Equity in Compensation between Expatriate and Nationals within the same country
Understanding equity in compensation between expatriates and nationals within the same country begins with a focusing on three groups; home country nations (HCN), parent country nationals (PCN), and third country nationals (TCN). As organizations expand operations and they move more activities and functions to the global market place, domestic sources of labor become exhausted, so firms have to look to local home country nationals or third country nationals to sources of labor to provide much needed local knowledge. Incentives and adjustments are more finely tuned for PCN’s and HCN’s usually have more locally driven salaries and benefits, TCN’s are usually paid by way of a citizenship salary system that is based on their native country residence or citizenship, in essence little adjustments are made to HCN’s.
Equity in compensation revolves around careful negotiations “give too many premiums and incentives and you create an international stampede and unrest in the domestic pay system. Give too few incentives and you cannot influence people to risk foreign assignments” (Engle, 2007). As an organization decides to go global or expand internationally, the number of expatriates grows. Compensating these expatriates is the key to expanding globally. “Multinational companies have always faced challenges with respect to compensation” (Watson, 2005). Compensation practices may involve three basic forms; “negotiated” compensation packages, the “balance sheet” approach, and the “going rate” approach. Negotiated compensation package involves advantages of flexibility especially when there are few employees working abroad. Like wise when more expatriates are called for or required, compensation practices change to the “balance sheet” approach in which base salary, benefits, bonuses, etc., are adjusted by incentives such as housing and relocation costs to create a compensation package that reflects systems at the home location. “The goal of this package is to keep the expatriate economically whole while providing incentives for career risk taking abroad” (Briscoe, 1995). Through the balance sheet approach and the negotiation package an organization can motivate expatriates to accepting assignments abroad. The “going-rate” approach involves variation of pay because of assignments in multiple locations. This approach is evident when an employee is transferred from an economically advanced location to a developing country. Compensation plays a significant role in international strategies. There are various approaches that can be utilized to ensure compensation is sufficient for both home nationals and expatriates.
The effect of Trade Union and Employee involvement in Compensation systems for Cross Border Organizations
Employee Involvement (EI) has a tremendous effect on compensation systems as do trade unions. Employees input are integral in determining their type of compensation. The way in which employees are compensated effects the overall performance of an organization, it affects morale, and it ultimately effects the growth of the organization. If employees are compensated “fairly” productivity will suffer and no company will grow and prosper with unhappy, underpaid employees. When employees are involved in compensation decisions it gives them a sense of value. Trade unions also play a dominant role in determining the level of wages as well as working conditions. The way in which trade unions determine compensation has the potential to affect their membership levels and their power. In places such as the United States and Japan, trade unions have a significant effect on compensation levels and pay structure; however in places like India, the impact of trade union on compensation is rather limited.
In essence, the United States and Japanese corporations are at an advantage of understanding the potential of trade unions and EI programs compared to other countries. “In Japan, with bargaining conducted exclusively at company level and no mechanisms for the extension of agreements beyond the signatories, bargaining coverage exactly matches union density” (eurofound, 2005). With recent economic conditions, it has been difficult for trade unions over the last few years as they have been forced to choose between maintaining employment levels and pay increases. Japanese trade unions focus more on employment levels and working conditions because pay structures are set by industry or sector pay raises are a focus of trade unions put emphasis is more on employment levels and working conditions.
Compare and Contrast Pay Systems across Countries
Pay systems across countries can be broken down into three categories; local systems, sector/industry wide systems, and nationwide systems. With local systems, pay is determined by the organizations and it is usually performance or seniority based. For sector/industry wide systems, pay is determined by industry so workers within the same industry make the same pay depending on position and seniority. With nationwide systems, there is a national pay system. “The United States, United Kingdom, Canada, Hong Kong, and Brazil use highly decentralized approaches with little government involvement. Japan, Singapore, Germany, Belgium, and Slovakia are moderately centralized by industry sector. Sweden, Denmark, and Austria use highly centralized approaches that create a national pay system” (Milkovich & Newman, 2004). According to some culture has a significant influence on pay systems. “The 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” (Milkovich & Newman, 2004). Although that thinking can be a little stereotypical it is very clear that pay structures across the countries have similarities and differences whether the differences or similarities are based on culture, local conditions, government involvement, or performance either way they exist. Countries are filled with diverse people, so uniformity within a country should not be taken into consideration when determining pay systems.
“The pay objectives in traditional German systems include mutual long-term commitment, egalitarian pay structures, and cost control through tariff agreements, which apply to competitors’ labor costs too. Japanese organizations set pay objectives that focus on the long term (age and security), support high commitment (seniority/ability-based), are also more egalitarian, signal the importance of company and individual performance , and encourage flexible workers (person-based pay). U.S. companies, in contrast, focus on the shorter term (less job security); are market-sensitive (competitive total pay); emphasize cost control (variable pay based on performance); reward performance improvement, meritocracy, and innovation (individual bonuses and stock, etc.) and encourage flexibility” (Milkovich & Newman, 2005)
Robert Lord’s pay as an Expatriate
Compensation consists of many parts, although money (extrinsic compensation) is the most recognized, other factors such as benefits and bonuses can be just as rewarding. Robert Lords’ salary of $140,000 is similar to what other senior managers earn in Japan, Germany, and Denmark. Because gross salaries alone are misleading, once local taxation and living cost are considered United States employees are much better off than their Japanese counterparts. Robert Lord be sent to Japan on local terms, his buying power would be greatly reduced although his gross salary would be higher. Expatriates salaries are generally higher than salaries paid to Japanese nationals. The expatriate’s disposable income is adjusted for cost of living differences between home and host locations. This is to ensure that the expatriate will have the same spending power in their host location as they enjoyed in their home location.
Expatriate salaries are generally higher than salaries paid to Japanese nationals. According to the overseas digest, average monthly salaries are in the range of 300,000 to 500,000 JPY ($2,560 to $4,270 USD). Japan also has a bonus system that is a major part of their salary structure. In addition to a monthly salary, two bonuses are paid annually; this amount is sometimes equal to as much as one-third of a salary. Salary in Japan is often about 85% of the total compensation package. Additional benefits in Japan typically include pension contributions, health compensation, and child-bearing allowance insurance. In addition, Japanese companies also provide subsidized private housing or family allowances. Ultimately, Robert Lord’s pay as an expatriate would be higher than that of a Japanese national, not only because his compensation package will include other benefits, but also because his base salary would also be higher. If he were to return to the U.S. his pay would decrease because the cost of living is less expensive and certain incentives and allowances will no longer be necessary.
Conclusion
U.S corporations looking to expand internationally must take into consideration many issues in respects to culture, local conditions, expatriate compensation, etc. Riordan Manufacturing has to ensure that they do their homework in respects to understanding the Japanese culture, customs, and systems. It will be imperative for Riordan to ensure their global strategies and compensation practices are in tuned or complementary to Japan’s systems. It is even more important for Robert Lord and other expatriates to understand the uncertainty of taking assignments abroad. Expatriates must also have a thorough understanding of the international pay systems and how they will affect their quality of life.
References
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