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CHAPTER SIXTEEN
INTERNATIONAL PAY SYSTEMS
Overview
Around the world, global competitive forces have changed the way people work and how they
get paid. The globalization of businesses, financial markets, trade agreements, and even labor
markets is affecting every workplace and every employment relationship. Employee
compensation is central to the workplace, and embedded in the different
political-socioeconomic arrangements found around the world.
The first section of the chapter focuses on the global guide to international compensation.
Understanding international compensation begins with recognizing variations (differences and
similarities) and figuring out how best to manage them—how people get paid around the world
depends on variations in the factors in the global guide. The global guide includes four general
factors—economic, institutional, organizational, and employee—with sub factors. Five of
these sub factors are particularly relevant to the understanding of international compensation—
social contract, culture, trade unions and employee involvement, ownership and financial
markets, and managerial autonomy. The significance of these factors in explaining
international pay is described. Then, issues related to comparing costs of total compensation
among nations are discussed.
The next section of the chapter concentrates on comparing compensation systems in Japan,
Germany, and the U.S. using the strategic choices of the total pay model. Three general
compensation strategies—localizer, exporter, and globalizer—used by companies with
worldwide operations are described. Next, the key features associated with expatriate pay are
presented. Finally, the chapter concludes by raising the issue of borderless pay systems to
allow managers to operate anywhere in the world in a borderless manner.
Learning Objectives
Understand the global context and the social contract of international pay systems,
including the importance of national culture, trade unions and employee involvement,
ownership and financial markets, and managerial autonomy.
Compare and contrast labor costs and productivity, cost of living and purchasing power
between countries.
Evaluate the national pay systems of the United States, Japan, and Germany and
identify the strategic market mind-sets of the localizer, the exporter, and the globalizer.
Discuss the elements of expatriate compensation including the balance sheet approach
and the objectives of expatriate compensation systems.
Lecture Outline: Overview of Major Topics
I. The Global Context
II. The Social Contract
III. Culture
IV. Trade Unions and Employee Involvement
V. Ownership and Financial Markets
VI. Managerial Autonomy
VII. Comparing Costs (And Productivity)
VIII. Comparing Systems
IX. National Systems: Comparative Mind-Set
X. Strategic Market Mind-Set
XI. Expatriate Pay
XII. Borderless World → Borderless Pay? Globalists
XIII. Your Turn: IBM’s Worldwide Business and Employment Strategies and Compensation
XIV. Still Your Turn: Globalization of the Labor Market: The English Premier League
Lecture Outline: Summary of Key Chapter Points
All around the world, decentralized pay-setting competitive forces have changed the way
people work and how they get paid. China’s employment system has experienced a
“fundamental transformation from stable and permanent employment with good benefits (often
called the iron rice bowl) to a system characterized by highly precarious employment with no
benefits for about 40 percent of the population.” Among the largest U.S. companies, about
three-fourths of new jobs in recent years were added not in the United States, but rather
overseas.
Global acquisitions of former competitors change pay systems. For example, Prior to
Daimler’s acquisition of Chrysler in 1998, the pay for Chrysler’s CEO was equal to the
combined total pay of the top 10 Daimler executives. As little as 25 percent of Chrysler
managers’ total compensation was in the form of base pay, whereas Daimler managers’ base
pay accounted for up to 60 percent of their total compensation. The merged DaimlerChrysler
adopted a Chrysler-like approach to executive compensation.
Sometimes, changes in pay are directly tied to cataclysmic sociopolitical change, as in China,
Russia, and Eastern Europe, where government authorities had long dictated pay rates. Now
companies in these countries face the challenge of devising pay systems responsive to business
and market pressures while maintaining a sense of social justice among the people. In China,
the only hope for profitability in many state-owned enterprises is to cut the massively bloated
head count. Yet an army of unemployed people without social support is a threat to government
survival. China may still be striving to become a worker’s paradise, but the experimentation
with compensation approaches might already qualify it as a pay pundit’s paradise.
However, too much change and experimentation can have a dark side that threatens to create
social unrest.
I. The Global Context
Understanding international compensation begins with recognizing differences
and similarities and figuring out how best to manage them.
oHow people get paid around the world depends on variations shown in Exhibit
16.1—economic, institutional, organizational, and employee characteristics.
