COMPENSATION

MANAGEMENT
Brief Notes for Students
HRSB 353

Chapter 16: International

Pay System
LEARNING OBJECTIVES
1. Realize that studying international
compensation enhances their understanding of
compensation within their own country.
2. Understand how changes in political and
economic conditions affect pay in every
country.
3. Recognize the danger of making
generalizations about systems in a country.
4. Discuss how compensation in every country
must deal with the objectives of efficiency,
fairness, and compliance.
Understanding international
compensation begins with
recognizing variations
(differences and
similarities) and figuring
out how best to manage
them.
 Managing Variations
How people get paid around the world
depends on differences (and similarities)
in the following general factors:
Economic
Institutional
Organizational
Employee
Guide to International Compensation
Social Contract: Government, Organizations, &
Employees

Organizations Individuals

Employment Relationship

Government

Organizations Individuals
• Individual Employers • Unions
• Employer Consortium • Union Federations

Social Contract
 Social Contracts and Pay Setting
Highly
Centralized

Austria
Belgium
Czech Republic Cuba
SOCIAL CONTRACT

Germany Hungary
India Poland
Argentina
Israel Sweden
Brazil
Canada Japan
France Korea
Hong Kong Slovakia
Mexico Slovenia
Singapore
U.K.
U.S.A.

Localized Local Sector/Industry- Nationwide

Systems wide Systems Systems
PAY SETTING SYSTEMS
 Culture
Culture is often defined as shared mental
programming.
Culture is acquired knowledge that
people use to interpret experience and
generate social behavior.
It is rooted in the values, beliefs, and
assumptions shared in common by a
group of people.
It influences how information is
processed.
Culture and Managing International
Pay
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.
The job of a global manager is to search
for national characteristics whose
influence is assumed to be critical in
managing international pay systems.
 Hofstede’s Cultural Dimensions
Power Distance
Uncertainty Avoidance
Individualism – Collectivism
Masculinity – Femininity
Long-term – Short-term
Trompenaar’s Cultural Dimensions
and Human Resource Management
Employment Practices Differ Among Nations:
Time and the Clock
Employment Practices Differ Among Nations:
The Cost of an Employee
Strategic Similarities and Differences:
An Illustrated Comparison
Strategic Similarities and Differences:
An Illustrated Comparison (continued)
Strategic Similarities and Differences:
An Illustrated Comparison (continued)
 Strategic Market Mindset
Localizer: “Think Global, Act Local”
Designs pay systems to be consistent
with local conditions.
Business strategy is to seek competitive
advantage by providing products and
services tailored to local customers.
Operate independently of the corporate
headquarters.
Strategic Market Mindset (continued)
Exporter: “One Size Fits All”
Basic total pay system designed at
headquarters and is “exported” world-wide
for implementation at all locations.
Exporting a basic system makes it easier to
move managers and professionals among
locations.
One plan from headquarters gives all
managers around the world a common
vocabulary and a clear message what the
leadership values.
Strategic Market Mindset (continued)
 Globalizer: “Think and Act Globally and
Locally”
 Seek a common system that can be used as
part of the “glue” to support consistency across
all global locations.
 Headquarters and the operating units are
heavily networked to shared ideas and
knowledge.
 Performance is measured where it makes sense
for the business.
 Pay structures are designed to support the
business.
 Shift in Strategic Global Focus
Focus of strategic global approaches is
no longer on matching national systems.
Shift to aligning the total pay system with
the global business strategy.
The challenge is for managers to rethink
international compensation in the face of
global competition.
The challenge is to align global pay with
the way the business is aligned.
 Objectives of Compensation and
Benefits for Expatriates
Attraction and retention of employees
who are qualified for foreign
assignments
Providing an incentive to leave the
home country for a foreign assignment
Maintaining a given standard of living
Taking into consideration expatriates’
career and family needs
Facilitating reentry into the home
country at the end of the foreign
assignments
Elements of Expatriate Compensation

Salary Taxes

Allowances
Housing and
Premiums
Common Allowances in Expatriate Pay
Packages

Social Adjustment Assistance

Family Support
 The Balance Sheet Approach
 Based on the premise that employees on
overseas assignments should have the same
spending power as they would in their home
country.
 The home country is the standard for all
payments.
 The objective is to:
 Ensure cost effective mobility of people to global
assignments
 Ensure that expatriates neither gain nor lose
financially
 Minimize adjustments required of expatriates
 Balance Sheet Approach
Equivalent Salary and Allowances,
Host Country
$10,200
Relocation
Bonus
$1,500
Home Country Currency

Home Country Salary Taxes

$7,000 Allowances,
$1,000 paid by
Taxes company
$2,000
Housing
Housing
$2,000 $700
Goods and Goods and
Services Services
$2,000
Reserve
Reserve
$1,000
 Other Approaches to Compensation
for Expatriates
Negotiation
Localization
Lump Sum
Cafeteria Plan
Regional Systems
Tax Strategies for Expatriate Income

Laissez faire
Tax equalization
Tax protection
Ad hoc
 Save the Global Bottom Line
Provide employees with assistance that
doesn’t show up as income
Provide some of the income in the home
country
Provide part of the compensation before or
after the assignment
Time the assignment to take advantage of
residency laws
Take advantage of incentives offered in the
host country
Issues in Designing a Compensation
Strategy for Multinationals
Establishing a worldwide
compensation system
Compensation of third-country
nationals
International benefits and related
taxes
Pension plans
Stock ownership plans
Summary
 Anyone interested in compensation needs to
adopt a global perspective.
 The globalization of businesses, financial
markets, trade agreements, and labor markets
is affecting every workplace and every
employment relationship.
 Employee compensation is embedded in the
different political-socioeconomic
arrangements found around the world.
 Compensation systems have a profound
impact on individual behavior, organizational
success, and social well-being. This holds
true within and across all national boundaries.
Review Questions
1. Rank the factors in the global guide according
to your belief in their importance for
understanding and managing compensation.
a. How do your ranks differ from your peers?
b. From international peers?
c. Discuss how the rankings may change over time.
2. Distinguish between nationwide and industry-
wide pay determination. How do they compare
to a business strategy-market approach?
3. Develop arguments for and against “typical”
Japanese style, German style, and U.S. style
approaches to pay.
 Review Questions (continued)
4. Distinguish between global, expatriates,
local nationals, and third-country nationals.
5. Under the balance sheet approach to paying
expatriates, most of total compensation is
linked to costs of living. Some argue that
expatriate pay resembles a traditional
Japanese pay system. Evaluate this
argument.
6. What is meant by “the full house” or
“variations within a nation”? Evaluate its
importance in understanding and managing
global total compensation.