Evaluation of the strategy involved in employee compensation

Introduction

Compensation is at the core of any employment exchange (Milkovich and Newman, 1993; Simon, 1951). It is probably the most basic reason people agree to become employees and it serves as a defining characteristic of any employment relationship (March and Simon, 1958). Recently, in a context of internationalization the dilemma between cultural and sector predictors of compensation policies is more important than ever. Even some well known cultural norms, such as lifetime employment in Japan, industry wide bargaining in Germany and attractive wide-range social safety net in France, are weakening in response to the pressures of a global economy. Unprecedented challenges have been created by pressures caused by globalization and market oriented economies for multinational employers. The impact of the growth of international economy has become a major force in business in general and in human resource management in particular. Meanwhile, company leaders are recognizing that global mind-sets are required to meet these challenges and create opportunities. Compensation is one of the most complex areas of international human resource management. Multinational cultures to consider carefully the motivational use of incentives and rewards among the employees drawn from different national or country categories. Compensation and reward systems they can be crucial tools to support this global mind-set, or can form major obstacles blocking the way. In this study, several factors which influence compensation strategy have been investigated.

International compensation strategy should be studied within the context of changing economic and business conditions. The dynamics of both the local and/or regional, and international and/or global business context in which the firm operates should be given serious consideration. Further, it could be helpful to study compensation management within the context of the industry and the firm’s strategy and its other functional areas and operations. In taking these perspectives, one needs to use multiple levels of analysis when studying compensation package: the external social, political, cultural and economic environment; the industry, the firm, the sub-unit, the group, and the individual. Research in contextual isolation is misleading: it fails to advance understanding in any significant way (Adler and Ghadar, E. 1990; de Gruyter et al. 1995).

For organizations competing in worldwide markets, managerial compensation and reward systems always depend on understanding the economic, social, and political changes existing in the countries in which they operate. A compensation package should be more than just the means to attract and retain the talented employees. Furthermore, a right kind of compensation plan can give companies a powerful strategy advantage. Then a crucial question that how to keep the consistency of international compensation strategy across the world when local environment change, has been put on the desk of the leaders in multination companies. What is emerging is that some companies are adopting global compensation and reward strategies that are aligned with and signal their global mind-sets. Rather than only reacting to and matching local conditions, the global perspective shifts to finding how they can best use compensation and rewards to compete on a worldwide basis. Such a mind-set has enormous intellectual, and it gives companies powerful competitive advantages.

Part I Factors affecting compensation strategy

The basic issue here is to determine what factors shape the patterns of policy choices in compensatio. Preliminary research in overall human resource strategy and compensation suggests the following major sets of factors. The writer intends to pay attentions on only some of them in this part of study. Then we can draw some arguments on how the factors that are chosen below determine the international compensation strategy and in what extent we should discuss those when make decisions.

If we want to understanding international compensation, we should recognize the variations and similarities and figure out how to manage them. That people get salaries depends on differences in the factors in the global guide described in Figure1. There are four general ones in the following: economics, institutional, organizational, and employee, with sub factors. There has been a discussion about these factors, which can be used all over the world. But once we change from a domestic to an international aspect, you can see there are a lot of other important factors. Institutional factors, such as culture traditions and political structures, and economics factors, such as variation in ownership of corporation and the development of fund and labor markets, come into pay. Moreover, you should consider social contracts and the role of trade union.

Figure 1 Milkovich & Newman Compensation 8th edition pp500

The International organisations are looking for five particularly factors after testing each one. (1) social contract (2) culture (3) trade union (4) ownership and capital markets, and (5) managers’ autonomy

Social contract

Considered as part of the social contract, the employment relationship is not just an interaction between an employee and an employer, and it also includes the government, all managers and all employees. The relationships and expectations of these groups form the social contract. When thinking about how people get salaries around the world, it is apparent that different people have different ideas, so they think variously of government, employers and employees. The understanding of employee compensation management requires understanding of the social contract in that country. How to change employee compensation systems–for example, to make them serve better to customers, encourage innovative and quality service, or control costs–requires changing the expectations of groups to the social contract.

Culture

The cultural thing is a comprehensive term that can include aspects of economy, education, the local culture, religious beliefs, and legal system. It makes important impact on international compensation management follow the way in the definition of acceptable, legitimate, and feasible work practices and behaviors (Adler 2001; Adler and Bartholomew 1992; Bhawuk and Triandis 1996; Laurent 1986).

