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International Pay Systems Chapter Outline

Chapter Sixteen

German National System Strategic Comparisons: Japan, Germany, United States

Strategic Market Mind-Set Localizer: “Think Global, Act Local” Exporter: “One Size Fits All” Globalizer: “Think and Act Globally and Locally”

Expatriate Pay Elements of Expatriate Compensation The Balance Sheet Approach Expatriate Systems → Objectives? Quel dommage!

Borderless World → Borderless Pay? Globalists

Your Turn: Back to Classic Coke

Managing Variations: The Global Guide

The Social Contract

Culture Culture Matters, but So Does Cultural Diversity

Trade Unions and Employee Involvement

Ownership and Financial Markets

Managerial Autonomy

Comparing Costs Standard of Living: Basket of Goods versus Big Mac

Comparing Systems The Total Pay Model: Strategic Choices

National Systems-Comparative Mind-Set Japanese National System

Around the world, global competitive forces have changed the way people work and how they get paid. Toyota dismantled its seniority-based pay system for managers and re- placed it with a merit-based system.1 Toshiba offers stock awards, which were not even legal in Japan only a few years ago.2 Deutsche Bank, Nokia, Seimens, and other Euro- pean companies are experimenting with variable pay and performance-based (rather than personality-based) appraisal in their search for ways to improve productivity and control labor costs.3 Global acquisitions of former competitors change pay systems. As part of its

1A. Harney, “Toyota Plans Pay Based on Merit,” Financial Times, July 8, 1999, p. 20. 2Interviews with Toshiba managers, included in G. Milkovich, M. Bloom, and A. Mitra, “Research Report: Rethinking Global Reward Systems,” working paper, Cornell University, 2000. 3Also see Pay in Europe 2003, Remuneration Policy and Practices (Surrey, England: Federation of European Employers, 2003), and the FEE’s website at www.euen.cok.uk; Zhong-Ming Wang, presentation to Cornell University Global HRM Distance Learning seminar, Shanghai, China, March 2000; Conference Board, “Organizing for Global Competitiveness—Headquarters Design Report,” No. 123399RR, and “The Country Subsidiary Design Report,” No. 1180–97RR (New York: Conference Board, 1999).

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takeover and restructuring of Tungsram Electric in Poland, General Electric changed the pay system from a rigid seniority-based one to a more flexible one with broad bands, market-based wage rates, and performance bonuses.

Sometimes the changes in pay are directly tied to cataclysmic sociopolitical change, as in China, Russia, and eastern Europe.4 Central and government authorities had dictated pay rates in these communist command-and-control economies. Now these companies face the challenge of devising pay systems responsive to business and market pressures while maintaining a sense of social justice among the people. The Chinese situation is ex- traordinarily complex.5 State-owned enterprises are being asked to become profitable. The only hope of profitability is to cut the massively bloated head count. Yet an army of unemployed people without social support threatens stability and even government sur- vival. Some state-owned enterprises, such as Bao Gang, the country’s largest steelmaker, have moved to more “market- and performance-based” systems, even though labor mar- kets are just emerging in China. Shanghai Shenyingwanguo Security Company and Shanghai Bank have implemented job-based structures to help them retain key employees and increase pay satisfaction. Privatized enterprises, start-ups, and joint ventures with for- eign firms use a variety of approaches. Most surprising of all is that some town-owned enterprises are using stock ownership as part of their employee compensation.6 China may still be striving to become a worker’s paradise, but the experimentation with com- pensation approaches might already qualify it as a pay pundit’s paradise.

However, too much change and experimentation can have a dark side that threatens social unrest. There are reports from the Ukraine, Romania, and Russia of people going unpaid for months, without legal recourse.7 In Russia, a friend maintains that “the most effective pay delivery system is a brown bag under the table.”

4A. Puffer and S. Shekshnia, “Compensating Local Employees in Post-Communist Russia,” Compensation and Benefits Journal, September–October 1994, pp. 35–42; D. Soskice, “Wage Determination: The Changing Role of Institutions in Advanced Industrialized Countries,” Oxford Review of Economic Policy 6(4), pp. 36–61; D. Vaughan Whitehead, ed., Paying the Price: Crisis in Central and Eastern Europe (Geneva: ILO, 1999); L. Bajzikova, “Transition Process of HRM in the Slovak Republic,” Journal of International Human Resource Management, no. 2, 2001; N. Zupan, “HRM in Slovenian Transitional Companies,” presentation at CAHRS international conference, Berlin, June 2002. 5D. Dong, K. Goodall, and M. Warner, “The End of the Iron Rice Bowl,” International Journal of Human Resource Management, April 2, 2000, pp. 217–236. 6Zhong-Ming Wang, presentation to Cornell University Global HRM Distance Learning seminar, Shanghai, China, March 2000; comments by Ningyu Tang, instructor in Shanghai for Global HRM Distance Learning seminar; Peter Nolan, “China and the Global Business Revolution, Cambridge Journal of Economics 26 (2002), pp. 119–137; Jing Zhou and J. J. Martocchio “Chinese and American Managers’ Compensation Award Decisions,” Personnel Psychology 54 (Spring 2001), pp. 115–145; National Bureau of Statistics, People’s Republic of China, 2003; J. T. Landry, “Review of `The New Chinese Empire and What It Means for the United States’ by R. Terrill,” Harvard Business Review 81 (7) (July 3, 2003); Zaohui Zhao, “Earnings Differentials between State and Non-State Enterprises in Urban China,” Pacific Economic Review 7(1) (2002), pp. 181–197. 7G. T. Khulikov, “Ukraine Wage Decentralization in a Nonpayment Crisis,” chap. 11 in Pay the Price (Geneva: ILO, 2000); R. Yokovlev, “Wage Distortions in Russia,” chap. 9 in Pay the Price (Geneva: ILO, 2000); Muneto Ozocki, ed. Negotiating Flexibility: The Role of the Social Partners and the State (Geneva: ILO, 1999).

