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The overall aim of this report is to critically analyse the real case study of health care pharmaceuticals, a geocentric company with headquarter in Germany, and to suggest the best suitable compensation policy for the company. The report demands to suggest that whether the globally standardised or locally customised policy will be best suitable for the company. In order to reach this target, a number of questions have been answered, which include kind of relationship does exist between the transnational business strategy and the pay systems? Countries differ with regard to their risk taking and risk adverse orientation? Does the bonus composition reflect a standardised policy? Standardised long term incentives? Ranges? Currency basis of Japan and U.S.? Local adoption of fringe benefits and the fringe benefits? On the basis of answers got from these question, it is suggested that the company HR manager needs to design compensation policy on the basis of economic, cultural and institutional environment of the countries, the company operating in. It is also suggested that in order to globally standardise the compensation policy, wolf gang Henson needs to change the proportion of fixed and variable pay adjusting according to the cultural and institutional environment of all subsidiaries.
Health care is a pharmaceutical company, founded about 100 years ago and counts as the one of the largest Europe pharmaceutical company. The company figures shows that about 30000 staff were working in health care in 2005, the company net profit in 2005 was 750 million Euros out of total sale, which was 5.9 billion Euros. The company's owner started business from in a small shop in Elm shorn, Hamburg, and Germany. The company later progressed from there and acquired several local pharmaceutical companies and then as a result of massive expansion, it started operating worldwide. The US was the first subsidiary of health care, and then it later went to Canada, Japan, China and Asia. Changes in the environment, the companies use to operate and increasing research and development costs forced the health care to move its research and development activities in other countries, where it affordable and also it helped the company to use the full available talent. As health care is German pharmaceutical company and it posses' geocentric approach towards the HRM activities. That why, the company has adopted HRM processes according to the region it operating in.
Wolf gang Henson is a company's new HR manager and his task is to review the current global compensation policy of company and realign and design a new health care's pay system to increase global integration. Formally the compensation system for subsidiary employees were designed according to the local standards whiles now the company aim to standardise from the previous localised compensation system. This will enable the company to increase effectiveness throughout the subsidiaries.
Relationship between transnational business strategy and pay systems
In this fast growth economy, the MNEs are competing in term of allocating resources, the balance of power between the headquarters and subsidiaries and the degree to which products are designed in order to fulfil the global requirement and local preferences. The transnational business strategy is designed keeping in mind both the global and domestic issues. It helps to benefit from both the global and multi domestic strategies. According to (Zwass, 1998) transnational business strategy is a management approach in which organisation align their global business activities through close cooperation between the subsidiaries and headquarters. A transnational business strategy represents coordination between the local autonomy and the global centralised decision making. The transnational business strategy also based on the level of organisation learning, the current skills and the skills required competing in the international market (Stonehouse G., 2004). Thus it can be concluded that the philosophy of transnational business strategy is to built a strategy based on the best strategies available within the operating span of organisation, which suites the organisation to implement globally keeping in mind the local responsiveness of headquarters and subsidiaries.
On the other hand the pay strategy, which includes the compensation, reward and benefits depend on the different geographical locations of countries, the culture and the institutional environment in which they are developed. Countries of Anglo Saxon culture, for example the USA, adopt exchange compensation systems, n which implying a shorter term vision, the compensation linked to individual performance. Countries of oriental culture such as China and Japan prefer traditional compensation system. The wage package is characterised by the important weight of fixed earning rather than performance based system. While in Europe the wage system is closely regulated by collective negotiation and state interventions. As a result, the pay system not largely dependent on the transnational business strategy but dependent on the cultural and institutional environment, where the business is situated.
Risk taking and risk adverse orientation in different cultures.
According to Geert hofstede, (1994) Uncertainty avoidance describes the extent to which individuals within a culture feel threatened by the uncertain and unknown situation. It is related to Durkheim's concept of anomie. Low uncertainty avoidance result in high risk taking and high uncertainty avoidance result in low risk taking.
Hofstede 1980, identifies the five dimension of culture, these are
Uncertainty avoidance index
Long term orientation
Risk taking and risk avoiding is directly associated to uncertainty avoidance index (dimension) of culture. Geert hofstede (1980) identifies that USA have very low score in uncertainty avoidance, while Japan, France and Germany score high uncertainty avoidance. That is the reason that why American is favouring the new compensation systems of health care, while Japan, Germany and France opposed the new compensation system. This is why because it threatens them that if they lost the proportion of their fixed pay, they might not be able to earn as much as they earning know. So the risk taking and risk adverse depends on the culture and constitutional environment of country.
Bonus composition reflect a standardised policy
Bonuses are awarded to employees on the successful completion of task. The MNCs organise their bonus system mainly on the basis of local conditions. From one angle, the bonus composition reflects standardized policy. This work in this way that the bonus percentage is fixed regardless of the subsidiary location and the bonuses will be granted on the successful completion of task.
The health care managers are granted bonuses in three ways.
If the manager able to fulfil his/her responsibilities like identifying the needs, setting target and then making possible for employees to achieve. This component counts 50%.
