Global Compensation

Foundations and Perspectives

Luis Gomez-Mejia, Steve Werner

• Publisher: Routledge
• Year: 2008
• Print ISBN: 9780415775038
• eBook ISBN: 9781135974275
• Topic: Business
• Subtopic: Business internazionale
• Index: Business

Compensation is a systematic approach to providing monetary value and other benefits to employees in exchange for their work and service. But pay and conditions becomes a more complicated issue for multinational companies which operate across different locations and cultures, and who employ an increasingly diverse range of personnel.

This unique new text gives in-depth analysis of the key themes and emerging topics faced by global enterprises when dealing with compensation issues. The first section, 'Foundation Concepts', looks at the design of compensation packages for a number of different employee groups; from supply chain management to research and development, as well as ethical considerations when dealing with a global context, and the concept of performance related pay. The second section, 'Global Applications', looks at current debates in the field, including the influence of national cultures on compensation schemes, discrepancies in CEO pay, and contrasts in wages between industry types.

Part of Routledge's Global HRM, this is is an invaluable text for any student of HRM, Business and Management, or any practitioner working in this area.

SECTION 1
Foundational concepts

1 The influence of institutional and cultural factors on compensation practices around the world

Gregorio Sánchez Marín

The globalization of economies, a process which is clearly leaving its mark on today’s world, has led to many changes such as the disappearance of trade barriers, the interdependence of economies, greater mobility of people and the progressive homogenization of culture. These factors, together with the increase in international competition, have modified the way in which organizations are managed. The main consequence has been the rise of the international company. Transnational businesses came onto the scene in the 1950s, when there was an intensification of international exchange and a subsequent increase in the number of firms selling their products on new markets and setting up filial companies abroad.

One may, therefore, state that the internationalization processes of companies have influenced globalization and have been encouraged by it. What challenges arise from globalization and the increase of competition in terms of managing organizations? In the first place, there are those emerging from having to trade in different countries with different levels of economic development, different legal and political systems, varied national and organizational cultures, with workers of different skills, expectations, values and motivations. Such internationalized organizations need, on the one hand, to attempt to adapt to the cultural and institutional contexts of the countries in which they are operating and, on the other, to set up a more global and homogenized organization which aligns and harmonizes its management structures throughout its offices, be they at home or abroad.

One of the basic pillars of success of international organizations is a correct adaptation of human resource management (HRM). If an organization is able to apply international management of human resources which can be adapted to the cultural demands and the expectations of all the employees, while at the same time configuring a global strategy, then it is more likely to achieve a competitive advantage (Scullion and Starkey, 2000). Thus, HRM practices should adopt a global view so that the organization is able to select, promote, reward and train its employees fittingly so that they, in turn, may contribute to overcoming the challenges presented by internationalization. (See Chapters 10 and 11 for more on this issue.)

In such a scenario compensation assumes a highly relevant role. Management of compensation practices in the sphere of global business is subject to the same adaptation conditions and requirements as other areas of HRM and maybe even more so since decisions on compensation have special impacts on employees and arouse greater social and even political sensitivity (Gomez-Mejia and Welbourne, 1991).

According to Bloom and colleagues (2003), compensation systems in the international arena require a more global approach which must move between two main objectives: (1) strategic alignment-compensation systems must be adapted to the organizational context to support and improve the corporate aims; and (2) adaptation to the institutional and cultural context—compensation systems must be adjusted to the local contexts within which the international firm is working. The balance struck between these two objectives can lead to compensation becoming a key element in the international success of the company. (See Chapter 11 for a different perspective on this.) This chapter seeks to analyze the role of compensation from an international perspective and to examine the main factors affecting it while studying how organizations can adapt their design to improve performance and increase motivation among employees, and hence, their competitive level.

