compensation

Managing the Challenges of Global Compensation

Robert Mattson

© 2008 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/ert.20201

Designing, planning, and managing com-pensation on a global basis is highly challenging as companies scale and expand to new markets or attempt to create consis- tent processes in multiple countries. When it comes to compensating a globally dispersed workforce, organizations need to manage intricate data-privacy regulations, differing cultures, currencies, time zones, and lan- guages while aligning employees across vari- ous regions toward common goals. Employ- ees need to be equitably rewarded, both competitively within their regional market as well as internally, for their contributions to the organization’s success.

A recent survey by Watson Wyatt World- wide of 275 companies with operations in two or more global regions revealed that half of them are already taking a centralized approach to their companies’ global com- pensation structure.1 Global organizations that take this centralized approach to com- pensation can universally realize the bene- fits of standardization across their entire operation.

However, even with implementing a cen- tralized compensation structure, there are other challenges that global organizations need to navigate when crossing continents and countries. Understanding the issues and options for accommodating variations in compensation structures, local data-privacy laws, and local customs (including holiday schedules) is necessary to improve an orga- nization’s ability to compete in a global world.

BENEFITS OF A CENTRALIZED APPROACH

According to the Watson Wyatt global com- pensation practices survey,2 respondents with a centralized compensation structure noted that key drivers for taking a more centralized approach were having a consistent link between rewards and results and maintaining a consistent position vis-à-vis market and inter- nal equity. There are two facets of a central- ized approach: (1) the creation of a centralized compensation structure that provides consis- tent guidelines while maintaining flexibility to be used in multiple regions and (2) providing an automated system that helps manage the compensation structure. Having a centralized system also offers greater budgetary control; increased visibility into compensation and performance review processes; the ability to consistently enforce policy throughout the organization; shorter compensation cycles; reduced information technology (IT) expenses; and audit trails to demonstrate compliance.

A centralized approach shortens the com- pensation cycle by automating workflow while enabling managers to see who has taken action, as well as the ability to quickly identify process bottlenecks. The planning process is inherently more efficient when managers have access to online guidelines and decision-support tools such as automatic calculations and other auto-allocations based on performance ratings.

Another benefit of a centralized approach is the ability to lower IT costs by streamlining systems. Companies that maintain separate

51

ert352_09_20201.qxd 6/23/08 5:45 PM Page 51

Employment Relations Today

Robert Mattson Employment Relations Today DOI 10.1002/ert

52

systems require distinct yet sometimes dupli- cate skills and schedules to support islands of technology that are performing similar tasks and functions. As a result, they incur increased costs whether they are supporting these systems using internal IT resources or external vendors. In addition, they also have to manage multiple service-level agreements (SLAs) and pay for separate hardware, operat- ing systems, and databases.

Even with a centralized system in place, there are still challenges to be faced when competing globally. For example, it is difficult to maintain equity globally while accommodat- ing market-specific practices such as expense allowances. Although a centralized system enables a company to gain insight into whether or not a region is conforming to corporate pol- icy on allowances, the company still must plan for necessary variations in that policy that result because of government regulations or even local market expectations. Another chal- lenge is accounting for differences in local data-privacy laws and options for managing the compliant sharing of information. Local curren- cies, languages, and cultures also need to be considered and managed through a system that offers the flexibility to account for these varia- tions. Organizations that understand the issues can then begin strategizing the most effective solutions to operate across multiple countries.

BEYOND COMPENSATION—NAVIGATING DATA PRIVACY AROUND THE GLOBE

One key issue that organizations wrestle with is the data-sharing and privacy regulations

that vary from country to country. For busi- nesses that operate in the United States, orga- nizations tend to focus on U.S.- or industry- specific data and reporting requirements such as those under the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act (HIPAA). A shift in pro- cesses and thinking is required when facing the challenges of operating in other coun- tries that embrace an entirely different set of standards.

Organizations that do business in Europe, for example, need to meet requirements set forth by the European Union. The EU’s data- protection directive3 sets restrictions on how elements of personal information can be collected, stored, and shared, and these vary from similar U.S. privacy restrictions or even run counter to other U.S. laws. Under the EU directive, the focus is heavily on protecting individuals and their personally identifying information such as race, political affiliation, sex, and name and even seemingly standard business information such as an office phone extension number. These types of data are restricted from being shared unless explicit employee permission is given or procedures put in place to properly protect this informa- tion. Organizations must be aware that per- sonal data that is protected under EU privacy directives could be the same data that could be requested under U.S. law such as the PATRIOT Act. It is these types of conflicts that require scrutiny once a U.S. company goes abroad and needs to adhere to new rules and requirements when it comes to their employee data.

The EU restricts the transfer of data to those countries that it deems do not have rig- orous data-privacy regulations, including the United States. However, there are a few countries within which companies are free to

One key issue that organizations wrestle with is the data- sharing and privacy regulations that vary from country to country.

ert352_09_20201.qxd 6/23/08 5:45 PM Page 52

Summer 2008

share information under the EU require- ments. Those countries include Argentina, Canada, Guernsey, the Isle of Man, and Switzerland, which have more rigorous pri- vacy regulations than those of the United States.

