International human resource management lesson 07

LESSON COMPENSATION AND INCENTIVES CONTENTS 7.0 Aims and Objectives 7.1 Introduction 7.2 Designing Compensation Programme 7.2.1 Compensation 7.2.2 Employee Benefits 7.2.3 Objectives of International Compensation 7.3 Approaches to International Compensation 7.3.1 Going Rate Approach 7.3.2 Balance Sheet Approach 7.4 Factors Affecting International Compensation System 7.4.1 Host Country Market Cost of Living 7.4.2 Nature of the Expatriate Job 7.4.3 Culture Adjustment 7.4.4 International Living Cost Data 7.5 International Benefits 7.6 Adjustments and Incentives 7.6.1 Base Salary 7.6.2 Foreign Service Inducement/Hardship Premium 7.6.3 Allowances 7.6.4 Differentiating between PCNs and TCNs 7.6.5 Termination of Contract 7.6.6 Incentives and Corporate Commitments 7.7 Japanese Model and Matsushita 7.8 Let us Sum up 7.9 Lesson End Activity 7.10 Keywords 7.11 Questions for Discussion 7.12 Suggested Readings 7.0 AIMS AND OBJECTIVES After studying this lesson, you will be able to: Define international compensation and benefits Describe various components of international compensation 132 International Human Resource Management Know what are the various approaches of international compensation Explain factors that affect international compensation system 7.1 INTRODUCTION Worker compensation tends to vary widely around the business world Consider, for example, a comparison between U.S and Chinese worker compensation First all, the average wage of the Chinese worker is only about to 5% of that of the U.S worker, but the Chinese are not required to pay income tax, insurance premiums, or pension plan payments In addition, Chinese housing costs only about one dollar a month, so the difference in net income is not as large as first indicated, although the differential is still significant In Japan, compensation is based on the traditional Oyabun-Kobun, or parentchild relationship, in which pay and promotions are determined almost entirely by seniority In the new European Community (EC), efforts are progressing to establish Europay, by which member nations would develop common policies regarding employment practices, especially compensation (Markland, 1987) Employee benefits also vary by country For instance, benefits and employee perks constitute a much greater share of the overall compensation package in Europe than in America Cross-cultural differences impact the importance of benefits For instance, vacation time is not an important benefit to the Japanese worker, who seldom takes more than three or four days off in a year However, vacation and holiday time-off is critical in Africa, most Muslim nations, and some Latin American countries 7.2 DESIGNING COMPENSATION PROGRAMME HR executives in global firms spend a great deal of time and effort in designing and managing compensation programmes, because of their high costs and impact on corporate performance, commitment of employees and their retention Compensation also influences organisational culture, recruitment and selection of competent employees, motivation and performance Then there are issues in designing compensation programmes, such as parity between HCNs and PCNs, state of the labour market and relevant national laws and practices Compensation decisions are strategic decisions and play a key role in achieving performance and sustainable competitive advantage for international firms These policy decisions should be consistent with the overall strategy, structure and business needs of the multinational Second, the policy should attract and retain the best staff in those areas where the firm has greatest needs and opportunities and where its core competency lies Third, the policy must facilitate the transfer of international employees in a cost effective manner Fourth, the policy should give due consideration to equity and ease of administration It should reduce cost of operations and enhance commitment of employees It should also facilitate international posting and transfer of employees (Gupta, 2006) These policy decisions regarding compensation and benefits require the knowledge of employment and taxation laws, customs, cost of living index, environment, employment practices of various countries and so on Without such comprehensive knowledge and database, the corporate HR executive will not be able to advise expatriates regarding avoidance of double taxation or to reimburse the actual costs or decide about incentives that will encourage employees to take up foreign assignments In addition, the knowledge of labour markets and industry norms regarding benefits and compensation is also necessary In order to ensure equity with PCNs, the salary of expatriates has to be adjusted for foreign currency fluctuations of the two countries unless they are paid full salary and allowances in the home country currency If the expatriates are paid in local currency, then their salary should also be adjusted for rise in the cost of living in that country from time to time Hence HR managers have to continuously watch foreign exchange rate fluctuations and monitor rate of inflation or cost of living index in different countries For multinational firms, successful management of compensation and benefits requires knowledge of the employment and taxation laws, customs, environment, and employment practices of many foreign countries Also needed are familiarity with currency fluctuations and the effect of inflation on compensation, and an understanding of why and when special allowances must be supplied and which allowances are necessary in what countries All of these needs must be fulfilled within the context of shifting political, economic, and social conditions Because of their high-cost, HR managers spend a general a great deal of time developing effective compensation and benefit programs for international employees A recent report in Fortune on doing business in China (Tomlmson; 1997) reported that hiring a local Chinese manager with 15 years of experience would cost less than U.S.$70,000; a U.S expatriate chief financial officer would cost U.S.$300,000 with the following compensation package (all figures in U.S.