International Pay Systems Chapter Outline

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International Pay Systems Chapter Outline

Chapter Sixteen

German National System Strategic Comparisons: Japan, Germany, United States

Strategic Market Mind-Set Localizer: “Think Global, Act Local” Exporter: “One Size Fits All” Globalizer: “Think and Act Globally and Locally”

Expatriate Pay Elements of Expatriate Compensation The Balance Sheet Approach Expatriate Systems → Objectives? Quel dommage!

Borderless World → Borderless Pay? Globalists

Your Turn: Back to Classic Coke

Managing Variations: The Global Guide

The Social Contract

Culture Culture Matters, but So Does Cultural Diversity

Trade Unions and Employee Involvement

Ownership and Financial Markets

Managerial Autonomy

Comparing Costs Standard of Living: Basket of Goods versus Big Mac

Comparing Systems The Total Pay Model: Strategic Choices

National Systems-Comparative Mind-Set Japanese National System

Around the world, global competitive forces have changed the way people work and how they get paid. Toyota dismantled its seniority-based pay system for managers and re- placed it with a merit-based system.1 Toshiba offers stock awards, which were not even legal in Japan only a few years ago.2 Deutsche Bank, Nokia, Seimens, and other Euro- pean companies are experimenting with variable pay and performance-based (rather than personality-based) appraisal in their search for ways to improve productivity and control labor costs.3 Global acquisitions of former competitors change pay systems. As part of its

1A. Harney, “Toyota Plans Pay Based on Merit,” Financial Times, July 8, 1999, p. 20. 2Interviews with Toshiba managers, included in G. Milkovich, M. Bloom, and A. Mitra, “Research Report: Rethinking Global Reward Systems,” working paper, Cornell University, 2000. 3Also see Pay in Europe 2003, Remuneration Policy and Practices (Surrey, England: Federation of European Employers, 2003), and the FEE’s website at www.euen.cok.uk; Zhong-Ming Wang, presentation to Cornell University Global HRM Distance Learning seminar, Shanghai, China, March 2000; Conference Board, “Organizing for Global Competitiveness—Headquarters Design Report,” No. 123399RR, and “The Country Subsidiary Design Report,” No. 1180–97RR (New York: Conference Board, 1999).

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takeover and restructuring of Tungsram Electric in Poland, General Electric changed the pay system from a rigid seniority-based one to a more flexible one with broad bands, market-based wage rates, and performance bonuses.

Sometimes the changes in pay are directly tied to cataclysmic sociopolitical change, as in China, Russia, and eastern Europe.4 Central and government authorities had dictated pay rates in these communist command-and-control economies. Now these companies face the challenge of devising pay systems responsive to business and market pressures while maintaining a sense of social justice among the people. The Chinese situation is ex- traordinarily complex.5 State-owned enterprises are being asked to become profitable. The only hope of profitability is to cut the massively bloated head count. Yet an army of unemployed people without social support threatens stability and even government sur- vival. Some state-owned enterprises, such as Bao Gang, the country’s largest steelmaker, have moved to more “market- and performance-based” systems, even though labor mar- kets are just emerging in China. Shanghai Shenyingwanguo Security Company and Shanghai Bank have implemented job-based structures to help them retain key employees and increase pay satisfaction. Privatized enterprises, start-ups, and joint ventures with for- eign firms use a variety of approaches. Most surprising of all is that some town-owned enterprises are using stock ownership as part of their employee compensation.6 China may still be striving to become a worker’s paradise, but the experimentation with com- pensation approaches might already qualify it as a pay pundit’s paradise.

However, too much change and experimentation can have a dark side that threatens social unrest. There are reports from the Ukraine, Romania, and Russia of people going unpaid for months, without legal recourse.7 In Russia, a friend maintains that “the most effective pay delivery system is a brown bag under the table.”

4A. Puffer and S. Shekshnia, “Compensating Local Employees in Post-Communist Russia,” Compensation and Benefits Journal, September–October 1994, pp. 35–42; D. Soskice, “Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries,” Oxford Review of Economic Policy 6(4), pp. 36–61; D. Vaughan Whitehead, ed., Paying the Price: Crisis in Central and Eastern Europe (Geneva: ILO, 1999); L. Bajzikova, “Transition Process of HRM in the Slovak Republic,” Journal of International Human Resource Management, no. 2, 2001; N. Zupan, “HRM in Slovenian Transitional Companies,” presentation at CAHRS international conference, Berlin, June 2002. 5D. Dong, K. Goodall, and M. Warner, “The End of the Iron Rice Bowl,” International Journal of Human Resource Management, April 2, 2000, pp. 217–236. 6Zhong-Ming Wang, presentation to Cornell University Global HRM Distance Learning seminar, Shanghai, China, March 2000; comments by Ningyu Tang, instructor in Shanghai for Global HRM Distance Learning seminar; Peter Nolan, “China and the Global Business Revolution, Cambridge Journal of Economics 26 (2002), pp. 119–137; Jing Zhou and J. J. Martocchio “Chinese and American Managers’ Compensation Award Decisions,” Personnel Psychology 54 (Spring 2001), pp. 115–145; National Bureau of Statistics, People’s Republic of China, 2003; J. T. Landry, “Review of `The New Chinese Empire and What It Means for the United States’ by R. Terrill,” Harvard Business Review 81 (7) (July 3, 2003); Zaohui Zhao, “Earnings Differentials between State and Non-State Enterprises in Urban China,” Pacific Economic Review 7(1) (2002), pp. 181–197. 7G. T. Khulikov, “Ukraine Wage Decentralization in a Nonpayment Crisis,” chap. 11 in Pay the Price (Geneva: ILO, 2000); R. Yokovlev, “Wage Distortions in Russia,” chap. 9 in Pay the Price (Geneva: ILO, 2000); Muneto Ozocki, ed. Negotiating Flexibility: The Role of the Social Partners and the State (Geneva: ILO, 1999).

