International Pay Systems

Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them.

Managing Variations How people get paid around the world depends on differences (and similarities) in the following general factors Economic Institutional Organizational Employee

Guide to International Compensation

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

The Social Contract Viewed as part of the social contract Employment relationship is more than an exchange between an individual and an employer It includes The government All enterprise owners All employees Relationships and expectations of these parties form the social contract

Social Contracts and Pay Setting

Culture Shared mental programming rooted in values, beliefs, and assumptions shared in common by a group of people Influences how information is processed

Culture and Managing International Pay Assumption that pay systems must be designed to fit different national cultures is based on the belief that most of a country’s inhabitants share a national character Job of a global manager Search for national characteristics whose influence is assumed to be critical in managing international pay systems

Culture Matters, but So Does Cultural Diversity How useful is the notion of a national culture when managing international pay? Only a starting point Can be thought of as the “average” Provides some information about what kinds of pay attitudes and beliefs you are likely to find in an area Over reliance on the “average” can seriously mislead

Culture Matters, but So Does Cultural Diversity (cont.) Interplay among various conditions within each nation or region, taken as a whole, form distinct contexts for determining compensation Economic Institutional Organizational Individual

Factors Affecting International Pay Ownership and capital markets Managers’ autonomy

Comparing Costs Factors affecting wage comparisons Standard of living costs Purchasing power Working time required

Strategic Similarities and Differences: An Illustrated Comparison See Exhibit 16.14 page 561

Strategic Market Mind-Set Localizer: “Think Global, Act Local” Designs pay systems to be consistent with local conditions Business strategy is to seek competitive advantage by providing products and services tailored to local customers Operate independently of corporate headquarters

Strategic Market Mind-Set (cont.) Exporter: “Headquarters Knows Best” Basic total pay system designed at headquarters and is “exported” world-wide for implementation at all locations Exporting a basic system makes it easier to move managers and professionals among locations One plan from headquarters gives all managers around the world a common vocabulary and a clear message what the leadership values

Strategic Market Mind-Set (cont.) Globalizer: “Think 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

Types of Expatriates Expatriates - Individuals whose citizenship is that of employer’s base country Third country nationals (TCNs) - Individuals whose citizenship is neither employer’s base country nor location of subsidiary Local country nationals (LCNs) - Individuals who are citizens of country in which subsidiary is located Advantages of hiring LCNs Advantages of bringing in expats or TCNs

Why Expatriates Are Selected

Common Allowances in Expatriate Pay Packages

Elements of Expatriate Compensation Salary Taxes Allowances and Premiums Housing

Common Allowances in Expatriate Pay Packages Financial Allowances Social Adjustment Assistance Family Support

Balance Sheet Approach Premise – Employees on overseas assignments should have same spending power as they would in their home country Home country is standard for all payments Objectives Ensure cost effective mobility of people to global assignments Ensure expatriates neither gain nor lose financially Minimize adjustments required of expatriates

Balance Sheet Approach See Exhibit 16.17, page 569 and text discussion pages 568 - 570

Other Approaches: Compensation for Expatriates Negotiation Localization Modified balance sheet Decrease allowances Lump-sum/cafeteria plan

Expatriate Systems → Objectives? How the expatriate pay system affects competitive advantage, customer satisfaction, quality, or other performance concerns Lack of attention to aligning expatriate pay with organization objectives Employee Preferences

Borderless World--Borderless Pay? Corporations attempting to become “globally integrated enterprises,” are creating cadres of globalists: Managers who operate anywhere in the world in a borderless manner To support a global flow of ideas and people, companies are also designing borderless, or at least regionalized, pay systems Testing ground for this approach - European Union