McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved International Pay Systems Chapter 16

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Identify the four general factors in the global guide to international compensation and be able to apply the global guide to increase understanding of the variations in international pay practices. 2. Explain how certain key factors in the global guide – social contract, culture, trade unions, ownership and capital markets, managers’ autonomy – impact international pay systems. 3. Understand the key strategic differences among the pay systems of Japan, Germany and the U.S. using the total compensation model. 4. Discuss the three general compensation strategies used by companies with worldwide operations. 5. Describe the key features of expatriate pay systems. Learning Objectives After discussing Chapter 16, students should be able to:

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them.

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Managing Variations  How people get paid around the world depends on differences (and similarities) in the following general factors  Economic  Institutional  Organizational  Employee  Exhibit 16.1: Guide to International Compensation  Exhibit 16.2: Applying the Global Guide

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exh. 16.1: Guide to International Compensation

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Employment Relationship OrganizationsIndividuals Social Contract Organizations Individual Employers Employer Consortium Individuals Unions Union Federations Government The Social Contract

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exh. 16.3: Social Contracts and Pay Setting Localized Highly Centralized SOCIAL CONTRACT Local Systems Nationwide Systems Sector/Industry -wide Systems Argentina Brazil Canada France Hong Kong Mexico Singapore U.K. U.S.A. Czech Republic Germany India Israel Japan Korea Slovakia Slovenia PAY SETTING SYSTEMS Austria Belgium Cuba Hungary Poland Sweden

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Characteristics of Culture  Often defined as shared mental programming  Involves acquiring knowledge that people use to interpret experience and generate social behavior  Rooted in values, beliefs, and assumptions shared in common by a group of people  Influences how information is processed

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Culture and Managing International Pay  Assumption that pay systems must be designed to fit different national cultures is based on the belief that most of a country’s inhabitants share a national character  Job of a global manager  Search for national characteristics whose influence is assumed to be critical in managing international pay systems

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Hofstede’s Cultural Dimensions  Power Distance  Uncertainty Avoidance  Individualism – Collectivism  Masculinity – Femininity  Long-term – Short-term

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Trade Unions and Employee Involvement  Exhibit 16.5: Union Density  Exhibit 16.7: Employment Practices Differ Among Nations

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 16.5: Union Density

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 16.6: Employment Practices Differ Among Nations: The Cost of an Employee 14.8%$2.00$13.47Britain $ %$2.85$16.52Japan $ %$3.90$14.34United States $ %$7.34$20.94Germany $ %$5.61$12.36France $17.97 What those extra costs are as a percentage of salary.... and what an employer pays in social insurance and labor taxes.... is made up from the salary paid directly to the worker before deductions... The hourly cost of a production worker in manufacturing...

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Factors Affecting International Pay  Ownership and capital markets  Managers’ autonomy

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Comparing Costs  Factors affecting wage comparisons  Standard of living costs  Purchasing power  Exhibit 16.7: The Hamburger Standard

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 16.11: Strategic Similarities and Differences: An Illustrated Comparison JapanUnited StatesGermany Objectives Long-term focus High commitment Egalitarian – internal fairness Flexible workforce Control cash flow with bonuses Short / intermediate focus High commitment Performance – market – meritocratic Flexible workforce Cost control; varies with performance Long term High commitment Egalitarian – fairness Highly trained Cost control through tariff negotiations Internal Alignment Person based: age, ability, performance determines base pay Many levels Small pay differences Work based: jobs, skills, accountabilities Fewer levels Larger pay differences Work based: jobs and experience Many levels Small pay differences

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved JapanUnited StatesGermany External Competitiveness Monitor age – pay charts Consistent with competitors Market determined Compare on variable and performance-based pay Tariff based Same as competitors Employee Contribution Bonuses vary with performance only at higher levels in organization Performance appraisal influences promotions and small portion of pay increases Bonuses an increasing percentage of total pay Increases based on individual, unit, and corporate performance Tariff negotiated bonuses Smaller performance bonuses for managers Exhibit 16.11: Strategic Similarities and Differences: An Illustrated Comparison

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved JapanUnited StatesGermany Advantages Supports commitment and security Greater predictability for companies and employees Flexibility – person based Supports performance – competitor focus Costs vary with performance Focus on short-term payoffs (speed to market) Supports commitment and security Greater predictability for companies and employees Companies do not compete with pay Disadvantages High cost of aging work force Discourages unique contributors Discourages women and younger employees Skeptical workers, less security Fosters “What’s in it for me?” No reward for investing in long-term projects Inflexible; bureaucratic High social and benefit costs Not a strategic tool Exhibit 16.11: Strategic Similarities and Differences: An Illustrated Comparison

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Strategic Market Mind-Set Localizer: “Think Global, Act Local”  Designs pay systems to be consistent with local conditions  Business strategy is to seek competitive advantage by providing products and services tailored to local customers  Operate independently of corporate headquarters

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Strategic Market Mind-Set (continued) Exporter: “One Size Fits All”  Basic total pay system designed at headquarters and is “exported” world-wide for implementation at all locations  Exporting a basic system makes it easier to move managers and professionals among locations  One plan from headquarters gives all managers around the world a common vocabulary and a clear message what the leadership values

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Strategic Market Mind-Set (continued) Globalizer: “Think and Act Globally and Locally”  Seek a common system to be used as part of “glue” to support consistency across all global locations  Headquarters and operating units are heavily networked to shared ideas and knowledge  Performance is measured where it makes sense for the business  Pay structures are designed to support business

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Shift in Strategic Global Focus  Focus of strategic global approaches – Avoid matching national systems  Involves aligning the total pay system with the global business strategy  Challenges  Managers must rethink international compensation in the face of global competition  Align global pay with the way business is aligned

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Types of Expatriates  Expats - Individuals whose citizenship is that of employer’s base country  Third country nationals (TCNs) - Individuals whose citizenship is neither employer’s base country nor location of subsidiary  Local country nationals (LCNs) - Individuals who are citizens of country in which subsidiary is located  Advantages of hiring LCNs  Advantages of bringing in expats or TCNs

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Objectives of Compensation and Benefits for Expatriates  Attract and retain employees who are qualified for foreign assignments  Provide an incentive to leave the home country for a foreign assignment  Maintain a given standard of living  Take into consideration expatriates’ career and family needs  Facilitate reentry into the home country at the end of a foreign assignment

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Salary Taxes Housing Allowances and Premiums Elements of Expatriate Compensation

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Common Allowances in Expatriate Pay Packages Financial Allowances Social Adjustment Assistance Family Support

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Balance Sheet Approach  Premise – Employees on overseas assignments should have same spending power as they would in their home country  Home country is standard for all payments  Objectives  Ensure cost effective mobility of people to global assignments  Ensure expatriates neither gain nor lose financially  Minimize adjustments required of expatriates

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Base-country currency Reserve $1,000 Reserve Goods and Services $2,000 Goods and Services $700 Housing Housing $2,000 $1,000 Taxes Taxes $2,000 $1,500 Relocation Bonus Allowances paid by company Base-country salary $7,000 Equivalent salary and allowances, host country $10,200 Exhibit 16.14: Balance Sheet Approach

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Other Approaches: Compensation for Expatriates  Negotiation  Localization  Modified balance sheet - regional  Decrease allowances over time  Lump-sum/cafeteria plan

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved Borderless World--Borderless Pay?