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So it is a time of unprecedented global change. Or is it? Let’s step back to gain some historical perspective:

There is hardly a village or town anywhere on the globe whose wages are not influenced by distant foreign markets, whose infrastructure is not financed by foreign capital, whose engineering, manufacturing, and even business skills are not imported from abroad, or whose labor markets are not influenced by the absence of those who had emigrated or by the presence of strangers who had immigrated.8

This is not a description of the 21st century. Rather, it is from 100 years ago. In the late 1800s, trade barriers were being reduced, free trade was being promoted, and mass mi- gration of people was underway. Thanks to transoceanic telegraphic cables, the speed of communication had increased dramatically, and investment capital flowed among na- tions. Yet by 1917 these global links had been replaced with a global war. Citizens be- came uncomfortable with the greater risks and uncertainty of globalization. Nations began to raise tariffs to protect domestic companies hurt by foreign competitors. Immi- grants were accused of “robbing jobs.” Historians conclude that “globalization is neither unique nor irreversible; it has and can again sow seeds of its own destruction.”9

MANAGING VARIATIONS: THE GLOBAL GUIDE

Understanding international compensation begins with recognizing differences and simi- larities 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 depicted in Exhibit 16.1. Four general ones are listed: economic, institutional, organizational, and employee, with sub- factors. These factors have been discussed throughout the book; now they can be applied globally. But once we shift from a domestic to an international perspective, additional factors become important, too. Institutional factors, such as cultural traditions and politi- cal structures, and economic factors, such as differences in ownership of enterprises and the development of capital and labor markets, come into play. Further, social contracts and the role of trade unions must be considered. An example using the global guide illus- trates its usefulness.

Consider the DaimlerChrysler situation discussed in Chapter 2. Prior to Daimler’s ac- quisition of Chrysler, the pay for the top 10 Daimler executives equaled the pay of Chrysler’s CEO alone. 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. Some have even claimed that the attractive pay was the reason Daimler executives were eager to acquire Chrysler!

Chapter 16 International Pay Systems 499

8Kevin O’Rourke and J. G. Williamson, Globalization and History: The Evolution of a 19th Century Atlantic Economy (Cambridge, MA: MIT Press, 1999), p. 2. 9Kevin O’Rourke and J. G. Williamson, Globalization and History: The Evolution of a 19th Century Atlantic Economy (Cambridge, MA: MIT Press, 1999), chap. 14. Also see D. Rodrik, “Has Globalization Gone Too Far?” California Management Review 39(3) (Spring 1997); W. Keller, L. Pauly, and S. Reich, The Myth of the Global Corporation (Princeton, NJ: Princeton University Press, 1998); B. Kogut, “What Makes a Company Global?” Harvard Business Review, January–February 1999, pp. 165–170.

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The Daimler and Chrysler managerial pay systems are contrasted in Exhibit 16.2, using the factors in our global guide (Exhibit 16.1). At Daimler, the roots of today’s pay system reach back to postwar Germany and efforts to rebuild an economy devastated by two world wars. Rather than companies’ engaging in aggressive wage competition that risked inflation, trade union federations, employer associations, government agencies, and financial institutions participated in centralized negotiations. The result was industry- wide negotiated pay systems called tariff agreements. They included predictable annual increases, government-provided social welfare programs, and well-defined internal struc-

EXHIBIT 16.1 Guide to International Compensation

Competitive dynamics/ marketsSocial

contract

Culture/ politics

Capital flows/ ownership

Taxes

Demographics

Knowledge/ skills

Attitudes/ preferences

Strategic intent

Technology Innovation Work roles

Autonomy

Information flows

Trade unions

Employer federations

IN TE

RNATIONAL

Organization Success and Fair Treatment of Employees

C O

M PENSATION SY

ST EM

S

IN ST

IT UT

IO NA

L OR

GA NI

ZA TI

O N

A L

EM PLOYEE

ECONOM IC

© George T. Milkovich.

