16-1

Chapter

16

McGraw-Hill

International
Pay Systems

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

1.

2.

3.
4.
5.

16-2

After discussing Chapter 16, students

should be able to:

Identify the four general factors in the global guide

to international compensation and be able to apply
the global guide to increase understanding of the
variations in international pay practices.
Explain how certain key factors in the global guide
social contract, culture, trade unions, ownership
and capital markets, managers autonomy impact
international pay systems.
Understand the key strategic differences among the
pay systems of Japan, Germany and the U.S. using
the total compensation model.
Discuss the three general compensation strategies
used by companies with worldwide operations.
Describe the key features of expatriate pay systems.

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2005 The McGraw-Hill Companies, Inc. All rights reserved.

16-3

Understanding
international
compensation begins with
recognizing variations
(differences and
similarities) and figuring
out how best to manage
them.
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2005 The McGraw-Hill Companies, Inc. All rights reserved.

16-4

Managing Variations
How

people get paid around the world

depends on differences (and similarities) in
the following general factors
Economic
Institutional
Organizational
Employee

Exhibit

16.1: Guide to International

Compensation

Exhibit
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16.2: Applying the Global Guide

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Exh. 16.1: Guide to

International Compensation

McGraw-Hill

16-5

2005 The McGraw-Hill Companies, Inc. All rights reserved.

16-6

The Social Contract

Organizations

Individuals

Employment Relationship

Government

Individuals

Organizations

Unions
Union Federations

Individual Employers
Employer Consortium

Social Contract
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2005 The McGraw-Hill Companies, Inc. All rights reserved.

16-7

Exh. 16.3: Social Contracts

and Pay Setting

SOCIAL
CONTRACT

Highly
Centralized

Localized

McGraw-Hill

Argentina
Brazil
Canada
France
Hong Kong
Mexico
Singapore
U.K.
U.S.A.
Local
Systems

Czech Republic
Germany
India
Israel
Japan
Korea
Slovakia
Slovenia

Sector/Industry
-wide Systems
PAY SETTING SYSTEMS

Austria
Belgium
Cuba
Hungary
Poland
Sweden

Nationwide
Systems

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16-8

Characteristics of Culture
Often

defined as shared mental

programming

Involves

acquiring knowledge that people

use to interpret experience and generate
social behavior

Rooted

in values, beliefs, and

assumptions shared in common by a
group of people

Influences
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how information is processed

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Culture and Managing

International Pay

16-9

Assumption

that pay systems must be

designed to fit different national cultures
is based on the belief that most of a
countrys 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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2005 The McGraw-Hill Companies, Inc. All rights reserved.

Hofstedes Cultural
Dimensions
Power

Distance

Uncertainty

Avoidance

Individualism
Masculinity
Long-term
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16-10

Collectivism

Femininity

Short-term
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Trade Unions and Employee

Involvement

Exhibit

16-11

16.5: Union Density

Exhibit

16.7: Employment Practices

Differ Among Nations

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16-12

Exhibit 16.5: Union Density

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2005 The McGraw-Hill Companies, Inc. All rights reserved.

Exhibit 16.6: Employment Practices

Differ Among Nations: The Cost of
an Employee
The hourly cost of a
production worker in
manufacturing . . .

. . . is made up from
the salary paid
directly to the worker
before deductions . . .

. . . and what an
employer pays in
social insurance and
labor taxes.

What those extra

costs are as a
percentage of salary.

France

$17.97

$12.36

$5.61

45.4%

Germany

$28.28

$20.94

$7.34

35.1%

United States $18.24

$14.34

$3.90

27.2%

Japan

$19.37

$16.52

$2.85

17.3%

Britain

$15.47

$13.47

$2.00

14.8%

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16-13

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Factors Affecting
International Pay

Ownership

Managers

McGraw-Hill

16-14

and capital markets

autonomy

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16-15

Comparing Costs
Factors

affecting wage comparisons

Standard of living
costs

Purchasing power

Exhibit

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16.7: The Hamburger Standard