Options for Managing Privacy-Protection Rules

To manage the transfer of data to other coun- tries, multinational employers need to adopt compliance strategies for managing employee data. A few options are listed below.

❏ Local processing provides for local stor- age and processing of data within the country of origin and restricts the move- ment of data. Organizations embracing this strategy may want to partner with a vendor that has local hosting facilities that will keep data within EU boundaries for services like payroll. This option would have to include controls on who accesses data, as all accessing personnel would have to be considered “local” to that country. Under this option, managers in countries outside the approved set would not have access to compensation data for employees in those countries. Arrange- ments can be made to have a local manager act as proxy in compensation decisions.

❏ Derogations make specific provisions or exemptions for data sharing and require individual consent. The challenge with relying on derogations is that, for them to be valid, a company cannot require employees to give individual consent and must allow individual employees to opt out at any time. As a result, companies need to be prepared for blocking individual

Managing the Challenges of Global Compensation Employment Relations Today DOI 10.1002/ert

53

compensation data from being viewed when permission has not been given or is withdrawn.

❏ Safe-harbor guidelines are another strat- egy for organizations to meet privacy stan- dards. Safe-harbor standards were agreed on by the EU and United States and ensure protection of personal data consis- tent with EU policy specifications. The safe-harbor framework offers a clear set of steps to comply with the EU data-privacy directive and requires organizations to obtain certification on completion of those steps. U.S. organizations adhering to safe- harbor guidelines are subject to audits by the U.S. Commerce Department. By adopting safe-harbor practices in each

country in which employee data is acces- sible, organizations will be deemed com- pliant and able to share data and conduct business without interruption.

❏ Model contracts are another strategy for complying with data-sharing privacy rules. These contracts contain standard clauses that are accepted throughout the EU and require organizations to adhere to established terms before data can be shared between them, even in the case of corporate subsidiaries.

❏ Binding corporate rules are multina- tional data-protection standards that are adopted by a corporate group. In 2005, General Electric was the first organization to ever use these rules and the first to be granted permission in the United Kingdom

To manage the transfer of data to other countries, multi- national employers need to adopt compliance strategies for managing employee data.

ert352_09_20201.qxd 6/23/08 5:45 PM Page 53

Employment Relations Today

to export data. A benefit to binding corpo- rate rules is the ability to negotiate con- tent, reporting, and compliance mecha- nisms with the data-privacy regulators in each country. Many countries, such as Germany, require data-privacy regulations to be approved by local work councils, which can extend the time it takes to become compliant.

Although there are challenges with manag- ing data-privacy regulations from country to country, heightened awareness of the various options will enable effective compliance and adherence to varying data-protection require- ments. Because many data-privacy options

can take months or years to achieve compli- ance, many companies focus initially on get- ting employees to sign consent forms. In the case where consent is not given, it is impor- tant to have a compensation system where access to employee information is easily restricted based on geography and status of consent. Also, the compensation system should make it easy to implement proxies so a manager in the employee’s country can act on behalf of an actual manager who resides in another country.

VARIATIONS IN COMPENSATION STRUCTURES AND LEVELS

In addition to navigating various data-privacy regulations, maintaining equity globally is

Robert Mattson Employment Relations Today DOI 10.1002/ert

54

another challenge for organizations that operate in multiple countries. Performance- driven compensation is already changing the way organizations align individual, group, and company goals to determine business outcomes. By implementing a consistent global HR strategy, organizations can more effectively reward their workforce to reach their goals.

Although a centralized compensation sys- tem can help attain global consistency, it must also be able to easily accommodate variations in salary and other elements of the compensation package that differ from mar- ket to market. What constitutes base salary in one area of the world may differ from what defines base salary in another region. For example, in Australia, base salary is the guar- anteed rate paid to every employee, regard- less of his or her performance. Commissions, incentives, car allowances, and other bonuses are not included as part of an employee’s base pay. In Taiwan, base salary is inclusive of bonus or other contractual payments. In France, base pay may also encompass vaca- tion pay and overtime payments. These regional differences need to be built into the compensation rules.

One of the issues for global organizations is having a strategy in place for managing the differences in salary and bonus ratios. The EU, for example, is moving toward a system similar to that in the United States, where there is a heavy emphasis on bonus and incentives; areas such as Asia put more weight on salary versus bonus.

Managing environmental pay issues is another area for concern for organizations that operate globally. In some emerging mar- kets, there simply isn’t enough adequate market data available for organizations to have the intelligence to make competitive

Although there are challenges with managing data-privacy regulations from country to country, heightened awareness of the various options will enable effective compliance and adherence to varying data-protection requirements.

ert352_09_20201.qxd 6/23/08 5:45 PM Page 54

Summer 2008

compensation decisions. Compensation experts are advising companies operating in countries such as Russia, where compensa- tion data is scarce and unreliable, to privately fund studies for a small sample of key jobs.