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So it is a time of unprecedented global change. Or is it? Let’s step back to gain some historical perspective:

There is hardly a village or town anywhere on the globe whose wages are not influenced by distant foreign markets, whose infrastructure is not financed by foreign capital, whose engineering, manufacturing, and even business skills are not imported from abroad, or whose labor markets are not influenced by the absence of those who had emigrated or by the presence of strangers who had immigrated.8

This is not a description of the 21st century. Rather, it is from 100 years ago. In the late 1800s, trade barriers were being reduced, free trade was being promoted, and mass mi- gration of people was underway. Thanks to transoceanic telegraphic cables, the speed of communication had increased dramatically, and investment capital flowed among na- tions. Yet by 1917 these global links had been replaced with a global war. Citizens be- came uncomfortable with the greater risks and uncertainty of globalization. Nations began to raise tariffs to protect domestic companies hurt by foreign competitors. Immi- grants were accused of “robbing jobs.” Historians conclude that “globalization is neither unique nor irreversible; it has and can again sow seeds of its own destruction.”9

MANAGING VARIATIONS: THE GLOBAL GUIDE

Understanding international compensation begins with recognizing differences and simi- larities and figuring out how best to manage them. How people get paid around the world depends on variations in the factors in the global guide depicted in Exhibit 16.1. Four general ones are listed: economic, institutional, organizational, and employee, with sub- factors. These factors have been discussed throughout the book; now they can be applied globally. But once we shift from a domestic to an international perspective, additional factors become important, too. Institutional factors, such as cultural traditions and politi- cal structures, and economic factors, such as differences in ownership of enterprises and the development of capital and labor markets, come into play. Further, social contracts and the role of trade unions must be considered. An example using the global guide illus- trates its usefulness.

Consider the DaimlerChrysler situation discussed in Chapter 2. Prior to Daimler’s ac- quisition of Chrysler, the pay for the top 10 Daimler executives equaled the pay of Chrysler’s CEO alone. As little as 25 percent of Chrysler managers’ total compensation was in the form of base pay, whereas Daimler managers’ base pay accounted for up to 60 percent of their total compensation. The merged DaimlerChrysler adopted a Chrysler- like approach to executive compensation. Some have even claimed that the attractive pay was the reason Daimler executives were eager to acquire Chrysler!

Chapter 16 International Pay Systems 499

8Kevin O’Rourke and J. G. Williamson, Globalization and History: The Evolution of a 19th Century Atlantic Economy (Cambridge, MA: MIT Press, 1999), p. 2. 9Kevin O’Rourke and J. G. Williamson, Globalization and History: The Evolution of a 19th Century Atlantic Economy (Cambridge, MA: MIT Press, 1999), chap. 14. Also see D. Rodrik, “Has Globalization Gone Too Far?” California Management Review 39(3) (Spring 1997); W. Keller, L. Pauly, and S. Reich, The Myth of the Global Corporation (Princeton, NJ: Princeton University Press, 1998); B. Kogut, “What Makes a Company Global?” Harvard Business Review, January–February 1999, pp. 165–170.

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The Daimler and Chrysler managerial pay systems are contrasted in Exhibit 16.2, using the factors in our global guide (Exhibit 16.1). At Daimler, the roots of today’s pay system reach back to postwar Germany and efforts to rebuild an economy devastated by two world wars. Rather than companies’ engaging in aggressive wage competition that risked inflation, trade union federations, employer associations, government agencies, and financial institutions participated in centralized negotiations. The result was industry- wide negotiated pay systems called tariff agreements. They included predictable annual increases, government-provided social welfare programs, and well-defined internal struc-

EXHIBIT 16.1 Guide to International Compensation

Competitive dynamics/ marketsSocial

contract

Culture/ politics

Capital flows/ ownership

Taxes

Demographics

Knowledge/ skills

Attitudes/ preferences

Strategic intent

Technology Innovation Work roles

Autonomy

Information flows

Trade unions

Employer federations

IN TE

RNATIONAL

Organization Success and Fair Treatment of Employees

C O

M PENSATION SY

ST EM

S

IN ST

IT UT

IO NA

L OR

GA NI

ZA TI

O N

A L

EM PLOYEE

ECONOM IC

© George T. Milkovich.