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Exhibit 16.11: Strategic Similarities

and Differences: An Illustrated
Comparison
Japan
Objectives

Internal
Alignment

McGraw-Hill

United States

16-16

Germany

Long-term focus
High commitment
Egalitarian internal
fairness
Flexible workforce
Control cash flow with
bonuses

Short / intermediate focus

High commitment
Performance market
meritocratic
Flexible workforce
Cost control; varies with
performance

Long term
High commitment
Egalitarian fairness

Person based: age,

ability, performance
determines base pay
Many levels
Small pay differences

Work based: jobs, skills,

accountabilities

Work based: jobs and

experience

Fewer levels
Larger pay differences

Many levels
Small pay differences

Highly trained
Cost control through
tariff negotiations

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Exhibit 16.11: Strategic Similarities

and Differences: An Illustrated
Comparison
Japan
External
Competitiveness

Employee
Contribution

McGraw-Hill

United States

16-17

Germany

Monitor age pay

charts
Consistent with
competitors

Market determined

Tariff based

Compare on variable and

performance-based pay

Same as competitors

Bonuses vary with

performance only at
higher levels in
organization
Performance appraisal
influences promotions
and small portion of
pay increases

Bonuses an increasing
percentage of total pay

Tariff negotiated
bonuses

Increases based on
individual, unit, and
corporate performance

Smaller performance
bonuses for managers

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Exhibit 16.11: Strategic Similarities

and Differences: An Illustrated
Comparison
Japan
Advantages

Disadvantages

McGraw-Hill

United States

Supports commitment
and security
Greater predictability
for companies and
employees
Flexibility person
based

Supports performance
competitor focus
Costs vary with
performance

High cost of aging

work force
Discourages unique
contributors
Discourages women
and younger
employees

Skeptical workers, less

security
Fosters Whats in it for
me?
No reward for investing in
long-term projects

Focus on short-term
payoffs (speed to market)

16-18

Germany
Supports commitment
and security
Greater predictability for
companies and
employees
Companies do not
compete with pay
Inflexible; bureaucratic
High social and benefit
costs
Not a strategic tool

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16-19

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

16-20

(continued)

Exporter: One Size Fits All

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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2005 The McGraw-Hill Companies, Inc. All rights reserved.

Strategic Market Mind-Set

16-21

(continued)

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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2005 The McGraw-Hill Companies, Inc. All rights reserved.

Shift in Strategic Global

Focus

16-22

Focus

of strategic global approaches

Avoid matching national systems
Involves aligning the total pay system
with the global business strategy
Challenges
Managers

must rethink international

compensation in the face of global
competition
Align global pay with the way business is
aligned
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2005 The McGraw-Hill Companies, Inc. All rights reserved.

16-23

Types of Expatriates
Expats

- Individuals whose citizenship is

that of employers base country

Third

country nationals (TCNs) Individuals whose citizenship is neither

employers 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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2005 The McGraw-Hill Companies, Inc. All rights reserved.

Objectives of Compensation
and Benefits for Expatriates

16-24

Attract

and retain employees who are

qualified for foreign assignments

Provide

an incentive to leave the home

country for a foreign assignment

Maintain

a given standard of living

Take

into consideration expatriates

career and family needs

Facilitate

reentry into the home country

at the end of a foreign assignment

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Elements of Expatriate
Compensation
Salary

Housing

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16-25

Taxes

Allowances
and
Premiums
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Common Allowances in Expatriate

Pay Packages

16-26

Financial Allowances

Social Adjustment Assistance

Family Support

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16-27

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
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adjustments required of expatriates

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Exhibit 16.14: Balance Sheet

Approach

16-28

Base-country currency

Equivalent salary and allowances,

host country
$10,200

McGraw-Hill

Relocation
Bonus
$1,500
Base-country salary
$7,000

Taxes
$1,000

Taxes
$2,000

Housing

Housing
$2,000

$700

Goods and
Services
$2,000

Goods and
Services

Reserve
$1,000

Reserve

Allowances
paid by
company

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Other Approaches:
Compensation for Expatriates

Negotiation

Localization

Modified balance sheet - regional

Decrease allowances over time

Lump-sum/cafeteria plan

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16-29

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Borderless World--Borderless
Pay?

McGraw-Hill

16-30

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