16 – 19 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
business, labor, and government that creates generous vater staat, or “nanny
state.”
o Vergutung is the most common German word for “compensation”.
o Pay decisions are highly regulated; over 90 different laws apply.
Base Pay
o Base pay accounts for 70-80% of German employees’ total compensation
depending on their job level.
▪ It is based on job descriptions, job evaluations, and employee age.
▪ The tariff agreement applicable to the German car company Adam
Opel AG, for example, sets the following tariff groups (akin to job
families and grades):
Wage earners 8 levels (L2–L9)
Bonuses
o While there is a trend toward performance-based bonuses, they have not
been part of a traditional German pay system for unionized workers.
o However, Adam Opel AG’s tariff agreement stipulates that an average of
13% of the total base wages must be paid as “efficiency allowances.”
Allowances and Benefits
Chapter Sixteen: International Pay Systems 16 – 20
o Germany’s social contract includes generous social benefits.
o These nationally mandated benefits, paid by taxes levied on employers
and employees, include:
▪ Liberal social security
▪ Unemployment protection
o Employer and employee contributions to the social security system can
add up to more than one-third of wages.
o Additionally, companies commonly provide other benefits and services
such as pension plans, savings plans, building loans, and life insurance.
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.
o German companies face pay rates, job evaluation methods, and bonuses
identical to those of their competitors, set by negotiated tariff agreements.
o In contrast, managers in U.S. companies possess considerable flexibility to
align pay systems with business strategies.
• The pay objectives in traditional German systems include mutual long-term
16 – 21 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
commitment, security, egalitarian pay structures, and cost control through
tariff agreements, which apply to competitors’ labor costs too.
o Japanese organizations set pay objectives that focus on the long term (age
and security),
o U.S. companies, in contrast, focus on the shorter term (less job security);
▪ are market-sensitive (competitive total pay);
• In Japan, person-based factors (seniority, ability, and performance) are used to
set base pay.
o Market comparisons are monitored in Japan, but internal alignment based
on seniority remains more important.
o Job-based factors (job evaluation) and seniority are also used in Germany.
▪ Labor markets in Germany remain highly regulated, and tariff
• Each approach has advantages and disadvantages.
o The Japanese approach is consistent with low turnover/high commitment
and high security, greater acceptance of change, and the need to be
flexible.
o U.S. firms face higher turnover and greater skepticism about change.
o U.S. firms encourage innovation; they also recognize the contributions to
D. Evolution and Change in the Traditional Japanese and German Models
Chapter Sixteen: International Pay Systems 16 – 22
• 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.
o At the same time, cheaper labor in emerging Asian countries (e.g., China)
puts further pressure on controlling labor costs and/or increasing
productivity.
o To 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.
o Likewise, Exhibit 16.17 shows that Japan is similar to other countries such
as the U.S. in its degree of performance-based differentiation in the merit
increase process.
• China too moved toward pay for performance many years ago.
o The fact the China, Korea, and Japan are medium high or high on
collectivism and uncertainty avoidance,
▪ characteristics thought to be inconsistent with individual pay for
• Turning to Germany, it is no longer all traditional manufacturing, machine
tools, and BMW.
o Many of the changes in Germany are the result of global competitive
16 – 23 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
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.
• Studies report substantial changes in the traditional German model, including
greater use of pay for performance, similar to the shifts seen in Japan.
o As Exhibit 16.16 indicates, 47% of German companies now report that
performance is highly emphasized in compensation decisions and only 9%
report that it receives little emphasis.
o Exhibit 16.17 demonstrates the magnitude of merit pay increases for top
versus average performers is similar in Germany, China, the U.S., and the
U.K., with Japan being somewhat different.
X. Strategic Market Mind-Set
• A global study of pay systems used by companies with worldwide operations
identifies three general compensation strategies.
o Localizer
• 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.
o The company’s business strategy is to seek competitive advantage by
providing products and services tailored to local customers.
o Localizers operate independently of corporate headquarters.
Chapter Sixteen: International Pay Systems 16 – 24
B. Exporter: “Headquarters Knows Best”
• Exporters are virtual opposites of localizers.
o Exporters design a total pay system at headquarters and “export” it
worldwide for implementation at all locations.
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.
• Some believe the globalizer is the business model for the 21st century.
o The point is that rather than emphasizing national pay systems as the key
XI. Expatriate Pay
• Multinationals operate, by definition, in many nations.
o Employees temporarily working and living in a foreign country are called
expatriates (or “expats”).
▪ Expatriates who are citizens of the employer’s parent or home country and
living and working in another country (e.g., a Japanese citizen working for
• Hiring LCNs has advantages.
o LCNs know local conditions and have relationships with local customers,
suppliers, and government regulators.
16 – 25 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
rarely do organizations decide that hiring LCNs is inappropriate.
• Expats or TCNs may be brought in for a number of reasons.
o The foreign assignment may represent an opportunity for selected employees to
• Exhibit 16.18 catalogs a number of reasons for asking employees to take work
assignments in another country.
• Designing expatriate pay systems is a challenge.