$): Salary Car and driver $130,000 12,000 Benefits: Medical 3,000 Pension 13,000 Housing 97,000 Flights home 10,000 Rest and Rehabilitation 10,000 Private school for children 25,000 Total $300,000 While a driver may be considered a luxury in most Western countries, available only to CEOs, in developing economies a driver is both economical in terms of cost and it is in the interests of the multinational to provide this benefit Apart from the practical realities that managers are expected to have a driver, parking is frequently chaotic in developing countries (especially in large cities) and the driver also performs the function of a parking attendant It can also be quite dangerous for expatriates to drive in certain developing countries For example, in some developing countries it is quite common for the police to arrest drivers involved in traffic accidents and keep them in detention while the matter is sorted out in terms of responsibility and damages Such a risk is unacceptable to most firms and many multinationals not allow their expatriate employees to drive at all in certain developing countries and provide local drivers for both the expatriate and spouse 7.2.1 Compensation Compensation may be defined as the financial remuneration the employees receive in exchange for their labour Compensation management deals with wages, salaries, pay increase, and other monetary issues The compensation system is designed to reward 133 Compensation and Incentives 134 International Human Resource Management employees is an equitable manner and to serve as an inducement for the attraction and retention of a good workforce Cherrington (1991) writes that compensation decisions should achieve six critical objectives: Be legal: Compensation decisions should be consistent with federal, state, and local laws and regulation Be adequate: Compensation should be sufficient to attract qualified job applications and retain them Be motivating: Compensation should be sufficient to provide the necessary incentives to motivate employees to high performance levels Be equitable: Employees should be made to feel that the compensation system is equitable Provide security: Employees should be made to feel that their income is secure and predictable Be cost-benefit effective: The employing organisation should administer the compensation system effectively The design of a wage and salary structure begins with the job evaluation, which is the process of assessing the values of the jobs within the organisation The most common job evaluation system is the point system, which is accomplished in seven steps: Perform a job analysis and document or update the job descriptions Choose a point-based job evaluation, that assigns point values for the various skills and responsibilities inherent in the jobs Use the point-based evaluation to assess the value of the jobs Select the key jobs and obtain a pay survey to establish their market pay rates Compare the survey pay rates for the key jobs with their job evaluation points by plotting a pay-trend line on a graph From the pay-time line, assign average pay rates to the non-key jobs Group the jobs into categories and establish pay ranges within each categories (Daft; 1991) 7.2.2 Employee Benefits Benefit management is concerned with the administration of insurance, pensions, vacations, educational benefits, and other matters of value to the employee Because benefits are usually of a monetary nature, they are coordinated closely with compensation management Benefit programmes are based on three critical philosophies: (1) sharing the risks of illness and injury; (2) forced savings for that ‘rainy day’; and (3) sharing the costs of special human services (Cherrington; 1991) Specifically, optional employee benefits may be categorised as health and accident insurance, life insurance, income continuation, pay for time off (vacations, holidays, sabbaticals, etc.), and employee services such as employee assistance programmes: 7.2.3 Objectives of International Compensation When developing international compensation policies, a firm seeks to satisfy several objectives First, the policy should be consistent with the overall strategy, structure, and business needs of the multinational Second, the policy must work to attract and retain staff in the areas where the multinational has the greatest needs and opportunities Third, the policy should facilitate the transfer of international employees in the most cost-effective manner for the firm Fourth, the policy must give due consideration to equity and ease of administration The international employee will also have a number of objectives that need to be achieved from the firm’s compensation policy First, the employee will expect that the policy offers financial protection in terms of benefits, social security, and living costs in the foreign location Second, the employee will expect that a foreign assignment will offer opportunities for financial advancement through income and/or savings Third, the employee, will expect that issues such as housing, education of children, and recreation will be addressed in the policy 7.3 APPROACHES TO INTERNATIONAL COMPENSATION There are two main options in the area of international compensation—the Going Rate approach and the Balance Sheet Approach 7.3.1 Going Rate Approach The key characteristics of this approach are summarized in Figure 7.1 With this approach, the base salary for international transfer is linked to the salary structure in the host country The multinational usually obtains information from local compensation surveys and must decide whether local nationals (HCNs), expatriates of the same nationality, or expatriates of all nationalities will be the reference point terms of benchmarking For example, a Japanese bank operating in New York would need to decide whether its reference point would be local U.S salaries, other Japanese competitors in New York, or all foreign banks operating in New York With the Going Rate Approach, if the location is in a low-pay country, the multinational usually supplements base pay with additional benefits and payments Based on local market rates Relies on survey comparisons Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities Compensation based on the selected survey comparison Base pay and benefits may be supplemented by additional payments for low-pay countries Figure 7.1: Going Rate Approach There are advantages and disadvantages of