1. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Chapter 16 International Pay Systems © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2. Learning Objectives The global context The social contract Culture Trade unions and employee involvement Ownership and financial markets Managerial autonomy 16-2

3. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Learning Objectives Comparing costs Comparing systems National systems-comparative mind-set Strategic market mind-set Expatriate pay Borderless world  borderless pay? Globalists 16-3

4. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 16.1 - The International Context of Compensation Source: © George T. Milkovich. 16-4

5. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Variation in International Pay Practices Social contracts Cultures Trade unions Ownership and financial markets Managers’ autonomy 16-5

6. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. The Social Contract Is formed as a result of relationships and expectations between: The government Enterprise owners Employees Is affected by degree of centralization Centralized - High level of government involvement in wage bargaining Decentralized - Little government involvement 16-6

7. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 16.2 - The Social Contracts and Primary Bargaining Level in Selected European Union Countries and the United States Source: European Industrial Relations Observatory Online, “Changes in National Collective Bargaining Systems Since 1990,” 2005, http://www.eurofound.europa.eu/eiro/, June 30, 2009. 16-7

8. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. The Social Contract Regulation Countries differ in regulatory restrictions on: Maximum hours of work Hiring and firing workers 16-8

9. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Culture Shared mental programming rooted in values, beliefs, and assumptions Influences how information is processed Job of a global manager Define national characteristics that influence international pay systems 16-9

10. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Ownership and Financial Markets Differ widely around the world These differences are important to international pay Type of ownership determines what forms of pay make sense 16-10

11. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Managerial Autonomy Is the degree of discretion managers have to: Make total compensation a strategic tool It is inversely related to the degree of centralization and regulatory intensity 16-11

12. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Comparing Costs Labor costs and productivity Substantial difference in average labor costs forces companies to: Move to lower cost countries if productivity can be maintained at a workable level Cost of living and purchasing power Comparison allows to: Adjust pay for employees who transfer among countries Maintain the same level of purchasing power 16-12

13. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Comparing Systems Pay systems differ from business to business The total pay model: strategic choices Objectives of pay systems External competitiveness Internal alignment Employee contributions Management 16-13

14. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. National Systems: Comparative Mind- set Assume that most employers in a country adopt similar pay practices Overlook variations among organizations within each nation 16-14

15. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Japanese Traditional National System Pillars of Japan’s employment relationships Lifetime security within the company Seniority-based pay and promotion systems Enterprise unions 16-15

16. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Japanese Traditional National System Japanese pay system emphasizes on: The person rather than the job Seniority and skills possessed rather than job or work performed Promotions based on a combination of supervisory evaluation Internal alignment over competitors’ market rates Employment security based on the performance 16-16

17. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Japanese Traditional National System Three basic components Base pay depends on: Career Years of service Skills and performance Bonuses Allowances/Benefits Legally mandated benefits 16-17

18. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. German Traditional National System Embedded in a social partnership between: Business Labor Government Pay decisions are highly regulated 16-18

19. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. German Traditional National System Different tariff agreements negotiated for each industrial sector: Include job evaluation and career progression Do not apply to managerial jobs 16-19

20. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. German Traditional National System The three components of German traditional national system are: Base pay Bonuses Allowances and benefits 16-20

21. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 16.15 - Strategic Similarities and Differences: An Illustrated Comparison 16-21

22. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 16.15 - Strategic Similarities and Differences: An Illustrated Comparison 16-22

23. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Evolution and Change in Traditional Japanese and German Model Challenges for Japanese model Slow economic growth Controlling labor costs Availability of cheap labor in Asian countries Changes in traditional model Focus on long-term employment rather than life- time employment Young employees seek employment in non- Japanese firms 16-23

24. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Evolution and Change in Traditional Japanese and German Model Companies are increasingly using performance- based pay Challenges for German model Aging population Low birth rates Early retirement ages High pension and unemployment benefits Inflexible labor markets 16-24

25. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Evolution and Change in Traditional Japanese and German Model Changes in traditional model Greater use of pay for performance Frequent use of stock options 16-25

26. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Strategic Market Mind-Set Localizer - “Think Global, Act Local” Pay systems consistent with local conditions Business strategy Competitive advantage through products and services tailored to local customers Operate independently of corporate headquarters 16-26

27. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Strategic Market Mind-Set Exporter: “Headquarters Knows Best” Basic total pay system: Designed at headquarters Exported world-wide for implementation at all locations Makes it easier to move managers and professionals among locations Gives common vocabulary and a clear message about the leadership values 16-27

28. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Strategic Market Mind-Set Globalizer: “Think and Act Globally and Locally” Seek a common system to support consistency across all global locations Headquarters and operating units are heavily networked to share knowledge Global approaches: Focus first on the global business strategy and then adapt to local conditions 16-28

29. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Expatriate Pay Expatriates: Employees temporarily working and living in a foreign country Parent-country nationals (PCNs) Citizens of the employer’s home country living and working in another country Third country nationals (TCNs) Citizens of neither the employer’s parent country nor the foreign country Local country nationals (LCNs) Citizens of a foreign country where the parent employer operates 16-29

30. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Expatriate Pay Advantages of hiring LCNs Know local conditions Have relationships with local customers, suppliers, and government regulators Company saves relocation and other associated expenses Avoids concerns about employees adapting to the local culture Satisfies nationalistic demands for hiring locals 16-30

31. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Expatriate Pay Reasons of hiring TCNs Helps employees develop an international perspective The position may require a proven domestic veteran Skills required for a position may not be readily available in the local labor pool 16-31

32. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit: 16.19- Common Allowances in Expatriate Pay Packages 16-32

33. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Elements of Expatriate Compensation Salary Taxes Housing Allowances and premiums 16-33

34. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. The Balance Sheet Approach Employees on overseas assignments should have same spending power as in their home country Home country is standard for all payments 16-34

35. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Balance Sheet Approach Objectives Ensure mobility of people in most cost effective manner Ensure that expatriates neither gain nor lose financially Minimize adjustments required of expatriates and their dependents 16-35

36. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 16.20 - Balance Sheet Approach 16-36

37. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Balance Sheet Approach Alternatives to balance sheet approach Negotiation Localization Modified balance sheet Decrease allowances Lump-sum/cafeteria plan Using more LCNs 16-37

38. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Expatriate Systems → Objectives? Identify how expatriate pay system affects Competitive advantage Customer satisfaction Quality Performance concerns Lack of attention to aligning expatriate pay with organization objectives 16-38

39. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Expatriate Systems → Objectives? Employee preferences Determine how they perceive overseas jobs Can vary over time 16-39

40. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Borderless World- Borderless Pay? Globalists Globalists Managers who operate anywhere in the world in a borderless manner 16-40