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VII. Comparing Costs
Comparisons of total compensation among nations can be very misleading.
Even if wage rates appear the same, expenses for health care, living costs, and other
employer-provided allowances complicate the picture.
oFor example, outside the U.S., many nations offer some form of national health
care. An organization may pay for it indirectly through payroll taxes, but since all
people in a nation share similar coverage, its value as part of total compensation is
diminished.
Comparisons between a specific U.S. firm and a specific foreign competitor
may be even more misleading. Accurate data are usually difficult to obtain.
oWhile consulting firms are improving their global data collection, much of their
data is still from U.S. companies’ operations in global locations. Other foreign and
local-national companies’ data are often not available.
oThus, international data may be biased toward U.S. companies’ pay practices.
A. Labor Costs and Productivity
Substantial differences in (average) labor costs do exist (Exhibit 16.9)
and companies may find that it makes sense to move or grow employment in
lower cost countries if productivity can be maintained at a workable level.
Most companies have to do their own analysis of the pros and cons of
where to locate employment. While differences in labor costs are often the
impetus to do the analysis, many other factors must be considered.
B. Cost of Living and Purchasing Power
If comparing total compensation is difficult, comparing living costs and
standards across borders is even more complex.
However, companies need such data to adjust pay for employees who
transfer among countries. The objective is to maintain the same level of
purchasing power.
Exhibit 16.12 provides several types of relevant types of relevant data
for this purpose.
VIII. Comparing Systems
We now know that pay systems differ around the globe and that the differences
relate to variations in economic pressures, sociopolitical institutions, and the diversity
of organizations and employees.
This section compares several compensation systems.
oThe caution about stereotyping raised earlier applies here as well.
oEven in nations described by some as homogeneous, pay systems differ from
business to business.
oSo as “typical” national systems are discussed students should remember that
differences exist and that change in these systems is occurring everywhere.
A. The Total Pay Model: Strategic Choices
The total pay model used throughout this book guides the discussion of
pay systems in different countries.
The basic choices, which seem universal, are:
oObjectives of pay systems
oExternal competitiveness
oInternal alignment
oEmployee contributions
oManagement
While the choices may be universal, the results are not.
IX. National Systems: Comparative Mind-Set
A national system mind-set assumes most employers in a country adopt similar
pay practices.
oUnderstanding and managing international compensation then consists mainly of
comparing the Japanese to the German to the U.S. or other national systems.
oThis method may be useful in nations with centralized approaches. Some even
apply it to regional services.
oThe national or regional mind-set overlooks variations among organizations
within each nation. Thus, the text refers to the national system discussed as the
“traditional” systems, to emphasize that this is one country model in each but not
the only one.
A. Japanese Traditional National System
Traditionally, Japan’s employment relationships were supported by
“three pillars”:
oLifetime security within the company
oSeniority-based pay and promotion systems
oEnterprise unions (decentralized unions that represent workers within a
single company)
Japanese pay systems tend to emphasize the:
oPerson rather than the job
oSeniority and skills possessed rather than job or work performed
oPromotions based on a combination of supervisory evaluation of
trainability, skill/ability levels, and performance rather than on
performance alone
oInternal alignment over competitors’ market rates
oEmployment security based on the performance of the organization and
the individual (formerly lifetime security)
Japanese pay systems can be described in terms of three basic
components: base pay, bonuses, and allowances/benefits.
Base Pay
oBase pay is not based on job evaluation or market pricing, nor is it
attached to specific job titles. Rather, it is based on a combination of
employee characteristics: career category, years of service, and
skill/performance level.
oCareer—Five career categories prevail in Japan:
General administration
Engineer/scientific
Secretary/office
Technician/blue-collar job
Contingent
oYears of Service—Seniority remains a major factor in determining base
pay.
Management creates a matrix of pay and years of service for
each career category.
Exhibit 16.13 shows a matrix for general administration work.
Companies meet periodically to compare their matrixes, a
practice that accounts for the similarity among companies.
In general, salary increases with age until workers are 50 years
old, when it is reduced.