the Going Rate Approach that are summarized in Figure 7.2 Advantages include: equality with local nationals (very effective in attracting PCNs or TCNs to a location that pays higher salaries than those received in the home country), approach is simple and easy for expatriates to understand, expatriates are able to identify with the host country, and there is often equity among expatriates of different nationalities 135 Compensation and Incentives 136 International Human Resource Management Advantages Disadvantages Equally with local nationals Variation between assignments for same employees Simplicity Variation between expatriates of same nationality in different countries Identification with host country nationalities Potential re-entry problems Figure 7.2: Advantages and Disadvantages of the Going Rate Approach 7.3.2 Balance Sheet Approach The key characteristics of this approach (the most widely used approach for international compensation) are summarized in Figure 7.3 The basic objective is to “keep the expatriate whole” (Teague, 1972) (i.e., maintaining relatively to PCN colleagues, and compensating for the costs of an international assignment) through maintenance of home-country living standard, plus a financial inducement to make the package attractive The approach links the base salary for PCNs and TCNs to the salary structure of the relevant home country For example, a U.S executive taking up an international position would have his or her compensation package built on the U.S base-salary level rather than that applicable to the host country The key assumption of this approach is that foreign assignees should not suffer a material loss due their transfer, and this is accomplished through the utilization of what is generally referred to as the balance sheet approach The basic objective is maintenance of home-country living standard, plus financial inducements Home-country pay and benefits are the foundations of this approach Adjustment to home package to balance additional expenditure in host country Financial incentives (expatriate/hardship premium) added to make the package attractive Most common system in usage by multinational firms Figure 7.3: Balance Sheet Approach There are four major categories of outlays incurred by expatriates that are incorporated in the balance sheet approach (Dowling, etc 2001): Goods and services—home-country outlays for items such as food, personal care, clothing, household furnishings, recreation, transportation, and medical care Housing—major costs associated with housing in the host country Income taxes—parent-country and host-country income taxes Reserve—contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, and so on Where costs associated with the host-country assignment exceed equivalent costs in the parent country, these costs are met by both the firm and the expatriate to ensure that parent-country equivalent purchasing power is achieved Employee: Position: Country: Reason for change: Effective date of change: Item Brian Smith Marketing Manager New Euphoria New Assignment February 1998 Amount Paid in A$ PA A$ PA 67,500 Base salary Cost of living allowance Overseas service premium (20%) Hardship allowance (20%) Housing deduction (7%) Tax deduction 135,000 33,750 27,000 27,000 -9,450 -51,079 27,000 27,000 -9,450 -51,079 Total COLA Index = 1500 Exchange Rate = 1.5 162,221 60,971 137 Compensation and Incentives Paid in local currency NE$ PA 101,250 50,625 151,875 Authorized / Date Figure 7.4: Expatriate Compensation Worksheet Figure 7.4 shows a typical spreadsheet for an expatriate assignment using the balance sheet approach In this example, an Australian expatriate is assigned to a country called New Euphoria which has a COLA index of 150 relative to Australia, and an exchange rate of 1.5 relative to the A$ In addition to a foreign service premium, a hardship allowance is also payable for this location Housing is provided by the firm, and a national cost for this is recognized by a 7% deduction from the package, along with a national tax deduction The expatriate can see from this spreadsheet what components are offered in the package and how the package split between Australian currency and New Euphoria currency There are advantages and disadvantages of the balance sheet approach, which are summarized in Figure 7.5 Advantages Disadvantages Equity Can result in great disparities between assignments between expatriates of different nationalities between expatriates of the same nationality between expatriates and local nationals Facilities expatriates re-entry Can be quite complex to administer Easy to communicate to employees Figure 7.5: Advantages and Disadvantages of the Balance Sheet Approach Check Your Progress 1 What is balance sheet approach of international compensation management? Mention the salient features of the going rate approach 138 International Human Resource Management 7.4 FACTORS AFFECTING INTERNATIONAL COMPENSATION SYSTEM To keep employees whole “is the goal of expatriate compensation (Omig, 1999, p40) In order to maintain expatriates’ feeling “wholeness”, organizations need to consider following factors (Robert et al.) 7.4.1 Host Country Market Cost of Living Scholars suggest that cost of living in the host country is the greatest impact on expatriate compensation (Frazee, 1998b, Overman, 2000) Also housing, children’s education, and healthcare costs are the details need to be discussed when people considering the cost of living in the host country (Robert et al) For example, an expatriate family leaves their own American and move to Japan, May be their home used to be a big house located in a quite suburb But now their rooms are small apartment stated in central area in Tokyo It will be a big changing for them and it is very hard for these family members to start their new life (Omig, 1999) Also expatriate employee can not his (her) assignment very well In order to make sure expatriates’ working quality, compensation package should include the detail about housing change, introduce the new environment, list advantage and disadvantage of these changing Then expatriates know what will happen in the future and also they can lots of prepare to adopt the new home Then about healthcare, healthcare is also one of important factors of compensation package