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Renaissance in Rewards: A Historical Preface and Comparative Analysis

Of Contemporary Pay Practices

by

Allen D. Engle, Sr.*

011 Business and Technology Center Building Eastern Kentucky University

521 Lancaster Avenue Richmond, Kentucky 40475-3102

USA allen.engle@eku.edu

+1 859 622 6549

+1 859 622 2359 Fax

*Contact Author

Marion Festing

Professor of Human Resource Management and Intercultural Leadership ESCP-EAP European School of Management

Heubnerweg 6 14059 Berlin

Germany mfesting@escp-eap.net

Peter J. Dowling

Victoria University of Wellington Level 11

Rutherford House Wellington, New Zealand peter.dowling@vuw.ac.nz

Ihar Sahakiants

Research Assistant Chair of Human Resource Management and Intercultural Leadership

ESCP-EAP European School of Management Heubnerweg 6 14059 Berlin

Germany ihar.sahakiants@escp-eap.de

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OVERVIEW

Contemporary reward practices may be described as complex, diverse and in a state of

dynamic change (Dowling et al., 2008). Any analysis of the broad range of rewards practiced

by firms in Europe (and around the world) will require a certain level of reductionism. In

order to present a meaningful but parsimonious analysis, we present our paper in two sections.

First, a tri-part, historical sketch of dominant themes in European pay practices is outlined.

The first element of the preface emphasizes the closed, closely held, institutionally prescribed

set of pay practices characterizing the post WWII period until the mid 1970s. Second, we

present a period of dynamic change in pay practices from the 1980s until the year 2000 or so.

This second period is characterized by the spread of a set of universalistic, often US based set

of “best practices” of pay – emphasizing standardizing pay across regions and industry,

individualistic, hierarchical pay models with competitive, outcome based pay logic. Finally,

we outline a third period, a synthesis of the two previous forms, beginning in the early 1990s

and continuing to characterize many contemporary practices. These three stages overlap, as

criticisms of the dominant reward philosophy of the moment may extend over a decade and

the dominant philosophy will not change overnight.

This brief “historical preface” sets the stage for a contemporary analysis of total

rewards and a proposed analytical framework to support further developments of research into

comparative rewards. The contemporary analysis draws heavily from extant empirical

research.

PART ONE: A Historical Preface

I “A Closed Arcadia”

Pay practices across Europe (and around the world) between 1945 and the mid to late

1970s may be characterized by the imagery of the forest. Closed (lacking transparency),

complex, historically grown, organic and often idiosyncratic pay forms vary tremendously

across national borders, across industries and across firms. Strong local institutional contexts

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dictate pay practices. Pay decisions may be delimited by legislation, long-term national or

industrial level contracts, or by the inflexibility of dominant unions and the viable threat of

crippling industrial action. Tariffs and treaties may also contribute to effectively create

national product and labour markets. This is the specific reward context that Bartlett, Ghoshal

and Beamish (2008) might relate to an emphasis on “local customization” – the idea that local

institutional contexts make appropriate reward practices for each firm or industry more or less

unique. These deep, dark “forests” are closed, in that a limited number of institutional leaders

in business and government privately coordinate these institutional processes to determine the

allocation of rewards.

From the mid 1960s until the early 1980s two forces combined to challenge this

dominant approach to rewards. First, US based multinational enterprises (MNEs) and

consulting firms brought their own Tayloristic “logic” to European operations. US based pay

practices were the focus of conversations in boardrooms, universities and the halls of

government. The argument was made that the expanding American economic engine was

fuelled partly by the “best practices” of strategically linked, competitively flexible, cost

sensitive, individually centred and production based “total rewards” (Balkin and Gomez-

Mejia, 1987; Dooher and Marquis, 1950; Mahoney, 1979). Simultaneous to this growing

chorus we see cracks in the closed institutionalist order. An increasing awareness of the

toughness of global competition and the dismantling of many tariffs and legislative

boundaries (first within Western Europe and then around the world) combined with very

public failures by planned economies (West and East) to meet economic and social targets,

productivity declines, crippling industrial action and declining standards of living.

Paradoxically, these conflicting forces also triggered two very different reactions; many firms

and governments began to look favourably at adopting US based pay practices, while at the

same time, stimulating the development of a stronger European Union to act as an alternative

to US hegemony (Costin, 1996; Gauron, 2000).

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II “The Dogma”

Accelerating with the “Thatcherite” revolution of 1979 in the U.K and Reagan’s

increasingly strident and public argument that government is the problem and not the solution

in terms of economic growth, many countries set about “liberalizing” their institutions and

reduced or softened protectionist legislation and regulatory processes. In the mid 1980s

socialist planned economies teetered on the brink of economic and philosophical bankruptcy

and in 1989 the political reconstitution of Central and Eastern Europe (CEE) was seen by

some free market zealots as the final word of the “scientific truth” of the superiority of free

markets and unfettered capitalism.

What forms of reward practices are better suited to this new globally competitive

environment than those “best practices” that have so long been practiced by the “winners” of

the Cold War? This fundamentalist dogma of standardized, universally applicable rewards

may be seen in the imagery of uniformed ranked rows of a single crop. The Arcadian forest

of localized pay practices is to be swept away and replaced by planting standardized rows in

open fields; rewards are to consist of individually focused, competitively/strategically linked,

total rewards. Only these systems will be able to maximize the economic motivation for

actors in the economy and optimize the firm’s global position. Philosophies, systems,

practices and forms may be imported wholesale into all of Europe. This is the specific reward

context that Bartlett, Ghoshal and Beamish (2008) might associate with “global

standardization”.