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tures. All companies competing in the same product markets (e.g., Daimler, Volkswagen, and Opel) used the same pay structures. Daimler could pay above these negotiated rates but had little reason to do so. Instead, it competed for employees based on its reputation as a place to work, its quality of training, and the like. As a result, managers were less likely to consider pay as an instrument of strategy. Instead, pay was a constraint deter- mined outside the organization.

German tax policies and labor regulations supported this approach. A typical Daimler employee’s marginal tax rate (percent tax on each additional euro earned) is 30 percent higher than a Chrysler employee’s tax rate on an additional dollar’s pay in the United States. As a result, the financial returns for working longer and harder in order to

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Pressures Daimler Chrysler

Economic

Competitive markets Moderately competitive Highly competitive Capital/ownership Few shareholders Many shareholders Taxes High taxes Moderate taxes

Institutional

Culture/politics Centralized process Decentralized process Regulations Strong government/ Limited government involvement

trade union involvement Trade union/ Tripartite-based social contract Individual/employer-based social employer federations contract

Organizational

Strategic intent High margins/high-end vehicles Lower-margin passenger vehicles, higher-margin SUVs, mini vans

Autonomy Lower autonomy Moderate autonomy Work roles Defined roles More flexible roles

Employee

Skill/knowledge Continuous learning On-the-job Attitudes/behaviors High commitment Committed but contentious Demographics Older, experienced Older, experienced

Total pay system

Sensitive to social contract; Aligned with strategy, sensitive to hierarchical; well-defined jobs competitive markets Base and benefits; annual increase Base/performance bonuses, stock

ownership Focus on commitment and Focus on performance and cost control continuous learning

EXHIBIT 16.2 Applying the Global Guide

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receive performance bonuses are significantly smaller at Daimler. Until very recently, broad-based stock options for employees were illegal. Daimler changed its plan in 2003 to award stock rather than options. Nevertheless, base salary and across-the-board pay in- creases (rather than performance bonuses and stock) remain the most common pay forms. In exchange for their higher taxes, Daimler employees receive generous welfare and un- employment payments, plus subsidized college and apprenticeship programs. As Exhibit 16.2 shows, centralized wage setting with predictable annual pay increases, concentrated financial ownership, and high taxes that support a wide social safety net still provide the context for the pay system at DaimlerChrysler’s German locations.10

Now let us apply the global guide to Chrysler. Chrysler reflects the competitive dynamics in U.S. labor and product markets as well as the social contract in the United States, which places high value on individual choice. Pay setting is highly decentralized. Government’s in- volvement is limited to ensuring conformance with minimum wage, tax, and discrimination laws. Chrysler’s managerial pay system is arguably aligned with its business strategy, is sen- sitive to market conditions, and includes significant performance bonuses and stock owner- ship. The U.S. tax code supports the use of stock options. The pay system is considered a strategic tool intended to competitively attract, retain, and motivate managers and also sup- port customer satisfaction and improve shareholder value (sound familiar?).

So the global guide serves as a tool kit. By examining each of the factors, we can in- crease our understanding of the variation in international pay practices. Five factors are particularly salient. These are variations in (1) social contracts, (2) cultures, (3) trade unions, (4) ownership and capital markets, and (5) managers’ autonomy. While we sepa- rate the factors to clarify our discussion, they do not separate so easily in reality. Instead, they overlap and interact.

THE SOCIAL CONTRACT

Viewed as part of the social contract, the employment relationship is more than an ex- change between an individual and an employer. It includes the government, all enterprise owners (sometimes acting individually and sometimes collectively through owner associ- ations), and all employees (sometimes acting individually and sometimes in trade unions). The relationships and expectations of these parties form the social contract. As you think about how people get paid around the world, it will be clear that different peo- ple in different countries hold differing beliefs about the role of government, employees, unions, and employers. Understanding how to manage employee compensation in any country requires an understanding of the social contract in that country. Efforts to change employee compensation systems—for example, to make them more responsive to cus- tomers, encourage innovative and quality service, or control costs—require changing the expectations of parties to the social contract.

10Lowell Turner, ed., Negotiating the New Germany: Can Social Partnership Survive? (Ithaca, NY: Cornell University Press, 1998); Hugh Williamson, “IGMetall Is the Trend-Setter: What Happened in the Strike Will Have Far-Reaching Implications,” Financial Times, July 2, 2003, p. 11; G. Thomas Sims and Christoper Rhoads, “Tough Times Humble German Labor,” Wall Street Journal, July 1, 2003, p. A9; NCEO “Global Employee Ownership Plans Continue to Grow,” Employee Ownership Report 22(2) (2002); Uta Harnischfeger, “DaimlerChrysler Mulls Removal of Options,” Financial Times, July 10, 2003, p.