Employees can expect annual increases no matter what their
performance level until age 50, although the amount of increase varies
according to individual skills and performance.
oSkills and Performance—Each skill is defined by its class (usually 7 to
13) and rank (1 to 9) within the class. Exhibit 16.14 illustrates a skill
salary chart for the general administration career category.
Employees advance in rank as a result of their supervisor’s
evaluation of their:
Effort (e.g., enthusiasm, participation, responsiveness)
Skills required for the work (e.g., analytical, decision making,
leadership, planning, process improvement, teamwork)
Performance (typical MBO-style ratings)
To illustrate how the system works, say you are a graduate fresh
from college who enters at class 1, rank 1:
After one year, you and all those hired at the same time are
evaluated by your supervisors on their effort, abilities, and
performance
Early in your career (the first three years) effort is more important;
in later years abilities and performance receive more emphasis.
The number of ranks you move each year (and therefore your
increase in base pay) depends on this supervisory rating.
Setting a minimum time in each class helps ensure that the
employee knows the work and returns value to the company.
However, the system slows the progress of high-potential
performers. Additionally, even the weakest performers eventually
get to the top of the pay structure, though they do not get the
accompanying job titles or responsibility.
The system reflects the traditional Japanese saying, “A nail that
is standing too high will be pounded down.”
An individual employee will not want to stand out.
Employees work to advance the performance of the group or team
rather than themselves.
Under the traditional Japanese system, since the Japanese system
is so seniority-based, labor costs increase as the average age of the
workforce increases.
In fact, a continuing problem facing Japanese employers is the
increasing labor costs caused by the cumulative effects of annual
increases and lifetime employment security.
Early retirement incentives and “new jobs” with lower salaries are
being used to contain these costs.
Bonuses
oBonuses provide additional pay equivalent to 1 to 5 months of annual
salary, depending on the level in the organization.
oGenerally, the higher up an employee is, the larger the percent of annual
salary received as bonus.
oThe bonuses are an expectable additional payment to be made twice a
year, even in bad financial times. They are not necessarily related to
performance.
oThe amount of bonuses is calculated by multiplying employees’ monthly
base pay by a multiplier.
The size of the multiplier is determined by collective bargaining
between employers and unions in each company. Sometimes the
multiplier may also vary according to an employee’s performance
evaluation.
oAccording to the Japan Institute of Labour, for most employees (other than
managers) bonuses are in reality variable pay that helps control the
employer’s cash flow and labor costs but are not intended to act as a
motivator or to support improved corporate performance.
oJapanese labor laws encourage the use of bonuses to achieve cost savings
by omitting bonuses from calculations of many other benefit costs (i.e.,
pension plan, overtime pay, severance pay, and early retirement
allowances).
oThe timing of the bonuses is very important.
In Japan both the summer festival and the new year are
traditional gift-giving times; in addition, consumers tend to make
major purchases during these periods.
Employees use bonuses to cover these expenses. Thus, the
tradition of the bonus system is deeply rooted in Japanese life and is
today considered an indispensable form of pay.
Benefits and Allowances
oThe third characteristic of Japanese pay systems, the allowance, comes in
a variety of forms:
Family allowances—vary with number of dependents
Commuting allowances
Housing and geographic differential allowances, and so on
Company housing in the form of dormitories for single
employees or rent or mortgage subsidies is a substantial amount.
Life-passage payments are made when an employee marries or
experiences a death in the immediate family.
oLegally Mandated Benefits—Legally mandated benefits in Japan include
social security, unemployment, and workers’ compensation.
Although these three are similar to the benefits in the United
States, Japanese employers also pay premiums for mandated health
insurance, preschool child support, and employment of the
handicapped.
B. German Traditional National System
Traditional German pay systems are embedded in a social partnership
between business, labor, and government that creates generous vater staat, or
“nanny state.” Vergutung is the most common German word for
“compensation”.
Pay decisions are highly regulated; over 90 different laws apply.
Different tariff agreements (pay rates and structures) are negotiated for
each industrial sector by the major employers and unions.