according the research by Frazee (1998a) Lots of international company have different insurer between home country and expatriate For instance, the expatriate worked in Hong Kong, while the insurer is Australian In this situation, normally the claims document is finished in Chinese But it is so inconvenient for the Australian headquarters reading this work It should be translated and will take a long time (Franzee, 1998) So these days, some enterprises contracting with insurance company which have special plan for expatriates These plans including special progress to deal with expatriates’ claim more quickly than normal company (Robert et al) 7.4.2 Nature of the Expatriate Job The nature of the expatriate job is very important for the whole expatriate management system (Tahvanainen, 2000) Expatriate employees want to achieve different tasks based on the different nature of their job (His-An Shih et al, 2003) This also means “expatriate performance appraisal should according to the nature of the expatriate mission” (HisAn Shih et al, 2003) The difficult part for the expatriate manager is that the nature of their job is defined by their home country, but performed in host country (Peter and Denice 2004) Especially when the expatriate need to complete important tasks and stay at host country for long time, the host country manager will be involved more in the expatriate objects’ decision (Tahvanainen, 2000) Scholars some research about expatriates of four information technology industry who worked in Taiwan They found different nature of the expatriate’s mission related to different goal-setting arrangement Hitachi (Japan), Philips (Dutch), Samsung (Korea) use the same way: the host country manager approbate the goals set by expatriates (His-An Shis et al, 2003) “I need to set my own work goals every six months and discuss them with my direct supervisor here (Philip).” “We have to set our own performance goals and get our (host) manager’s approved (Samsung)” But Applied Materials Taiwan’s expatriates set their performance after they satisfied their clients “We are also evaluated by our clients for instance, part of my performance goals is decided jointly by my boss and my client firm’s executives (AMT)” (His-An Shih et al, 2003) These findings provides hypothetic to EPM model which suggested Tchvaneiner (1998) And this model can help MNEs improve their global management to get competitive advantage 7.4.3 Culture Adjustment From past experience, hard to accept the new environment and difficult to operate effectively are main problems for most expatriates (Brewster and Harries, 1999) Pre-departure training, like language and sensitive training is very important for improving expatriates’ culture awareness and cross-culture suitability (Dowling et al, 1999) However, lots multinationals’ cross-culture training is not enough Some are insufficient, some are incomplete (Brewster, 1995; Waxin et al., 1997, Selmer, 2000) Why these things happen? Because it’s very hard to evaluate the effectiveness of such training (Marie-France Waxin et al) Teaching expatriate employees from one culture to coordinate with people of another culture is the goal of cross-culture training (Brislin and Peterson, 1986; Mendenhall and Oddou, 1991) For example, these days more and more multinational companies enter Chinese market There is one crucial reason decide success or failure of multinational enterprise This reason is culture difference (Zhuang, 2003) Scholars suggest expatiates managers should pay attention to two aspects, “how to handle culture difference, how to effectively communicate with staff members.” (Yuan qiang, zhou et al.,) Also there are some research about one American company and one European company conduct in China The American company believes training is a good way to make expatriate employees recognize the host country culture and communication is useful to reduce the gap of difference The European company considers culture fusing by training and providing opportunities, like business travels and making people appreciate different culture Communication is the most useful way to deal with the misunderstanding problems between expatriate managers and local staffs (Yuan qiang, zhou et al.) Both of these companies have common sense on the culture identification They all believe culture identification should be realized through training and daily influence (Yuan qiang, zhou et al.,) Also some global company offer extensive pre-departure training, such as culture awareness programs: “I attend Chinese classes three months before my assignment here (Samsung manger) In conclusion, researches show cross-culture training already has positive effect on culture adjustment 7.4.4 International Living Costs Data Obtaining up-to-date information on international living costs is a constant issue for multinationals The level of local knowledge required in many areas of international HRM requires specialized advice Consequently, many multinationals retain the services of consulting firms that may offer a broad range of services or provide highly specialized services relevant to HRM in the multinational context With regard to international living coasts, a number of consulting firms offer regular surveys calculating cost-of-living index that can be updated in terms of currency exchange rates A recent survey of living costs (Finfacts, 2003) in selected cities ranked the ten most expensive cities as Tokyo, Moscow, Okasa, Hong Kong, Beijing, Geneva, London, Seoul, Zurich and New York The least expensive city was Asuncion (Paraguay) Multinationals using the balance sheet approach must constantly update compensation packages with new data on living costs, an on-going administrative requirement This is an issue to which expatriate employees pay great attention, and forms the basis of many complaints if updating substantially lags behind any rise in living costs Multinationals 139 Compensation and Incentives 140 International Human Resource Management must also be able to respond to unexpected events, such as the currency and stock market crash that suddenly occurred in a number of Asian countries in late 1997 Some countries, such as Indonesia, faced a devaluation of their currency by over 50% against the U.S dollar in a matter of weeks, which had a dramatic