Once again, dominance triggers dissent. Globally standardized rows of best pay

practices were being planted across all of Eastern and Western Europe in the 1990s while

forces of opposition were heard and articulation of the concerns were developed. Pan

European codifications from the Single European Act (SEA) of 1987 and the Maastricht

Treaty of 1992 triggered a widespread discussion of what comprises a “Euro-manager”.

(Barham and Oates, 1991). The unfettered promises of rapid economic development and

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utopian standards of living thought to be associated with the dogma of free markets failed to

materialize. The social costs of privatization – sweetheart deals, inflation, tax base erosion

and faltering social support networks – as well a rising nationalistic impulses and concerns for

fragile local heritage and a local identity seemingly lost in a global pursuit of “the American

dream” became apparent to social and political observers.

In the early 1990s, an academic discussion began questioning the universality of US

based HR models and practices. Researchers argued for considering the importance of

institutionally linked HR systems (Brewster and Bournois, 1991; Brewster, Mayrhofer and

Morley, 2004). This argument built as doubts crept in to the dogma of universalistic

standardization. There may be very good economic reasons for collective (as opposed to

individual) bargaining for wages, paying based on factors other than short-term market

indicator triggers, or even for the coordination of pay and reward policies across nations or

within an industry.

III “Renaissance”

Starting in the mid 1990s and continuing on until today, many firms within Europe

(and around the world) attempted to balance a concern for institutional realities with the

dynamics of free markets. These hybrid reward systems acknowledge the parameters of

national and regional institutional heritage while incorporating some elements of globally

standardized pay (Festing, Eidems, and Royer, 2007; Dowling et al. 2008) – for example a

more externally competitive focus to pay, increased transparency and accountability

connecting pay practices to firm and societal outcomes, and a movement from rewards as

wages to the broader conceptualization of “total rewards”.

The imagery of this final stage is found in a patchwork of fields, each field surrounded

by trees comprising institutional “windbreaks” to reduce the harsh effects of the

unconstrained winds of free market booms and busts on firms, industries and economies.

Each national, industrial or regional field is more open to efficiencies or some standardization,

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but the local competitive and historical terrain is taken into account when determining the

most locally appropriate mix of reward practices. Sustainability – the long-term social,

political, ecological and economic development of the region – is at least as important a short-

term market efficiency.

Note this renaissance is not a wholesale return to Arcadia, no more than the 15th

century renaissance was a return to the classical world of Greece and Rome. Rather the pay

system is a new and vibrant combination and synthesis of the two previous forms. It is this

form we now describe in the following section.

PART TWO: An Analytical Comparison

Despite the importance of the field of compensation and rewards, the topic of

international or comparative rewards is still an underdeveloped area. It is part of comparative

management research, an objective of which is to “identify aspects of organizations which are

similar and aspects which are different in cultures around the world” (Adler, 1984: 32).

An objective of this contribution is to build on this knowledge and to draw a holistic

picture of comparative rewards considering the various practices, the prevalent theoretical

explanations and methodological approaches as well as the limited empirical evidence. Main

research questions include: What are the differences in approaches to compensation in

international contexts, how can these differences be explained and what are the limits for the

international best practices in certain national contexts or what is the space for global

standardisation of compensation practices? For a descriptive analysis illustrating our results

we will use selected data so kindly provided by Hewitt Associates.

Understanding Total Rewards

Recently, there has been an increased attention to the total compensation approach in

the international context in the academic (Milkovich and Bloom, 1998; Milkovich and

Newman, 2008) – as well as in the practitioner literature (Hewitt Associates, 1991; Milkovich

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and Newman, 2008; White, 2005). In fact, Hewitt Associates (1991) have already used the

total compensation approach in an international context in 1991. Manas and Graham (2003)

define total compensation as a part of total rewards, which includes extrinsic and quantifiable

elements of total rewards: fixed and variable pay, benefits and perquisites (see Figure 1).

INSERT FIGURE ONE ABOUT HERE

The importance of nonmonetary compensation elements in national and international

contexts could be presented by their relative weight in the total remuneration package. For

example, according to the assessment of the Institute of German Economy, the compensation

for hours worked in Germany (including variable pay) accounts for about 76% of total cash

compensation package, excluding employers’ social security contributions and training costs

(Figure 2).

INSERT FIGURE TWO ABOUT HERE

The figure shows that compensation for time not worked accounts for nearly 17% of the total

pay. Performance neutral bonuses (for example the Christmas bonus or the 13th salary) are

often a part of the employment contract and account for about 7% of total pay.

A strong argument in favour of using the total compensation approach for international

comparisons of the pay structures is the substitutive effect between the monetary (wages or

salaries, incentives) and non-monetary (benefits and perquisites) elements of pay, which may

vary significantly between different countries and cultures. This broader conceptualization of

total compensation ensures more objective comparisons of compensation packages. For,

example, in multinational enterprises (MNE) it can be used as an important instrument to

benchmark pay systems around the globe, either to install external competitiveness or to

promote internal consistency. Furthermore, the total compensation approach can be

instrumental in ensuring strategic flexibility necessary to operate in multiple institutional

environments (Gross and Wingerup, 1999; Milkovich and Bloom, 1998; White, 2005).

However, although intrinsic rewards constitute an important part of employment relations and

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play an important role as motivators, it is very difficult to express these factors in monetary

terms other than merely pointing out the employers’ costs (e.g., for training). Given this

definition of total rewards, we will concentrate on the total remuneration concept in the

remaining part of the paper (further referred to as total compensation).

The National Context as a Major Determinant of Pay Practices

Research on the determinants of pay practices is rich. Milkovich and Newman (2008)

have identified four groups of factors explaining the variations in compensation designs:

institutional, economic, organizational and employee pressures (see also Gerhart, 2008).