Methods for job evaluation and career progression are included in the
tariff agreements. However, these agreements do not apply to managerial jobs.
Even small organizations that are not legally bound by tariffs tend to use
them as guidelines.
Base Pay
oBase pay accounts for 70 to 80 percent of German employees’ total
compensation depending on their job level.
oIt is based on job descriptions, job evaluations, and employee age.
oThe tariff agreement applicable to Adam Opel AG, for example, sets the
following tariff groups (akin to job families and grades):
Wage earners 8 levels (L2–L9)
Salary earners 6 administrative levels (K1–K6)
6 technical levels (T1–T6)
4 supervisory levels (M1–M4)
oGenerally, a rate will be negotiated for one of the levels, for example, K2
and the other levels in that group will be calculated as a percentage of the
negotiated rate.
Bonuses
oWhile there is a trend toward performance-based bonuses, they have not
been part of a traditional German pay system for unionized workers.
oHowever, Adam Opel AG’s tariff agreement stipulates that an average of
13 percent of the total base wages must be paid as “efficiency
allowances.” Systems for measuring this efficiency are negotiated with the
works councils for each location
In reality, the efficiency allowances become expected annual
bonuses.
oPerformance bonuses for managerial positions not included in tariffs are
based on company earnings and other company objectives.
oCurrently only about one-third of top executives receive stock options.
Allowances and Benefits
oGermany’s social contract includes generous social benefits.
oThese nationally mandated benefits, paid by taxes levied on employers
and employees, include:
Liberal social security
Unemployment protection
Health care
Nursing care
Other programs
oEmployer and employee contributions to the social security system can
add up to more than one-third of wages.
oAdditionally, companies commonly provide other benefits and services
such as pension plans, savings plans, building loans, and life insurance.
Company cars are always popular. The make and the model of
the car and whether or not the company provides a cell phone are
viewed as signs of status in an organization.
German workers receive 30 days of vacation plus about 13
national holidays annually.
C. Strategic Comparisons: Traditional Systems in Japan, Germany, United
States
Looking at the average firms in each country, Japanese and German
traditional systems reflect different approaches compared to U.S. pay systems.
Exhibit 16.15 uses the basic choices outlined in the total pay model—
objectives, internal alignment, competitiveness, and contributions—as a basis
for comparisons.
Both the Japanese and German sociopolitical and cultural systems
constrain organizations’ use of pay as a strategic tool.
oGerman companies face pay rates, job evaluation methods, and bonuses
identical to those of their competitors, set by negotiated tariff agreements.
The basic strategic premise, that competitive advantage is sustained by
aligning with business strategy, is limited by laws and unions.
oJapanese companies do not face pay rates fixed industry-wide; rather, they
voluntarily meet to exchange detailed pay information. However, the end
result appears to be the same: similar pay structures exist across
companies competing within an industry.
oIn contrast, managers in U.S. companies possess considerable flexibility to
align pay systems with business strategies. As a result, greater variability
exists among companies within and across industries.
The pay objectives in traditional German systems include mutual
long-term commitment, security, egalitarian pay structures, and cost control
through tariff agreements, which apply to competitors’ labor costs too.
oJapanese organizations set pay objectives that focus on the long term (age
and security), support high commitment (seniority-based/ability-based),
are also more egalitarian, signal the importance of company and individual
performance, and encourage flexible workers (person-based pay).
oU.S. companies, in contrast, focus on the shorter term (less job security);
are market-sensitive (competitive total pay); emphasize cost control
(variable pay based on performance); reward performance improvement,
meritocracy, and innovation (individual bonuses and stock, etc.); and
encourage flexibility.
In Japan, person-based factors (seniority, ability, and performance) are
used to set base pay. Market comparisons are monitored in Japan, but internal
alignment based on seniority remains more important.
oJob-based factors (job evaluation) and seniority are also used in Germany.
Labor markets in Germany remain highly regulated, and tariff agreements
set pay for union workers.
So, like the Japanese system, the German system places much
greater emphasis on internal alignment than on external markets.