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tures. All companies competing in the same product markets (e.g., Daimler, Volkswagen, and Opel) used the same pay structures. Daimler could pay above these negotiated rates but had little reason to do so. Instead, it competed for employees based on its reputation as a place to work, its quality of training, and the like. As a result, managers were less likely to consider pay as an instrument of strategy. Instead, pay was a constraint deter- mined outside the organization.

German tax policies and labor regulations supported this approach. A typical Daimler employee’s marginal tax rate (percent tax on each additional euro earned) is 30 percent higher than a Chrysler employee’s tax rate on an additional dollar’s pay in the United States. As a result, the financial returns for working longer and harder in order to

Chapter 16 International Pay Systems 501

Pressures Daimler Chrysler

Economic

Competitive markets Moderately competitive Highly competitive Capital/ownership Few shareholders Many shareholders Taxes High taxes Moderate taxes

Institutional

Culture/politics Centralized process Decentralized process Regulations Strong government/ Limited government involvement

trade union involvement Trade union/ Tripartite-based social contract Individual/employer-based social employer federations contract

Organizational

Strategic intent High margins/high-end vehicles Lower-margin passenger vehicles, higher-margin SUVs, mini vans

Autonomy Lower autonomy Moderate autonomy Work roles Defined roles More flexible roles

Employee

Skill/knowledge Continuous learning On-the-job Attitudes/behaviors High commitment Committed but contentious Demographics Older, experienced Older, experienced

Total pay system

Sensitive to social contract; Aligned with strategy, sensitive to hierarchical; well-defined jobs competitive markets Base and benefits; annual increase Base/performance bonuses, stock

ownership Focus on commitment and Focus on performance and cost control continuous learning

EXHIBIT 16.2 Applying the Global Guide

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receive performance bonuses are significantly smaller at Daimler. Until very recently, broad-based stock options for employees were illegal. Daimler changed its plan in 2003 to award stock rather than options. Nevertheless, base salary and across-the-board pay in- creases (rather than performance bonuses and stock) remain the most common pay forms. In exchange for their higher taxes, Daimler employees receive generous welfare and un- employment payments, plus subsidized college and apprenticeship programs. As Exhibit 16.2 shows, centralized wage setting with predictable annual pay increases, concentrated financial ownership, and high taxes that support a wide social safety net still provide the context for the pay system at DaimlerChrysler’s German locations.10

Now let us apply the global guide to Chrysler. Chrysler reflects the competitive dynamics in U.S. labor and product markets as well as the social contract in the United States, which places high value on individual choice. Pay setting is highly decentralized. Government’s in- volvement is limited to ensuring conformance with minimum wage, tax, and discrimination laws. Chrysler’s managerial pay system is arguably aligned with its business strategy, is sen- sitive to market conditions, and includes significant performance bonuses and stock owner- ship. The U.S. tax code supports the use of stock options. The pay system is considered a strategic tool intended to competitively attract, retain, and motivate managers and also sup- port customer satisfaction and improve shareholder value (sound familiar?).

So the global guide serves as a tool kit. By examining each of the factors, we can in- crease our understanding of the variation in international pay practices. Five factors are particularly salient. These are variations in (1) social contracts, (2) cultures, (3) trade unions, (4) ownership and capital markets, and (5) managers’ autonomy. While we sepa- rate the factors to clarify our discussion, they do not separate so easily in reality. Instead, they overlap and interact.

THE SOCIAL CONTRACT

Viewed as part of the social contract, the employment relationship is more than an ex- change between an individual and an employer. It includes the government, all enterprise owners (sometimes acting individually and sometimes collectively through owner associ- ations), and all employees (sometimes acting individually and sometimes in trade unions). The relationships and expectations of these parties form the social contract. As you think about how people get paid around the world, it will be clear that different peo- ple 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. Efforts to change employee compensation systems—for example, to make them more responsive to cus- tomers, encourage innovative and quality service, or control costs—require changing the expectations of parties to the social contract.

10Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive? (Ithaca, NY: Cornell University Press, 1998); Hugh Williamson, “IGMetall Is the Trend-Setter: What Happened in the Strike Will Have Far-Reaching Implications,” Financial Times, July 2, 2003, p. 11; G. Thomas Sims and Christoper Rhoads, “Tough Times Humble German Labor,” Wall Street Journal, July 1, 2003, p. A9; NCEO “Global Employee Ownership Plans Continue to Grow,” Employee Ownership Report 22(2) (2002); Uta Harnischfeger, “DaimlerChrysler Mulls Removal of Options,” Financial Times, July 10, 2003, p. 17.

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Centralized-Localized Decision Making Perhaps the most striking example of the social contract’s effects on pay systems is in Ex- hibit 16.3, which contrasts the degree of centralization of pay setting among countries.11

The United States, United Kingdom, Canada, Hong Kong, and Brazil use highly decentral- ized approaches with little government involvement. Japan, Singapore, Germany, Bel- gium, and Slovakia are moderately centralized by industry sector. Sweden, Denmark, and Austria use highly centralized approaches that create a national pay system.