These four groups of factors can be summarised in three levels of analysis featuring

individual (employee), organizational and environmental (economic and institutional) factors.

Figure 3 presents examples of the parameters included in each level. While we will briefly

discuss how individual and organizational factors influence compensation decisions the focus

clearly is on the impact of the environmental factors, as these issues matter most in

comparative rewards. However, taking this simplifying approach, we do not deny the

interrelationships between the mediation of national effects for example through

organisational practices and thus multi-level effects (Bowen and Ostroff, 2004; Brewster,

Sparrow and Vernon, 2007).

INSERT FIGURE THREE ABOUT HERE

The first level of analysis deals with individual preferences and expectations of

employees that influence compensation decisions. According to Milkovich and Newman

(2008), negative perceptions of pay-related organisational fairness result in absence and

turnover of employees. This points to the relative nature of the justice perception of pay

(Milkovich and Newman, 2008). The pay levels and structures are compared to those of the

social referents chosen by an individual. For instance, Kulik and Ambrose (1992) have

identified a variety of personal characteristics that determine the process of referent selection:

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gender, race, age, position and professionalism. Furthermore, situational factors such as job

facet comparison, changes in allocation procedures and physical proximity (Kulik and

Ambrose, 1992) may deliver additional insights about the perception of justice in international

context.

In today’s globalised economy, supported by sophisticated information and

communication devices, individuals can theoretically compare their pay conditions with

anyone around the globe with the same demographic features and holding comparable

positions. Apparently in most cases the limits of physical proximity seem to hamper selection

of referents outside the national borders. Moreover, individual differences do not only have an

impact on the selection of referents but also on pay preferences themselves, including

elements of monetary and non-monetary rewards. A study by Churchill Jr., Ford and Walker

Jr. (1979) suggested that in the USA, older workers have expressed higher preference for

extrinsic rewards than their younger counterparts, while Frey (1997) presents empirical

studies from Europe and the US supporting his contention that explicit rewards “crowd out”

intrinsic rewards across a wide range of employee groups. Milkovich and Newman (2008)

show preferences of pension plans among older workers or health insurance among

employees with dependants.

The second level of analysis presented in Figure 3 concerns the impact of

organisational features on compensation decisions. Here, an important influence factor is the

corporate strategy (Boudreau and Ramstad, 2007). In the case of remuneration this was

confirmed by an early empirical study by Balkin and Gomez-Mejia (1987). However,

especially in large international and diversified corporations other contingencies such as the

functional area matter as well. For instance, in their analysis of factors influencing

compensation strategies in foreign subsidiaries in Finland, Björkman and Furu (2000) have

noted a higher incidence of pay-for-performance (PfP) schemes in sales companies than in

production and R&D units. Similar results were found by Hannon, Milkovich, Gerhart and

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Friedrich (1990). They found that organizations adopting research and development intensive

strategies differ in the pattern of their pay practices from other firms. The impact of

ownership structures not only on CEO compensation but also on the pay of all employees

(Werner, Tosi and Gomez-Mejia, 2005) is another example of the matter of contingencies. In

international comparisons they become crucial due to significant variations in ownership and

control schemes around the globe (Whitley, 1999).

The third level of analysis deals with the external contextual factors, which according

to Hofer (1975) include economic conditions, demographic trends, socio-cultural trends,

political, legal and other environmental factors. The explicit consideration of environmental

factors in the study of comparative human resource management reflects a contextual rather

than a universalistic paradigm (Brewster, 2007). This points to two major explanations in the

variation of HRM practices including compensation: The institutional approach and the

cultural perspective (Sánchez Marín, 2008a, 2008b; Sparrow, 2008).

The institutionalism perspective (DiMaggio and Powell, 1983; Whitley, 1992)

highlights the importance of exogenous factors and recognizes that contextual institutional

pressures may be powerful influences on pay strategy (De Cieri and Dowling 1999; Wächter,

Peters, Tempel and Müller-Camen, 2003). Whitley, promoting an institutional reasoning,

noted that differences in business practices and organizational structures along the globe “are

important features of distinctive business systems which are linked to the institutional

environments in which they develop and emphasise the contextual nature of ‘firms’ as

economic agents” (1992: 7). These environmental factors become of primary importance

especially for MNE that operate in multiple institutional contexts and are confronted with the

need to promote internal consistency and at the same time face the local isomorphic pressures

(Festing et al., 2007; Rosenzweig and Nohria, 1994). Empirical studies have delivered

evidence about the impact of institutional factors on compensation designs (see, for example,

Wächter et al., 2003). For example, trade unions, which are part of the national institutional

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environment may play an important role in the collective determination of wages and salaries

(Parboteeah and Cullen, 2003; Traxler et al., 2008) and may oppose the diffusion of

compensation practices (Grund, 2005; Kurdelbusch, 2002). However, according to Brewster,

Sparrow and Vernon (2007), the empirically tested correlation between union density and the

incidence of PfP practices is far from being obvious. The key role of industrial action

organisations and legal regulations seems to concern working hours. For example, the latest

Economic Policy Reforms Report by OECD (2008a) indicates that the high union density

accounts for lower hours actually worked by men and higher hours actually worked by

women.

However, no other elements of rewards seem to be as much affected by national

institutions as benefits. Here, mainly tax reasons account for the differences. As Brewster et

al. (2007: 122) point out “in China, but also in Japan and Korea, employees value benefits

increases and bonuses above basic pay increases, partly because tax is levied on basic pay.”

The same is true in the USA while in Europe benefits are less common.