impact on prices and the cost of living It is also to take a wider view and focus on business costs rather than living costs for expatriates, because the multinational firm is interested in the overall cost of doing business in a particular country as well as the more micro issue of expatriate living costs Germany is the most expensive country overall because of its very high basic wages, while the second most expensive rank for the United States is in large part because of high executive salaries In general, developed countries rank as more expensive than developing countries because their wage costs are higher 7.5 INTERNATIONAL BENEFITS The complexity inherent in international benefits often brings more difficulties than when dealing with compensation Pension plans are very difficult to deal with country to country because national practices vary considerably Transportability of pension plans, medical coverage, and social security benefits are very difficult to normalize Therefore, firms need to address many issues when considering benefits Most U.S PCNs typically remain under their home-country’s benefit plan In some countries, expatriates cannot opt out of local social security programmes; in such circumstances, the firm normally pays for these additional costs European PCNs and TCNs enjoy portable social security benefits within the European Union Multinationals also provide vacations and special leave Included as part of the employee’s regular vacation, annual home leave usually provides airfares for families to return to their home countries Rest and rehabilitation leave, based on the conditions of the host country, also provides the employee’s family with free airfares to a more comfortable location near the host country Emergency provisions are available in case of a death or illness in the family Employees in hardship locations often receive additional leave expense payments and rest and rehabilitation periods (Dowling, etc 2001) 7.6 ADJUSTMENTS AND INCENTIVES If we contrast the objectives of the multinational and the employee we see the potential for many complexities and possible problems, since some of these objectives cannot be maximized on both sides The area of international compensation is complex primarily because multinationals must cater for three categories of employees: PCNs, TCNs, and HCNs The key components of international compensation include base salary, foreign service inducement/hardship programme, allowances, and benefits 7.6.1 Base Salary The term base salary acquires a somewhat different meaning when employees go abroad In a domestic context, base salary denotes the amount of cash compensation that serves as a benchmark for other compensation elements (e.g., bonuses and benefits) For expatriates, it is the primary component of a package of allowances, many of which are directly related to base salary (e.g., foreign service premium, cost-of-living allowance, housing allowance) as well as the basis for in-service benefits and pension contributions The base salary is the foundation block for international compensation and the employee’s package depending on whether the base salary is linked to the home country of the PCN or TCN or whether an international rate is paid 7.6.2 Foreign Service Inducement/Hardship Premium Parent-country nationals often receive a salary premium as an inducement to accept a foreign assignment as compensation for any hardship caused by the transfer Under such circumstances, the definition of hardship, eligibility for the premium, and amount and timing of payment must be addressed As Ruff and Jackson (1974) have noted however, making international comparisons of the cost-of-living is problematic It is important to note that these payments are more commonly paid to PCNs than TCNs Foreign service inducements, if used, are usually made in the form of a percentage of salary, usually to 40% of base pay Such payments vary, depending upon the assignment, actual hardship, tax consequences, and length of assignment 7.6.3 Allowances Issue concerning allowances can be very challenging to a firm establishing an overall compensation policy, partly because of the various forms of allowances that exist The cost-of-living allowance (COLA), which typically receives the most attention, involves a payment to compensate for differences in expenditures between the home country and the foreign country The provisions of a housing allowance imply that employees should be entitled to maintain their home-country living standards Such allowances are often paid on either an assessed or an actual basis Other alternatives include company-provided housing, either mandatory or optional; a fixed housing allowance; or assessment of income, out of which actual housing costs are paid Financial assistance and/or protection in connection with the sale or leasing of an expatriate’s former residence are offered by many multinationals Those in the banking and finance industry tend to be the most generous, offering assistance in sale or leasing, payment of closing costs, payment of leasing management fees, rent protection, and equity protection There is also a provision for home leave allowances Many employers cover the expense of one or more trips back to the home country each year The purpose of paying for such trips is to give expatriates the opportunity to renew family and business ties, thereby helping them to avoid adjustment problems when they are repatriated Educational allowances for expatriate’s children are also an integral part of any international compensation policy Allowances for education can cover items such as tuition, language class tuition, enrolment fees, books and supplies, transportation, room and board, and uniforms The level of education provided for, the adequacy of local schools, and transportation of dependents who are being educated in other locations may present problems for multinationals The employer typically covers the cost of local or boarding school for dependent children, although there may be restrictions, depending on the availability of good local schools and on their fees Relocation allowances usually cover moving, shipping, and storage charges, temporary living expenses, subsidies regarding appliance or car purchases (or sales), and down payments or lease-related