Factors affecting employee compensation strategy

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Compensation is the most important part worth consideration in any employment exchange. It is perhaps the only reason push people to be employed and employment relationship is characterized by compensation (March and Simon, 1958).

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.

In this study, several factors which influence compensation and reward systems have been investigated. However, it is important to note that the successful study of compensation and reward systems depends on comprehensive mind rather than isolated investigation. The changing economic and business circumstances should be regarded as an organic component in the study of the compensation strategy. That is to say, the strategy should be studied in that circumstance. In details, the study should involves the circumstances of both local and or regional, both national and or global business, which are all the operating environment of companies. What’s more, the study of the factors like the industry where the company lie, the company strategy it use, corporate culture, the employee participation and institutional settings could also contribute to the study of compensation systems. All those aspects internal and external should be taken into consideration when analyzing the compensation and reward systems of the company to form a systematic theory of it. Just like Adler and Ghadar (1990) and de Gruveter (1995) quoted that research in contextual isolation is misleading: it fails to advance understanding in any significant way.

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 essay is aimed to talk about compensation and reward systems. It will be separated into two parts. In the first part, factors affecting compensation strategy will be discussed. Five factors including social contract, culture, trade union, ownership and capital markets, and managers’ autonomy are listed to analysis. And in the final, some other factors are also concerned. Then, it follows the second part. Consistency of international compensation

Part I Factors affecting compensation strategy

The basic issue here is to determine what factors shape the patterns of policy choices in compensation. Preliminary research in overall human resource strategy and compensation suggests the following major sets of factors. The writer intends to pay attentions on only some of them in this part of study. Then we can draw some arguments on how the factors that are chosen below determine the international compensation strategy and in what extent we should discuss those when make decisions.

If we want to understanding international compensation, we should recognize the variations and similarities and figure out how to manage them. That people get salaries depends on differences in the factors in the global guide described in Figure1. There are four general ones in the following: economics, institutional, organizational, and employee, with sub factors. There has been a discussion about these factors, which can be used all over the world. But once we change from a domestic to an international aspect, you can see there are a lot of other important factors. Institutional factors, such as culture traditions and political structures, and economics factors, such as variation in ownership of corporation and the development of fund and labor markets, come into pay. Moreover, you should consider social contracts and the role of trade union.

Figure 1 Milkovich & Newman Compensation 8th edition pp500

The International organisations are looking for five particularly factors after testing each one. (1) social contract (2) culture (3) trade union (4) ownership and capital markets, and (5) managers’ autonomy

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.


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. According to the research of Remick (1995) and Shipley (1984), replacing a loss in Slovak and pay in Malaysia, making equal in Sweden, reward in Hebrew; and `pay’ in the English language meant to pacify or please as an early use of the word.

Culture which forms a system of knowledge, information and beliefs will affect attitudes and behaviors associated with the work. According to the research of Bloom and Milkovich (1995), though little has been found to figure out how the culture functions and affect people’s work, it is evident that culture affects the variables of the established compensation system. The theory of Bhagat (1990) and Triandis (1993) also support the argument that culture affects “saliency and value of employment returns”. 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 (Kim et al, 1990). 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.

Trade unions

As research, 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. (Milkovich & Newman Compensation 8th edition Press by McGraw-Hill)

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. (Milkovich & Newman Compensation 8th edition Press by McGraw-Hill)

Managers’ autonomy

Managerial autonomy, an organizational factor in the global guide figure 1 reflects managers set his employees to make decisions by themselves. There is a relationship between it and the degree of centralization discussed earlier.

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, as the global guide reveals, 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. (Milkovich & Newman Compensation 8th edition Press by McGraw-Hill)

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 (Bloom and Milkovich, 1995). 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 (Bloom and Milkovich, 1995). 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.

Part II Consistency of international compensation

Where do compensation theories will continue to develop under those conditions above? As the development of globalization continues, these research issues will gain in importance. The degree of fit between compensation strategy and organization strategy contributes to organization performance by signaling and rewarding the behaviors that are consistent with the organization’s objectives. So the consistency of international compensation is really worth to be analyzed.

The psychological contracts theory and the resource-based theory can be used to analyze the problem. As for the psychological contracts (Macneil, 1980; 1985; Rousseau and McLean Parks, 1993), psychological contracts represent an invisible relationship between employers and employees, which is established by promises, values, recognition and respect. 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 (Bloom and Milkovich, 1995). Companies can benefit development by satisfying the inner needs of employees to increase employee participation. The returns of the company from satisfying the needs of employees and establishing the bridge of psychological contracts can be huge and have developing future. The psychological contracts theory concerns the provisions of organization and the contribution of employees. Psychological contracts can show the meaning of bundle and make the employees to respond to it (Cantor, 1990). Cash returns will stimulate the hard-work to match working situations at the present. Besides, the belief and loyal relationships between employers and employees and also the initiatives of leaders can be evoked by the mutuality (Eisenberger, et al, 1986; 1990). So as a result, the psychological contracts theory will be very important to harvest benefits for companies (Rousseau and McLean Parks, 1993). In turn, the bundles of valued returns will influence the psychological contracts.