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 infor- mation is processed.12 How critical is culture in managing international pay? Very impor- tant, according to some. The assumption that pay systems must be designed to fit differ- ent national cultures is based on the belief that most of a country’s inhabitants share a

Chapter 16 International Pay Systems 503

Highly Centralized

Argentina Brazil Canada France Hong Kong Mexico Singapore U.K. U.S.A.

Local Systems

Sector/Industrywide Systems

PAY-SETTING SYSTEMS

Nationwide Systems

Czech Republic Germany India Israel Japan Korea Slovakia Slovenia

Austria Belgium Cuba Hungary Poland Sweden

SO C

IA L

C O

N T

R A

C T

Localized

EXHIBIT 16.3 Social Contracts and Pay Setting

11Linda Bell and R. Freeman, “The Incentive for Working Hard: Explaining Hours Worked Differences in the US and Germany,” NBER paper, 2000; R. Freeman and L. F. Katz, Differences and Changes in Wage Structures (Chicago: University of Chicago Press, 1994); Income Data Services, Employment Europe 2000 (monthly newsletter). 12F. Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1995); H. C. Triandis, “Cross-Cultural Industrial and Organizational Psychology,” in Handbook of Industrial and Organizational Psychology, eds. M. D. Dunnette and L. M. Hough (Palo Alto, CA: Consulting Psychologists Press, 1994), pp. 103–172; H. C. Triandis, Individualism and Collectivism (Boulder, CO: Westview Press, 1995).

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national character. Therefore, the job of the global manager is to define the national char- acteristics that influence pay systems.

Typical of this thinking is the widely used list of national cultural attributes proposed by Hofstede (power distance, individualism–collectivism, uncertainty avoidance, and masculinity–femininity).13 Advocates of this view believe that “it is crucial that compa- nies adjust their compensation practices to the cultural specifics of a particular host coun- try.”14 Accordingly, in nations where the culture emphasizes respect for status and hierar- chy (high power distance, attributed to Malaysia and Mexico), hierarchical pay structures are appropriate. In low-power-distance nations (Australia and the Netherlands), egalitari- anism is called for.15

Advice can get even more specific. Companies operating in nations with “collectivis- tic” cultures, such as Singapore, Japan, Israel, and Korea, should use egalitarian pay structures, equal pay increases, and group-based rather than individual-based perfor- mance 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 risks stereotyping.16 The question is not, What are the cultural dif- ferences among nations. Rather, the question is, Whose culture matters?17 Any group of people may exhibit a shared set of beliefs. Look around your college or workplace; engi- neers, lawyers, accountants, and technicians may each share some beliefs and values. Employees of organizations may, too. Your school’s “culture” probably differs from Mi- crosoft’s, Toshiba’s, or the London Symphony Orchestra’s. You may even have chosen your school because of its culture. However, you are likely part of many cultures. You

13G. Hofstede, “Cultural Constraints in Management Theories,” International Review of Strategic Management 5 (1994), pp. 27–51. 14R. Schuler and N. Rogovsky, “Understanding Compensation Practice Variations across Firms: The Impact of National Culture,” Journal of International Business Studies 29 (1998), pp. 159–178. 15L. R. Gomez-Mejia and T. Welbourne, “Compensation Strategies in a Global Context,” Human Resource Planning 14 (1994), pp. 29–41; Sunny C. L. Fong and Margaret A. Shaffer, “The Dimensionality and Determinants of Pay Satisfaction: A Cross-Cultural Investigation of a Group Incentive Plan,” International Journal of Human Resource Management 14(4), (June 2003), pp. 559–580. 16G. Milkovich and M. Bloom, “Rethinking International Compensation: From Expatriates and National Cultures to Strategic Flexibility,” Compensation and Benefits Review, April 1998; L. Markoczy, “Us and Them,” Across the Board, February 1998, pp. 44–48. 17F. Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Burr Ridge, IL: Irwin, 1995); M. Bloom, G. Milkovich, and A. Mitra, “International Compensation: Learning from How Managers Respond to Variations in Local Host Contexts,” International Journal of Human Resource Management special issue, 2003; Allen D. Engle, Sr., and Mark Mendenhall “Transnational Roles and Transnational Rewards: Global Integration in Executive Compensation,” presentation at international HR conference, Limerick, Ireland, June 2003; Paul Evans, Vlado Pucik, and Jean-Louis Barsoux, The Global Challenge (New York: McGraw-Hill, 2002); G. Hundley and J. Kim, “National Culture and the Factors Affecting Perceptions of Pay Fairness in Korea and the U.S.,” International Journal of Organization Analysis 5(4) (October 1997), pp. 325–341; L. Kim and G. Yi, “Transformation of Employment Practices in Korean Business,” International Studies of Management and Organizations 28(4) (1998–99), pp. 73–83; G. Hofstede, “Cultural Constraints in Management Theories,” International Review of Strategic Management 5 (1994), pp. 27–51; P. C. Earley and C. B. Gibson, “Taking Stock in our Progress on Individualism–Collectivism: 100 Years of Solidarity and Community,” Journal of Management 24 (1998), pp. 265–304; David Landes, Culture Matters: How Values Shape Human Progress (New York: Basic Books, 2001).