charges Allowances regarding perquisites (cars, club memberships, servants, etc.) may also need to be considered (usually for more senior positions, but this is according to location) These allowances are often contingent upon tax-equalization policies and practices in both the home and the host countries Many multinational firms are also offering spouse assistance to help guard against or offset income lost by an expatriate’s spouse as a result of relocating abroad Although some firms may pay an allowance to make up for a spouse’s lost income, U.S firms are beginning to focus on providing spouses with employment opportunities abroad, either by offering job-search assistance or employment in the firm’s foreign unit (Dowling, etc 2001) 141 Compensation and Incentives 142 International Human Resource Management 7.6.4 Differentiating between PCNs and TCNs One of the outcomes of the balance sheet approach is to produce differentiation between expatriate employees of different nationalities because of the use of nationality to determine the relevant home-country base salary In effect, this is a differentiation between PCNs and TCNs Many TCNs have a great deal of international experience because they often move from country to country in the service of one multinational (or several) headquarters in a country other than their own (e.g., and Indian banker may work in the Singapore branch of a U.S bank) Multinational firms need to match their compensation policies with their staffing policies and general HR philosophy If, for example, a firm has an ethnocentric staffing policy, its compensation policy should be one of keeping the expatriate whole (i.e., maintaining relativity to PCN colleagues plus compensating for the costs of international services) If, however, the staffing policy follows a geocentric approach (i.e., staffing a position with the ‘best person’ regardless of nationality) there may be no clear ‘home’ for the TCN, and the firm will need to consider establishing a system of international base pay for key managers paid in a major reserve currency, such as the U.S dollar or the Deutsche Mark This system allows firms to deal with considerable variations in base salaries for managers Milkovich and Bloom (1996) argue that nationality has had an excessive influence on managing compensation and reward systems internationally, and propose a strategic model, shown in Figure 7.6 CHOICE Stock Purchase Assignments CUSTOMIZE Base/ Bonus Mix Flexible Schedules CORE Competitive Cash Basic Benefits Performance Based Employability Work Challenges Stock Options Benefit Choices Tax Deferral Base / Bonus Mix Source: Compensation and Benefits Review, 1995 (30 no 1) p 22 Figure 7.6: Strategic Flexibility Model of International Compensation This model groups consist of total compensation into three sets: core, crafted, and choice Specific practices in the core section may vary according to market and local conditions but must be consistent with the core policies The crafted set of compensation elements assumes that regional managers have discretion to choose from a menu of compensation forms, while alternatives in the choice set of offer flexibility for employees to select among various forms of compensation The model also supports the performance management approach It is clear that such a strategic flexibility model has the potential to overcome some of the problems identified in both the Going Rate and Balance Sheet approaches to international compensation because firms may be able to utilize aspects of both approaches that suit particular circumstances 7.6.5 Termination of Contract One aspect of compensation that varies from country to country and has important implications for both subsidiary HR managers and HQ-based managers is the issue of what happens if the MNC decides to leave a foreign country or another firm takes over the management, and is not interested in doing business in this country When such a decision is made, termination liabilities may result in significant payoffs to employees By tradition, or law, or union contract, the MNC may be required to pay up to two years’ salary to employees who are involuntarily terminated 7.6.6 Incentives and Corporate Commitments Job satisfaction in organizations in Japan is reported to be low (De Beer, 1978) yet productivity is often reported to be high (Chen, 1995) Job satisfaction is a measure of motivation, but it is only one part of it Motivation generally is a key factor in productivity, organizational effectiveness, as well as in the well-being of people The way people are motivated is an aspect of the way organizations, in different parts of the world, manage the disjuncture between life at work, and life outside work Incentive schemes based on pay are often developed in individualistic cultures, where the relationship with employees is seen as instrumental and contractual This may be based on an achievement motive perspective (McCelland, 1987) Although there is some evidence of the introduction of pay incentive schemes in countries that are assumed to have a collectivist culture (Jackson, Back, 1998) in Japan a more inclusive concept of motivation is employed which is based on instilling commitment to the organization, and by the organization This may provide at least one explanation of why work satisfaction is low, while general commitment to the company and productivity are high Corporate Commitment Etzioni (1975) has classified employee commitment, or involvement in the organization, into three different levels: Moral involvement: Positive and intense orientation, with an internalization of organizational goals and values; Calculative involvement: Based on exchange where the organization is seen as a means to an end Employees will work spontaneously and cooperatively if this is seen as benefiting them directly, but will leave if a more lucrative opportunity occurs outside; Compliant involvement: Some identification with the organisation, but behaviour is based on compliance The organisational values are espoused but not owned; Alternative involvement: A negative set of attitudes that reject the organizational values Membership continues because of lack of alternatives Effort is minimal Humanism indicates a regard for people as an end in themselves Whether or not this end is