NATIONAL DIFFERENCES IN COMPENSATION
Substantial differences exist in the compensation of executives at the same level in various countries. The results of a survey undertaken by Towers Perrin are summarized in Table 17.3. Among other things, this survey looked at average compensation for top human resource executives across 26 countries in the 2005–2006 period for companies with annual sales of about $500 million.55 The figures include both base compensation and performance-related pay bonuses, but they do not include stock options. As can be seen, wide variations exist across countries. The average compensation for a top HR executive in the United States was $525,923, compared with $278,697 in Japan and $158,146 in Taiwan. According to Towers Perrin, similar pay differences can be seen across other job categories, including the CEO and CFO positions. These figures underestimate the true differential because many U.S. executives earn considerable sums of money from stock option grants.
TABLE 17.3 Compensation in 26 Countries for Top Human Resource Executives
HR Executive Total Compensation ($)
China (Hong Kong)
Source: Towers Perrin, Towers Perrin Worldwide Total Remuneration Study, 2005–2006, www.towersperrin.com.
MANAGEMENT FOCUS Global Compensation Practices at McDonald’s
With more than 400,000 managers and senior staff employees in 118 countries around the world, by the early 2000s McDonald’s realized it had to develop a consistent global compensation and performance appraisal strategy. After months of consultation with managers all over the world, the company began to roll out its new global compensation program in 2004.
One important element of this program calls for the corporate head office to provide local country managers with a menu of business principles to focus on in the coming year. These principles include areas such as customer service, marketing, and restaurant re-imaging. Each country manager then picks three to five areas to focus on for success in the local market. For example, if France is introducing a new menu item, it might create business targets around that for the year. Human resource managers then submit their business cases and targets to senior executives at headquarters for approval. At the end of the year, the country’s annual incentive pool is based on how the region met its targets, as well as on the business unit’s operating income. A portion of an individual employee’s annual bonus is based upon that mix.
The other portion of an employee’s annual incentive is based on individual performance. McDonald’s has always had a performance rating system, but in 2004 the company introduced global guidelines that suggest 20 percent of employees receive the highest rating, 70 percent the middle, and 10 percent the bottom. By giving guidelines rather than forced ranking, McDonald’s hopes to encourage differentiation of performance while allowing for some local flexibility nuances. By providing principles and guidance, and yet allowing local managers to customize their compensation programs to meet local market demands, McDonald’s also claims it has seen a reduction in turnover. The company’s own internal surveys suggest more employees now believe that their compensation is fair and reflects local market conditions.
Source: J. Marquez, “McDonald’s Rewards Program Leaves Some Room for Local Flavor,” Workforce Management, April 10, 2006, p. 26.
National differences in compensation raise a perplexing question for an international business: Should the firm pay executives in different countries according to the prevailing standards in each country, or should it equalize pay on a global basis? The problem does not arise in firms pursuing ethnocentric or polycentric staffing policies. In ethnocentric firms, the issue can be reduced to that of how much home-country expatriates should be paid (which we will consider later). As for polycentric firms, the lack of managers’ mobility among national operations implies that pay can and should be kept country specific. There would seem to be no point in paying executives in Great Britain the same as U.S. executives if they never work side by side.
However, this problem is very real in firms with geocentric staffing policies. A geocentric staffing policy is consistent with a transnational strategy. One aspect of this policy is the need for a cadre of international managers that may include many different nationalities. Should all members of such a cadre be paid the same salary and the same incentive pay? For a U.S. based firm, this would mean raising the compensation of foreign nationals to U.S. levels, which could be expensive. If the firm does not equalize pay, it could cause considerable resentment among foreign nationals who are members of the international cadre and work with U.S. nationals. If a firm is serious about building an international cadre, it may have to pay its international executives the same basic salary irrespective of their country of origin or assignment. Currently, however, this practice is not widespread.
Over the past 10 years, many firms have moved toward a compensation structure that is based on consistent global standards, with employees being evaluated by the same grading system and having access to the same bonus pay and benefits structure irrespective of where they work. Some 85 percent of the companies in a survey by Mercer Management Consulting stated they now have a global compensation strategy in place.56 McDonald’s, which is featured in the accompanying Management Focus, is one such enterprise. Another survey found that two-thirds of multinationals now exercise central control over the benefit plans offered in different nations.57 However, except for a relative small cadre of internationally mobile executives, base pay in most firms is set with regard to local market conditions.