Based on the belief that “most of a country’s inhabitants share a national character that represents mental programming for processing ideas and information that these people have in common.” it is assumed that compensation systems must fit national cultures. A search for distinct national characteristics whose influence is then assumed to be critical in managing international compensation systems is lead by this belief. As a result of fundamental cultural influences people view compensation differently. This can be found easily in different languages by discussing the different meanings of compensation. For example, in Slovak kompenzacia means to replace a loss and in Malaysia ganti rugi is the term for pay; in Sweden utajmnig means making equal, in Hebrew shaceer means reward; and `pay’ in the English language meant to pacify or please as an early use of the word (Remick, 1995; Shipley, 1984).

Work-related attitudes and behaviors are significant influent by culture, which has been regard as a learned system of meaning and values(Bhagat, Kedia, Crawford, & Kaplan, 1990; Hofstede, 1980; Triandis, 1993). The basic premises with compensation theories (both of the theories that social and psychological contracts), fully include the role of norms and values, are most likely influenced by differences in cultural values. It is suggested that the saliency and value of employment returns are influenced by culture based on theories of cultural values (Bhagat, et al, 1990; Triandis, 1993). However, how culture influences the way people view their employment relationships and the returns they receive is just known little about. Kim, et al (1990) report that the equity norm is held by employees from the U. S., Korea, and Japan, but the strength of the norm appears to vary across cultures. Hui, Triandis, and Yee (1991) found that cultural differences explained when people used equity or equality-based reward distributions, but the social situation also seems to influence how rewards are distributed. This raises the point that intra-cultural variation in equity norms may be greater than inter-cultural variation. The supply of research questions expands greatly when one considers that several dimensions of culture may work together to influence key compensation relationships, for example I-C and uncertainty avoidance (UA) (Hofstede, 1980; Triandis, 1993). In their study of reward distribution preferences, it predicts that individuals from collectivist cultures prefer equality-based distributions while those from individualist cultures prefer an equity basis. Managers from a is culture high on collectivism and UA may react more negatively to incentive pay than those from a high individualism/low UA culture. Whether these differences effect the pay-performance relation is not known. Cultural differences might also influence which components in the bundle of valued returns are salient and how various bundles influence work attitudes and behaviors. This rather straightforward hypothesis is still understudied.How these differences play out in the employment relationship is not well understood and we simply do not know, but, in some researches it is indicated that attitudes about compensation appear to be affect by cultural differences. Understanding which cultural values matter and how they affect employees is profoundly important to managers as the globalization of economies continues. Once again a reoccurring theme emerges: controlling for context is of paramount importance. The effectiveness of international compensation policies must, at least in part, dependent upon how they support or conflict with cultural norms and values (Arvey, Bhagat, and Salas, 1991; Bhagat, et al., 1990; Triandis, 1993).

Trade unions

As research, Europe keeps highly solidaric and Asia is less heavily unionized. In some countries, team agreement sets how much the workers can earn even though the workers may not be union members. In France for example a majority of workers are paid by collective agreements, but only a few are union members. Social legislation differs among European countries; UK has the fewest requirements, because it has no minimum salaries, no maximum working hours, and no common methods for employee participation. Social insurance in Germany and France are the most generous. (Milkovich & Newman Compensation 8th edition Press by McGraw-Hill)

Ownership and capital markets

Ownership and financing of companies are dramatically different around the world. These differences are vital to the understanding and managing of international payment. These patterns of ownership make certain kinds of pay systems have no significance. Employees in these corporations have various values and expectations. One research indicated that people who work for local or public corporations like salaries according to one’s performance more; however, those who work in federal-owned corporations are on the opposite side. So it is obvious that ownership differences have great effects on types of payment. It is very misleading to consider that every place is just like home. (Milkovich & Newman Compensation 8th edition Press by McGraw-Hill)

Managers’ autonomy

Managerial autonomy, an organizational factor in the global guide figure 1 reflects managers set his employees to make decisions by themselves. There is a relationship between it and the degree of centralization discussed earlier.

Both government, trade unions and corporate police are responsible to restrict managerial autonomy. Compensation decisions made in the domestic corporate offices and exported to subsidies all over the world may relate to the corporate strategy but discount local economics and social conditions.