Organizations must first determine the degree to which each of these contextual
factors constrain their compensation decisions and practices.
oSome constraints are regulatory (i.e., laws), while others may be more normative
(national culture, the social contract).
oIn some cases (e.g., laws/regulations), there may be little room to exercise
strategy. On the other hand, in the case of other contextual factors (e.g., national
culture), the constraint may be less than often believed.
oSo, to be sure, there are differences, on average, between organizations,
depending on the country. However, there is also evidence that different
management approaches are used within the same country.
To the degree that strategy can be exercised, an organization must decide the
degree to which it will choose compensation practices similar to those used by other
organizations and the degree to which it will be different.
oBeing the same is perhaps less risky, but, following the pack means there is little
chance to stand out from the pack and thus little chance to achieve anything better
than average performance.
oAlso, in the international context, it is not always simple to follow the pack.
oEvidence indicates that multinational corporations (MNCs) are influenced by both
the institutional pressures in their home country and in the local context.
Finally, organizations may weigh the home and local country context differently
of different jobs.
Five contextual factors are especially relevant in international compensation.
These are variations in:
oSocial contracts, including the legal framework and regulation
oCultures
oTrade unions
oOwnership and financial markets
oManagers’ autonomy
These five factors overlap and interact with each other.
II. The Social Contract
Viewed as part of the social contract, the employment relationship is more than
an exchange between an individual and an employer.
oIt includes the government, all enterprise owners (sometimes acting individually
and sometimes collectively through owner associations), and all employees
(sometimes acting individually and sometimes in trade unions). The relationships
and expectations of these parties form the social contract.
Different people in different countries hold differing beliefs about the role of
government, employees, unions, and employers.
Understanding how to manage employee compensation in any country requires
an understanding of the social contract in that country
Changing employee compensation systems—for example, to make them more
responsive to the customers, encourage innovative and quality service, or control
costs—require changing the expectations of parties to the social contract.
The social contract evolves over time, sometimes very quickly.
oCompared to many countries (e.g., those in the European Union), government has
traditionally played a relatively modest role in the employment relationship.
However, the role has recently greatly expanded, at least in two key sectors of the
U.S. economy:
Automobiles—Chrysler and General Motors (GM) have recently gone
through bankruptcy and upon their exit, major shareholders were the United
Automobile Workers (UAW) union and the U.S. government (in return for the
many billions in funds it has provided to stave off liquidation).
Financial services—the U.S. government played a major role recently in
saving firms, either by:
Providing funds (e.g., Citibank, Goldman Sachs, Capital One, and many
others) under the Troubled Assets Relief Program (TARP)
Actively facilitating mergers and acquisitions (e.g., Bank of America’s
acquisition of Merrill Lynch)
In summary, the social contract in the United States, known for the small role of
government and the lack of a tripartite relationship between government, employees
(and their representatives), and employers, has done a rapid “about face,” at least in
two of its major industries.
A. Centralized or Decentralized Pay-Setting
Perhaps the most striking example of the social contract’s effects on pay
systems is in Exhibit 16.2, which contrasts the degree of centralization of pay
setting among countries.
oCompanies in the United States, United Kingdom, and some central
European countries use highly decentralized approaches with little
government involvement.
oIn contrast, in western and northern European countries, wage bargaining
is more likely to be centralized, taking place primarily at the industry or
national level, with government involvement being typical in
national-level bargaining countries.
Although understanding differences in wage bargaining levels is
important, it should also be understood that things continue to evolve. Even
where bargaining is primarily centralized, there is also typically bargaining at
other levels.
Likewise, there may be exceptions under particular circumstances that
permit companies to deviate from the centralized agreement.
Thus, differences across countries in the degree of pay-setting
centralization translate, but not perfectly, into differences in wage flexibility.
oSuch flexibility is generally desirable to employers who do not want to be
“locked in” to a particular wage level when product market conditions
(i.e., level and growth of sales and profits) are in flux.
Exhibit 16.3 shows judgments of wage flexibility gathered from an
international sample of executives.
B. Regulation
The social compact also relates to the legal/regulatory environment for
human resource decisions in each country.
The country differences in wage flexibility relate not only to degree of
bargaining centralization, but also to regulatory restrictions such as maximum
hours of work.