Besides, strategic can be used to describe the compensation policy. The compensation policy should be considered in the strategic aspect. The compensation policy in the strategic perspective will influence the objectives of companies and gets popularity among the public. Someone may just consider it as another fashion. However considering compensation from a strategic perspective is part of a growing recognition that macro-organizational issues are an important part of the study of human resource management (Dyer, 1985). It is a more than profound way to consider the compensation policy.

Then, what is a strategic perspective on compensation policy? The meaning of a strategic perspective on compensation policy depends on three aspects indeed. Above all, it should be notable that compensation systems vary across different companies and different staff groups. It is obvious to some of the companies. But it is the different case to others. Some scholars collect many data and establish some models to analyze compensation differentials and the differences in the compensation systems. They find that there are little related. And some other survey finds that the difference do really exists. Different kinds of organization behave differently in the compensation system. For example, some companies promise to give base pay to their employees as a sign of meeting the general market and some don’t. Some companies chase long-term performance of the employees when making incentive schemes and some don’t. Some companies adopt individual oriented incentives schemes and some adopt group oriented incentives schemes. Some companies tend to empower and some tends to centralization of state power. Some companies just disclose every details of the compensation policy to employee and some don’t. Though those are all facts, it is surprised that little proofs have been founded to prove the influences of those differences, which calls for more professional and systematic analysis.

Besides the first aspect, some decisions the leaders and workers make contribute to the formation of these differences, this discretionary power exists to select different options and procedures to perform. This does not discount, like pressures and taxation customs in the labor force change on the environment impact. In fact, the strategic level means that the prediction and assessment of environment stress the need for such pressure changes in the payment system. However, tracking changes and compensation system for all the inevitable changes in the external force and no room for discretionary decision-making is not a good way.

Proofs lately does not (at the national wage systems) of the national borders should be left out, but it showed that the organizations of the system in these countries there are sufficient discretion to enable enterprise to customize the compensation and reward system. Therefore, business strategy and market globalization of the unit of analysis should be given more than the state as the appropriate compensation. A “national culture” concept, you must assume that the logic of social customs and values in nature is complete leap in the country. Obviously, geopolitical boundaries alone can not determine the cultural values and social customs. Subgroup consisting of the United Nations and the Asian culture, and anecdotal and empirical evidence shows that a variety of local cultural values and the very different value systems within the organization. In fact, it seems increasingly inappropriate to start the compensation system at the country level and analysis. Some studies suggest that the average level of attention to cross-culture many be misleading. It does not take into account the significant changes within countries, creating enough with other countries the distribution of overlap. Further analysis showed that the political, economic, institutional and the other forces (rather than national culture) to explain the staff from different countries expressed the desire to considerable numbers of changes.

In fact, compensation systems and the sectors of activity will share little in common when they are analyzed in only one country. When compared with the condition in the strategic human resource aspect, the leaders in fact have a high level of autonomy to deal with the human capital under different business circumstances like strategy and structure, institutional pressures. But in some other countries, the power to handle those things and use the well-established international compensation policies of the leaders will be limited.

Just like talked earlier, the globalized economy and the emerging markets have brought about pressures and also unprecedented opportunities for multinational employers. 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.

The concept of global mind-set should be made understood at first. It relates to a kind of values or attitudes by which people used to establish a usual mental programming system to make business judges in the globe perspective. The global mind-set is unique and fully decided by individual’s talent or intelligence, so undoubtedly it will bring competitive advantage over the others. The voices from Jack Welch can be helpful to illustrate, “the aim in a global business is to get the best ideas from everyone, everywhere…. I think [employees] see that if you are going to grow in GE, you are not going to have a domestic background all your life.”

The international compensation systems can also develops in the aspect of International Human Resource Management structures, IHRM for short. IHRM relates to the management of human resource in the perspective of globe. It is created for the benefits of the success of companies operating the world-wide range. As to International Human Resource Management structures, there are many topics can be listed to analyze it. Those topics are very typical in the study of the compensation system to the people who are expatriates. The issues can be researched are as follows, including managing expectations of foreign workers, increasing proper value to the foreign workers compensation systems, reforming the foreign workers compensation systems by localizing or regionalization, redefining the term of ” balance sheet”, adding the thoughts of human resource to the foreign workers compensation system, cost control, putting forward the retirement plans or similar welfare schemes in the world perspective, emphasizing the importance of development when making foreign workers compensation policies, and centralizing or decentralizing the distribution policy. Those aspects all can be the list of the study of International Human Resource Management structures to get a full understanding.