In the tradition of the contextual paradigm researchers have also extensively explored

the impact of cultural variables on the national compensation designs (Gomez-Mejia and

Welbourne, 1991; Newman and Nollen, 1996; Tosi and Greckhamer, 2004; Townsend, Scott

and Markham, 1990) either by applying Hofstede’s dimensions (Hofstede, 1980) directly or

using such similar cultural factors as “individualism/collectivism” as reference points (Lowe

et al., 2002). The significance of national culture is based on Hofstede’s statement, that most

inhabitants of a country share the same mental program (Hofstede and Bond, 1988).

Following the national culture approach means that “national culture can play a significant

part in the evolution of pay systems and the effectiveness of compensation strategies”

(Gomez-Mejia and Welbourne, 1991: 39). Respective hypotheses are, for example, outlined

by Gerhart (2008). Since Hofstede’s research (1980) many other academics have recognized

the importance of culture and its impacts on human resources or compensation issues

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(Rogovsky, Schuler and Reynolds 2000). Sparrow (2004) has identified cultural influences on

reward behaviour. For example, he states that “different expectations of the manager-

subordinate relationship and their impact on performance management and motivational

processes influence the perceived validity and attractiveness of performance-related pay

systems” (Sparrow 2004: 105).

Some researchers have pointed out deficiencies of cultural typologies and their

application to the comparative studies of remuneration designs (Milkovich and Bloom, 1998;

Milkovich and Newman, 2008). Vernon states: “Assertions about the nature of a particular

nation’s culture are sometimes ill-based and simplistic, evidence of a particular pay system is

sketchy, and the claim that there is some link between the two is left unsubstantiated by any

contrast with the situation in other nations” (2006: 225). To conclude the discussion of the

national contexts on compensation decisions, it should be mentioned that even though the

arguments based on the institutional point of view seem to be much more robust, the

importance of research based on the cultural perspective should not be underestimated. Thus,

some researchers call for a richer theoretical framework which allows for the explicit

inclusion and further development of cultural and institutional arguments (see, for example

Sánchez Marín, 2008a, 2008b).

It should be borne in mind, that due to the large number of contingency factors

effecting the compensation strategy (Balkin and Gomez-Mejia, 1987) and the wide choice of

benefit programmes that could potentially be offered to the employees, even a nation-wide

comparison of total compensation is extremely difficult. An international comparison of total

compensation is even more complex in the view of different regulatory environments, in the

first place with respect to taxation, social security systems and work time regulations.

However, a number of features characteristic for each country or region could be identified

with respect to the elements and structure of pay, which will be analysed below.

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Empirical Evidence for Nation-based Differences in Total Compensation: Analysing

Elements of Total Rewards

There are considerable pay level and pay mix variations across nations (Dowling,

Engle, Festing and Müller, 2005). First of all, compensation levels differ due to varying

economic conditions in low and high pay countries. This is confirmed by such macro-

economic indicators as gross domestic product (GDP) per capita levels calculated by

purchasing power parity (PPP) (UNDP, 2007). These variations have been extensively studied

by a number of national and international organisations that carry out regular surveys on

international pay (e.g., the Organisation for Economic Cooperation and Development or

European Foundation for the Improvement of Living and Working Conditions). The

information provided by these agencies along with the data from the national or supranational

organisations, like the Bureau of Labor Statistics of the US Department of Labor or

International Labour Organisation, are rich but sometimes limited in their comparability due

to aggregation problems. In the next paragraphs we will summarise core results on different

elements of total compensation from these sources.

Evidence on Working Hours and Paid Leave

Working hours and paid leave deliver important additional information when

analysing the pay level in a comparative way. Those two elements represent examples how

the institutional context influences total compensation packages. There are different sources

of information on working hours and paid leave. However, while the comparison of statutory

minimum vacation can give a good picture of the differences in regulatory environments

around the globe, there are substantial differences in some countries between the mandatory

minimum and customary length of the paid time off. For instance, the statutory minimum

vacation in Germany (legislatively mandated at 24 days) is far less than a very common

practice of 30 days paid vacation. In Germany, this is the result of the influence of trade

unions that stipulate in collective agreements the duration of the paid time off, which

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normally exceeds the statutory minimum. Even though nearly 62 % of German enterprises

were not bound by any collective agreement in 2006, a significant number of these companies

(26%) used collective agreements as a guide to arrange employment conditions (Institut der

deutschen Wirtschaft, 2008).

A second way to compare working time internationally is to measure the hours worked

per year in different countries. However, the evidence delivered by this approach, used for

example by OECD (2008c), is also limited because the statistics do not only include full-time

positions but also part-time labour. Thirdly, the differences in working arrangement can be

presented by comparing collectively agreed working hours and paid days off. Figure 4 starts

from the last category and presents the data for workers in manufacturing (BDA, 2005).

INSERT FIGURE FOUR ABOUT HERE

To outline the importance of this figure it is pointed out that, for example, a customary

vacation of 30 days and 9 paid holidays in Germany may account for about 17% of total cash

compensation (see Figure 2). In contrast, Martocchio, quotes 2005 data from the U.S.

Department of Labor, Bureau of Labor Statistics, noting “paid leave benefits (vacations,

holidays, sick leave, and other leave) average $1.72 [per hour] (6.6 percent)” (2007: 147).

Thus, an orientation at the base pay market rate alone does not make compensation at

different locations comparable.

While research on the perceived value of paid days off from the part of employees

both in national and international contexts is scarce, the importance of comparative data on

vacations cannot be underestimated. Agreements of vacation time for international transferees

have become an indispensable part of transfer planning (Poe, 2001). Employees on

international assignments often have a choice between a longer vacation and its monetary

equivalent. According to Oechsler, Trautwein and Schwab (2008), BASF, one of the world

largest chemical companies, offers its transferees a choice between taking a vacation

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according to the home country regulations or an additional allowance to compensate for the

shorter annual leave in the host country.