To sum up, as the global guide reveals, international compensation is affected by economic, institutional, organizational, and individual conditions, globalization really represents that these conditions are varying– thus international pay system are altering too. (Milkovich & Newman Compensation 8th edition Press by McGraw-Hill)

Other Factors

There are global national policies differences as well. Taxation burden on some returns are heavy in one country, but not in another. There are differences in coverage on retirement plan contributions and regulations on the ratio of pay between the top-most and lowest organization levels in some countries, but not in others. Obviously, national public policy, which reflects social contracts among unions, employers, financial institutions and people, is an important influence on compensation and reward systems. For example, differences in the use of stock options in Germany and Japan compared with the United States and United Kingdom are directly related to national tax and regulation policies. Differences in marginal tax rates are directly associated with the use of variable pay schemes. In Korea or Japan, for example, employees prefer increases in bonuses and allowances (not based on performance) rather than base pay increments. Social security and national health insurance rates paid by employers are calculated on base pay, not bonuses or allowances. In the U.S., many benefit forms are not subject to income tax and are therefore a relatively tax effective way to increase the value of employment for people.

The degree of discretion available to managers when they respond to governmental initiatives is often not a simple matter of compliance. Except in rare cases, firms usually have alternatives in terms of the strength and pervasiveness of their response to governmental actions. For example, structuring compensation practices around U.S. tax laws has led to some very creative and innovative new compensation schemes (e.g., deferred compensation plans, ESOPs, phantom stock options). These are used by some firms, but certainly not all. Thus, even the “how” of complying with public policies is a strategic choice.

Finally, there are public policies implications of social contracts. The public policies of representative governments theoretically reflect social contract norms. As such, they impose constraints on the employment relationship (e.g., minimum wage, social security, and family leave statutes). Expectations embedded in the psychological contract are probably influenced by public policy and policy debates. For example, criticisms of CEO pay may be changing managers’ views of what are fair pay differentials in managerial ranks (and underlies our earlier discussion of hierarchical and egalitarian pay structures). The effects of differences in public policies on managers’ expectations, the configuration of the bundle of valued returns, and its consequences is unknown. For example, differences in tax and family leave policies in the European Union may impact managerial attitudes the toward variable pay initiatives undertaken by many U. S.-based multinationals. Since research applying the social contract view to the employment relationship is just beginning, opportunities abound.

To be sure, national laws, particularly tax and welfare regulations, are important forces. Yet logic argues that understanding differences and variability within as well as between nations reinforces strategic concerns. In the U.S., no manager presumes all the people are equal to the U.S. average; differences matter. It’s the same around the world. In addition, the focus on differences helps managers think in terms of shaping a common mind-set and creating and energizing a workforce with shared values and the capabilities necessary to achieve success.

Part II Consistency of international compensation

What do compensation theories predict will occur under those conditions above? As the development of globalization continues, these research issues will gain in importance. The degree of fit between compensation strategy and organization strategy contributes to organization performance by signaling and rewarding the behaviors that are consistent with the organization’s objectives.

Some guidance here may be offered by two theories: psychological contracts theory (Macneil, 1980; 1985; Rousseau and McLean Parks, 1993) and resource-based theory (Barney, 1990; Wright, McMahan, and McWilliams, 1994). According to psychological contracts theory, a view has been reflected that between employer and employee the relationship just like a collection of promises; to take a bunch of obligations for contributions to returns. The field of valued returns moves from an absolute focus on cash in pay to lots of socio-emotional benefits, because this exchange is kind of not like a simple sales transaction but a developing relationship (Macneil, 1980; 1985; Rousseau and McLean Parks, 1993). Psychological contracts theory argues that it should be totally match between what the organization offers (i.e., the bundle of valued returns) and what the employee contributes in exchange. Psychological contracts are schemas (Cantor, 1990) which reveal the meaning of the bundle and lead individual reactions to it. The primary effort to fit current work conditions is evoked by simple monetary returns. Mutuality and commitment derive d from the organization elicits interactive commitment and perhaps creativity and innovation from the manager as well (Eisenberger, et al, 1986; 1990). Consequently, psychological contracts theory might be helpful and useful for perceiving the effects of various bundles of valued returns (Rousseau and McLean Parks, 1993). Investigating how differences in these bundles affect managers’ psychological contracts may be one approach to this issue.

The thought that compensation policies are strategic, which can affect the objectives of the organization, is supposed to be fairly popular. This could be included into the current popularity of every thing strategic. When some may consider it as another fad, a more pertinent view is shown. Considering compensation from a strategic perspective is part of a growing recognition that macro-organizational issues are an important part of the study of human resource management (Dyer, 1985).

