chapter 16 - international pay systems Flashcards
the social contract
Viewed as part of the social contract, the employment relationship is more than an individual and an employer
Different countries hold differing beliefs about the role of government, employees, unions, and employers
- The social contract in the US is known for the small role of government and lack of relationship between government, employees and employers
- Outside the US the employment relationship is viewed as part of the social contract
– As an example, in China, they have more bloated headcount but if the state-owned agency laid people off, it would have a significant social impact
The social contract evolves over time, sometimes quickly
The Social Contract Regulation
The social contract also relates to the legal/regulatory environment for HR decisions in each country; employment regulation is the degree of legal restriction in hiring and firing workers; Countries differ on regulatory restrictions
- Maximum hours worked
- Hiring and firing workers
In Europe, like in the United States, laws can also vary between states/countries, but the goal of the EU is to provide common labor standards in all it’s member countries
- Consider the role of works councils and co-determination in a European country like Germany where work councils are employee formed and separate from the unions; these councils have veto-rights and rights of consent and co-determination law requires companies with 500-2000 employees have a third of supervisory board be employees
The social contact in Europe, with its regulatory and institutional limits on employer flexibility and protection of workers, comes at a cost
- Taxes are higher to protect workers from unemployment
- Generous worker protection may undermine worker incentive;
- The tax burden is 60% higher than U.S. to help insulate workers from unemployment
EXHIBIT 16.3 Flexibility of Wage Determination
Differences across countries in the degree of pay-setting centralization translates into differences in wage flexibility
Such flexibility is generally desirable to employers
Trade Unions and Employee Involvement
Union membership as a percentage of employment is not so different between Germany, France, and the U.S.:
- The major difference is that the terms and conditions of employment are much more likely to be covered by a union contract in Europe (collective agreements based on the type of work performed), even for those not members of a union
- The union coverage rate in EU is higher than US and Asia: 56% in Germany, 99% in France (although only 10% are in unions as the US define, it’s the collective agreements they are covered by)
- Workers in Germany may establish Works Councils that must be consulted for almost all employee decisions
- 12% in the United States – Japan is 17% and Mexico is just 10%
China has a different model:
- Labor unions are still closely linked to the Communist Party
- They sometimes asset themselves – especially at foreign companies with operations in China
Culture and Hofstede
Hofstede’s national cultural attributes are:
Power distance
Individualism – Collectivism
Uncertainty avoidance
Masculinity – Femininity
Long-term versus short-term orientation
Comparing Labor and Productivity Cost of Living and Purchasing Power
Substantial differences in (average) labor costs do exist:
- Average hourly rate in Mexico may be 10% ($4/hour versus $40/hour) of the US, but quality and productivity are also less than the US
- Employers consider not only labor costs, but access to talent, average productivity and quality of outcomes, and legal, regulatory and tax environments as well
- Taxes and the legal/regulatory environment are important too
- If comparing total compensation is difficult, comparing living costs and standards across borders is even more complex
– The objective is to maintain the same level of purchasing power
Cost of Living and Purchasing Power
Comparing living costs across boarders is very complex
- Companies need such data to adjust pay for transferred employees
- The objective is to maintain the same level of purchasing power
A worker in Copenhagen has higher gross hourly pay than a worker in NY City, but much lower purchasing power
- To maintain the purchasing power of a New Yorker moving to Copenhagen, additional compensation beyond pay would be needed
- In contrast, a move to Kuala Lumpur at NYC pay levels would provide an economic windfall
One index of purchasing power is the number of working hours needed to purchase an iPhone
- 54 hours in New York City, 243 in Kuala Lumpur, 299 in Moscow, and 306 hours in Shanghai
Japanese Traditional National System
Traditionally, Japan’s employment relationships were supported by “three pillars:” lifetime security within the company, seniority-based pay and promotion systems, and enterprise (decentralized) unions
Japanese pay systems emphasize the following:
- The person rather than the job
- Seniority and skills rather than job or performance
- Promotions based on a combination of evaluation and performance rather than performance alone
- Internal alignment over competitors’ market rates
- Employment security based on the performance of the organization and the individual
Japanese pay systems can be described in terms of three basic components: base pay, bonuses, and allowances and benefits
Germany – Allowances and Benefits
Germany’s social contract includes generous social benefits
Nationally mandated benefits, paid by taxes levied on employers and employees, include:
- Liberal social security
- Unemployment protection
- Health care
- Nursing care and other programs
Additionally, companies commonly provide pension plans, savings plans, building loans, and life insurance
- Company cars are a popular status symbol
- 30 vacation days and 13 national holidays annually
German Traditional National System
Traditional German pay systems are embedded in a social partnership between business, labor, and government:
- This creates a generous vater staat, or “nanny state”; pay decisions are highly regulated; over 90 different laws apply
- Different tariff agreements for non-management positions only
– These are akin to US job families and levels - pay rates and structures and are negotiated for each industrial sector by the major employers and unions
– Base pay hinges on job descriptions, job evaluations, and employee age
While there is a trend toward performance-based bonuses, they have not been part of a traditional German pay system.
- However, some percentage of the base wages may be set aside to be paid as an “efficiency allowance”
- In reality, the efficiency allowances become expected annual bonuses
- Performance bonuses for managerial positions not included in tariffs hinge on company earnings and other company objectives
- Top executives increasingly receive stock options
Strategic Market Mind-Set
three general global compensation strategies:
- localizer
- exporter
- globalizer
Strategic Market Mind-Set
Localizer: “Act Local”
- May have different pay systems and for each country and operate independent of headquarters
- Pay designed in local areas
Exporter: “Headquarters Knows Best”
- Opposite of Localizer – one pay systems exported from the headquarters
- Basic pay systems designed at headquarters
Globalizer: “Think/Act Globally and Locally”
- Seek a common system to support consistency across all global locations
- Global approaches focus first on global business strategy and then adapt to local conditions
Expatriate Systems → Objectives?
Expatriates: Employees temporarily working and living in a foreign country (called “expats”)
Expat Pay:
- Complex and the cost is high (as much as 3x regular pay in the country of origin)
- Pay emphasize maintaining employee purchasing power & minimizing disruptions and inequities
- Pay must be enough to encourage applicants yet not so attractive that local nationals will feel unfairly treated or the worker will feel entitled
Preferences differ for overseas jobs, and this can vary over time
- 68% do not know what their jobs will be when they return home
- 54% return to lower-level jobs, only 11% are promoted
- Only 5% believe their company values overseas experience
- 77% have less disposable income when they return home
- Only 13% of U.S. expatriates are women
- Over half of returning expatriates leave their company within a year
