2002), pp. 489–514; T. Kato and M. Rockell, “Experiences, Credentials, and Compensation in the Japanese and U.S. Managerial Labor Markets: Evidence from New Micro Data,” Journal of the Japanese and International Economies 6 (1992), pp. 30–51; Vlado Pucik, “The Challenges of Globalization: The Strategic Role of Local Managers in Japanese-Owned U.S. Subsidiaries,” paper presented at Cornell Conference on Strategic HRM, Ithaca, NY, October 1997; P. Evans, V. Pucik, and J. Barsoux, The Global Challenge: Frameworks for International Human Resource Management (New York: Irwin, 2002).
ceiving an A on an appraisal form lets you move up three ranks within the class, a B moves you two ranks, and so on).
Theoretically, a person with an A rating could move up three ranks in class each year and shift to the next class in three years. However, most companies require both mini- mum and maximum years of service within each class. So even if you receive four A rat- ings, you would still remain in class 1 for the minimum of six years. Conversely, if you receive four straight D grades, you would still get promoted to the next skill class after spending the maximum number of years in class 1. On the one hand, setting a minimum time in each class helps ensure that the employee knows the work and returns value to the company. On the other hand, the system slows the progress of high-potential performers. And even the weakest performers eventually get to the top of the pay structure, though they do not get the accompanying job titles or responsibility.
The system reflects the traditional Japanese saying, “A nail that is standing too high will be pounded down.” An individual employee will not want to stand out. Employees work to advance the performance of the group or team rather than themselves.
Under the traditional Japanese system, increases in annual base pay are relatively small (7 percent in our example of superior performance, compared to 10 to 12 percent for star performers in many U.S. merit systems), although they compound over time, just like conventional merit and across-the-board increases in the United States. However, since the Japanese system is so seniority-based, labor costs increase as the average age of the work force increases. In fact, a continuing problem facing Japanese employers is the increasing labor costs caused by the cumulative effects of annual increases combined with lifetime employment security. Early retirement incentives and “new jobs” with lower salaries are used to contain these costs.38
Bonuses Bonuses account for between 20 and 40 percent of annual salary, depending on the level in the organization. Generally, the higher up you are, the larger the percent of annual salary received as bonus. Typical Japanese companies pay bonuses twice a year (July and December). The bonuses are an expectable additional payment to be made twice a year, even in bad financial times. They are not necessarily related to performance.
Cybercomp U.S. consulting firms are entering the Japanese market to provide HR consulting services for firms in Japan. For example, the Unifi Tokyo office has an English website (www.unifinetwork .co.jp/html/index_eng.htm). Go to this website to see how it describes Japanese pay systems.
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The amount of bonuses is calculated by multiplying employees’ monthly base pay by a multiplier. The size of the multiplier is determined by collective bargaining between employ- ers and unions in each company. Sometimes the multiplier may also vary according to an employee’s performance evaluation. In a recent year, the average multiplier was 4.8 (2.3 in summer and 2.5 in winter) for white-collar workers. So an individual whose monthly base pay is $4,500 would receive a bonus of $10,350 in July and $11,250 in December.
According to the Japan Institute of Labour, for most employees (other than managers) bonuses are in reality variable pay that helps control the employer’s cash flow and labor costs but are not intended to act as a motivator or to support improved corporate perfor- mance. Japanese labor laws encourage the use of bonuses to achieve cost savings by omitting bonuses from calculations of many other benefit costs (i.e., pension plan, over- time pay, severance pay, and early retirement allowances).
The timing of the bonuses is very important. In Japan both the summer festival and the new year are traditional gift-giving times; in addition, consumers tend to make major pur- chases during these periods. Employees use their bonuses to cover these expenses. Thus, the tradition of the bonus system is deeply rooted in Japanese life and is today considered an indispensable form of pay.
Benefits and Allowances The third characteristic of Japanese pay systems, the allowance, comes in a variety of forms: family allowances, commuting allowances, housing and geographic differential al- lowances, and so on. Company housing in the form of dormitories for single employees or rent or mortgage subsidies is a substantial amount. Life-passage payments are made when an employee marries or experiences a death in the immediate family. Commuting allowances are also important. One survey reported that employees who took public transportation received about 9,000 yen (approximately $90) per month for commuting. Family allowances vary with number of dependents. Toyota provides about 17,500 to 18,000 yen ($175 to $180) a month for the first dependent and about 4,500 to 5,500 yen ($45 to $55) for additional dependents. Some employers even provide matchmaking al- lowances for those who tire of life in company dorms.
Legally Mandated Benefits Legally mandated benefits in Japan include social security, unemployment, and workers’ compensation. Although these three are similar to the bene- fits in the United States, Japanese employers also pay premiums for mandated health in- surance, preschool child support, and employment of the handicapped.
The lack of economic growth that Japan has been experiencing over the last decade, coupled with the nation’s heavy emphasis on seniority-based pay, means that Japanese companies’ labor costs have climbed faster than those of many of their global competitors. Faced with these pressures, many companies are trying to maintain long-time (rather than lifetime) employment and are looking for other ways to reward younger and more flexible employees. These younger employees, who have been paid relatively poorly under the seniority-based pay system, are finding the pay in non-Japanese firms operating in Japan more attractive. Their willingness to move is creating a more active labor market. U.S. firms are succeeding in hiring young Japanese workers by offering them more competitive base pay plus performance-based pay. In order to retain younger employees, Toyota,
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Toshiba, and Mitsubishi are increasingly using the performance-based pay. As a result, more variation in pay systems has emerged among traditional Japanese companies.39
German National System Traditional German pay systems are embedded in a social partnership between business, labor, and government that creates a generous vater staat, or “nanny state.”40 Vergutung is the most common German word for “compensation.” Pay decisions are highly regu- lated; over 90 different laws apply. Different tariff agreements (pay rates and structures) are negotiated for each industrial sector (e.g., banking, chemicals, metals, manufacturing) by the major employers and unions. Thus, the pay rates at Adam Opel AG, a major car company, are quite similar to those at Daimler, Volkswagen, and any other German car company. Methods for job evaluation and career progression are included in the tariff agreements. However, these agreements do not apply to managerial jobs. Even small or- ganizations that are not legally bound by tariffs tend to use them as guidelines.