The importance of a strategic perspective on compensation rests on three fundamental tenets. The first is that compensation policies and practices differ widely across organizations and across employee groups within organizations. To some students of organizations this may be self-evident. But to others, such as economists using human capital models to examine compensation differentials, differences in organizations’ compensation policies and practices are treated as random noise with little relevance. Anecdotal evidence and sporadic surveys of specific policies or practices report that differences do exist. (The Conference Board, 1984; American Productivity Center, 1987). For example, some organizations claim to position their base pay to meet the market, while others follow it; some design incentive schemes to emphasize long-term performance, others short term. Some firms employ individual based incentives while others emphasize group or team based gain sharing schemes. Some decentralize the administration of compensation, others do not. Some disclose very specific information about pay to employees, such as ranges and merit guide charts, while others communicate only the broad policies, such as fairness and competitiveness. Surprisingly little systematic evidence exists on the effects of these differences. So the proposition that policy and practice differences have meaningful effects requires more systematic study.

The second tenet is that the decisions managers and employees make help shape these differences; that discretion exists to choose among options and the processes used to implement them. This does not discount the importance of environmental effects such as competitive pressures, changes in tax laws and accounting conventions or workforce demographics. Indeed, a strategic perspective implies the anticipation of such environmental pressures and assesses whether these pressures require changes in pay systems. But tracing all changes and variations in compensation systems to inevitable exogenous imperatives, leaving only a minor role for discretionary decision making, does not seem an accurate representation.

Perhaps most fundamental of all the tenets on which a strategic perspective on compensation is based is the belief that fitting compensation systems to environmental and organizational conditions makes a difference; that systematic variation in compensation systems is more than random noise; that making compensation policies and practices contingent on organizational and environmental conditions has some desired effects on employee behaviors and the performance of organizations. Considering that state of research and theory in compensation, this is probably the greatest leap of faith (Ehrenberg and Milkovich, 1987).

The recent evidence does not suggest that national boundaries (national wage systems) should be ignored or overlooked, it does suggest that sufficient discretion for individual organizations exists within these national systems to allow organizations to customize compensation and reward systems. Hence, business strategy and markets are more appropriate than countries as the unit of analysis for globalizing compensation. The idea of a “national culture” requires a leap of logic in assuming that social norms and cultural values are solely national in character. Clearly, geopolitical boundaries alone do not determine cultural values and social norms. Nations comprise a variety of subgroups and subcultures, and anecdotal and empirical evidence suggests that local cultural values as well as values within organizations differ significantly. Indeed, it seems increasingly inappropriate to begin analysis for compensation systems at the national level. Some research suggests that paying attention to average levels across national cultures may be misleading. It fails to account for the significant variation within countries that creates sufficient overlap with the distributions in other countries. Closer analysis reveals that political, economic, institutional, and other forces (rather than national culture) explain a significant amount of variation in the expressed desires of employees from different countries.

If relations between sectors of activity and compensation practices are well established in a single country, international comparisons are less common. In contrast with the strategic human resource perspective, whereby human resource managers have high autonomy in alignment of human resources with various business contingencies, such as strategy and structure, institutional pressures in a particular country somewhat limit firms’ power to adopt well-established international compensation policies.

The pressures generated by globalization and market-based economies create unprecedented opportunities for multinational employers. Increasingly, company leaders are recognizing that global mind-sets are required to meet these challenges, and create opportunities.

A global mind-set means adopting values or attitudes to create a common mental programming for balancing corporate, business unit, and functional priorities on a worldwide scale. Such a mind-set has enormous intellectual and thus competitive advantages. According to Jack Welch, CEO at General Electric, “The aim in a global business is to get the best ideas from everyone, everywhere…. I think [employees] see that if you are going to grow in GE, you are not going to have a domestic background all your life.”

This perspective goes beyond “think globally, act locally.” It seems to imply the converse: “Think locally but act globally.” Compensation and reward systems can become crucial tools to support this global mind-set–or they can form major obstacles blocking the way. For organizations competing in worldwide markets, managing compensation and reward systems has always depended on understanding the economic, social, and political changes occurring in the countries in which they operate. What is emerging is that some companies are adopting global compensation and reward strategies that are aligned with and signal their global mind-sets. Rather than only reacting to and matching local conditions, the global perspective shifts to finding how they can best use compensation and rewards to compete on a worldwide basis.

How can multinational enterprises develop more culturally sensitive compensation schemes that recognize country differences, yet are equally motivating and still equitable? How can international-assignees’ compensation be better linked to the strategy and industry characteristics of a given multinational company?