Total Cash Compensation

The data presented in this and some of the following sections below have been

provided by Hewitt Associates. These data provide details with respect to specific positions

and allows for greater comparability than the publicly available aggregated data. We present

the results of the total compensation survey for the positions of the General Manager, Head of

Human Resources and Junior Human Resources Specialist for 2007. The data presented

relates to 15 countries and is based on the survey of 784 companies for the position of General

Manager, 820 companies for the position of Head of HR and 284 companies for the position

of Junior HR Specialist. The data is based on median values for all companies ranked by sales

volumes and positions. Figure 5 shows the total cash compensation levels for both positions

in 15 countries, which includes base pay and short-term variable compensation.

INSERT FIGURE 5 ABOUT HERE

The comparison of total cash compensation levels for two executive and one generalist

position shows the following features:

- Levels of executive total cash compensation in the USA significantly exceed the levels

in other countries, which has been confirmed by the recent studies on executive

compensation in the global perspective (e.g. Berrone and Otten, 2008)

- While the USA, Western European countries and Mexico lead with respect to pay

levels for all positions, in several countries (Brazil in our sample) senior executives,

unlike lower management and generalist positions, enjoy far more lucrative total cash

compensation packages than their Eastern European and Asian counterparts.

Share of Target Variable Pay

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An analysis of the share of variable pay allows us to observe further differences

between the countries surveyed with respect to the pay structure.

INSERT FIGURE 6 ABOUT HERE

Figure 6 shows comparable shares of variable compensation for executives in all countries

presented with the exception of the USA, where companies traditionally increasingly promote

PfP schemes. While this result was expected by the CRANET researchers as well, researchers

could not confirm that PfP-schemes were indeed more prevalent in the USA than in other

countries (Brewster et al., 2007: 133). Possibly the further differentiation with respect to

positions can help to shed light on this result. While the Hewitt data clearly indicates that for

lower management positions the spread of PfP-schemes does not vary very much, this

changes on higher hierarchical levels. One immediately notices the relatively high level of

variable pay in India. This fact is explained by the existence of cash allowances paid on top of

the base salary, including lunch, house, travel, medical and other allowances.

In their study on the cultural influences of CEO compensation Tosi and Greckhamer

(2004) find evidence that the ratio of variable pay to total pay is influenced by Hofstede’s

dimension of individualism. At least for the US, the data presented here may confirm this. On

the other hand, Balkin showed that in addition to “cultural norms that emphasize

individualism” the high US CEO pay with respect to CEO remuneration levels in companies

of comparable size in other industrial economies could be explained by such institutional

factors as: “(1) the system of corporate governance; (2) regulations that require CEO pay

disclosure; (3) regulations that facilitate the early adoption of stock options; (4) decentralized

rules of incorporation; (5) mega-stock option grants diffused as a CEO pay practice” (2008:

202-203).

Here we may be seeing the complex interaction between a pattern of cultural values

and assumptions interacting with historically derived, yet dynamic institutional and contextual

artefacts codified into laws and operating on a national level. The difficulty is that all national

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pay systems probably result from this complex web of cultural-historical-institutional and

regulatory elements (Berrone, Makri and Gomez-Mejia, 2008). Recent institutional concerns

over the dysfunctional consequences of executive pay programs may yet result in even more

explicit and transparent systems in North America (Makri and Gomez-Mejia, 2007). Under

this complex model it may be “that reward preferences might not be conditioned solely by

cultural influences (cultural determinism) but also by other contextual factors (e.g. economic

conditions). How culture interacts with other contextual variables to influence reward

preferences warrants future research.” (Chaing, 2005: 1559)

Increased applications of more formalized performance management systems as a

“best practice” across cultures may provide a more standardized, explicit platform for

justifying (or “selling” if you will) PfP-practices for a range of employee groups (DeNisi,

Varma and Budhwar, 2008: 254-258). At the same time, an adequate conceptualization of a

performance management system that “travels well” across cultures continues to elude

practitioner and researcher alike (Brody, Lin and Salter, 2006; Engle, Dowling and Festing,

2008). In the absence of such a compelling, flexible system local and regional traditions are

likely to remain robust. The exact nature of the targets and systems operationalized as triggers

to performance based payouts vary significantly amongst firms that emphasize variable pay

(Hope and Fraser, 2003).

Other Elements of Total Remuneration

An international comparison of other elements of total remuneration is far more

difficult. Varying local social security and taxation laws as well as the specifics of local

financial markets make it impossible to make a comparable international evaluation of both

long-term incentives, benefits and perquisites. Instead, a comparison of the prevalence of

certain remuneration elements could give an idea of differences with respect to the total pay

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structures over the globe. For instance, Figures 7 and 8 show the prevalence of stock option

schemes and company-owned cars in the countries surveyed.

Pendleton, Poutsma, Brewster and van Ommeren (2001) researching financial

participation in the European Union have found, that “the incidence of . . . profit sharing and

share ownership differed considerably among Member States, and that this correlated broadly

with the extent of differences in legislative and fiscal support for them” (p. 21). Research by

Festing, Groening, Kabst and Weber (1999) has confirmed these findings. They argue that the

complexity of German law and the formalized German workplace industrial relations relates

to the empirical finding that financial participation schemes are not very common in

Germany. Another important external influencing factor identified by these authors is the

government’s attitude to financial participation. While in Britain the government supports the

existence of profit sharing, the German government seems to be more conservative in this

regard. Thus, the government’s legislation can also be a determinant of major importance here

(Festing et al., 1999). Country level factors, i.e. external factors in the sense of the suggested

framework, strongly influence the incidence of financial participation in Europe and their

impact even exceeds the importance of many internal influencing factors in global pay

systems (Pendleton, Poutsma, van Ommeren and Brewster 2001).