Base Pay Base pay accounts for 70 to 80 percent of German employees’ total compensation de- pending on their job level. Base pay is based on job descriptions, job evaluations, and employee age. The tariff agreement applicable to Adam Opel AG, for example, sets the following tariff groups (akin to job families and grades):
Wage earners 8 levels (L2–L9)
Salary earners 6 office/administrative levels (K1–K6) 6 technical levels (T1–T6) 4 supervisory levels (M1–M4)
Exhibit 16.10 shows the rates established in the tariff agreement for the office and adminis- tration group (K1 to K6). The rates for K1 through K6 are a percent of the rate negotiated
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39S. Strom, “In Japan, from Lifetime Job to No Job at All,” New York Times Online, February 3, 1999; M. Bloom, G. Milkovich, and A. Mitra “International Compensation: Learning from How Managers Respond to Variations in Local Host Contexts,” International Journal of Human Resource Management, special issue, 2003; Michiyo Wakamoto, “Leaving the Fold,” Financial Times, April 22 2000, p. 18; Yoshio Yanadori and George Milkovich, “Minimizing Wage Competition? Entry-Level Compensation in Japanese Firms,” working paper, Center for Advanced HR Studies, Ithaca, NY, 2003; T. Kato, “The End of Lifetime Employment in Japan? Evidence from National Surveys and Field Research,” Journal of Japanese and International Economies 15 (2002), pp. 489–514; T. Kato and M. Rockell, “Experiences, Credentials, and Compensation in the Japanese and U.S. Managerial Labor Markets: Evidence from New Micro Data,” Journal of the Japanese and International Economies 6 (1992), pp. 30–51; Hiromichi Shibata, “Wage and Performance Appraisal Systems in Flux: Japan-U.S. Comparison,” Industrial Relations 41 (4) (2002); E. Gedajlovic and D. J. Shapiro “Ownership Structure and Firm Profitability in Japan,” Academy of Management Journal 45 (2002), pp. 565–575; National Personnel Authority, Current Status of Private Firms’ Remuneration Systems, 2001; Tokyo: Japan Labour Bureau, 2001 Nendo Saiyo Keikaku, Nihon Keizai Shimbun (“Recruiting Plan Survey”), fiscal year 2001 (in Japanese). 40We thank Thomas Gresch and Elke Stadelmann, whose manuscript, Traditional Pay System in Germany (Ruesselsheim, Germany: Adam Opel AG, 2001), is the basis for this section of the chapter.
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Tariff Group Base Pay (in Euros, (Salaried Employees) Job Examples Percent of Corner Rate March 2000)
K1 (simple tasks) Mail clerk 80–100 €1,149–1,437
K2 Receptionist 85–120 €1,221–1,724 (corner rate = salary Typist 100 €1,437
for employees age 23–25) (simple administration)
K3 (general administration) Secretary Clerk 100–140 €1,437–2,011
K4 (capable of
independent work) HR specialist 125–165 €1,796–2,370
K5 (capable of
independent work plus specialized knowledge) Senior specialist 165–190 €2,370–2,730
K6 (broader range
of responsibility) Supervisor 200–220 €2,874–3,160
EXHIBIT 16.10 Base Pay Rates for Office/Administrative Jobs in Adam Opel AG’s Tariff Agreement
for K2 (the “corner rate”). An HR specialist (K4) receives between 1,796 and 2,370 euros, depending on age (which is presumed to reflect professional experience).
Cybercomp A number of web locations offer currency conversions to change euros into U.S. dollars, Canadian dollars, Hong Kong dollars, and any number of other currencies. Try www.xe.net or www.globaldevelopment.org over a period of several weeks to appreciate the complexity that currency conversion adds to managing compensation.
Bonuses While there is a trend toward performance-based bonuses they have not been part of a traditional German pay system for unionized workers. However, Adam Opel AG’s tariff agreement stipulates that an average of 13 percent of the total base wages must be paid as “efficiency allowances.” Systems for measuring this efficiency are negotiated with the works councils for each location. In reality, the efficiency allowances become expected annual bonuses. Performance bonuses for managerial positions not included in tariffs are based on company earnings and other company objectives. Currently only about one- third of top executives receive stock options.
Allowances and Benefits Germany’s social contract includes generous social benefits. These nationally mandated benefits, paid by taxes levied on employers and employees, include liberal social secu-
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rity, unemployment protection, health care, nursing care, and other programs. Employer and employee contributions to the social security system can add up to more than one- third of wages. Additionally, companies commonly provide other benefits and services such as pension plans, savings plans, building loans, and life insurance. Company cars are always popular. The make and model of the car and whether or not the company pro- vides a cell phone are viewed as signs of status in an organization. German workers also receive 30 days of vacation plus about 13 national holidays annually (compared to an av- erage of 11 holidays in the United States).