Another indicator of employment regulation (i.e., restriction on
flexibility) is the degree of legal restriction in hiring and firing workers.
As shown in Exhibit 16.4, employers in the United States have more
flexibility than employers in the European Union, South America, and Japan.
As a final example of how the legal framework comes into play and
affects employer flexibility, consider the role of works councils and
co-determination in a European country like Germany.
oA works council may be formed by employees in any business unit having
five or more permanent employees.
oIt operates separately from the trade union and collective bargaining
process (although works council members are often union members) and
may not, for example, call a strike.
oAn employer must consult the Works Council and give it an opportunity to
respond prior to taking actions in the area of compensation as well as in a
wide range of other human resource and operational areas.
oThe Works Council has “veto-rights and rights of consent” including “the
right to block management decisions until an agreement is reached or a
decision by the labor court is taken overruling the veto.”
oThe co-determination law in Germany requires that in companies with 500
to 2000 employees, one-third of the supervisory board must be employee
representatives.
In companies with over 2000 employees, one-half of the board
must be composed of employee representatives.
By way of contrast, neither works councils or co-determination
are legally required in the United States and are quite rare.
oIn Europe, like in the United States, laws can also vary within countries.
Further, there are also directives that apply across countries such as that
dealing with working time in the European Union (EU).
oAnother EU directive gives employees the right to information and
consultation on company decisions in companies having 1,000 or more
employees, including 150 or more in at least two member countries
through the establishment of a European works council.
oThus, a company operating in multiple EU countries might have
consultation obligations with a works council in each country as well as a
European works council.
The EU has a goal of providing common labor standards in all its
member countries. The purpose of standards is to avoid “social
dumping,” or the relocation of a business in a country with lower
standards and labor costs.
Finally, the social compact in Europe, with its regulatory and
institutional limits on employer flexibility and protection of workers, comes at
a cost.
oA longstanding literature seeks to determine whether more generous
worker protection undermines incentives for workers to put forth effort on
the job and look for work (thus resulting in higher unemployment rates
and higher public expenditures).
oExhibit 16.5 shows that the tax burden in countries like Germany and
France is more than 60 percent higher than in the United States, Canada,
Australia, and Japan.
oOne purpose of these higher taxes is to help insulate workers from income
losses due to unemployment.
oAs exhibit 16.6 indicates, Germany, as well as some other EU countries,
spends nearly 10 times as much as the United States on unemployment
benefits.
III. Culture
Culture is defined as shared mental programming which is rooted in the values,
beliefs, and assumptions held in common by a group of people and which influences
how information is processed.
oThe 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.
oThe job of the global manager, according to this assumption, is to define the
national characteristics that influence pay systems.
oTypical of this thinking is the widely used list of national cultural attributes
proposed by Hofstede (Exhibit 16.7):
Power distance
Uncertainty avoidance
Individualism
Masculinity-femininity
Long-term versus short-term orientation
oAdvocates of this view believe that “it is crucial that companies adjust their
compensation practices to the cultural specifics of a particular host country.”
oIn Malaysia and Mexico, where the culture is alleged to emphasize respect for
status and hierarchy (high power distance), hierarchical pay structures are
appropriate.
In low-power-distance nations such as Australia and the Netherlands,
egalitarianism is a better approach.
oCompanies operating in nations with supposedly “collectivistic” cultures, such as
Singapore, Japan, Israel, and Korea, should use egalitarian pay structures, equal
pay increases, and group-based rather than individual-based performance
incentives.
Employers in the more “individualistic” national cultures, such as the
United States, United Kingdom, and Hong Kong, should use individual-based
pay and performance-based increases.
But such thinking can result in stereotyping. The question is not, What are the
cultural differences among nations? Rather, the question is, Which culture matters?
oAny group of people may exhibit a shared set of beliefs.
oCultures may be similar or different among various categories.
A. Is National Culture a Major Constraint on Compensation?
Re-analysis of data from Hofstede’s seminal work on national
differences in culture finds that the variance between individuals within
countries is far larger than the variance between countries.
In other words, knowing what country someone is from tells us much
less than the national culture literature seems to suggest.
The notion of a national culture is useful when managing international
pay. In the absence of better data on variations such as those in Exhibit 16.8, it
may offer a starting point.
