Milkovich/Newman: Compensation, Ninth Edition

Chapter 16
International Pay
Systems

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter Topics
 Managing Variations: The Global Guide
 The Social Contract
 Culture
 Trade Unions and Employee Involvement
 Ownership and Financial Markets
 Managerial Autonomy

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 Chapter Topics (cont.)
 Comparing Costs
 Comparing Systems
 National Systems-Comparative Mind-Set
 Strategic Market Mind-Set
 Expatriate Pay
 Borderless WorldBorderless Pay? Globalists
 Your Turn: Coke and IBM

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 Understanding
international
compensation begins with
recognizing variations
(differences and
similarities) and figuring
out how best to manage
them.
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 Managing Variations
How people get paid around the world depends
on differences (and similarities) in the following
general factors
– Economic
– Institutional
– Organizational
– Employee

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Exhibit 16.1: Guide to International Compensation

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Variation in International Pay Practices
 Social contracts
 Cultures
 Trade unions
 Ownership and financial markets
 Managers’ autonomy

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 The Social Contract
 Viewed as part of the social contract
– Employment relationship is more than an exchange
between an individual and an employer
– It includes
 The government
 All enterprise owners
 All employees

 Relationships and expectations of these parties

form the social contract

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Exhibit 16.3: Social Contracts
and Pay Setting

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 Culture
 Shared mental programming rooted in values,
beliefs, and assumptions shared in common by a
group of people
 Influences how information is processed

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 Culture and Managing International Pay
 Assumption that pay systems must be designed
to fit different national cultures is based on the
belief that most of a country’s inhabitants share
a national character
 Job of a global manager
– Search for national characteristics whose influence is
assumed to be critical in managing international pay
systems

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 Culture Matters, but So Does Cultural
Diversity
 How useful is the notion of a national culture
when managing international pay?
– Only a starting point
– Can be thought of as the “average”
– Provides some information about what kinds of pay
attitudes and beliefs you are likely to find in an area
– Over reliance on the “average” can seriously mislead

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 Culture Matters, but So Does Cultural
Diversity (cont.)
 Interplay among various conditions within each
nation or region, taken as a whole, form distinct
contexts for determining compensation
– Economic
– Institutional
– Organizational
– Individual

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 Factors Affecting International Pay

 Ownership and capital markets

 Managers’ autonomy

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 Comparing Costs
 Factors affecting wage comparisons

– Standard of living
costs

– Purchasing power

– Working time required

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Exhibit 16.8: Strategic Similarities and Differences: An
Illustrated Comparison

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 Strategic Market Mind-Set
Localizer: “Think Global, Act Local”
– Designs pay systems to be consistent with local
conditions
– Business strategy is to seek competitive
advantage by providing products and services
tailored to local customers
– Operate independently of corporate headquarters

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 Strategic Market Mind-Set (cont.)
Exporter: “Headquarters Knows Best”
– Basic total pay system designed at headquarters
and is “exported” world-wide for implementation
at all locations
– Exporting a basic system makes it easier to move
managers and professionals among locations
– One plan from headquarters gives all managers
around the world a common vocabulary and a
clear message what the leadership values

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 Strategic Market Mind-Set (cont.)
Globalizer: “Think and
Act Globally and Locally”
– Seek a common system to be used as part of “glue”
to support consistency across all global locations
– Headquarters and operating units are heavily
networked to shared ideas and knowledge
– Performance is measured where it makes sense for
the business
– Pay structures are designed to support business

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 Types of Expatriates
 Expatriates
- Individuals whose citizenship is that
of employer’s base country
 Thirdcountry nationals (TCNs) - Individuals
whose citizenship is neither employer’s base
country nor location of subsidiary
 Local country nationals (LCNs) - Individuals who
are citizens of country in which subsidiary is
located
 Advantages of hiring LCNs
 Advantages of bringing in expats or TCNs
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Exhibit 16.9: Why Expatriates Are Selected

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Exhibit: 16.10 Common Allowances in
Expatriate Pay Packages

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Elements of Expatriate Compensation

Salary Taxes

Allowances
Housing
and
Premiums
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Common Allowances in Expatriate Pay
Packages

Financial Allowances

Social Adjustment Assistance

Family Support

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 Balance Sheet Approach
 Premise – Employees on overseas assignments
should have same spending power as they would in
their home country
 Home country is standard for all payments
 Objectives
– Ensure cost effective mobility of people to global
assignments
– Ensure expatriates neither gain nor lose financially
– Minimize adjustments required of expatriates
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Exhibit 16.11: Balance Sheet Approach

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 Other Approaches: Compensation for
Expatriates
 Negotiation

 Localization

 Modified balance sheet

 Decrease allowances

 Lump-sum/cafeteria plan
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 Expatriate Systems → Objectives?
 How the expatriate pay system affects
competitive advantage, customer satisfaction,
quality, or other performance concerns
 Lack of attention to aligning expatriate pay with
organization objectives
 Employee Preferences

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 Borderless World--Borderless Pay?
 Corporations attempting to become “globally
integrated enterprises,” are creating cadres of
globalists:
– Managers who operate anywhere in the world in a
borderless manner
 To support a global flow of ideas and people,
companies are also designing borderless, or at
least regionalized, pay systems
– Testing ground for this approach - European Union

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