Trends Germany today is not all traditional manufacturing, machine tools, and Mercedes vehi- cles. It has over half of the top Internet companies in Europe. And nearly one in five Ger- man adults own stock—double the rate in the late 1990s. Many of the changes are the re- sult of global competitive pressures and technological changes. However, the picture today is not as bright as it once was. An aging population, low birth rates, earlier retire- ment ages, and high pension and unemployment benefits are pushing up the costs of the social support system. Since 1970, the total number of pensioners and jobless increased by 80 percent in western Germany. But the number of workers, who together with em- ployers finance the social support system, grew by just 4 percent in that time. A relatively inflexible labor market has slowed job creation, as employers are finding it easier to move to other EU countries. All these factors are causing a rethinking of the traditional German social contract and the resulting total compensation systems. Companies are ask- ing for greater autonomy in negotiating tariff agreements to better reflect each company’s economic conditions, the use of performance-based pay, and ways to link job security to company performance.41
Strategic Comparisons: Japan, Germany, United States Japanese and German traditional systems reflect different approaches compared to U.S. pay systems. Exhibit 16.11 uses the basic choices outlined in the total pay model— objectives, internal alignment, competitiveness, contribution, and management—as a basis for comparisons. Both the Japanese and the German systems constrain organiza- tions’ use of pay as a strategic tool. German companies face pay rates, job evaluation methods, and bonuses identical to those of their competitors, set by negotiated tariff agreements. The basic strategic premise, that competitive advantage is sustained by align- ing with business strategy, is limited by laws and unions. Japanese companies do not face pay rates fixed industrywide; rather, they voluntarily meet to exchange detailed pay infor- mation. However, the end result appears to be the same: similar pay structures across companies competing within an industry. In contrast, managers in U.S. companies pos- sess considerable flexibility to align pay systems with business strategies. As a result, greater variability exists among companies within and across industries.
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41George Boyer “Review Symposium: Converging Divergences: Worldwide Changes in Employment System,” Industrial and Labor Relations Review 54 (2001); Wolfgang Streeck, Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Capitalist Economies (London: Sage, 1992).
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Japan U.S. German
Objectives
Internal alignment
External competitiveness
Employee contribution
Advantages
Disadvantages
Long-term focus High commitment Egalitarian—internal fairness Flexible work force Control cash flow with bonuses
Person based: age, ability, performance determines base pay Many levels Small pay differences
Monitor age-pay charts Consistent with competitors
Bonuses vary with performance only at higher levels in organization Performance appraisal influences promotions and small portion of pay increases
Supports commitment and security Greater predictability for companies and employees Flexibility—person based
High cost of aging work- force Discourages unique contributors Discourages women and younger employees
Long term High commitment Egalitarian—fairness
Highly trained Cost control through tariff negotiations
Work based: jobs and experience
Many levels Small pay differences
Tariff based Same as competitors
Tariff negotiated bonuses
Smaller performance bonuses for managers
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
Short/intermediate focus High commitment Peformance—market— meritocratic Flexible work force Cost control; varies with performance
Work based: jobs, skills, accountabilities
Fewer levels Larger pay differences
Market determined Compete on variable and performance-based pay
Bonuses an increasing percentage of total pay
Increases based on individual, unit, and corporate performance
Supports performance— competitor focus Costs vary with performance Focus on short-term payoffs (speed to market)
Skeptical workers, less security Fosters “What’s in it for me?”
No reward for investing in long-term projects
EXHIBIT 16.11 Strategic Similarities and Differences: An Illustrated Comparison
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The pay objectives in traditional German systems include mutual long-term commit- ment, egalitarian pay structures, and cost control through tariff agreements, which apply to competitors’ labor costs too. Japanese organizations set pay objectives that focus on the long term (age and security), support high commitment (seniority-/ability-based), are also more egalitarian, signal the importance of company and individual performance, and encourage flexible workers (person-based pay). U.S. companies, in contrast, focus on the shorter term (less job security); are market-sensitive (competitive total pay); em- phasize cost control (variable pay based on performance); reward performance improve- ment, meritocracy, and innovation (individual bonuses and stock, etc.); and encourage flexibility.
In Japan, person-based factors (seniority, ability, and performance) are used to set base pay. Market comparisons are monitored in Japan, but internal alignment based on senior- ity remains far more important. Job-based factors (job evaluation) and seniority are also used in Germany. Labor markets in Germany remain highly regulated, and tariff agree- ments set pay for union workers. So, like the Japanese system, the German system places much greater emphasis on internal alignment than on external markets.
Each approach has advantages and disadvantages. Clearly, the Japanese approach is consistent with low turnover/high commitment, greater acceptance of change, and the need to be flexible. U.S. firms face higher turnover (which is not always a disadvantage) and greater skepticism about change (i.e., what’s in it for me?). U.S. firms encourage in- novation; they also recognize the enormous talent and contributions to be tapped from work-force diversity. German traditional systems tend to be more bureaucratic and rule- bound. Hence, they are more inflexible. However, they also offer more predictability and stability for people. Both the Japanese and the German national systems face challenges from the high costs associated with an aging work force. Japan has taken very limited ad- vantage of women’s capabilities. The U.S. challenges include the impact of increased un- certainty and risk facing employees, the system’s short-term focus, and employees’ stress and skepticism about continuous change.
Cybercomp Discussing national systems in other countries in the same detail as we do here for the Japanese and German systems would require another textbook. More information on these and other countries can be found easily on the web. Some useful websites for starting your search are provided by:
Economist Intelligence Unit (EIU): countrydata.bvdep.com/ip (EIU country reports) www.ebusinessforum.co (Ebusiness Forum) Federation of European Employers: www.euen.co.uk/condits.html (Report on Pay and Working Conditions across Europe) Trak-it-Down: www.trak-it-down.com/InterHR.htm (list of international HR sites, updated regularly)
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STRATEGIC MARKET MIND-SET
A global study of pay systems used by companies with worldwide operations identifies three general compensation strategies: (1) localizer, (2) exporter, and (3) globalizer.42
These approaches reflect the company’s business strategy.43
Localizer: “Think Global, Act Local” If a localizer operates in 150 countries, it will have 150 different systems. The company’s business strategy is to seek competitive advantage by providing products and services tai- lored to local customers. Localizers operate independently of the corporate headquarters. One manager in the study compared his company’s pay system this way: “It’s as if McDonald’s used a different recipe for hamburgers in every country. So, too, for our pay system.” Another says, “We seek to be a good citizen in each nation in which we operate. So should our pay system.” The pay systems are consistent with local conditions.
