Understanding International Compensation: Managing Variations and Cultural Diversity

1. International Pay Systems Chapter 16

2. Chapter Topics • Managing Variations: The Global Guide • The Social Contract • Culture • Trade Unions and Employee Involvement • Ownership and Financial Markets • Managerial Autonomy • Comparing Costs • Comparing Systems • National Systems-Comparative Mind-Set • Strategic Market Mind-Set • Expatriate Pay • Borderless WorldBorderless Pay? Globalists

3. Chapter Topics (cont.) • Comparing Costs • Comparing Systems • National Systems-Comparative Mind-Set • Strategic Market Mind-Set • Expatriate Pay • Borderless WorldBorderless Pay? Globalists

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

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

6. Exhibit 16.1: Guide to International Compensation

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

8. 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

9. Exhibit 16.3: Social Contractsand Pay Setting

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

11. 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

12. 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

13. 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

14. Factors Affecting International Pay • Ownership and capital markets • Managers’ autonomy

15. Comparing Costs • Factors affecting wage comparisons • Standard of livingcosts • Purchasing power • Working time required

16. Exhibit 16.8: Strategic Similarities and Differences: An Illustrated Comparison

17. 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

18. 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

19. Strategic Market Mind-Set (cont.) Globalizer: “Think andAct Globally and Locally” • Seek a common system to be used as part of “glue” to support consistency across all global locations • Headquarters and operating units are heavily networked to shared ideas and knowledge • Performance is measured where it makes sense for the business • Pay structures are designed to support business

20. 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

21. Exhibit 16.9: Why Expatriates Are Selected

22. Exhibit: 16.10 Common Allowances in Expatriate Pay Packages

23. Elements of Expatriate Compensation Salary Taxes Allowances and Premiums Housing

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

25. 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

26. Exhibit 16.11: Balance Sheet Approach

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

28. 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

29. 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