Compensation in a global context

In order to understand compensation within an international context it is necessary, first of all, to recognize the existing differences and similarities between the various contexts in which the company operates, and then be in a position to handle such differences appropriately. Milkovich and Newman (2008) believe that employee compensation design hinges on the variations presented by four key factors—institutional, economic, organizational and individual. The changes—be they greater or smaller—that these factors impose in the different countries will be reflected in the changes that the organization may have to undertake when designing different compensation systems in the different territories in which it works.

Each factor is made up of a set of subfactors. The institutional factors are determined in the main by political structures and cultural traditions along with social contracts and trade union power. Business organizations are also of influence. The economic factors are integrated in the existing level of competitiveness and the degree of market development, the differences in ownership structures of the organizations and the characteristics of the tax systems. The organizational factors which may influence compensation design are related to the degree of autonomy enjoyed by the employees, the level of technology and innovation, and strategic aims. Finally, the individual factors refer to aspects connected with employees of international firms: demographic characteristics, level of knowledge and skills, attitudes, motivations and preferences.

Studies on compensation carried out at a local level (a single country) have analyzed almost all the factors. However, when the analysis is extended to the international sphere some factors assume much greater importance and their analysis requires special attention. Milkovich and Newman (2008) consider that a compensation analysis from a global perspective needs to focus primarily on five of the factors/subfactors: (1) social contracts; (2) trade unions; (3) capital markets and ownership structure; (4) management autonomy; and (5) institutional and cultural framework. These factors have been shown to be particularly important when explaining the variations which are produced in international compensation practices.

In terms of its being part of a social contract, Milkovich and Newman (2008) state that labor relations go beyond employee—employer interchange. This interchange also includes the state, all the owners of the other companies (acting at an individual or, through business associations, at a collective level) and all the employees (likewise acting at an individual or, through their unions, at a collective level). The relations and expectations of these three parties constitute the social contract. In this sense, it is clear that different people in different countries have different expectations and beliefs about the roles of government, unions, employees, employers and business organizations with respect to compensation. Thus, any understanding of the compensation phenomenon must include an understanding of the social contract established in each country. Efforts to modify employee compensation systems involve changes in the expectations of all parties to the social contract.

Perhaps the most extreme example of the effects of the social contract in compensation systems is that which relates to the degree of centralization within the compensation frameworks of different countries. According to Freeman and Katz (1994), the USA, United Kingdom and Canada use highly decentralized compensation systems with minimum government intervention. Countries such as Japan, Germany and Spain usually establish compensation systems of average centralization since they are controlled by the sector to which the company belongs. Elsewhere, Sweden, Denmark and Belgium have highly centralized frameworks with heavy government intervention, which form national wage systems.

Another example of a determining factor in international compensation design, and one which is related to the social contract, is the differing presence of trade unions in the different countries. Several papers (Katz and Darbishire, 2000; Boyer, 2001) have highlighted the high union membership in European countries such as Sweden and Denmark and the low membership in countries such as the United Kingdom. At the other end of the spectrum is the low union membership in Asian countries such as South Korea or Japan, and also in the case of the USA. Although some data seem to point to a downward trend in trade union power in countries where they have traditionally been very strong, the influence of collective agreements should not be overlooked. For example, in France or Spain, between 81 percent and 90 percent of workers are covered by collective agreements, although only 9 to 15 percent are members of a trade union (Boyer, 2001).

How does this affect international compensation systems? Union presence may, depending on the country in question, give rise to greater or lesser freedom for the organization when establishing its compensation system, and it may determine the level of resistance or involvement of the employees in the system. Thus, for example, in some countries, such as Germany or Belgium, employee compensation is established through a collective agreement with employees (even if they are not members of a union). Elsewhere in the European Union there is an attempt to set up employee boards which will be involved in any change in the companies’ compensation systems where they work (Milkovich and Newman, 2008).