Exporter: “One Size Fits All” Exporters are virtual opposites of localizers. Exporters design a total pay system at head- quarters and “export” it worldwide for implementation at all locations. Exporting a basic system (with some adjustments for national laws and regulations) makes it easier to move managers and professionals among locations (e.g., among European countries) without having to change how they are paid. It also communicates consistent corporatewide ob- jectives. Managers say that “one plan from headquarters gives all managers around the world a common vocabulary and a clear message about what the leadership values.” Common software used to support compensation decisions and deployed around the world makes uniform policies and practices feasible. However, not everyone likes the idea of simply implementing what others have designed. One manager complained that headquarters rarely consulted managers in the field: “There is no notion that ideas can go both ways. It’s a one-way bridge.”
Globalizer: “Think and Act Globally and Locally” Similar to exporters, globalizers seek a common system that can be used as part of the “glue” to support consistency across all global locations. But headquarters and the operat-
42M. Bloom, G. Milkovich, and A. Mitra, “International Compensation: Learning from How Managers Respond to Variations in Local Host Contexts,” International Journal of Human Resource Management, special issue, 2003. See also N. Napier and Van Tuan Vu, “International HRM in Developing and Transitional Economy Context,” Human Resource Management Review 8(1) (1998), pp. 39–71. 43J. W. Walker, “Are We Global Yet?” Human Resource Planning, First Quarter 2000, pp. 7–8; R. Locke and K. Thelen, “Apples and Oranges Revisited: Contextualized Comparisons and Comparative Labor Policies,” Politics and Society 23(2) (1996), pp. 337–367; Steve Gross and Per Wingerup “Global Pay? Maybe Not Yet!” Compensation and Benefits Review, 2000; H. Mehlinger and M. Krain, Globalization and the Challenges of the New Century (Bloomington, IN: Indiana University Press, 2000); M. Mendenhall and Gary Oddou, Readings and Cases in International Human Resource Management (Cincinnati: Southwestern College, 2000); J. S. Black, H. Gregerson, M. E. Mendenhall, and L. Stroh, Globalizing People through International Assignments (Reading, MA: Addison-Wesley, 1999); Daniel Yergin, “What Makes Global Firms Resilient?” Harvard Business Review, 7(14), July 2003.
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ing units are heavily networked to shared ideas and knowledge. Managers in these com- panies said:
“No one has a corner on good ideas about how to pay people. We need to get them from all our locations.”
“Home country begins to lose its meaning; performance is measured where it makes sense for the business, and pay structures are designed to support the business.”
“Compensation policy depends more on tax policies and the dynamics of our business than it does on ‘national’ culture. I suppose you could argue that tax policies reflect a country’s dominant culture, but from where I sit it depends on the political aims of the ruling coalitions and our ability to effectively work with them. The culture argument is something politicians hide behind.”
Cybercomp Go to the Organization Resources Counselors’ International website, www.orcin.com, to observe a state-of-the-art global market site. ORCI collects data from Azerbaijan, Belarus, and other central and eastern European locations as well as Latin America. How useful do you think its data would be for making pay decisions? What limitations exist? Compare the ORCI website with another consulting company’s website. Critique each site.
All three of these strategic global approaches avoid matching national systems. In- stead, they align the total pay system with the global business strategy. Even the localizer adapts to local (national) systems because such a pay system is aligned with the com- pany’s business strategy. If IBM, for example, is competing by integrating its solutions offered to customers around the world, then it is likely to use a globalizer approach. If Toshiba operates locally or nationally and emphasizes the differences among national markets, then it is likely to adopt a localizer approach. The challenge is for managers to rethink international compensation in the face of global competition and to align global pay with the way the business is aligned.
EXPATRIATE PAY
When multinationals decide to open facilities in an international location, one of the many decisions they face is the type of personnel to hire. International subsidiaries choose among a mix of:
• Expatriates (“expats”: people who are citizens of the employer’s base country; e.g., a Japanese citizen working for Sony in Toronto).
• Third-country nationals (TCNs: people who are citizens of neither the employer’s base country nor the subsidiary’s country; e.g., a German citizen working for Sony in Toronto).
• Local-country nationals (LCNs: people who are citizens of the country in which the subsidiary is located; e.g., a Canadian citizen working for Sony in Toronto).
Hiring LCNs has advantages. The company saves relocation expenses and avoids concerns about employees adapting to the local culture. Employment of LCNs satisfies nationalistic de- mands for hiring locals. Only rarely do organizations decide that hiring LCNs is inappropriate.
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However, expats or TCNs may be brought in for a number of reasons.44 The foreign as- signment may represent an opportunity for selected employees to develop an interna- tional perspective; the position may be sufficiently confidential that information is en- trusted only to a proven domestic veteran; or the particular skills required for a position may not be readily available in the local labor pool. Exhibit 16.12 catalogs a number of reasons for asking employees to take work assignments in another country.
Designing expatriate pay systems is a challenge. A company that sends a U.S. em- ployee (base salary of $80,000) with a spouse and two children to London for three years can expect to spend $800,000 to $1,000,000. Obviously, the high cost of expatriate as- signments must be offset by the value of the employee’s contributions.45
Broaden international perspectives
New ventures
Train locals
Specific expertise
Protect company interest
Developmental assignments
Technology or skills transfer
Management development
Sales
All others 10
5
6
10
12
16
20
20
22
23
0 5 10 15 20 25
Number of companies reporting (44 companies surveyed)
EXHIBIT 16.12 Why Expatriates Are Selected
44C. Reynolds, “Expatriate Compensation in Historical Perspective,” International Human Resource Journal, Summer 1997, pp. 118–131; Geoffrey Latta, “Expatriate Policy and Practice: A 10 Year Comparison of Trends,” Compensation and Benefits Review, 2000; C. Reynolds, “Global Compensation and Benefits in Transition,” Compensation and Benefits Review, January/February 2000, pp. 27–37; J. Stewart Black and Hal B. Gregerson, “The Right Way to Manage Expats,” Harvard Business Review, March–April 1999, pp. 52–62; Roger Heron, “The Cardinal Sins of Expatriate Policies,” Organization Resources Counselors: Innovations in International HR, Fall 2001; Hilary Harris, “Strategic Management of International Workers,” Organization Resources Counselors: Innovations in International HR, Spring 2002. 45What It Costs to House Expatriates Worldwide (New York: Runzheimer International, 2000); Steve Constantin and Charles Bell, “Linking a Global Work Force at Dow Chemical,” Workspan, no. 3, 2002, 3 pp. 22–28.