National culture can be thought of as the “average” in Exhibit 16.8. It
provides some information about what kinds of pay attitudes and beliefs you
are likely to find in an area.
But overreliance on the “average” can seriously mislead.
oTo claim that all organizations and people within any nation share a
certain mind-set ignores variations and differences within each nation, and
reviews of empirical work bear out the fact that differences in worker
preferences across countries for the use of performance-based pay, for
example, tend to be small in practice.
oConsiderable diversity among companies and people within any country
exists.
The interplay among economic, institutional, organizational, and
individual conditions within each nation or region, taken as a whole, forms
distinct contexts for determining compensation. Understanding these factors
in the global guide is useful for managing employee compensation.
oUnderstanding the full range of individuals within nations is even more
important.
IV. Trade Unions and Employee Involvement
Europe remains highly unionized.
oIn Sweden, 71 percent of the workforce belongs to unions; in the United
Kingdom, 28 percent; and in Italy, 33 percent.
Asia is less heavily unionized.
oJapan’s unionization rate is 18 percent, and South Korea’s is around 10 percent.
In some countries, workers’ pay is set by collective agreements even though the
workers may not be union members.
oIn France, for example, more than 90 percent of workers are covered by collective
agreements, even though fewer than 10 percent are union members.
In addition to having higher rates of unionization, workers in countries like
Germany have the right to establish works councils, which must be involved in any
changes to a pay plan.
V. Ownership and Financial Markets
Ownership and financing of companies differ widely around the world.
These differences are important to international pay.
In the U.S., corporate ownership and access to capital is far less concentrated
than in most other countries.
oFifty percent of American households own stock in companies either directly or
indirectly through mutual funds and pension funds. Direct stock ownership is only
a few mouse clicks away.
oIn Korea, for example, six conglomerates control a significant portion of the
Korean economy, and the six are closely linked with specific families.
oIn Germany, the national Bundesbank and a small number of other influential
banks have ownership interests in most major companies.
The different patterns of ownership make certain types of pay systems almost
nonsensical because ownership in the companies is not readily available for
individual investors.
oFor example, linking performance bonuses to increased shareholder value or
offering stock options to employees makes little sense in the large conglomerates
in Germany, Korea, and Japan.
oHowever, ownership in small start-ups in the nations is outside the traditional
channels, so these firms do offer stock options to attract new employees.
oRecent tax law changes in many countries have made stock options more
attractive, but limited ownership of many companies remains the rule.
The most vivid illustrations of the importance of ownership occur in China and
in eastern Europe (Poland, Hungary, Slovenia, Czech Republic, and Slovakia), where
a variety of forms are emerging.
oWhile state-owned enterprises still employ two-thirds of all workers in China,
township enterprises, wholly privately owned enterprises, joint ventures with
foreign companies, and wholly owned foreign enterprises (WOFEs) account for
50 percent of the profits.
oChinese employees switching from government-owned enterprises to these newer
organizations find that both the pay and the employer expectations (i.e., the social
contract) are substantially different.
oOne study found that those working for local or town-owned enterprises prefer
more performance-based pay than those working in federal-owned enterprises.
oMany families find it makes sense to have one wage earner working at a safe but
low-paying government enterprise and another wage earner working at a private
enterprise where expectations and pay are high.
So it is clear from the examples discussed above that ownership differences may
influence what forms of pay make sense.
VI. Managerial Autonomy
Managerial autonomy, an organizational factor in the global guide in Exhibit
16.1, refers to 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.
oMost U.S. and U.K.-based organizations have relatively greater freedom to
relative change employee pay practices or to hire and downsize than do most
European companies.
oThe centralized pay setting found in European Union countries limits
organizations’ autonomy to align pay to business strategies and changing market
conditions.
oIn contrast, in Singapore, the National Wage Council issues guidelines that are
voluntary. Most government organizations adhere to these guides, but private
organizations do so to varying degrees.
Governments and trade unions are not the only institutions to limit managerial
autonomy. Corporate policies often do so as well.
oCompensation decisions made in the home-country corporate offices and exported
to subunits around the world may align with the corporate strategy but discount
local economic and social conditions.
In sum, as the global guide depicts, international compensation is influenced by
economic, institutional, organizational, and individual conditions. Globalization really
means that these conditions are changing—hence international pay systems are
changing as well.
