Factors Influencing International Compensation

Recently, the dilemma between sector and cultural predictors of compensation policies has become a public concern, and is extremely important in the background of internationalization. Even some well-known cultural traditions at working styles of many countries, examples like the Industry Wide Bargaining of Germany, the Lifetime Employment of Japan and the Wide-range Social Safety Net of France, now are facing the threats of being damaged owing to the big pressures from economic globalization. As a result, multinational employers are facing unprecedented challenges when choosing a job due to the pressures of economic globalization and market economy. The growth of global economy plays a major role in general business, especially in the areas of human resource management. It has been at the agenda of company leaders to chase the qualification of global mind-sets by which they used to meet the challenges brought by the trend of globalization of economy and create more opportunities. Compensation in international human resource management is one of the aspects for them to come up with to form the global mind-sets, which is more than complex. When it comes to use some incentives and rewards to motivate employers from different countries, so-called multinational employers, the multinational cultures are extremely important to be taken into consideration. In all, the global mind-set talked earlier can be attained by the proper adoption of compensation and reward systems. Otherwise, the systems will come to hinder the development of global mind-set if improper.

Factors Affecting International Compensation Strategy

The understanding of the economic, political and social conditions of the business where they are is vital to make sound compensation strategy in the competing markets. Though compensation and reward system is used to motivate employees, but it isn’t just used to attract and hold talents. It serves as a comparative advantage for companies if used properly. Thus, the establishment of international compensation and reward system has been at the top agenda of multinational giants. It becomes a new boom that many multinational giants try to establish compensation and reward system in a perspective of global mind-sets rather than local. Global knowledge and information are collected to overcome the limits of local experience and the result is that the integration of global mind-sets in the system contributes to the competitive advantage of those brilliant companies.

The main factors affecting international compensation strategy are; (1) social contract (2) culture (3) trade union (4) ownership and capital markets, and (5) managers’ autonomy.

1. 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.

2. Culture

Culture is an abstract but collective concept, which is not defined as a certain object but covers more than one object. It is a collection of Material wealth and Spiritual wealth including religious, customs, education, regulations, laws, economy and even science. Culture also plays its part in the international compensation system.

People with different cultural backgrounds will view compensation system differently under the influence of culture. So does the management of the system. Culture is a thing deeply rooted in the blood of people. People in the same nation tends hold the same or similar mental programming way to process ideas and information. In other countries, the way may differ. So is the case of compensation system, the certain culture will inclines to match one culture of a nation if global mind-sets are not brought in and lead people to manage systems in a certain way. A simple and direct way to confirm it is to see the different meanings compensation in different countries.

Culture which forms a system of knowledge, information and beliefs will affect attitudes and behaviors associated with the work. Culture affects the variables of the established compensation system. Though equity customs are shared among the employees from many countries, America and Japan for example, the force of the customs really works differently in different countries. In all, having the awareness of focusing the influence of culture values on employees is extremely important for corporate leaders. When dealing with compensation system, the controlling for context of culture should be paid attention.

3. Trade Unions

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.

4. 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.

5. Managers Autonomy

Managerial autonomy reflects managers set his employees to make decisions by themselves. There is a relationship between it and the degree of centralization. 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, 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.

Other Factors

Besides the factors affecting compensation strategy talked about above, there exist some other important factors worth consideration. Global national policy is an example. Global national policy concerns many parts of the society, like tax. Taxation burden for the citizens vary across different countries. And so does welfare policy like retirement plan. The two are only two small parts of the national policy. National policy relates to the relationships among employers, employees, government and companies, which can exert influence on the compensation and reward systems as well. National policy of different countries will vary, so it will influence the international compensation and reward system. Some examples can be listed to support it. In German and Japan and in America and England, taxation and some regulation policies will show differently in the use of stock options. And the taxation will in turn decide the variable payment of a person. Different tax rates will decide different variable pay schemes. Besides, bonuses and allowances win popularity among employees in Korea or Japan. The increase of bonuses and allowances are not directly decided by the performance at work. However, this is not the case in other places. As we all know, only the base pay rather than bonuses and allowances can be the base point to be calculated in some welfare schemes like national health insurance rates. And in America, the income tax doesn’t mean too much to benefit schemes. In this way, the taxation can function more effective to create employment.

Besides, the complying with national policies is also a problem. When the government takes some initiatives, the corporate leaders is not easy to deal with even they are given discretion. They can’t just follow what others do. In many cases, companies can still have the clear mind to make decision about whether to follow the pervasiveness or to persist in the traditions. This just depends on the real condition of the company. For example, America once put forward some creative and innovative compensation schemes like phantom, ESOPs. The fact is that some companies adopted the initiatives and benefited a lot. And some didn’t, they just picked out what was proper for their companies. So whether to observe the national policies is a big choice worth consideration.

Finally, there are social contracts in terms of the national policies. Social contracts are related to fairness and justice. The other concept is psychological contract. It means the company can benefit from benefiting employees. That is to say, though the psychological contract is invisible, the company can use to motivate. It concerns the employee participation and the emotions of employees. Companies can benefit development by satisfying the inner needs of employees to increase employee participation. The national policies put forward by government can show the social contract customs. Some public policies are issued to put limits to the employment relationship like minimum wage and family leave statutes. However, those national policies will influence the psychological contract by influencing the expectations related to the psychological contract.