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Elements of Expatriate Compensation Exhibit 16.13 is a shopping list of items that can make up expatriate compensation. The list includes everything from household furnishing allowances to language and culture training, spousal employment assistance, and rest and relaxation leaves for longer-term assignments. Usually such lists are organized into four major components: salary, taxes, housing, and allowances and premiums.
Salary The base salary plus incentives (merit, eligibility for profit sharing, bonus plans, etc.) for expatriate jobs is usually determined via job evaluation or some system of “job leveling.”46 3M applies a global job evaluation plan for its international assignments. Common factors describe different 3M jobs around the world. With this system, the work of a general manager in Brussels can be compared to the work of a manager in Austin, Texas, or in Singapore.
Beyond salaries and incentives, the intent of the other components is to help keep ex- patriate employees financially whole and minimize the disruptions of the move. This means maintaining a standard of living about equal to their peers in their home or base country. This is a broad standard that often results in very costly packages.
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Financial Allowances Social Adjustment Assistance Reimbursement for tax return preparation Emergency leave Tax equalization Home leave Housing differential Company car/driver Children’s education allowance Assistance with locating new home Temporary living allowance Access to western health care Goods and services differential Club membership Transportation differential General personal services (e.g., translation) Foreign service premium Personal security (manager and family) Household furnishing allowance General culture-transition training (manager) Currency protection Social events Hardship premium Career development and repatriation planning Completion bonus Training for local-culture customs (manager)
Orientation to community (manager and Family Support family) Language training Counseling services Assistance locating schools for children Rest and relaxation leave Training for local culture’s customs (family) Domestic staff (excluding child care) Child care providers Use of company-owned vacation facilities Assistance locating spousal employment
EXHIBIT 16.13 Common Allowances in Expatriate Pay Packages
46Sherrie Webster Brown, “Spanning the Globe for Quality Pay Data,” in 2003–2004 Survey Handbook and Directory (Scottsdale, AZ: WorldatWork, 2002), pp. 95–100; Margaret A. Coil, “Salary Surveys in a Blended-Role World,” in 2003–2004 Survey Handbook and Directory (Scottsdale, AZ: WorldatWork, 2002), pp. 57–64.
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Taxes Income earned in foreign countries has two potential sources of income tax liability.47
With few exceptions (Saudi Arabia is one), foreign tax liabilities are incurred on income earned in foreign countries. For example, money earned in Japan is subject to Japanese income tax, whether earned by a Japanese or a Korean citizen. The other potential liabil- ity is the tax owed in the employee’s home country. The United States has the dubious distinction of being the only developed country that taxes its citizens for income earned in another country, even though that income is taxed by the country in which it was earned. Employers handle this through tax equalization.48 The employer takes the respon- sibility of paying whatever income taxes are due to the host country and/or the home country. Taxes are deducted from employees’ earnings up to the same amount of taxes they would pay had they remained in their home country.
This allowance can be substantial. For example, the marginal tax rates in Belgium, the Netherlands, and Sweden can run between 70 and 90 percent. So if a Swedish expatriate is sent to a lower-tax country, say, Great Britain, the company keeps the difference. If a British expatriate goes to Sweden, the company makes up the difference in taxes. The logic here is that if the employee kept the windfall from being assigned to a low-tax country, then getting this person to accept assignments elsewhere would become difficult.
Housing Appropriate housing has a major impact on an expatriate’s success. Most international companies pay housing allowances or provide company-owned housing. “Expatriate colonies” often grow up in sections of major cities where many different international companies group their expatriates.
Allowances and Premiums A friend in Moscow cautions that when we take the famed Moscow subway, we should pay the fare at the beginning of the ride. Inflation is so high there that if we wait to pay until the end of the ride, we won’t be able to afford to get off! Cost-of-living allowances, club memberships, transportation assistance, child care and education, spousal employ- ment, local culture training, and personal security are some of the many service al- lowances and premiums expatriates receive.
The logic supporting these allowances is that foreign assignments require that the ex- patriate (1) work with less direct supervision than a domestic counterpart, (2) often live and work in strange and sometimes uncongenial surroundings, and (3) represent the em- ployer in the host country. The size of the premium is a function of both the expected hardship and hazards in the host country and the type of job. An assignment in London will probably yield fewer allowances than one in Tehran, where Death to Americans Day is still a national holiday.
47Paul Bailey, “The Role of Cost of Living Data in Creating Cost-Effective Expatriate Assignments,” International Human Resource Journal 9(4) (Winter 2001), pp. 27–30. 48C. Reynolds, “Expatriate Compensation in Historical Perspective,” International Human Resource Journal, Summer 1997, pp. 118–131.
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The Balance Sheet Approach Most North American, European, and Japanese global firms combine these elements of pay in a balance sheet approach.49 The name stems from accounting, where credits and debits must balance. It is based on the premise that employees on overseas assignments should have the same spending power as they would in their home country. Therefore, the home country is the standard for all payments. The objective is to:
1. Ensure mobility of people to global assignments as cost-effectively as feasible.
2. Ensure that expatriates neither gain nor lose financially.
3. Minimize adjustments required of expatriates and their dependents.
Notice that none of these objectives link to performance. Exhibit 16.14 depicts the balance sheet approach. Home-country salary is the first col-
umn. A person’s salary (based on job evaluation, market surveys, merit, and incentives) must cover taxes, housing, and goods and services, plus other financial obligations (a “re- serve”). The proportions set for each of the components in the exhibit are norms (i.e., as- sumed to be “normal” for the typical expatriate) set to reflect consumption patterns in the home country for a person at that salary level with that particular family pattern. They are not actual expenditures. These norms are based on surveys conducted by consulting firms. Using the norms is supposed to avoid negotiating with each individual, although substantial negotiation still occurs.
