International Compensation

1. InternationalCompensation

2. Learning Objectives • 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. • Explain how certain key factors in the global guide – social contract, culture, trade unions, ownership and capital markets, managers’ autonomy – impact international pay systems. • Understand the key strategic differences among the pay systems of Japan, Germany and the U.S. using the total compensation model. • Discuss the three general compensation strategies used by companies with worldwide operations. • Describe the key features of expatriate pay systems.

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

4. Guide toInternational Compensation

5. The Social Contract Organizations Individuals Employment Relationship Government • Individuals • Unions • Union Federations • Organizations • Individual Employers • Employer Consortium Social Contract

6. Social Contractsand Pay Setting Highly Centralized Austria Belgium Cuba Hungary Poland Sweden Czech Republic Germany India Israel Japan Korea Slovakia Slovenia Argentina Brazil Canada France Hong Kong Mexico Singapore U.K. U.S.A. SOCIAL CONTRACT Localized Local Systems Sector/Industry-wide Systems Nationwide Systems PAY SETTING SYSTEMS

7. 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

8. 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

9. Hofstede’s Cultural Dimensions • Power Distance • Uncertainty Avoidance • Individualism – Collectivism • Masculinity – Femininity • Long-term – Short-term

10. The hourly cost of a production worker in manufacturing . . . . . . is made up from the salary paid directly to the worker before deductions . . . . . . and what an employer pays in social insurance and labor taxes. What those extra costs are as a percentage of salary. France $17.97 $12.36 $5.61 45.4% Germany $28.28 $20.94 $7.34 35.1% United States $18.24 $14.34 $3.90 27.2% Japan $19.37 $16.52 $2.85 17.3% Britain $15.47 $13.47 $2.00 14.8% Employment Practices Differ Among Nations: The Cost of an Employee

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

12. Comparing Costs • Factors affecting wage comparisons • Standard of livingcosts • Purchasing power • The Hamburger Standard

13. Strategic Similarities and Differences: An Illustrated Comparison

14. Strategic Similarities and Differences: An Illustrated Comparison

15. Strategic Similarities and Differences: An Illustrated Comparison

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

17. 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

18. Strategic Market Mind-Set (continued) 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

19. 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

20. 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

21. Objectives of Compensationand 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

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

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

24. 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

25. Exhibit 16.14: Balance Sheet Approach Equivalent salary and allowances, host country$10,200 Relocation Bonus $1,500 Taxes Base-country salary $7,000 Allowances paid by company $1,000 Base-country currency Taxes $2,000 Housing Housing $2,000 $700 Goods and Services $2,000 Goods and Services Reserve $1,000 Reserve

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