Another good example of the influence of environmental factors on compensation

decisions may be found in the prevalence of stock options plans. On the one hand, there are

significant differences in national regulations pertaining to taxation of employee stock options

even within OECD member states (OECD, 2005), which could account for the incidence of

employee stock option plans (ESOP) in general. Bloom and Milkovich (1999) confirm this for

the specific case of stock options in Germany and in the United States.

INSERT FIGURE 7 ABOUT HERE

The statistics on the prevalence of stock options plans presented in Figure 7 are

consistent with data related to management positions provided by the CRANET survey

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(Brewster et al., 2007). This study reports an extensive use of stock options plans over the

globe. However, country-specific variations between the incidence of long-term incentives

(e.g. little prevalence of stock options for CEOs in Singapore or for all positions in the Czech

Republic) require further study of cultural and institutional influences (Bruce, Buck and Main,

2005).

On the other hand, there are variations with respect to the exercise patterns across

cultures (Balsam and Gifford, 2006), which could be attributed to the variations in such

cultural values as uncertainty avoidance. However, a study conducted by Balsam and Gifford

(2006) among Fortune 100 multinational corporations showed that the wish to exercise stocks

early correlated inversely with national income. The same profit from the stock options will

be perceived differently in the USA and in Mexico due to significant differences in basic pay

levels. A payout of US$ 1,000 can constitute only a 20 % additional monthly income for an

employee in a high-wage country, while the same amount may constitute far more than a 100

% wealth increase for an employee in a low-wage economy. According to this study, other

variables - particularly the age of the employees (individual level of analysis) and tax rates

(environmental factor) - do more to explain differences in stock exercise behaviour.

Conclusions: Evidences of Convergence and Divergence in Pay

The conclusion addresses possible convergences and divergences in pay systems,

implications for the compensation management in MNEs and draws implications for future

research. In his recent work, Fay (2008) reviewed the theoretical arguments for and against

convergence of compensation practices. He has pointed out the limits of such convergence at

the international level in the view of considerable variations of the compensation levels and

practices even within single nations, due to the contingency factors and regional differences.

Even the advocates of the national business systems approach admit the influence of

internationalization on local institutions, which as such could be seen as a certain

20

convergence. Whitley notes that the “national specificity of business systems is also affected

by the growth of international firms and markets which has modified the significance of

purely national institutions” (1992: 38).

There is some evidence of convergence of pay structures along the globe (White,

2005). Poutsma, Ligthart and Schouteten (2005) confirmed the key role of MNEs in

promoting share schemes for all groups of employees in Europe. Milkovich and Bloom noted:

"Even long-established, seemingly carved-in-granite cultural norms, such as lifetime

employment in Japan and industry-wide bargaining in Germany, are weakening in response to

the pressures of a global economy" (1998: 15).

It would be logical to say that the increased internationalization of the world economy

would also result in converging pay levels, at least for some groups of (mostly internationally

mobile) employees. Figure 8 shows that the average inflation-adjusted pay increases within

the period from 2002 to 2007 in new EU member states and some of BRIC (Brazil, Russia,

India and China) by far exceed those in developed industrial economies.

INSERT FIGURE 8 ABOUT HERE

This fact could be explained by the increased transparency of international labour

markets and labour force mobility (McMullen, Fitzpatrick and Ruiz, 2008). Gross and

Wingerup state that "the rise of networked organizations through telecommunications and the

Internet and intranets has increased the employee interaction, allowing an accountant in

Argentina, for example, to talk to her counterpart in Mexico and compare pay and working

conditions" (1999: 26).

An equally rapid convergence of other elements of total compensation is less likely

due to the role of the national legislation and industrial action. It is still questionable, whether

the level of integration of the world economy will force the legislators and trade unionists to

make relevant concessions. According to OECD (Economic Reform: A Mixed Scorecard,

21

2008), unlike many other measures to improve efficiency of national economies, local

governments seem to make little effort to alter the labour market regulations.

Morgan, Kelly, Sharpe, and Whitley underscore that unlike “the nationally based firm,

the multinational does not exist in a unified institutional context that reinforces and

reproduces particular practices” (2003: 389). MNEs react to this situation by trying to install a

“transnational social space … [by means of] creation of common policies and procedures and

the application of formal means of monitoring and accounting for performance” (2003: 389).

Lowe et al. note that “the traditional factors of production (capital, technology, raw

materials, and information) are increasingly fungible, with employee quality the only

sustainable source of competitive advantage to developed country multinationals” (2002: 46).

A way to maintain this competitive advantage is to promote internal consistency by means of

standardized HR practices, including rewards. The topic of international standardisation of

compensation practices has been increasingly discussed both in the academic (Festing et al.,

2007; Festing and Perkins, 2008) and practitioner literature (Gross and Wingerup, 1999;

Milkovich and Bloom, 1998; White, 2005).

Gross and Wingerup (1999) identified three groups of factors driving the globalization

of pay practices:

(1) global competition for talent due to the increased international mobility

(“organizational flexibility”), (2) growing transparency and manageability of

international pay systems owing to the development of the information and computer

technology ("effective knowledge management"), and (3) the need to promote "a strong

global culture" as a key to the organizational success.

For additional commentary on this trend, see Dowling et al., 2008: 159-161 and 219-220.

Due to significant variations of economic conditions among the countries, such

standardization of pay practices could be implemented by introducing global compensation

22

elements, including non-monetary rewards and salary level determination systems (Abosch,

Schermerhorn and Wisper, 2008).