Let us assume that the norms suggest that a typical manager with a spouse and one child, earning $84,000 in the United States, will spend $2,000 per month on housing, $2,000 on taxes, and $2,000 on goods and services and put away a reserve of $1,000 per month. The next building block is the equivalent costs in the host country where the as- signment is located. For example, if similar housing costs $3,000 in the host country, the expatriate is expected to pay the same $2,000 paid in the United States and the company pays the employee the difference; in our example, the extra $1,000 per month. In the il- lustration, the taxes, housing, and goods and services components are all greater in the host country than in the home country. The expatriate bears the same level of costs (white area of right-hand column) as at home. The employer is responsible for the additional costs (shaded area). (Changing exchange rates among currencies complicates these al- lowance calculations.)
However, equalizing pay may not motivate an employee to move to another country, particularly if the new location has less personal appeal. Therefore, many employers also offer some form of financial incentive or bonus to encourage the move. The right-hand column in Exhibit 16.14 includes a relocation bonus. Four out of five U.S. multinational corporations pay relocation bonuses to induce people to take expatriate assignments.
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49International Total Remuneration, certification course T9 (Scottsdale, AZ: WorldatWork, 2000); Cal Reynolds, “International Compensation,” in Compensation Guide, ed. William A. Caldwell (Boston: Warren, Gorham and Lamont, 1998); Steve Gross and Per Wingerup, “Global Pay? Maybe Not Yet!” Compensation and Benefits Review, 2000; J. Boudreau, P. Ramstad, and P. Dowling, “Global Talentship: Toward a Decision Science Connecting Talent to Global Strategic Success,” CAHRS Working Paper 02–21, Cornell, Ithaca, NY.
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If gaining international experience is really one of the future competencies required by organizations, then the need for such bonuses ought to be reduced, since the expatriate experience should increase the likelihood of future promotions. Either the experience ex- patriates obtain is unique to each situation and therefore not transferable or companies simply do not know how to value it. Whatever the reason, research reveals that U.S. ex- patriates feel their U.S. organizations still do not value their international expertise.50 So the rhetoric of the value of global competencies has yet to match the reality—hence the need for relocation incentives.
Alternatives to Balance Sheet Approach Employers continue to explore alternatives to the balance sheet, due primarily to the cost. Negotiation simply means the employer and employee find a mutually agreeable pack- age. The arrangements tend to be relatively costly (or generous, depending on your point of view), create comparability problems when other employees are asked to locate over- seas (“but Mike and Sarah got . . .”), and need to be renegotiated with each transfer.
Another alternative, localization, ties salary to the host (local) country’s salary scales and provides some cost-of-living allowances for taxes, housing, and dependents. The al- lowances tend to be similar to those under the balance sheet, but the salary can vary. The
Allowances paid by company
B as
e- co
un tr
y cu
rr en
cy
Taxes $2,000
Base-country salary $7,000
Housing $2,000
Goods and
Services $2,000
Reserve $1,000
Housing
Relocation Bonus
Equivalent salary and allowances, host country
$10,200
Goods and
Services
Reserve
Taxes
$700
$1,000
$1,500
EXHIBIT 16.14 Balance Sheet Approach
50Richard A. Guzzo, Katherine A. Noonan, and Efrat Elron, “Expatriate Managers and the Psychological Contract,” Journal of Applied Psychology 7(4) (1994), pp. 617–626; “Focusing on International Assignments,” ACA News, July/August 1999; Steve Gross and Per Wingerup, “Global Pay? Maybe Not Yet!” Compensation Benefits Review, 2000.
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downside is that individual salaries vary with the location (average rate for an engineer in Geneva is $55,000, compared to $41,300 in Rome and $32,000 in Bristol) rather than with the job or performance.
While the balance sheet approach ties salary to the home country, the modified bal- ance sheet ties salary to a region (Asia-Pacific, Europe, North America, Central America, or South America). The logic is that if an employee of a global business who relocates from San Diego, California, to Portland, Maine, receives only a moving allowance, why should all the extras be paid for international moves of far less distance (e.g., from Ger- many to Spain)? In Europe, many companies no longer view European managers who work outside their home country as expats. Instead, they are Europeans running their Eu- ropean businesses. And the use of a common currency, the euro, makes this easier.
Another common modification is to decrease allowances over time. The logic is that the longer the employee is in the host country, the closer the standard of living should come to that of a local employee. For example, if Americans eat a $10 pizza twice a week in the United States, should they eat a $30 pizza twice a week in Tokyo, at the em- ployer’s expense? More typically, after a couple of months, the expatriate will probably learn where the nationals find cheaper pizza or will switch to sushi. The main purpose of the modified balance sheet seems to be to reduce costs; it pays little attention to perfor- mance, ensuring fairness, or satisfying preferences of expats.
The lump-sum/cafeteria approach offers expats more choices. This approach sets salaries according to the home-country system and simply offers employees lump sums of money to offset differences in standards of living. For example, a company will still calculate differences in cost of living, but instead of allocating them housing, transporta- tion, goods and services, and so on, it simply gives the employee a total allowance. Per- haps one employee will trade less spacious housing for private schooling and tutors for the children; another employee will make different choices. We know of one expatriate who purchased a villa and a winery in Italy with his lump-sum allowance. He has been reassigned to Chicago but still owns and operates his winery.
Expatriate Systems → Objectives? Quel dommage! Talk to experts in international compensation, and you soon get into complexities of taxes, exchange rates, housing differences, and the like. What you do not hear is how the expatriate pay system affects competitive advantage, customer satisfaction, quality, or other performance concerns. It does emphasize maintaining employee purchasing power and minimizing disruptions and inequities. But the lack of attention to improving perfor- mance or ensuring that the expatriate assignment is consistent with organization objec- tives is glaring.