that of the individual as an entity, or the collective as an entity that comprises the individual, might be further defined by the level of collectivism or individualism within a society It is these cultural aspects that may influence the nature and levels of employee/ corporate commitment, as well as specific organizational and management factors Beau and Chung (1997) have shown Korean organizations to be different from those of Japan in the lower level of solidarity shown towards co-workers Although Korean employees expect a higher level of commitment from their companies towards them, the corporation shows a lower level of solidarity to workers than either its Japanese or its American 143 Compensation and Incentives 144 International Human Resource Management counterpart Chen (1995) The Korean style of people management is seen as being less consultative than that of Japanese firms, with a lower loyalty downwards, yet with loyalty expected upwards, and as representing a more authoritarian system than that of Japan Chen (1995) Korea has been more influenced by American management systems than Japan Korean workers put a stronger emphasis on extrinsic rather than intrinsic factors of motivation The greater mutual commitment found in Japanese organizations may represent a ‘capturing’ of the wider societal values of collectivism and humanism It may be that Japanese organizations have been more successful at doing this than organizations in other collectivist cultures The metaphor of the ‘motivating’ organization may therefore be appropriate in describing this more holistic approach to motivation, and looks at the extent to which such approaches may be successfully exported to other countries This is done within the wider framework of organizational motivational systems that are schematized in Figure 7.7 Incentives Corporate commitment to employees Task variables job design technology physical conditions Job variables pay autonomy Career variables opportunities Organizational variables participation conditions opportunities Requirements Job satisfaction Cultural variables collectivism uncertainty avoidance work centrality Career satisfaction Employees commitment to corporation Successfully obtaining corporate, group and individuals’ ends Needs satisfaction Individual variables Personal motivation attitudes and ambitions Source: International HRM: A cross-cultural Approach (2004), p 109 Figure 7.7: Relationship between Incentives, Needs and Commitment Task, Job, Career and Organizational Incentives A major factor in any consideration of employee commitment and motivation is the reward or compensation package that the employee receives People work for a living Most people would not go to work if they were not paid in some form This is one of Herzberg’s ‘hygiene’ factors and a prerequisite for someone to the job (Herzberg et al., 1959) Incentives focus on the external factors of motivation, rather than the internal needs or drives of individuals This is the area over which the manager has more influence when motivating subordinates: making sure the incentives match the needs Aspects of this that have been of concern in organisations (Jackson 1993c) include task, job, career and organisational variables Task Variables These include job design and working conditions, including available technology The way a job is designed influences the amount of intrinsic motivation, that is, the satisfaction of doing a job well or the enjoyment derived from the job, as well as the amount of autonomy within that job Job Variables These may include pay and degree of autonomy Pay is usually regarded as high in the list of extrinsic incentives of a job Money is also part of a symbolic system within Western society, representing a person’s worth Money may therefore be bound up with higher order needs such as self-actualization Career Variables These mainly involve promotion opportunities and providing extrinsic rewards, and satisfy a range of needs within Maslow’s hierarchy increases in pay, and self-fulfillment Organizational Variables Participation in decision-making may be a key factor closely connected to the way jobs are designed and to the management style of the manager and the structural communication arrangements of an organization This may also influence the amount of intrinsic reward derived from a job Check Your Progress Mention various key components of international compensation programme 7.7 JAPANESE MODEL AND MATSUSHITA Japanese management and what the West can learn from it, has been popular since Pascale and Athos published ‘The Art of Japanese Management’ in 1981 Pascale and Athos tell the story of Matsushita Konosuke Matsushita started off as an apprentice in a cycle shop in 1918, then founded his business in the consumer electrics industry which went on to become one of the 50 largest corporations in the world He based his initial strategy on developing his own distribution system dealing directly with retailers This was in direct contrast with Japanese practices 145 Compensation and Incentives 146 International Human Resource Management Matsushita has been built on developing market share and passing on the cost savings from high volume production to consumers in lower prices The company does not introduce new products but improves on the quality and price structure of imitations of original products Extensive R&D is invested in this purpose Its assumptions are that profits are tied to growth, and that long-term investment in growth will eventually pay off in profits Matsushita introduced decentralization into his domestic organization to retain its entrepreneurial character With each product, independent progress could be clearly measured, managers would be self-sufficient and close to consumers, small divisions would be flexible, and divisional management would gain the required training for general management positions He did centralizing accounting, by introducing a central ‘bank’ for divisional profits, and by centralizing the personal and training functions The management aim was to “develop extraordinary qualities in ordinary men” The top management took a ‘hands on’ approach with Matsushita talking with his divisional heads every day, and spending time on the shop floor Local managers were expected to take initiatives