However, such standardization strategies can be significantly hampered by the national

social, political and legal institutions, especially employment regulations in the form of

statutory minimums with respect to pay or benefits. Yet the limiting impact of such

mandatory minimums varies. On the one hand, there is evidence that the wages and salaries

offered to the employees of MNEs as a rule exceed the average country levels (OECD,

2008b) and thus minimum wages. On the other hand, such regulations or collectively agreed

customs as compulsory vacations considerably hinder the implementation of such a universal

strategy.

While local institutions are also reported to hamper the transfer of PfP-schemes, in

some countries profit-sharing programs could be mandatory. For instance, all companies in

France with over 50 employees must implement a statutory profit-sharing (participation) plan.

While Fakhfakh and Perotin (2000) report on the positive impact of voluntary profit-sharing

schemes on factor productivity in French companies, Hewitt Associates note that “[statutory]

participation is not regarded by employees as part of their compensation and is regarded as an

‘acquired right’ which has little or o motivational effect, even though it may be worth as much

as two months’ salary per year in a highly profitable organization” (Hewitt Associates, 1991:

289).

Trends and Directions for Future Research

Recently, academic literature on international compensation has increasingly

concentrated on the incidence of pay elements, notably PfP-schemes, including short-term and

long-term incentives (Antoni et al., 2005; Kurdelbusch, 2002). However, there is dearth of

comparative research on such non-monetary rewards as paid time off, pension plans or

medical insurance. A comprehensive measurement of value of benefits for employees in

23

different countries will thus support international total compensation comparisons. As

presented earlier in this paper, the operationalization and scaling of intrinsic elements such as

quality of work life, the value of institutional affiliation and career development opportunities

warrants further research (Klarsfeld and Maby, 2004).

Additional areas of transition include the future direction of hierarchical pay patterns in

executive compensation (as practiced in the US and the UK) in the light of recent stock

market “corrections” and an apparent disconnect between executive pay and long-term firm

performance, as opposed to the future of more egalitarian pay practices as seen in Europe and

parts of Asia Second, we note the continuation of an apparent trend of openness and

transparency in labour markets within the EU. There is some question as to how widely this

labour mobility goes. How far beyond entrepreneurs, executives and managerial ranks is this

transparency to be found?

This encompassing effort to capture cross cultural pay research and practice may be built

on rather flimsy empirical ground. Empirical research and publication has a North American

bias in terms of the number of articles published and the subject matter and firms surveyed.

Much of the data we have is from US based researchers, consulting firms or samples. Recent

activities by CRANET and more globally focused consulting firms have partially alleviated

this problem. There still remains the nagging concern of a weighted sample in cross cultural

reward research.

In an initial step toward building a vocabulary with which to more effectively pursue

cross cultural reward studies, we present a series of models. Milkovich and Bloom (1998)

outline a three part model of global compensation strategy, from the firm perspective (see

Figure 9).

INSERT FIGURE 9 ABOUT HERE

24

In the first element, core pay practices are standardized across all the regions and

cultures in which the firm operates; next, a crafted set of pay practices are customized to local

and regional contexts and markets; finally individual employees are given a choice of pay

practices, along the lines of flexible benefits. It is this combination of these three elements

that provides the global firm with a combination of systematic logic and responsiveness to

local and individual interests.

We present a proposed approach to comparative or cross cultural management based

on a similar composite model (see Figure 10). In the outer oval we present externally

influenced, institutionally mandated pay elements, required by legislation as well as industrial

regulation. In the centre oval we present culturally influenced norms and values, practices

influenced by historical context, local and regional supply and demand and the need for

competitive responsiveness. Finally, the centre oval represents strategically linked practices,

dependent on more internally based decisions of business intent and executive practice (for

more on the theoretical origins supporting internal as opposed to external foci for pay

systems, see Dowling, Engle, Festing and Muller, 2005).

INSERT FIGURE 10 ABOUT HERE

Given this framework, researchers can distinguish between “demanding

contexts” characterized by prescribed legislation and /or strongly held values and preferences

effecting major reward system decisions, and more “permissive contexts” characterized by

limited legislative or institutional frameworks and/or more indifferent social norms or values

related to employment exchange and rewards. More demanding social or institutional contexts

are associated with pay systems that emphasize local customization and an external focus to

the rewards system. More permissive contexts are thought to be associated with global (or

firm level) standardization and an internal focus to the reward system. How these two

roughly outlined contexts relate to specific pay practices (e.g. Base Cash, Short-Term

25

Variable, Long- Term Variable, Benefits, Perquisites and Other Noncash Rewards, as per

Figure 10 above) is a starting point for a more systematic approach to a very complex topic

area.

Distinguishing between when a given pay practice is an independent variable, varying

over a wide range; an independent variable, ranging over a narrower or prescribed range, or is

a constant, prescribed and given, is a critical first step in this challenging and complex subject

area. This admittedly primitive metric may be useful in describing and mapping the

“Renaissance” composite of selected institutional barriers (wherein little discretion in pay

decision making is allowed) in combination with reward elements providing a transparent and

open, market-based latitude for decision making. It is this combination that describes

contemporary European reward practices.

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35

Figure 1: Total Rewards

Common examples

Reward Elements

Definition

• Quality of Work & Life • Affiliation • Development

Other Noncash Rewards TOTAL

Extrinsic:

All things onto which

we can assign a

dollar value

• Cars • Clubs • Counselling • Contracts

Perquisites

TOTAL R E M U N E R A T I O N

REWARDS

• Retirement • Health & Welfare • Time Off w/Pay • Statutory Programs

Benefits

• Stock/Equity • Cash • Incentive (Long-Term)

Long-Term Variable TOTAL D

I C R A E S C H T

• Incentive (Short-Term) • Bonus/Spot Awards • Contract

Short-Term Variable

T O C T A A S L H

• Base Salary • Hourly Wage Base Cash

Source: Manas and Graham (2003: 2).

