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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
Learning Objectives
• Understand the global context and the social contract of international pay systems.
• 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.
• Discuss the elements and objectives of expatriate compensation systems.
Chapter Sixteen: International Pay Systems 16 – 2
Lecture Outline: Overview of Major Topics
I. The Global Context
II. The Social Contract
A. Centralized or Decentralized Pay-Setting
B. Regulation
III. Culture
A. Is National Culture a Major Constraint on Compensation?
IV. Trade Unions and Employee Involvement
V. Ownership and Financial Markets
VI. Managerial Autonomy
VII. Comparing Costs (And Productivity)
A. Labor Costs and Productivity
B. Cost of Living and Purchasing Power
VIII. Comparing Systems
A. The Total Pay Model: Strategic Choices
IX. National Systems: Comparative Mind-Set
A. Japanese Traditional National System
B. German Traditional National System
C. Strategic Comparisons: Traditional Systems in Japan, Germany, U.S.
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Lecture Outline: Summary of Key Chapter Points
All around the world, competitive forces have changed the way people work and how they get
paid.
• Japanese companies have dismantled their seniority-based pay systems and moved to
merit-based pay and Toshiba now offers stock awards, once illegal in Japan.
• European companies are shifting to variable pay and performance-based appraisal.
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% of Chrysler managers’ total compensation was in the form of base pay,
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.
However, too much change and experimentation can have a dark side that threatens to create
social unrest.
• Following the breakup of the USSR, workers reported going unpaid for months.
• So it is a time of unprecedented global change. Or is it?
Chapter Sixteen: International Pay Systems 16 – 4
I. The Global Context
• Understanding international compensation begins with recognizing differences and
similarities and figuring out how best to manage them.
o How 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.
o Some constraints are regulatory (i.e., laws), while others may be more normative
(national culture, the social contract).
• 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.
o Being 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
• Finally, organizations may weigh the home and local country context differently for
different jobs.
• Five contextual factors are especially relevant in international compensation. These
are variations in:
o Social contracts, including the legal framework and regulation
o Cultures
II. The Social Contract
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• Viewed as part of the social contract, the employment relationship is more than an
exchange between an individual and an employer.
o It includes the government,
• Different people in different countries hold differing beliefs about the role of
government, employees, unions, and employers.
o Understanding how to manage employee compensation in any country requires an
• The social contract evolves over time, sometimes very quickly.
o Compared to many countries (e.g., those in the European Union), government has
traditionally played a relatively modest role in the employment relationship.
o 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
▪ Financial services
• The U.S. government played a major role recently in saving firms, either
by:
• 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.
Chapter Sixteen: International Pay Systems 16 – 6
o Companies in the United States, United Kingdom, and some central
European countries use highly decentralized approaches with little
government involvement.
• Although understanding differences in wage bargaining levels is important, it
should also be understood that things continue to evolve.
o Even where bargaining is primarily centralized, there is also typically
bargaining at other levels.
o Likewise, there may be exceptions under particular circumstances that
• Exhibit 16.3 shows judgments of wage flexibility gathered from an
international sample of executives.
o This shows that countries with more centralized bargaining levels
B. Regulation
• The social contract also relates to the legal/regulatory environment for human
resource decisions in each country.
o 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
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o A works council may be formed by employees in any business unit having
five or more permanent employees.
o It operates separately from the trade union and collective bargaining
o The 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
• In Europe, like in the United States, laws can also vary within countries.
o Further, there are also directives that apply across countries such as that
dealing with working time in the European Union (EU).
o Another EU directive gives employees the right to information and
consultation on company decisions in companies having 1,000 or more
• Finally, the social compact in Europe, with its regulatory and institutional
limits on employer flexibility and protection of workers, comes at a cost.
o A 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
Chapter Sixteen: International Pay Systems 16 – 8
Australia, and Japan.
o One purpose of these higher taxes is to help insulate workers from income
losses due to unemployment.
o As exhibit 16.6 indicates, European countries spend more here than the
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.
o The 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.
o The job of the global manager, according to this assumption, is to define the
national characteristics that influence pay systems.
o Typical of this thinking is the widely used list of national cultural attributes
proposed by Hofstede (Exhibit 16.7):
▪ Power distance
o Advocates of this view believe that “it is crucial that companies adjust their
compensation practices to the cultural specifics of a particular host country.”
▪ In Malaysia and Mexico, where the culture is alleged to emphasize respect for
• Companies operating in nations with supposedly “collectivistic” cultures,
o such as Singapore, Japan, Israel, and Korea,
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o should use individual-based pay and performance-based increases.
• But such thinking can result in stereotyping.
o The question is not: “What are the cultural differences among nations?”
o Rather, the question is: “Which culture matters?”
A. Is National Culture a Major Constraint on Compensation?
• In the author’s view, theory and evidence increasingly say “no.”
o The authors believe the importance of national culture has been
overstated.
▪ Two very different national cultures, China and the U.S., have nearly
identical beliefs in the importance of basing pay on performance
• Culture classifiers consider the U.S. a country of risk takers, ranking high on
the individualistic (rather than collectivistic) scale.
o In contrast, Slovenia is classified as more collectivistic and security-
conscious (as opposed to risk taking).
• 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.
• How useful is the notion of a national culture when managing international
pay?
o In the absence of better data on variations such as those in Exhibit 16.8, it
may offer a starting point.
o It is only a starting point.
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• But overreliance on the “average” can seriously mislead.
• To 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 practical terms.
• The interplay among economic, institutional, organizational, and individual
conditions within each nation or region, taken as a whole,
o forms distinct contexts for determining compensation.