and solve problems where they arose The prevailing management style was tough-minded and pragmatic, encouraging competition and conflict Emphasis was placed on training Professional staff started in the company with six months of selling, and also spent time on the production line Promotion was accompanied by training for the new job There were lifelong employment policies to maintain shared values that were also promoted through the training process The company encouraged employee suggestions, with monetary rewards We can thus provide a balanced view of Japanese management, whose chief features can be summarised as: Managerial autonomy and long-term planning: Japanese managers have to worry less about the often parasitic interests of the shareholders Management can greatly influence ownership of the company and managers not have to serve the passive interests of workers with a life stake in the company Managers are therefore not pressured to meet short-term earning requirements and can take a longer view, both financially and in relation to employees’ long-term plans Corporate rigidity and hierarchy: Japanese companies tend to be rigidly organized and very hierarchical Under the level of chairman and then president, each department constitutes an autonomous power base, with the department head having the same authority as the president of a small company (Chen, 1995) Participatory decision-making: The ringi system of decision-making is well documented (Chen, 1995) Nemawashi is a practice used by management to informally and initially sound out employees’ ideas on a proposed course of action, and ringi seido is a formal procedure of management by group consensus This normally is initiated in one section, and forwarded to all relevant sections at the same level, then to section managers, department managers and president In both cases the idea is to obtain consensus, involvement and participation in decisionmaking The final decision is taken at the top, and the process can be lengthy Quality circles are an important institution and are regarded as a key feature of Japanese success They emphasize group working and bottom-up management, making recommendations upwards concerning product or service quality and operations, and which mirrors the ringi system (Gill, Wong, 1998) 7.8 LET US SUM UP Worker compensation tends to vary widely around the business world Employee benefits also vary by country Cross-cultural differences impact the importance of benefits HR executives in global firms spend a great deal of time and effort in designing and managing compensation programmes, because of their high costs and impact on corporate performance, commitment of employees and their retention Compensation may be defined as the financial remuneration the employees receive in exchange for their labour Compensation management deals with wages, salaries, pay increase, and other monetary issues Benefit management is concerned with the administration of insurance, pensions, vacations, educational benefits, and other matters of value to the employee There are two main options in the area of international compensation—the Going Rate approach and the Balance Sheet Approach Multinationals using the balance sheet approach must constantly update compensation packages with new data on living costs, an on-going administrative requirement The area of international compensation is complex primarily because multinationals must cater for three categories of employees: PCNs, TCNs, and HCNs The key components of international compensation include base salary, foreign service inducement/hardship programme, allowances, and benefits 7.9 LESSON END ACTIVITY Discuss the following statement: “Global compensation packages should keep expatriates even with what they would receive at home, but not allow them to get rich” 7.10 KEYWORDS Compensation: The financial remuneration the employees receive in exchange for their labour Benefit Management: It is concerned with the administration of insurance, pensions vacations, educational benefits and other matters of value to the employee Going Rate Approach: The base salary for international transfer is linked to the salary structure in the host country Balance Sheet Approach: Compensation system designed to match the purchasing power in a person’s home country Incentives: Motivational devices used such as bonuses or commissions to encourage special work effort 7.11 QUESTIONS FOR DISCUSSION What are the key components of an international compensation programme? Explain the “Going Rate” approach and “Balance Sheet” approach What approaches multinationals follow for handling international taxation? Explain the strategic flexibility of international compensation propounded by Milkovich and Bloom 147 Compensation and Incentives 148 International Human Resource Management Check Your Progress: Model Answers CYP 1 Balance Sheet Approach: It is a compensation system designed to match the purchasing power in a person’s home country Salient Features of Going Rate Approach: Based on local market rates Relies on survey comparisons Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities Compensation based on the selected survey comparison Base pay and benefits may be supplemented by additional payments for low-pay countries CYP Key Components of International Compensation Programme: (i) Base salary (ii) Hardship premium (iii) Allowances (iv) Other benefits 7.12 SUGGESTED READINGS P.L Rao, International Human Resource Management, Excel Books, New Delhi, 2008 Briscoi, Schuler and Claus, International Human Resource Management, Routledge, 2008 Breuester, Sparrow and Vernon, International Human Resource Management (3rd edition) P J Dowling and D.E Welch, International Human Resource Management, Thomson, London, 2004  ... Claus, International Human Resource Management, Routledge, 2008 Breuester, Sparrow and Vernon, International Human Resource Management (3rd edition) P J Dowling and D.E Welch, International Human Resource. .. of international compensation management? Mention the salient features of the going rate approach 138 International Human Resource Management. ..132 International Human Resource Management Know what are the various approaches of international compensation Explain factors that affect international compensation system