When talking about International Human Resource Management, another important aspect of IHRM concerning training and developing needs to be illustrated well. The aspect of training and developing IHRM provides another efficient way to link and centralize the decentralized parts of a multinational enterprise. Typically, the pre-departure training and developing of the parent country nationals and their family companies has been paid more attention by many scholars. A high level of foreign workers failure rate can be resulted from two aspects. Above all, the lack of preparation has resulted in a high level of foreign workers failure rate. For example, more training in the multinational enterprise will tend to appear in American companies compared with multinational competitors in the Europe and Japan (Noble 1997; Tung 1982). What’s more, because of the less focuses on communicative skills, language and culture sensitivity paid by multinational enterprises in America in the training system even worsen the situation (Dowling et al. 1999; Tung 1982). As a result, there is no doubt that the foreign workers failure rate will be higher in the American multinational enterprises than enterprises in other places. At recent present, such claims have been challenged: for example, Peterson et al. (1996) state lower failure rates than reported by Tung (1982). While, draw a comparison between Western European and Japanese multinational enterprises and American multinationals, as suggested above, America also has got higher foreign workers failure rates in the findings of Peterson et al. (1996) .

And in the view of Alder and Bartholomew 1992, the most persuasive reason for the change goes to the uniqueness of parent country nationals. In parent country nationals, training and developing, the very important aspect of IHRM is no more important than it is for people from other parts of the world. Actually, Bartlett and Ghoshal 2000, Fulkerson and Schuler 1992 suggested that international firms with the various managers from the citizen all over the world can benefit the firms for the promotion of inter-unit linkages. So the aspect of training and developing needs to be paid more attention. And that is the case. In reality, the fact is that training and developing in IHRM exert larger importance, like dual-career issues in foreign workers success (Mendenhall et al 2002).

Along with these cross-national leaders developing, there exist many qualifications for the leaders to learn and get, like comprehensive knowledge of the development, trend and information of the multinational enterprises, the recognition of the customs and values in region, the information of the current regional situation. The knowledge of the public policies, labor relations and laws will enriched the leaders in the operation of multinational enterprises. In some research, it is suggested that management development activities could be explored with local, regional, and other human resource parts assisting in program design and delivery in corporate or global headquarters (Bartlett and Ghoshal 1998; Dowling et al. 1999; Evans 1992). Obviously, there are also some empirical questions remaining on the efficacy of this or other structural approaches.


Wide range, comprehensive and systematic human resource system integrated with the global mind-sets should be established by the headquarters, where lie the basic responsibility and strategic vision. In this way, it will be appropriate enough for local units to adapt to their local environment and competitive strategy needs (Brewster 2002).According to the discussion of the additional “internet contact” talked earlier, some people suggest that a policy must be not only efficient enough to promote interknit contact and learning transfer, but also recognizes the needs of the local unit. This discussion argued that the leaders of those enterprises should systematically analyze their own environmental needs and ensure that these factors are integrated into the global human resource policies that create (Bartlett and Ghoshal 2000; Schuler 2001) folding process as well. With the decentralization of the regional part both in geographical and cultural perspective, figuring and picking out the factors will be a easy task for the bases of multinational companies. As Florkowski and Nath 1993; Niederman 1999 suggested that, those efficient means for multinational enterprises like internal labor market data are useless for the local parts. Local parts don’t need to follow the pattern in which multinational enterprises observe. However, if the headquarter revise the local human resource information system, the case will be different. More resource including capital and material will be invested by more and more multinational companies in development and environmental heterogeneity as a primary implementation of the policy (Schuler et al 1993). Further investigation and verification will be called for to figure out what is true.

Finally, after the study of international compensation system, the nature of compensation management is worth to be thought about before quick conclusion. A very persuasive argument can be said that the current compensation system develops in a bit messed-up manner over time, due to various pressures, administrative response, not in a rational analysis and objectives oriented process. If this is the case, most of the above, it is very important to systematize the compensation system in a reasonable and proper way. But before the success of the reforming of the current compensation system, it is wise to treat the current conditions in a more accepted way. When “betters” has not come yet, it is better to treat it in a development perspective. The corporate leaders should know that the difference and make precautions about what the difference will bring to the result. Those differences will influence the success of the company, which one needs to pay attention.

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