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are not only part of your university but also part of your family, your social/political/ interest groups, your region of the state or country, and so on. Cultures may be similar or different among all these categories.

Culture Matters, but So Does Cultural Diversity Culture classifiers consider the United States a country of risk takers who rank high on the individualistic (rather than collectivistic) scale. In contrast, the country of Slovenia has been classified as more collectivistic and security-conscious (as opposed to risk taking).18

Slovenia was the first country to break off from the former Yugoslavia. (How is that for taking a risk?) It has a population of less than 3 million and by most standards would be considered very homogeneous. So you would expect Slovenian managers to be very dif- ferent from U.S. managers. However, a study found that Slovenian managers tended, on average, to be more risk taking and individualistic than U.S. managers. The most striking finding, as shown in Exhibit 16.4, was that the degree of variation among managers on cultural dimensions was virtually the same in both the Slovenian and the U.S. data. Thus, one can find risk-averse collectivists and risk-taking individualists in both nations.

So how useful is the notion of a national culture? In the absence of better data on varia- tions such as those in Exhibit 16.4, it may offer a starting point. However, it is only a starting point. National culture can be thought of as the “average” in Exhibit 16.4. 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. This point is critical for managing international pay. As the paleobiologist Stephen Jay Gould noted, “Failure to consider the ‘full house’ of cases plunges us into serious error again and again.”19 While Gould may not

Chapter 16 International Pay Systems 505

18M. Bloom, G. Milkovich, and N. Zupan, “Contrasting Slovenian and U.S. Employment Relations: The Links between Social Contracts and Psychological Contracts” CEMS Business Review no. 2 (1997), pp. S95–S109. 19Stephen Jay Gould, Full House: The Spread of Excellence from Plato to Darwin (New York: Three Rivers Press, 1996).

Risk avoiding

U.S. MBAs Slovenian MBAs

Risk takingXU.S. XSlovenia

EXHIBIT 16.4 Understanding the “Full House” of Variation within a Culture

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have been talking about compensation, we can still extend his point to global pay. To claim that all organizations and people within Germany or within China use the same shared mind- set ignores variations and differences within each nation. Considerable diversity among com- panies and people within any country exists. So keep in mind our basic premise in this chap- ter: The interplay among economic, institutional, organizational, and individual conditions within each nation or region, taken as a whole, forms distinct approaches to total compar- isons. Understanding these factors in the global guide is useful for managing employee com- pensation. However, do not assume uniformity (the average) within a country. Understand- ing the full range of individuals within nations is important to managing international pay.

TRADE UNIONS AND EMPLOYEE INVOLVEMENT

As Exhibit 16.5 shows, Europe remains highly unionized: In Sweden, 91 percent of the work force belongs to unions; in the United Kingdom, 33 percent; and in Italy, 44 percent. Asia is less heavily unionized. Japan’s unionization rate is 24 percent, and South Korea’s is almost 13 percent. Although the exhibit might cause you to conclude that union power is declining, caution is in order. In some countries, workers’ pay is set by collective agreements even though the workers may not be union members. In France, for example, 90 percent of work- ers are covered by collective agreements, but only 9 percent are union members.20

In addition to having higher rates of unionization, Belgium, Germany, and the Euro- pean Union (EU) require the establishment of worker councils that must be involved in any changes to a pay plan. The European Union is trying to provide common labor stan- dards 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. At pres- ent, hourly labor costs and productivity vary substantially among the EU countries. Often the higher labor costs are offset by greater productivity.21

Social legislation varies among European countries, as shown in Exhibit 16.6. Britain specifies the fewest requirements, with no minimum wage, no maximum hours, and no for- mal methods for employee participation. France and Germany have the most generous so- cial insurance. Some writers predict the eventual “Europeanization” of pay determination.22

20H. Katz and Owen Darbishire, Converging Divergences: Worldwide Changes in Employment Systems (Ithaca, NY: Cornell University Press, 2000); George Boyer “Review Symposium: Converging Divergences: Worldwide Changes in Employment System,” Industrial and Labor Relations Review 54 (2001). 21Christopher L. Erickson and Sarosh Kuruvilla, “Labor Costs and the Social Dumping Debate in the European Union,” Industrial and Labor Relations Review, October 1994, pp. 28–47; K. Schwab, M. Porter, J. Sachs, A. Warner, and M. Levison, The Global Competitiveness Report 2000, World Economic Forum (Cambridge, MA: Harvard University Press, 2000). 22Chris Brewster and Hilary Harris, International HRM: Contemporary Issues in Europe (London: Routledge Press, 1999); P. Dowling and R. Schuler, International Dimensions of Human Resource Management (Boston: PWS Kent, 2000); Matthew F. Davis, “Global Compensation in the New Economy,” International HR Journal 9(3) (Fall 2000), pp. 45–50; Mark Fenton-O’Creevy, “HR Practices: Vive La Difference; Part 7: Mastering People Management,” Financial Times, November 26, 2001; Paul R. Sparrow, “International Rewards System: To Converge or Not To Converge?” in International HRM: Contemporary Issues in Europe, ed. Chris Brewster and Hilary Harris (London: Routledge Press, 1999).

