MilkovichNewman Compensation Ninth Edition Chapter 16 Mc GrawHillIrwin

Milkovich/Newman: Compensation, Ninth Edition Chapter 16 Mc. Graw-Hill/Irwin International Pay Systems Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Chapter Topics n Managing Variations: The Global Guide n The Social Contract n Culture n Trade Unions and Employee Involvement n Ownership and Financial Markets n Managerial Autonomy n Comparing Costs n Comparing Systems n National Systems-Comparative Mind-Set n Strategic Market Mind-Set n Expatriate Pay n Borderless World Borderless Pay? Globalists 16 -2

Chapter Topics (cont. ) n Comparing Costs n Comparing Systems n National Systems-Comparative Mind-Set n Strategic Market Mind-Set n Expatriate Pay n Borderless World Borderless Pay? Globalists 16 -3

Understanding international compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them. 16 -4

Managing Variations n. How people get paid around the world depends on differences (and similarities) in the following general factors – Economic – Institutional – Organizational – Employee 16 -5

Exhibit 16. 1: Guide to International Compensation 16 -6

Variation in International Pay Practices n Social contracts n Cultures n Trade unions n Ownership and financial markets n Managers’ autonomy 16 -7

The Social Contract n 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 n Relationships and expectations of these parties form the social contract 16 -8

Exhibit 16. 3: Social Contracts and Pay Setting 16 -9

Culture n Shared mental programming rooted in values, beliefs, and assumptions shared in common by a group of people n Influences how information is processed 16 -10

Culture and Managing International Pay n 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 n Job of a global manager – Search for national characteristics whose influence is assumed to be critical in managing international pay systems 16 -11

Culture Matters, but So Does Cultural Diversity n 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 16 -12

Culture Matters, but So Does Cultural Diversity (cont. ) n Interplay among various conditions within each nation or region, taken as a whole, form distinct contexts for determining compensation – Economic – Institutional – Organizational – Individual 16 -13

Factors Affecting International Pay n Ownership and capital markets n Managers’ autonomy 16 -14

Comparing Costs n Factors affecting wage comparisons – Standard of living costs – Purchasing power – Working time required 16 -15

Exhibit 16. 8: Strategic Similarities and Differences: An Illustrated Comparison 16 -16

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 16 -17

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 16 -18

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 16 -19

Types of Expatriates n Expatriates - Individuals whose citizenship is that of employer’s base country n Third country nationals (TCNs) - Individuals whose citizenship is neither employer’s base country nor location of subsidiary n Local country nationals (LCNs) - Individuals who are citizens of country in which subsidiary is located n Advantages of hiring LCNs n Advantages of bringing in expats or TCNs 16 -20

Exhibit 16. 9: Why Expatriates Are Selected 16 -21

Exhibit: 16. 10 Common Allowances in Expatriate Pay Packages 16 -22

Elements of Expatriate Compensation Salary Housing Taxes Allowances and Premiums 16 -23

Common Allowances in Expatriate Pay Packages Financial Allowances Social Adjustment Assistance Family Support 16 -24

Balance Sheet Approach n Premise – Employees on overseas assignments should have same spending power as they would in their home country n Home country is standard for all payments n Objectives – Ensure cost effective mobility of people to global assignments – Ensure expatriates neither gain nor lose financially – Minimize adjustments required of expatriates 16 -25

Exhibit 16. 11: Balance Sheet Approach 16 -26

Other Approaches: Compensation for Expatriates n Negotiation n Localization n Modified balance sheet n Decrease allowances n Lump-sum/cafeteria plan 16 -27

Expatriate Systems → Objectives? n How the expatriate pay system affects competitive advantage, customer satisfaction, quality, or other performance concerns n Lack of attention to aligning expatriate pay with organization objectives n Employee Preferences 16 -28

Borderless World--Borderless Pay? n Corporations attempting to become “globally integrated enterprises, ” are creating cadres of globalists: – Managers who operate anywhere in the world in a borderless manner n 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 16 -29