Each approach has advantages and disadvantages.
oThe Japanese approach is consistent with low turnover/high commitment
and high security, greater acceptance of change, and the need to be
flexible.
oU.S. firms face higher turnover and greater skepticism about change. U.S.
firms encourage innovation; they also recognize the contributions to be
tapped from workforce diversity.
oGerman traditional systems tend to be more bureaucratic and rule-bound.
Hence, they are more inflexible.
However, they also offer more stability for people.
oBoth the Japanese and German national systems face challenges from the
high costs associated with an aging work force.
oJapan has taken very limited advantage of women’s capabilities.
oThe U.S. challenges include the impact of increased uncertainty that
employees face, the system’s short-term focus, and employees’ skepticism
about continuous change.
D. Evolution and Change in the Traditional Japanese and German Models
The slow economic growth that Japan has experienced combined with
the emphasis in its traditional model on seniority-based pay creates a
challenge in controlling labor costs. At the same time, cheaper labor in
emerging Asian countries (e.g., China) puts further pressure on controlling
labor costs and/or increasing productivity.
oFaced with these pressures, many companies are trying to maintain
long-time employment (rather than lifetime employment) and are looking
for other ways to reward less senior employees.
oThese younger employees, who have been paid relatively poorly under the
seniority-based pay system, are increasingly finding alternative job
opportunities in non-Japanese firms operating in Japan, which have in past
rewarded individual ability and performance more strongly.
oTo compete, companies such as Toyota, Toshiba, and Mitsubishi are
increasingly using performance-based pay. As a result, more variation in
pay systems has emerged among traditional Japanese companies.
oThe Japanese model has moved closer to the U.S. model in some key
ways.
Turning to Germany, it is no longer all traditional manufacturing,
machine tools, and BMW.
oMany of the changes Germany are the result of global competitive
pressures and technological changes.
oLike many advanced economies, Germany, along with a number of other
Western European countries, faces serious challenges. An aging
population, low birth rates, earlier retirement ages, and high pension and
unemployment benefits are pushing up the costs of the social support
system.
oA relatively inflexible labor market means that employers are finding it
easier to move to (or expand in) other EU countries as well as to China
and India. All these factors are causing a rethinking of the traditional
German social contract and the resulting total compensation systems.
oCompanies are asking for greater autonomy in negotiating tariff
agreements to reflect each company’s economic conditions, the use of
performance-based pay, and ways to link job security to company
performance.
o47 percent of German companies now report that performance is highly
emphasized in compensation decisions and only 9 percent report that it
receives little emphasis. Performance is one of the most important factors
in promotion decisions as well.
oThe use of stock options in Germany has gone from near zero in 1990
(prior to the lifting of legal restrictions in 1998) to being commonplace in
large firms.
X. Strategic Market Mind-Set
A global study of pay systems used by companies with worldwide operations
identifies three general compensation strategies.
oLocalizer
oExporter
oGlobalizer
These approaches reflect the company’s business strategy.
A. Localizer: “Think Global, Act Local”
If a localizer operates in 150 countries, it may have 150 different
systems.
The company’s business strategy is to seek competitive advantage by
providing products and services tailored to local customers.
Localizers operate independently of corporate headquarters.
B. Exporter: “Headquarters Knows Best”
Exporters are virtual opposites of localizers. Exporters design a total pay
system at headquarters and “export” it worldwide for implementation at all
locations.
Exporting a basic system (with some adjustments for national laws and
regulations) makes it easier to move managers and professionals among
locations or countries without having to change how they are paid.
However, not everyone likes the idea of simply implementing what
others have designed.
C. Globalizer: “Think and Act Globally and Locally”
Similar to exporters, globalizers seek a common system that can be used
as part of the “glue” to support consistency across all global locations.
But headquarters and the operating units are heavily networked to share
ideas and knowledge.
Some believe the globalizer is the business model for the 21st century.
The point is that rather than emphasizing national pay systems as the key
to international compensation, the three strategic global approaches focus
first on the global business strategy and then adapt to local conditions.