The next is my unit performance that how the subsidiary has performed and achieved targets. This component counts 25%.
Broader context component
The third component is broader context component, 25 % bonuses are awarded to managers, depending on the overall performance of the company.
But on the other hand, the bonus composition does not seems to be standardised as the employees in risk adverse countries will not be able to put their full effort in the job, as they might be thinking that they would not be able to achieve their targets and all their efforts will go into vain. While the managers in high risk taking countries take it as opportunity and try to achieve the set goals and targets. Also in the border context all employees in all subsidiaries will be rewarded on the overall company performance but the more effort to achieve overall company targets will be from employees of high risk taking countries.
Standardised long term incentives
The long term incentives will be more beneficial in the Japan, France, Germany and Asia. Where there are risk avoiding managers. Long term incentives play important roles in the overall organizational performance. The long term incentives could be:
Performance based incentives
These incentives are awarded looking at the performance of individual. If some individual give the best performance in order to achieve the company targets, they will be provided with performance based incentives.
Awarding the employees with the shares of company is the other form of long term incentives. As long as the employees will work for the company, they will grant more shares. The shares are granted to employees normally at the end of each financial year, when companies achieve their targets. Some time half of the shares are given away to employees at the beginning and half at the end if they meet the targets. In this way the employees work hard to achieve targets set by the company to get the other half of shares.
This is the kind of incentive which signifies the employee ownership in the company and employees can claim the profits and assets of the company. This enables the employees to become the partners in the business.
They could be hard cash or shares. Some companies give out the percentage of their profits in the form of cash and some give as shares of company.
What is meant by ranges is that the different pay level or pay grades. This work in this way that the salary range will be fixed for managers who belong to level 1 like HR managers, there will be same range of salary for level 2 managers like line managers etc. So the HR managers in the US will get the same pay as HR managers in Japan, France or any other country. These will be fixed compensation or base pay (Hofstede, 2001).
Currency base rates for USA and Japan
There has been a lot of difference in the exchange rates of Japanese and American currency. The reason for not standardization of currency is that the value of Japanese currency is much more less than the American currency. Let's suppose the 2 Euros are equal to 1 dollar and 1 dollar is equal to 10 yens. If there will be a standardized currency let's say Euro is standard currency than 100 Euros will be equal to 50 dollars, which will be equivalent to 500 yen. In this way, the expatriates in US will think that they getting less than the expatriates in Japan and also its less cheaper to live in Japan as compared to US. That is the reason why expatriates in different locations receive compensation in local currency. As also said by (Watson and Gangeram, 2005) to pay the expatriates according to the local standard but keeping in view their high living standards.
Local adaptation benefits
Local adoption of benefits means, providing the expatriates with the benefits which are helpful in the certain societies to survive the difficulties there. Keeping in view (Dowling and Whelsh, 2004) the expatriates should get pay according to the local standards but can be provided with additional incentives like non cash incentives or fringe benefits, which are:
Term life insurance
Transport like company vehicle
These benefits play a vital role in motivating the expatriates. The fringe benefits are necessary, so that the expatriates do get use to host country. More realistically, the succession of most of the international assignments depends upon the fringe benefits. With every vital necessity available, the expatriates find it easy to adjust in the country of target.
Global compensation practices have recently moved for beyond the original domain of expatriate pay. Compensation is increasingly seen as a mechanism to develop and reinforce the global corporate culture. Increased complexities in global pay include the growing use of outsourced activities and subsequent labour pricing needs, balancing centralization and decentralisations of compensation. It is concluded from the case that wolf gang having difficulty to implement the new compensation system due to the fact that USA is a high risk taking country, while as Japan, France and Germany are lower risk taking counties . American managers are accepting the proposal of performance based pay. While the low risk taking countries not accepting this offer as they feel that they will lose their fixed pay and never able to meet the targets to get the variable pay. National differences, business environmental differences and cultural differences are the main issues which stop multinational companies to implement global policies rather than customised local policies.
Due to the fact that healths care operating in the countries with different cultural and institutional environments, in this case Wolf Gang Henson needs to think carefully about locally customising the compensation policy rather than globally standardising.
Henson needs to design compensation policy according to the cultural and institutional environment. The option of variable pay with the fixed pay seems to work in the United States and Canada and Australia, where there is high risk taking culture and people posses' individualistic point of view. But not seems to be affective in the countries like Japan, Germany and France etc, where the culture is to avoid risk. Moreover, in risk adverse countries, there is a need to think about large proportion of fixed pay and very small proportion of variable pay.
Also the three components on which the bonus of managers of health care based upon, which are individual component, my unit and the broader context. Henson needs to think about giving relatively high percentage of compensation on the basis of individual component to employees in high risk taking countries. And the rest two components are seems to work well as they were before. The reason for that is the low risk takers will get more fixed pay but less variable pay, while the high risk taking managers will get a bigger proportion of variable pay and less fixed pay as compared to low risk taking countries.
Henson needs to introduce a bigger proportion of fixed pay and smaller proportion of variable pay, if he wants to globally standardise the compensation system.