Further issues that can be examined include: managing expatriate expectations; adding ‘appropriate’ value to expatriate compensation packages; ‘localization’ of expatriate compensation; cost containment; global pension schemes; integration of HR planning with expatriate compensation; management development as a crucial factor in expatriate compensation planning; regionalization; revisiting the ‘balance sheet’ concept; and centralizing and decentralizing the assignment policy. Addressing these several general and specific issues in expatriate compensation is likely to provide a full research agenda for those interested in IHRM reward structures.

An aspect of IHRM is human resource development, or training and development. And it provides another way of linking the dispersed units of an MNE. Traditionally, researchers have paid more attention on the pre-departure training referred to PCNs and their families. Generally expatriate failure rate has been in a high level because of lack of preparation; for instance, multinationals in the US are more likely to engage in less training than do their European and Japanese counterparts (Noble 1997; Tung 1982). Furthermore, on communicative skills, language, and culture sensitivity commonly have only got less emphasis in the US MNEs’ training programs than do MNEs located elsewhere (e.g. Dowling et al. 1999; Tung 1982). Consequently, it is not hard to understand that there are higher expatriate failure rates US MNEs experience than other multinationals do. At recent present, such claims have been challenged: for example, Peterson et al. (1996) state lower failure rates than reported by Tung (1982). While, draw a comparison between Western European and Japanese MNCs and American multinationals, as suggested above, US also has got higher expatriate failure rates in the findings of Peterson et al. (1996) .

Increasingly, researchers and professionals are putting the training and developing of international assignees into a much larger frame, which is consistent with broader, more systematic and theoretical way of IHRM (Mendenhall et al. 2002). For example, a very significant factor concerned in expatriate success is now the family (Adler 2001; Dowling et al. 1999), particularly as dual-career issues as concerned (Punnett, B.J. and Ricks, D.A. 1992; Harvey and Buckley, 1998). Concerning the impact and likely success of cross-cultural training, better paradigms (e.g. culture theory and social learning theory) have begun to emerge (e.g. Bhawuk 1998; Black and Mendenhall 1990; Kim 1995). Based on expatriate assignment decisions and the repatriation process, international HR planning is seen more often as a key factor of expatriate career development (Black et al., 1999).

Perhaps in perspective most indicative of this shift is the argument that for parent country nationals training and development is no more important than it is for people from other parts of the world (Adler and Bartholomew 1992). Actually, by creating a pool of global managers with citizenship from all over the world, international firms can improve their inter-unit linkages (Bartlett and Ghoshal 2000; Fulkerson and Schuler 1992). Along with these cross-national managers developing, it appears that lots of capacities they need to have such as the global awareness of the MNE, the sensitivity to local cultures and knowledge of local conditions, particularly labor relations and laws, however. In some research, it is suggested that management development activities could be explored with local, regional, and other HR units assisting in program design and delivery in corporate or global headquarters (Bartlett and Ghoshal 1998; Dowling et al. 1999; Evans 1992). Obviously, there are also some empirical questions remain on the efficacy of this or other structural approaches.

Conclusion

The headquarter has a fundamental responsibility and strategic interest in developing broad HR policies that are appropriate enough for local units to adapt to their local environment and competitive strategy needs (Brewster 2002). This discussion complements the earlier discussion under ‘Interunit Linkages’. There it was argued that policies have to be created to facilitate interunit linkage and transfer of learning, while still recognizing the needs of the local units. That discussion suggested host units must not only systematically analyze their own environmental needs, but also ensure that those factors are folded into the process whereby global HR policies are created (Bartlett and Ghoshal 2000; Schuler 2001). As local units become more geographically and culturally dispersed, it becomes more difficult for headquarters to identify and track factors bearing on competitiveness. For example, internal labor market data that are useful to the larger MNE but unnecessary for local compliance may not need to be maintained by host units unless headquarters exercises some control over local HR information systems (Florkowski and Nath 1993; Niederman 1999). Schuler et al. (1993) proposed that MNEs will devote more resources to the development and implementation of such overarching policies as environmental heterogeneity. Subsequent investigations must verify the extent to which this is true in the reality.

In conclusion, it is useful to step back and consider the nature of compensation management. A fairly convincing argument can be made that existing compensation policies and practices have grown over time in a somewhat haphazard manner, as administrative responses to various pressure, rather than through some rational, analytical, objective-directed process. If that is so, then much of the foregoing has simply been an attempt to impose structure and rationality on compensation management. But even if this is the case, the need remains to understand the variation in these decisions made by organizations and how these variations affect the behaviors of the workforce and the success of the organization.