IV. Trade Unions and Employee Involvement
• Europe remains highly unionized.
o In Sweden, 67% of the workforce belongs to unions
• Asia is less heavily unionized.
o Japan’s unionization rate is 17%
• In some countries, workers’ pay is set by collective agreements even though the
workers may not be 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.
o 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.
o 50% of American households own stock in companies either directly or indirectly
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through mutual funds and pension funds. Direct stock ownership is only a few
mouse clicks away.
• 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.
o For example, linking performance bonuses to increased shareholder value or
offering stock options to employees makes little sense in the large conglomerates
• 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.
o While state-owned enterprises play a major role in China, township enterprises,
wholly privately owned enterprises, joint ventures with foreign companies, and
wholly owned foreign enterprises (WOFEs) play a much larger role in China than
in the past.
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.
o It is inversely related to the degree of centralization and regulatory intensity.
Chapter Sixteen: International Pay Systems 16 – 12
European companies.
o The centralized pay setting found in European Union countries limits
organizations’ autonomy to align pay to business strategies and changing market
conditions.
• Governments and trade unions are not the only institutions to limit managerial
autonomy. Corporate policies often do so as well.
o Compensation decisions made in the home-country corporate offices and exported
• In sum, as the global guide depicts, international compensation is influenced by
economic, institutional, organizational, and individual conditions.
VII. Comparing Costs
• Comparisons of total compensation among nations can be very misleading.
o Even if wage rates appear the same, expenses for health care, living costs, and
other employer-provided allowances complicate the picture.
• Comparisons between a specific U.S. firm and a specific foreign competitor may be
even more misleading. Accurate data are usually difficult to obtain.
o While consulting firms are improving their global data collection, much of their
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.
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▪ The average lower productivity in Mexico is more than offset by the
labor cost savings – drawing car manufacturers to Mexico.
o Exhibit 16.10 shows further information on wage rates in Asia, reporting
annual labor costs by country for two occupations: a manager and a
worker, both in manufacturing.
• For example, annual labor costs for a manufacturing worker grew
around 20% over the last three years in places like Laos and
Vietnam, much faster than in more developed economies.
▪ Exhibit 16.9 shows rapid pay rate growth in China also.
• Most companies have to do their own analysis of the pros and cons of where
to locate employment.
o While differences in labor costs are often the impetus to do the analysis,
many other factors must be considered.
▪ A small custom software company in the American Midwest has its
▪ Setting up a team several time zones away can take 6 months to a year
to get off the ground and fine tune.
▪ Other differences are harder to quantify such as the difference between
the consumer and marketing cultures of the countries.
• Countries in the former Soviet Bloc, until very recently, did not
have multiple options when it came to toothpaste, apartments, cars
o In some cases, especially manufacturing, it can sometimes be all labor
Chapter Sixteen: International Pay Systems 16 – 14
cost.
B. Cost of Living and Purchasing Power
• If comparing total compensation is difficult, comparing living costs and
standards across borders is even more complex.
• Exhibit 16.12 provides several types of relevant data for this purpose.
o The first two columns are hourly pay, Gross and Net (after taxes and
deductions.
York City.
▪ A worker in Copenhagen has slightly higher gross hourly pay than a
worker in New York City, but much lower purchasing power.
▪ To maintain the purchasing power of an expatriate from New York
o The last column, working hours required to pay for an iPhone X provides
another index of purchasing power.
VIII. Comparing Systems
• We now know that pay systems differ around the globe and that the differences relate
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to variations in economic pressures, sociopolitical institutions, and the diversity of
organizations and employees.
• This section compares several compensation systems.
o The caution about stereotyping raised earlier applies here as well.
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:
o Objectives of pay systems
IX. National Systems: Comparative Mind-Set
• A national system mind-set assumes most employers in a country adopt similar pay
practices.
o Understanding and managing international compensation then consists mainly of
comparing the Japanese to the German to the U.S. or other national systems.
o This method may be useful in nations with centralized approaches. See Exhibit
16.8.
▪ Some even apply it to regional systems, as in the “European Way,” or the
“Asian Way.”
o 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”:
o Lifetime security within the company
Chapter Sixteen: International Pay Systems 16 – 16
o Person rather than the job
o Seniority and skills possessed rather than job or work performed
o Promotions based on a combination of supervisory evaluation of
Base Pay
o Base pay is not based on job evaluation or market pricing, nor is it
attached to specific job titles.
Career – Five career categories prevail in Japan:
▪ General administration
▪ Engineer/scientific
▪ Secretary/office
▪ Technician/blue-collar job
▪ Contingent
Years 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.
Skills and Performance – Each skill is defined by 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.
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• Skills required for the work (e.g., analytical, decision making,
leadership, planning, process improvement, teamwork)
• 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.
▪ The system reflects the traditional Japanese saying, “A nail that is
standing too high will be pounded down.”
▪ 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
Bonuses
o Bonuses provide additional pay equivalent to 1-5 months of annual salary,
depending on the level in the organization and often the organization’s
financial results.
▪ Generally, the higher up an employee is, the larger the percent of
annual salary received as bonus.
Chapter Sixteen: International Pay Systems 16 – 18
o The amount of bonuses is calculated by multiplying employees’ monthly
base pay by a multiplier.
▪ The size of the multiplier is determined by collective bargaining
o According to the Japan Institute of Labour, for most employees (other than
managers) bonuses are variable pay that helps control the employer’s cash
flow and labor costs.
o Japanese 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).
o The timing of the bonuses is very important.
▪ In Japan both the summer festival and the new year are traditional gift–
Benefits and Allowances
o The third characteristic of Japanese pay systems, the allowance, comes in
a variety of forms:
▪ Family allowances—vary with number of dependents
Legally Mandated Benefits – Legally mandated benefits in Japan include
social security, unemployment, and workers’ compensation.
B. German Traditional National System
• Traditional German pay systems are embedded in a social partnership between