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507

0% 20% 40% 60% 80% 100%

Sweden

Denmark

Finland

Norway

Italy

Austria

U.K.

Germany

Netherlands

Portugal

Greece

New Zealand

Japan

Spain

U.S.

South Korea

France

91%

80%

79%

57%

44%

41%

33%

29%

26%

26%

24%

24%

24%

19%

14%

13%

9%

EXHIBIT 16.5 Union Density

For an employer, the cost of social insurance as a percentage of salary is higher in France than in some other places.

*Former West Germany

The hourly cost of a production worker in manufacturing . . .

France

United States

Japan

Britain

Germany*

$17.97

$18.24

$19.37

$15.47

$28.28

$5.61

$3.90

$2.85

$2.00

$7.34

45.4%

27.2%

17.3%

14.8%

35.1%

. . . 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 per- centage of salary.

The Cost of an Employee

$12.36

$20.94

$14.34

$16.52

$13.47

EXHIBIT 16.6 Employment Practices Differ among Nations

Source: Bureau of Labor Statistics; International Labor Office.

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OWNERSHIP AND FINANCIAL MARKETS

Ownership and financing of companies differ widely around the world. These differ- ences are important to understanding and managing international pay. In the United States, corporate ownership and access to capital is far less concentrated than in most other countries. Fifty percent of American households own stock in companies either di- rectly or indirectly through mutual funds and pension funds.23 Direct stock ownership is only a few mouse clicks away. In Korea, six conglomerates control a significant portion of the Korean economy, and the six are closely linked with specific families.24 In Ger- many, the national Bundesbank and a small number of other influential banks have own- ership interests in most major companies. These patterns of ownership make certain types of pay systems almost nonsensical. For 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. However, ownership in small start-ups in the nations is outside the traditional channels, so these firms do offer stock options to attract new employees.25 Recent tax law changes in these countries have made options more attractive, but the ownership of the major employers is slow to change.

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 vari- ety of forms are emerging. While state-owned enterprises still employ two-thirds of all workers in China, township enterprises, wholly privately owned enterprises, joint ven- tures with foreign companies, and wholly owned foreign enterprises (WOFEs) account for 50 percent of the profits. Chinese employees switching from government-owned en- terprises to these newer organizations find that both the pay and the employer expecta- tions (i.e., the social contract) are substantially different.26 Individuals attracted to work in these various enterprises have different values and expectations. One study found that

23The website of the National Center for Employee Ownership (NCEO) has information and referrals concerning employee stock ownership plans (ESOPs) and other forms of employee ownership: www.esop.org. Worker Ownership around the world is discussed at www.activistnet.org. 24G. R. Ungson, R. J. Steers, and S. H. Park, Korean Enterprises: The Quest for Globalization (Boston: Harvard Business School Press, 1997). 25Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive? (Ithaca, NY: Cornell University Press, 1998); D. Soskice, “Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries,” Oxford Review of Economic Policy 6(4), pp. 36–61; Wolfgang Streeck, Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Capitalist Economies (London: Sage, 1992). 26G. Breton, H. Lan, and Yuan Lu, “China’s Township and Village Enterprises,” American Management Executive 14(1) (February 2000), pp. 19–30; W. Van Honacher, “Entering China: An Unconventional Approach,” Harvard Business Review, March–April 1992, pp. 130–140; Wei He, Chao C. Chen, and Lihua Zhang, “Rewards Allocation Preferences in Chinese State-Owned Enterprises: A Revisit after a Decade’s Radical Reform,” Organization Science Special Issue: Corporate Transformation in the People’s Republic of China, in press; Helen Blair, Nigel Culkin, and Keith Randle, “From London to Los Angeles: A Comparison of Local Labour Market Processes in the US and UK Film Industries,” International Journal of Human Resource Management 14(4) (June 2003), pp. 619–633; Marshall Meyer, Yuan Lu, Hailin Lan, and Xiaohui Lu, “Decentralized Enterprise Reform: Notes on the Transformation of State-Owned Enterprises,” in The Management of Enterprises in the People’s Republic of China, eds. Anne S. Tsui and Chung-Ming Lau (Boston: Kluwer Academic, 2002).