Expatriate compensation systems are forever trying to be like Goldilocks’s porridge: not too high, not too low, but just right. The expatriate pay must be sufficient to encour- age the employee to take the assignment yet not be so attractive that local nationals will feel unfairly treated or that the expatriate will refuse any future reassignments. These sys- tems also presume that expats will be repatriated to their home country. However, the rel- evant standard for judging fairness may not be home-country treatment. It may be the pay of other expats, that is, the expat community, or it may be local nationals. And how do local nationals feel about the allowances and pay levels of their expat co-workers? Very little research tells us how expats and those around them judge the fairness of expat pay.
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Employee Preferences Beyond work objectives, costs, and fairness, an additional consideration is employees’ preferences for international assignments. For many Europeans, working in another coun- try is just part of a career. Yet for many U.S. employees, leaving the United States means leaving the action. They may worry that expatriate experience sidetracks rather than en- hances a career. Employees undoubtedly differ in their preferences for overseas jobs, and preferences can vary over time. Having children in high school or elderly parents to care for, divorce, working spouses, and other life factors exert a strong influence on whether an offer to work overseas is a positive or negative opportunity. Research does inform us of the following:
• 68 percent of expatriates do not know what their jobs will be when they return home.
• 54 percent return to lower-level jobs. Only 11 percent are promoted.
• Only 5 percent believe their company values overseas experience.
• 77 percent have less disposable income when they return home.
• Only 13 percent of U.S. expatriates are women. (Yet 49 percent of all U.S. managers and professionals are women.)
• More than half of returning expatriates leave their company within one year.51 Unfor- tunately, while research does highlight the problem, it does not offer much guidance for designers of expat pay systems. Consequently, we are at the mercy of conjecture and beliefs.52
BORDERLESS WORLD → BORDERLESS PAY? GLOBALISTS
Many multinational corporations are attempting to create a cadre of globalists: managers who operate anywhere in the world in a borderless manner. They expect that during their career, they will be located in and travel from country to country. According to a former CEO of General Electric, “The aim in a global business is to get the best ideas from everyone, everywhere.”53 To support this global flow of ideas and people, some compa-
51”Expatriate Dual Career Survey Report” (New York: Windham International and National Foreign Trade Council, 1997); Garry M. Wederspahn, “Costing Failures in Expatriate Human Resources Management,” Human Resource Planning 15(3), pp. 27–35; Michael S. Schell and Ilene L. Dolins, “Dual-Career Couples and International Assignments,” International Compensation and Benefits, November–December 1992, pp. 25–29; Soo Min Toh and Angelo S. DeNisi, “Host Country National Reactions to Expatriate Pay Policies: A Model and Implications,” Academy of Management Review, 28(4), 2003, pp. 606–621. 52Paul Evans, Vlado Pucik, and Jean-Louis Barsoux, The Global Challenge (New York: McGraw-Hill, 2002); Allen D. Engle, Sr., and Mark Mendenhall, “Transnational Roles and Transnational Rewards: Global Integration in Executive Compensation,” presentation at international HR conference, Limerick, Ireland, June 2003; Meenal Chaukar, Jakub Sovina, and Charles Tyler, “Globalist Compensation,” paper presented at Cornell University seminar on international compensation, Spring 2003. 53”The Global Company: Series on Global Corporations,” Financial Times, November 7, 1995.
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nies are also designing borderless or at least regionalized pay systems. One testing ground for this approach is the European Union. As our global guide points out, one diffi- culty with borderless pay is that base pay levels and the other components depend too much on differences in each nation’s laws and customs about managerial pay.54
Focusing on expatriate compensation may blind companies to the issue of adequate re- wards for employees who are seeking global career opportunities. Ignoring such employ- ees causes them to focus only on the local operations and pay less attention to the broader goals of the global firm. It is naive to expect commitment to a long-term global strategy in which local managers have little input and receive limited benefits. Paradoxically, at- tempts to localize top management in subsidiaries may reinforce the gap in focus between local and global management.
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54Paul Evans, Vlado Pucik, and Jean-Louis Barsoux, The Global Challenge (New York: McGraw-Hill, 2002); Allen D. Engle, Sr., and Mark Mendenhall, “Transnational Roles and Transnational Rewards: Global Integration in Executive Compensation,” presentation at international HR conference, Limerick, Ireland, June 2003; Meenal Chaukar, Jakub Sovina, and Charles Tyler, “Globalist Compensation,” paper presented at Cornell University seminar on international compensation, Spring 2003.
Your Turn Back to Classic Coke
1. Based on the description of Coca-Cola’s worldwide business strategy in the accompanying Financial Times article (Exhibit 1) contrast what Daft means by “going global” versus “multi-local.”
2. Which of the three international compensation strategies (globalizer, exporter, localizer) would you expect to find at Coca-Cola? Which would you recommend? Explain why.
On p. 533, Daft characterizes Coke’s approach as “Think local, act local.” Yet he quickly goes on to discuss Coke’s global brand recognition. Coke is experiencing a classic case of trying to blend cohesiveness (global glue) and efficiencies by communicating clear strategies, policy, values, and standards across the globe while encouraging the flexibility and agility to be sensitive and lever- age local conditions.
3. What does this mean for total compensation? What compensation decisions are global? Which are local? Why?
4. Select a specific policy, technique, and objective from the total pay model used in the book (e.g., external competitiveness or employee contributions). Use it to illustrate your answer to question 3.
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532 Part Five Extending the System
Coca-Cola’s President Discusses the Company’s Worldwide Business Strategy [In the] 1980s we were “going global”— expanding geographically into many of the nearly 200 countries in which we do business today. Even though our historical strength came from operating as a “multi-local” business that for decades relied heavily on the insight of our local bottling partners, we knew that we had to centralise control to manage the expansion, and to ensure that our business operated cohesively.