Another aspect, related to the above, which may influence the design of the compensation system is social legislation. For example, within the European Union, the United Kingdom is the country with the fewest legal requirements. There is no minimum salary, no maximum number of hours and no formal methods of participation. The system is similar in the USA and Japan. In contrast, France and Germany have the most heavily regulated social welfare systems—Spain too, but to a lesser extent. In this sense, the element that can most influence compensation systems is labor costs and, especially, social costs (which are included in the compensation), costs which the organization must meet in all these countries (Brewster and Harris, 1999). Although high labor costs usually go hand in hand with higher levels of productivity (Schwab et al., 2000), which compensates for the higher salaries, it does often lead to negative decisions such as relocating the company in countries where labor costs are cheaper.

From an economic standpoint, the financial and ownership structures differ in organizations around the world and these differences may be important in understanding international compensation systems. For example, in the USA the ownership structure of organizations and access to capital is much less concentrated than in the majority of countries (National Center for Employee Ownership, 2005). At the other end of the spectrum there is South Korea, whose economic structure depends to a large extent on six huge corporations which are closely linked to six families (Ungson et al., 1997). In countries such as Germany and Spain, while the situation is not as extreme as in Asia, there are also high ownership concentrations by a small number of large banks which are majority shareholders in the largest, most important companies in their respective countries (Turner, 1998; Crespi and Garcia-Cestona, 2001). The different ownership models have consequences for certain compensation systems. Hence, Milkovich and Newman (2008), among others, hold that the establishment of incentives linked to an increase in the value of shares or share purchase options for employees makes little sense in large corporations in countries with high concentrations of ownership. Nevertheless, ownership in small, recently created businesses normally operates outside traditional channels, and so offering ownership linked incentives may be more effective when seeking to attract new employees.

The clearest illustration of the importance of ownership structure has been seen in China and in the Eastern European countries. As a result of the social and political upheavals in these places, a huge variety of forms of ownership have come about. For example, while state owned companies are still the majority employers in China, the private companies with foreign shareholders and wholly foreign companies now account for 50 percent of total profits in that country. In the new Chinese private businesses employees have different values and expectations from those in the public sector. The same can be said of the expectations of employers (i.e. the social contract), which are substantially different. Zhou and Martocchio (2001) illustrate how ownership structure has led to a change in salary preferences and in the expectations of Chinese workers. Those authors report that private sector employees prefer more performance linked compensation than their public sector counterparts.

Management autonomy refers to the degree of discretion which managers enjoy when dealing strategically with a compensation system. This level of autonomy is inversely related to the degree of centralization of the compensation system. The majority of companies in the USA or the United Kingdom, for example, enjoy greater freedom of action and decision when designing or modifying their employees’ compensation system than their counterparts in other European countries. In EU countries, there is generally more government and legislative intervention and strong trade union pressure, all of which reduces autonomy from directors of organizations when it comes to aligning compensation with business strategy or market conditions (Fajertag, 2000). It is not only governments and trade unions which can limit managerial discretion. Corporative policies are also influential. Compensation decisions taken at the mother company of a multinational and then exported to the filial firms in the other countries, could align themselves to the corporate strategy, although not in the economic or sociocultural context of such countries (Roth and O’Donnell, 1996; Brewster and Harris, 1999). For example, North American multinationals which emphasize performance based compensation could expand such a policy to their filial companies in Asian countries, for example Japan, where egalitarian compensation systems are preferred, which supposes a limit to the autonomy of local managers when adapting compensation systems to local cultural conditions.

The above example leads us to ask how the institutional and cultural factors of a certain country or territory might exercise any influence of significance in the design of compensation systems. The institutional and cultural environment has been and still is without doubt the factor considered as most responsible for changes and adaptations in international compensation systems and, hence, that which has generated most research in recent times.

Institutional factors and compensation design

Institutional theory and, in particular, the contemporary neo institutionalist current (Meyer and Scott, 1983; Scott, 1987; Zucker, 1987) has become one of the most interesting technical frameworks to explain the behavior of organizations which have to face up to turbulent, changing environments where uncertainty reigns and seems to ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of illustrations
• Notes on contributors
• Foreword
• Preface
• Acknowledgments
• SECTION 1 Foundational concepts
• SECTION 2 Global applications