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27Jing Zhou and J. J. Martocchio, “Chinese and American Managers’ Compensation Award Decisions,” Personnel Psychology 54 (Spring 2001), pp. 115–145. 28Giuseppe Fajertag, ed., Collective Bargaining in Europe 1998–1999 (Brussels: European Trade Union Institute, 2000). The European Trade Union Institute’s website is at www.etuc.org/etui/default.cf. 29Hesan Ahmed Quazi and Sophia Lee, “A Study of Compensation Strategies of Organizations Operating in Singapore,” Nanyang Business School, May 2003. 30K. Roth and S. O’Donnell, “Foreign Subsidiary Compensation Strategy: An Agency Theory Perspective,” Academy of Management Journal 39(3) (1996), pp. 678–703; Ingmar Bjorkman and Patrick Furu, “Determinants of Variable Pay for Top Managers of Foreign Subsidiaries in Finland,” International Journal of Human Resource Management 11(4) (August 2000), pp. 698–713; Paola Bradley, Chris Hendley, and Stephen Perkins, “Global or Multi-Local: The Significance of International Values in Reward Strategy,” in International HRM: Contemporary Issues in Europe ed. C. Brewster and H. Harris (London: Routledge Press, 1999; J. Abowd and Michael Bognanno, “International Differences in Executive and Managerial Compensation,” working paper, ILR School, Cornell University, Ithaca NY.

those working for local or town-owned enterprises prefer more performance-based pay than those working in federal-owned enterprises.27 Many families find it makes sense to have one wage earner working at a safe but low-paying government enterprise and an- other wage earner working at a private enterprise where expectations and pay are high. So it is clear that ownership differences may influence what forms of pay make sense. It is very misleading to assume that every place is like home.

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 discussed earlier. Thus, most U.S.- and U.K.-based organizations have relatively greater freedom to change employee pay prac- tices than do most European companies. As already noted, the centralized pay setting found in European Union countries limits organizations’ autonomy to align pay to busi- ness strategies and changing market conditions.28 In contrast, in Singapore the National Wage Council issues voluntary guidelines (e.g., “Wage freezes for most companies,” “Emphasize variable and performance-based pay”). Most government organizations ad- here to these guides, while private organizations do so in varying degrees.29

Cybercomp A good source of free information on labor laws throughout the world is the NATLEX database produced by the International Labor Organization (ILO): natlex.ilo.org.

Governments and trade unions are not the only institutions to limit managerial auton- omy. Corporate policies often do so as well.30 Compensation 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. While IBM cor- porate in Armonk, New York, expects all its worldwide operations to “differentiate peo- ple on performance” with total compensation, some IBM units in Tokyo remain con- vinced that Japanese IBMers in Japan prefer more egalitarian practices. Nevertheless, managers are expected to comply with Armonk. Is IBM trying to attract the people in

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Japan who are seeking more performance-based pay and signal to others that IBM has a performance-based culture around the world? (Sounds like a research project to us.)

In sum, as the global guide depicts, international compensation is influenced by eco- nomic, institutional, organizational, and individual conditions.31 Globalization really means that these conditions are changing—hence international pay systems are changing as well.

COMPARING COSTS

In Chapter 8 we discussed the importance of obtaining accurate information on what competitors pay in domestic markets. Similar 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. Out- side the United States, many nations offer some form of national health care. An organi- zation 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. Conse- quently, comparing data in global and local markets around the world is a major chal- lenge. Comparisons between a specific U.S. firm and a specific foreign competitor may be even more misleading. Accurate data are usually difficult to obtain. While consulting firms are improving their global data collection, much of their data is still from U.S. com- panies’ operations in global locations. Other foreign and local-national companies’ data are often not available. Thus, international data may be biased toward U.S. companies’ practices.

Standard of Living: Basket of Goods versus Big Mac If comparing total compensation is difficult, comparing living costs and standards is even more complex. The Bank of Switzerland uses a uniform basket of goods based on Euro- pean consumer habits; the basket includes the prices of 137 items from clothing to trans- portation to personal care.32 A woman shopping for a summer dress, jacket, skirt, shoes, and stockings will find Tokyo the most expensive place to shop ($1,760), whereas Manila ($130) and Bombay ($120) are best buys. Tokyo is equally expensive for a man. If he wants a blazer, shirt, jeans, socks, and shoes, he will need to come up with $1,050 to pay for a medium-priced outfit.

If your tastes don’t run to summer dresses and blazers, the Economist takes a “Big Mac approach.” Rather than pricing a complex basket of goods and services, the maga- zine uses the price of a Big Mac in different locations.33 According to Exhibit 16.7, the average price of a Big Mac in the United States is $2.71 (average of four cities); in China, 9.90 yuan (US$1.20); in Canada, $3.20 (US$2.21); and in South Korea, 3,300 won (US$2.71).

31Christopher Brown-Humes, “Welcome to the Ways of the Market,” Financial Times, November 12, 1999, p. 10. 32Daniel Kalt and Manfred Gutmann, eds., Prices and Earnings around the Globe (Zurich: Union Bank of Switzerland, 2000). 33”Big Mac Currencies,” Economist, April 24, 2003.

