IHR NEWSLETTER

Adapting to Global and Local Compensation Culture and Trends

Designing and implementing remuneration (total rewards) systems responsive to diverse stakeholders is perhaps the most difficult challenge in the compensation arena. Diverse cultures, environments, markets, and evolving regulatory requirements keep us all vigilant. Structuring global remuneration packages is often a “moveable feast”. Once you think you have mastered a process or condition, a turn of events may cause a recast of approach. Even in the US a paradygm shift is taking place, which will give rise to a shift to more emphasis on cash pay brought about by the recent loss of share value and new corporate governance legislation. For example, ERL expects the cash elements of remuneration packages to increase globally as organizations seek a closer connection between pay and performance with somewhat less emphasis on stock options. The table below compares the pay between CEOs managing companies with annual revenue of $300 million of some of our larger trading partners.

During the last two decades, many U.S. remuneration practices have been exported to other parts of the world including pay-for-performance, economic value added (EVA), variable pay, executive broad-based stock ownership programs, and flexible benefits. When these practices conflict with local realities, however, it can negatively affect the organization. Local regulations, tax and legal requirements, strict customs, and divergent employee attitudes and values must be considered prior to establishing remuneration programs globally.

Furthermore, U.S. multi-national organizations have traditionally left the pay and working conditions of their employees outside of the U.S. to local management. However, increased globalization is forcing corporate headquarters to focus on local remuneration practices. Economic issues, productivity improvement, and the inclusion of international management in executive remuneration plans in the U.S. have given rise to an increase in local oversight.

The objectives of a remuneration program, whether international or domestic, are similar: to attract, retain, and motivate employees that have the skills, experience, and potential needed to meet the company’s short and long-term goals. Further, an effective program will:

• guarantee appropriate living standards
• provide social benefits
• meet the company’s economic needs
• contain performance incentives
• promote identification with company goals

To ensure they satisfy these objectives, global organizations seeking to export remuneration practices to those countries in which they are operating must go a step further if they were solely domestic-based by:

Knowing the culture and aligning remuneration practices with cultural workplace norms. This is as important as the attention to local laws and regulations. To most Europeans, for example, "compensation" means indemnities for injury or damages. It does not typically apply, as it does in the US, to wages, salaries, or benefits associated with reward for work. Europeans use the term "remuneration" instead of "compensation" when referring to all the elements for rewarding work.

In addition, the concept of equity differs from country to country. For example, in many European and Asian countries, social class, age, and education have a greater influence upon remuneration than ability and accomplishment.

Clearly, incorporating cultural considerations when developing remuneration practices may mean modifying corporate policies when exporting them to other countries.

Compliance with Local Laws and Regulations
Besides considering salary, purchasing power, and culture, organizations determining global remuneration practices must also factor in the local legal and regulatory environment which may include any or all of the following:

• Tax ramifications
• Securities law compliance
• Exchange controls
• Data privacy
• Acquired rights issues
• Employee and labor law
• Communication issues

Establishing a "uniform" remuneration program in every country in which a company operates can be challenging, particularly when you consider the variety of possible corporate legal arrangements that exist between a branch, a subsidiary, a wholly owned subsidiary, and a joint-venture with a local company.

"One size does not fit all"
Some say that conducting business internationally is as different from conducting business in the US as the number of countries that exist. In spite of this truism, a company can indeed export its compensation and benefits practices internationally, provided it's done in the context of each country's remuneration practices (statutory, custom, local operating culture). By looking at total remuneration, rather than exporting individual elements of pay, (which may be a duplication or even meaningless in the local market), companies can establish competitive practices that will enable them to expand in existing markets or move into new ones. Knowledge, experience, and data in remuneration planning and competitive practice scanning are the critical elements needed to accomplish this goal.

For more information contact Gary Parker at (516) 449-4397 or by Email at gparker@erlimited.com