A. Elements of Expatriate Compensation
• Exhibit 16.19 is a shopping list of items that can make up expatriate
compensation.
o The list includes everything from household furnishing allowances to
language and culture training, spousal employment assistance, and rest
and relaxation leaves for longer-term assignments.
o Usually such lists are organized into four major components:
▪ Salary
Salary
o The base salary plus incentives (merit, eligibility for profit sharing, bonus
plans, etc.) for expatriate jobs is usually determined via job evaluation or
some system of “job leveling.”
Taxes
o Income earned in foreign countries has two potential sources of income
tax liability.
▪ With few exceptions, foreign tax liabilities are incurred on income
Chapter Sixteen: International Pay Systems 16 – 26
earned in foreign countries.
▪ The other potential liability is the tax owed in the employee’s home
country.
o The United States has the dubious distinction of being the only developed
country that taxes its citizens for income earned in another country, even
though that income is taxed by the country in which it was earned.
Housing
o Most international companies pay housing allowances or provide
company-owned housing.
Allowances and Premiums
o Cost-of-living allowances, club memberships, transportation assistance,
childcare and education, spousal employment, local culture training, and
personal security are some of the many service allowances and premiums
expatriates receive.
o The logic supporting these allowances is that foreign assignments require
that the expatriate:
▪ Work with less direct supervision than a domestic counterpart
B. The Balance Sheet Approach
• Most North American, European, and Japanese global firms combine these
elements of pay in a balance sheet approach.
o It is based on the premise that employees on overseas assignments should
have the same spending power as they would in their home country.
o Therefore, the home country is the standard for all payments. The
objective is to:
16 – 27 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
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Education.
▪ Ensure mobility of people to global assignments as cost-effectively as
feasible
▪ Ensure that expatriates neither gain nor lose financially
▪ Minimize adjustments required of expatriates and their dependents
o Notice that none of these objectives link (explicitly) to performance.
o Exhibit 16.20 depicts the traditional balance sheet approach.
▪ Home-country salary is the first column.
▪ A person’s salary (based on job evaluation, market surveys, merit, and
incentives) must cover taxes, housing, and good and services, plus
other financial obligations (a reserve).
• However, equalizing pay may not motivate an employee to move to another
country, particularly if the new location has less personal appeal.
• If gaining international experience is really one of the future competencies
required by organizations, then the need for such bonuses ought to be reduced,
since the expatriate experience should increase the likelihood of future
promotions.
o Either the experience expatriates obtain is unique to each situation and
therefore not transferable or companies simply do not know how to value
it.
o While international experience could have a handsome payoff in later
promotions for some, this payoff is not certain and not true for all.
▪ Consistent with agency theory, a compensating differential for risk
may be required.
Alternatives to Balance Sheet Approach
Chapter Sixteen: International Pay Systems 16 – 28
o Employers continue to explore alternatives to the balance sheet, due
o Negotiation simply means the employer and employee find a mutually
agreeable package.
▪ The arrangements tend to be relatively costly, create comparability
problems when other employees are asked to locate overseas, and need
to be negotiated with each transfer.
o Another alternative, localization, or local plus, ties salary to the host
country’s salary scales and provides some cost-of-living allowances for
taxes, housing, and dependents.
o While the balance sheet approach ties salary to the home country, the
modified balance sheet ties salary to a region (Asia-Pacific, Europe, North
America, Central America, or South America).
▪ The logic is that if an employee of a global business who relocates
o The lump-sum/cafeteria approach offers expats more choices.
▪ This approach sets salaries according to the home-country system and
o Finally, a company can consider using fewer expatriates and more local
country nationals.
▪ Such a strategy has many advantages, including lower cost, and greater
familiarity with the aspects of the business environment unique to that
country.
▪ Another advantage is that such a strategy can be combined with a
16 – 29 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
strategy of greater integration of talent into the career planning and
development system.
▪ Greater use of third-country nationals (TCNs) can also fit this
strategy. TCNs can be less expensive if they come from countries
having lower compensation levels.
C. Expatriate Systems → Objectives? Quel dommage!
• When talking to experts in international compensation, the complexities of
taxes, exchange rates, housing differences, and the like become clear.
• Expatriate pay systems do emphasize maintaining employee purchasing power
and minimizing disruptions and inequities.
o But the lack of attention to aligning expatriate pay with organization
objectives is glaring.
o Sadly, the major innovation in expat pay over the past decade seems to
have been to re-label expats and TCNs as “international assignees.”
• The expatriate pay must be sufficient to encourage the employee to take the
assignment yet not be so attractive that local nationals will feel unfairly
treated or that the expatriate will refuse any future reassignments.
Employee Preferences
o Beyond work objectives, costs, and fairness, an additional consideration is
employees’ preferences for international assignments.
o For many Europeans, working in another country is just part of a career.
o For many U.S. employees, leaving the United States means leaving the
Chapter Sixteen: International Pay Systems 16 – 30
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
▪ Only 5% believe their company values overseas experience
▪ 77% have less disposable income when they return home
▪ Only 13% of U.S. expatriates are women (yet 49% of all U.S.
managers and professionals are women)
▪ More than half of returning expatriates leave their company within one
year
XII. Borderless World → Borderless Pay? Globalists
• Some corporations, particularly those attempting to become “globally integrated
enterprises,” are creating cadres of globalists: managers who operate anywhere in the
world in a borderless manner.