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So what does a Big Mac have to do with compensation? Companies use cost compar- isons in adjusting pay for employees who transfer among countries. The objective is to maintain the same level of purchasing power.34

There are several ways to calculate purchasing power. A common approach is to di- vide hourly wages by the cost of a standard basket of goods and services. Another way is to calculate the working time required to buy a common item such as a 1-kilogram loaf of

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Big Mac Price

In Local Currency In Dollars

United States $2.71 2.71 Argentina Peso 4.10 1.43 Australia A$3.00 1.86 Brazil Real 4.55 1.48 Britain £1.99 3.14 Canada C$3.20 2.21 Chile Peso 1,400 1.95 China Yuan 9.90 1.20 Czech Rep. Koruna 56.57 1.96 Denmark Dkr27.75 4.10 Egypt Pound 8.00 1.35 Euro area £2.71 2.97 Hong Kong HK$11.50 1.47 Hungary Forint 490 2.18 Indonesia Rupiah 16,100 1.84 Japan ¥262 2.19 Malaysia M$5.04 1.33 Mexico Peso 23.00 2.18 New Zealand NZ$3.95 2.21 Peru New Sol 7.90 2.29 Philippines Peso 65.00 1.24 Poland Zloty 6.30 1.62 Russia Rouble 41.00 1.32 Singapore S$3.30 1.86 South Africa Rand 13.95 1.84 South Korea Won 3,300 2.71 Sweden SKr30.00 3.60 Switzerland SFr6.30 4.59 Taiwan NT$70.00 2.01 Thailand Baht 59.00 1.38 Turkey Lira 3,750,000 2.34 Venezuela Bolivar 3,700 2.32

EXHIBIT 16.7 The Hamburger Standard

Source: “Big Mac Currencies,” Economist April 23, 2003

34J. Abowd and M. Bognanno, “International Differences in Executive and Managerial Compensation,” in Differences and Changes in Wage Structures, R. B. Freeman and L. Katz, eds. (Chicago: NBER, 1995), pp. 67–103.

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bread: 7 minutes in London, 15 minutes in Tokyo, 27 minutes in Montreal, and 12 min- utes in Chicago. Or to buy a Big Mac: 14 minutes in Chicago, 36 minutes in London, and 90 minutes in Mexico City. The Big Mac (plus fries) attains luxury status in Nairobi, Caracas, and Lagos; an employed person must toil three hours (Nairobi), four hours (Caracas), or almost two days (Lagos) to afford it. (Hold the fries.)

COMPARING SYSTEMS

We have made the points that pay systems differ around the globe and that the differ- ences relate to variations in economic pressures, sociopolitical institutions, and the diver- sity of organizations and employees. In this section we compare several compensation systems. The caution about stereotyping raised earlier applies here as well. Even in na- tions described by some as homogeneous, pay systems differ from business to business. For example, two well-known Japanese companies, Toyota and Toshiba, have designed different pay systems. Toyota places greater emphasis on external market rates, uses far fewer levels in its structure, and places greater emphasis on individual-based merit and performance pay than does Toshiba. So as we discuss “typical” systems, remember that differences exist and that change in these systems is occurring everywhere.

The Total Pay Model: Strategic Choices The total pay model used throughout the book guides our discussion of pay systems in different countries. You will recognize the basic choices, which seem universal:

• Objectives of pay systems

• External competitiveness

• Internal alignment

• Employee contributions

• Management

While the choices are universal, the results are not. We have noted that each nation has its own laws regulating pay determination.

NATIONAL SYSTEMS: COMPARATIVE MIND-SET

A national system mind-set assumes that most employers in a country adopt similar pay practices. Understanding and managing international compensation then consists mainly of comparing the Japanese to the German to the U.S. or other national systems.35 This method may be useful in nations with centralized approaches (see Exhibit 16.4) or where homogeneous economic and cultural conditions exist (e.g., Sweden). Some even apply it

35Hugh Williamson, “IGMetall Is the Trend-Setter: What Happened in the Strike Will Have Far-Reaching Implications,” Financial Times, July 2, 2003, p. 11; Bertrand Benoit, “German Executives May Be Forced to Publish Salaries,” Financial Times, May 20, 2003, p. 6; Christopher Rhoads, “In Deep Crisis, Germany Starts to Revamp Vast Welfare State,” Wall Street Journal, July 10, 2003, pp. 1, A5.

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to regional systems, as in the “European Way,” the “Asian Way,” or the “North Ameri- can Way.”36 We describe the Japanese and German national systems below. But please read this information with caution: The national or regional mind-set overlooks variations among organizations within each nation.

Japanese National System Traditionally, Japan’s employment relationships were supported by “three pillars”:

1. Lifetime security within the company.

2. Seniority-based pay and promotion systems.

3. Enterprise unions (decentralized unions that represent workers within a single company).

Japanese pay systems tend to emphasize the person rather than the job; seniority and skills possessed rather than job or work performed; promotions based on supervisory evaluation of trainability, skill/ability levels, and performance rathe