We also encouraged consolidation among our bottling partners, equipping them to provide ef- fective service to rapidly consolidating retailers, as well as creating capital structures substantial enough to weather the new global economic dy- namics. That approach served its purpose very well, and we stuck with it. . . .
Globalisation had forced fundamental changes at a pace so rapid that many countries struggled to cope. And as globalisation acceler- ated, many national and local leaders under- standably sought to ensure sovereignty over their political, economic and cultural destinies.
As a result, the very forces that were making the world more connected and homogeneous were simultaneously triggering a powerful de- sire for local autonomy and preservation of unique cultural identity.
So, as the century was drawing to a close, the world had changed course, and we had not. The world was demanding greater flexibility, re- sponsiveness and local sensitivity, while we were further centralising decision-making and
standardising our practices, moving further away from our traditional multi-local approach. We were operating as a big, slow, insulated, sometimes even insensitive “global” company; and we were doing it in a new era when nimble- ness, speed, transparency and local sensitivity had become absolutely essential to success.
Consequently, you could say we got a taste of the 21st century before it arrived, making it obvious to us we had a lesson to learn. And what we learned was something simple, yet powerful: that the next big evolutionary step of “going global” now has to be “going local”. In other words, we had to rediscover our own multi-local heritage. . . .
Because the world has changed so much, we do not have the luxury of merely turning back the clock to simpler days. We must lead a Coca- Cola business system that not only has the pro- fessional expertise, management systems and capital structures required for success in a glob- alised economy, but which is also able to act nimbly and with great sensitivity in every local community where our brands are sold.
That is why I have a mandate from our board of directors to create a new company and quickly change our behaviour. . . . In every community, we must remember we do not do business in markets, we do business in societies. The purpose was not simply to cut costs, or to try to save our way to prosperity. It was to begin to recreate the multi-local company that we need to be. Thus, in the first 100 days of our new management team, we specifically set out to remove the significant internal structural ob- stacles we had created for ourselves over the
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years, and thus to create optimal flexibility for our local operating units.
It was a painful decision to eliminate the jobs of good Coca-Cola professionals, but it was the most responsible choice for the long-term suc- cess of our company and our stakeholders around the world. We are moving quickly, and during the next few years you will see us fol- lowing some clear principles to meet the de- mands of the 21st century:
• Think local, act local. Many people say Coca- Cola is the brand with the greatest worldwide relevance. We know instinctively, however, that the global success of Coca-Cola is the di- rect result of people drinking it one bottle at a time in their own local communities. So we are placing responsibility and accountability in the hands of our colleagues who are closest to those billions of individual sales.
We will not abandon the benefits of being global. But if our local colleagues develop an idea or strategy that is the right thing to do lo- cally, and it fits within our fundamental val- ues, policies, and standards of integrity and quality, then they have the authority and re- sponsibility to make it happen. Just as impor- tant, we will hold them accountable for the outcomes of that idea or strategy.
• Focus as a pure marketing Company. Disci- plined focus is absolutely critical. All our suc- cess flows from the strength of our brands, and our ability to relate to people. . . .
• Lead as model citizens. In every community where we sell our brands, we must remember we do not do business in markets; we do busi- ness in societies. In Mozambique two weeks
ago, for example, I was extremely proud to see how our local colleagues and bottling partners all across southern Africa rallied to- gether to provide much-needed support for the flood relief efforts. . . . They did it because they cared, and because they understood the implications for their own societies.
For two weeks this month, I travelled across Europe and southern Africa, talking with our people and with government, business and com- munity leaders as well. As I listened during those conversations, I heard two consistent themes. First, our local people are ready to take on their shoulders the authority and accountabil- ity that naturally belongs to them. Second, the government, business and community leaders were very encouraging, openly sharing insights that will be helpful to us as we work hard to re- earn the status of model business citizens any- where we might have taken steps backward.
So overall, we will draw on a long-standing belief Coca-Cola always flourishes when our people are allowed to use their insight to build the business in ways best suited to their local culture and business conditions.
We will, of course, maintain clear order. Our small corporate team will communicate explic- itly the clear strategy, policy, values and quality standards needed to keep us cohesive and effi- cient. But just as important, we will also make sure we stay out of the way of our local people and let them do their jobs.
Source: Adapted from a Financial Times article by Douglas Daft, chairman and CEO of the Coca-Cola Company, March 27, 2000.
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534 Part Five Extending the System
Summary Studying employee compensation only in your neighborhood, city, or country is like being a horse with blinders. Removing the blinders by adopting an international perspec- tive deepens your understanding of local issues. Anyone interested in compensation must adopt a worldwide perspective. The globalization of businesses, financial markets, trade agreements, and even labor markets is affecting every workplace and every employment relationship. And employee compensation, so central to the workplace, is embedded in the different political-socioeconomic arrangements found around the world. Examining employee compensation with the factors in the global pay model offers insights into man- aging total compensation internationally.
The basic premise of this book is that compensation systems have a profound impact on individual behavior, organization success, and social well-being. We believe this holds true within and across all national boundaries.
Review Questions 1. Rank the factors in the global guide according to your belief in their importance for
understanding and managing compensation. How does your ranking differ from those of your peers? From those of international peers? Discuss how the rankings may change over time.
2. Distinguish between nationwide and industrywide pay determination. How do they compare to a business strategy–market approach?
3. Develop arguments for and against “typical” Japanese-style, “typical” German-style, and “typical” U.S.-style approaches to pay. Using the global guide, what factors are causing each approach to change?
4. Distinguish between global, workers, expatriates, local nationals, and third-country nationals.
5. In the balance sheet approach to paying expats, most of total compensation is linked to costs of living. Some argue that expatriate pay resembles a traditional Japanese pay system. Evaluate this argument.
6. Go back to Exhibit 16.4. What is meant by “the full house” or “variation within a cul- ture”? Evaluate the concept’s importance in understanding and managing global total compensation.