• Focusing on expatriate compensation may blind companies to the issue of appropriate
pay for employees who seek global career opportunities.
o Ignoring these employees causes them to focus only on the local operations, their
XIII. Your Turn: Globalization of the Labor Market: The English Premier League
Summary of Case
Three of the top five most valuable sports teams in world are soccer teams. English
players are now the minority, from 69% to 31%. The English Premier League, where one
of those top three teams play, is the top soccer league in the world based on revenue
generated. Greg Dyke, chairman of the Football Association, which governs English
soccer, has proposed limits on the number of foreign players in the Premier League.
Learning Objective
Discuss and explain the global impact of placing player limits on the game of soccer.
Discussion of Case Questions
1. Has the globalization of the English Premier League been a good thing? Who is
16 – 31 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
better off as a result? Who is worse off? Think carefully about owners,
fans/consumers, and players. Are there others who have been affected as well?
Student’s answer will vary with their views on globalization. Globalizing soccer is
generally a good thing for owners, fans, and players. Owners can generate more revenue
2. Consider the proposal by Mr. Dyke to limit the number of foreign players in the
English Premier League. Take the perspective of owners, players, and
fans/consumers. Who would benefit and who would lose under this proposal?
3. Do players from England play in elite leagues outside of England? Does that affect
your evaluation of the proposal? If so, how?
4. One concern expressed by Mr. Dyke is that the English national team may be
suffering because fewer English players can develop in the English Premier League.
Jürgen Klinsmann, coach of the U.S. National team has criticized players who play in the
Major League Soccer (MLS) league in the United States, rather than in one of the European
elite leagues, because he feels MLS does not provide strong enough competition for the U.S.
players to develop their full potential. Comment on the arguments by Mr. Dyke and Mr.
Klinsmann. What would be best for the English national team?
Chapter Sixteen: International Pay Systems 16 – 32
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Source: Lipka, Michael, and Inkpen, Christoper. “Where World Cup footballers play
during the regular season.” PewResearchCenter, Factank: News in the Numbers. June 6,
2014. http://www.pewresearch.org/fact-tank/2014/06/06/where-world-cup-footballers-
play-during-the-regular-season/ . Accessed November 22, 2018.
Answers to Review Questions
1. Rank the factors in the global guide according to your belief in their importance for
understanding and managing compensation. How does your ranking differ from
those of your peers? From those of international peers? Discuss how the rankings
may change over time.
Student responses will vary as to their rankings of the factors in the global guide.
The following suggested rankings are recommended:
• Institutional variations
2. Distinguish between nationwide and industrywide pay determination. How do they
compare to a business strategy-market approach?
Nationwide pay determination is a highly centralized approach with significant
government involvement, i.e. laws and regulations. Industrywide pay determination is
3. Develop arguments for and against “typical” Japanese–style, “typical” German-style,
and “typical” U. S. -style approaches to pay. Using the global guide, what factors are
causing each approach to change?
Japanese pay systems tend to emphasize the following:
• Person rather than the job
16 – 33 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
• Internal alignment over competitors’ market rates
• Employment security based on the performance of the organization and the individual
(formerly lifetime security)
German pay systems are embedded in a social partnership between business, labor, and
government. Pay decisions are highly regulated; over 90 different laws apply. The major
employers and unions negotiate different tariff agreements (pay rates and structures), for
each industrial sector. Methods for job evaluation and career progression are included in
The U.S. approach to pay has several advantages. U.S. companies possess considerable
flexibility to align pay systems with business strategies, which results in greater variability
among companies within and across industries. The U.S. pay system supports
4. Distinguish between global workers, expatriates, local nationals, and third-country
nationals.
Global workers or globalists are managers who operate anywhere in the world in a
borderless manner.
Employees temporarily working and living in a foreign country are called expatriates (or
“expats”).
5. In the balance sheet approach to paying expats, most of total compensation is linked
to costs of living. Some argue that expatriate pay resembles a traditional Japanese
pay system. Evaluate this argument.
The premise of the expatriate pay approach is that employees on overseas assignments
should have the same spending power as they would in their home country. Therefore, the
home country is the standard for all payments. The objective is to:
Arguments in favor of the comparison:
• Both approaches aim at increasing the flexibility of their workforce
Arguments against the comparison:
• While the traditional Japanese approach has a long-term focus, the expatriate pay
approach focuses only the short-term.
16 – 35 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
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Education.
the traditional Japanese system, bonuses vary with performance only at higher levels
in the organization.
• The expatriate pay approach ignores the aspect of external competitiveness—
matching pay with competitors—to a large extent. In the Japanese approach, pay is
consistent with competitors.
• The expatriate approach offers lesser predictability, especially for the employees.
Evidence shows that 68% of expatriates do not know what their jobs will be when
they return home. The Japanese approach offers greater predictability for companies
and employees.