Figure 2: Labour Costs in Germany Manufacturing industry, in percent to gross wages and salaries1) Remuneration elements 2004 2007 Compensation for hours worked (direct pay)2)3) 75.8 76.1 + Pay for time not worked4) 16.6 16.6 + Bonuses 7.6 7.3 = total cash compensation 100.0 100 + Social security contributions 26,1 25.7 + Other additional personnel expenses5) 4.5 4.3 = Total labour costs 130.6 130.0 1) Compensation for hours worked; 2) Including additional payments for performance; 3) Calendar adjusted; 4) Including vacation, paid sick leave, paid days off; 5) Less refunds; Source: Adapted from Schröder (2008: 4)

Figure 3: Factors Influencing Compensation Decisions

Intrinsic

36

Levels of Analysis Factors Individual • Age

• Job tenure • Marital status • Family size • Education (Churchill Jr, Ford and Walker Jr, 1979; Huddleston, Good and Frazier, 2002)

Organizational • Stage in the product life cycle • Size of the firm • Industry traits • Ownership structure • Organizational culture • Profitability (Balkin and Gomez-Mejia, 1987)

Environmental • Employer federations • Trade unions • Social contract • Culture/politics • Competitive dynamics/markets • Taxes (Milkovich and Newman, 2008)

Figure 4: Collectively Agreed Annual Working Time of Workers in Manufacturing,

2004

A. Weekly Hours

Ger

man

y

Fran

ce

UK

USA

Finl

and

Pola

nd

Japa

n

30

32

34

36

38

40

Hours B. Annual paid leave

Ger

man

y

Fran

ce

UK

USA

Finl

and

Pola

nd

Japa

n

0

5

10

15

20

25

30Days

Field Code Changed

Field Code Changed

37

C. Annual working hours

Ger

man

y

Fran

ce

UK

USA

Finl

and

Pola

nd

Japa

n

1400

1500

1600

1700

1800

1900

Hours

Source: (BDA, 2005; Institut der deutschen Wirtschaft, 2008).

Figure 5: International Comparison of Total Cash Compensation Levels 2007.

Total Cash Compensation, in EUR

0,0050000,00

100000,00150000,00200000,00250000,00300000,00350000,00400000,00

Cze

ch R

epub

lic

Bra

zil

Hun

gary

Indi

a

Arg

entin

a

Pol

and

Swed

en

Sing

apor

e

Fran

ce

Spa

in

Bel

gium

Ger

man

y

Mex

ico

UK

US

A

Head of HR HR Specialist Junior

Field Code Changed

38

Total Cash Compensation, in EUR

0,00200000,00400000,00600000,00800000,00

1000000,001200000,001400000,001600000,00

Cze

ch R

epub

lic

Braz

il

Hun

gary

Indi

a

Arge

ntin

a

Pola

nd

Swed

en

Sin

gapo

re

Fran

ce

Spai

n

Belg

ium

Ger

man

y

Mex

ico

UK

USA

General Manager

Source: Hewitt Global TCM Cash and Prevalence Reports, 2007

Figure 6: Share of Target Variable Pay, 2007.

Target Variable Pay as % of Base Salary

0

20

40

60

80

100

Cze

chR

epub

licB

razi

l

Hun

gary

Indi

a

Arg

entin

a

Pol

and

Sw

eden

Sin

gapo

re

Fran

ce

Spa

in

Bel

gium

Ger

man

y

Mex

ico

UK

US

A

Head of HRHR Specialist JuniorGeneral Manager

Source: Hewitt Global TCM Cash and Prevalence Reports, 2007

Figure 7: Prevalence of Stock Option Schemes*, 2007

39

Prevalance of Stock Option Plans, %

0,0010,0020,0030,0040,0050,0060,0070,00

Cze

ch R

epub

lic

Bra

zil

Hun

gary

Indi

a

Arg

entin

a

Pol

and

Sw

eden

Sin

gapo

re

Fran

ce

Spa

in

Bel

gium

Ger

man

y

Mex

ico

UK

US

A

Head of HRHR Specialist JuniorGeneral Manager

* For USA the data on nonqualified stock options only is available. In UK, there is statistics on both approved

and nonapproved stock options (the prevalence of both types is nearly the same for all the companies surveyed).

In order to maintain comparability of the data with the prevalence of nonqualified stock options in the USA, the

UK statistics is limited to nonapproved stock options.

Source: Hewitt Global TCM Cash and Prevalence Reports, 2007

Figure 8: Average Annual Pay Increases in Selected Countries, 2002-2007

Country Actual Average Pay

Increase* Average Pay Increases

over Inflation**

Europe Spain 4,07% 0,93% Belgium 3,50% 1,55% Germany 3,18% 1,59% Switzerland 2,45% 1,61% Netherlands 3,48% 1,63% United Kingdom 3,83% 2,06% Poland 5,12% 3,14% Czech Republic 5,28% 3,26%

40

North America United States 3,55% 0,88%

BRIC States Brazil 8,75% 1,34% China 7,93% 5,88% India 13,03% 8,32% * Based on the annual reports for 2002-2007 by Hewitt Associated ** Based on OECD statistics on consumer price indexes (CPI) growth rates for 2002-2007 (stats.oecd.org)

Figure 9: Elements of Global Pay

Source: Adapted from Milkovich and Bloom (1998: 22)

CORE

CRAFTED

CHOICE

41

Figure 10: Institutional, Cultural and Strategic Discretion in

Pay

Strategically Linked

Culturally

Institutionally

Influenced