As employees become aware of differences in compensation structures by region, some will campaign for similar rewards. For exam- ple, if an organization generally supplies car allowances to employees in Australia, that same benefit does not have to be offered to employees holding the same position in the United States. Companies that give in to employee pressure for homogeneity may end up with a very expensive plan. First and fore- most, you need to establish appropriate bonus levels that are competitive with the market. For example, bonuses for engineers in Silicon Valley may be higher than for those in other areas of the world to help companies operat- ing there improve their competitive advan- tages through employee retention. In India, the bonus percentage for an engineer may be less, requiring organizations to support that difference in structure. Although the measure- ment for a top-level bonus may be the same, the bonus percentage will differ due to the price of talent in that particular area.

ACCOMMODATING LANGUAGE, CULTURE, AND CURRENCY

Another point for consideration is accommo- dating the various languages, cultures, and currencies that global organizations need to manage. Cross-cultural communications are much more effective when received in the local language. How organizations handle multilingualism can make a difference in improving employee morale, as well as the ability to effectively deliver content to their workforce. For a country where English is

Managing the Challenges of Global Compensation Employment Relations Today DOI 10.1002/ert

55

not the official language, organizations need compensation systems that enable managers to access the same centralized systems simul- taneously, but in their own local languages.

Managing cultural differences is another issue for global organizations. For example, unlike the more casual customs in the United States, most other cultures put greater emphasis on titles and surnames. In many cultures, honorifics indicate either social sta- tus or noteworthy achievements. In Japan, the -san suffix is a sign of respect bestowed on someone with higher social standing, such as the boss. In Chinese, honorifics are slightly different from their Japanese counterparts. Employees expect that their total reward statements will address them appropriately. Whether earned or not, ignoring someone’s

honorific can be insulting. Also, some titles are not gender-neutral and can lead organiza- tions to communication faux pas. A proper understanding and use of sociocultural titles can play an important role in communicating with a global workforce and boosting morale.

Setting and paying compensation in local currencies is another element needing to be managed for global organizations. There may be wide disparities in salary for the individu- als holding the same position but in different countries, and although the individuals must be paid in the currency of the countries in which they reside, managers planning salary and rewards need to be able to toggle the view between compensation in the employees’ cur- rency and the manager’s currency and also to

For a country where English is not the official language, organizations need compensation systems that enable man- agers to access the same centralized systems simultane- ously, but in their own local languages.

ert352_09_20201.qxd 6/23/08 5:45 PM Page 55

Employment Relations Today

the headquarters’ currency. Regardless of the currency displayed on the screen, all the roll- ups should be handled in the headquarters’ currency.

BEST PRACTICES FOR MANAGING GLOBAL COMPENSATION

Although there are numerous considerations that enter into managing anything on a global scale, there are four recommendations that are critical for managing global compensation:

1. Have a centralized system for compen- sation management. A centralized sys- tem reduces IT expenses as well as pro- vides more stringent budgetary control and the data visibility necessary to make informed decisions.

2. Find a data-privacy strategy that best meets your organizational needs. One size does not fit all. With multiple options for managing data storage and sharing, choose one that delivers the flexibility you need and enables you to remain compliant in the areas where you operate.

3. Target your focus for market data to meet specific needs. Salary surveys may not be available for new or emerging markets. In areas such as Brazil, China, and Russia, which have a shorter history than that of U.S. companies with estab- lished business operations, be prepared to go out and do individual surveys. Instead of pricing 150 jobs as you may in more developed markets, focus on the top 20 jobs that you will have operating in this emerging area to determine the cost of talent.

Robert Mattson Employment Relations Today DOI 10.1002/ert

56

4. Accommodate local cultures. If you’re trying to determine when to schedule your planning cycles, take local customs into consideration. In Israel, employees may take extended time off during the Jewish high holidays. During the Euro- pean summers, many organizations close down for seasonal vacations. When oper- ating globally, scheduling a common focal planning period becomes much more challenging.

PLAN AHEAD AND BE PREPARED

Organizations in the new global economy need to prepare for additional levels of com- plexity when running their business. To suc- ceed, multiple divisions must effectively manage processes that span different operat- ing units or global regions and address multi- ple local demographic challenges.

When it comes to global compensation sys- tems, be sure to look for one that can not only scale to handle the volume of users you have, but also accommodate the requirements for multiple languages, currencies, and local cul- tures. And, even after making this wise invest- ment, be prepared to proactively manage the ever-changing ancillary issues surrounding data privacy and other geographical nuances by having strategies in place to position your orga- nization for success—anywhere in the world.

NOTES

1. Watson Wyatt WorldatWork Global Compensation Survey, September 13, 2006.

2. Id. 3. Directive 95/46/EC.

ert352_09_20201.qxd 6/23/08 5:45 PM Page 56

Summer 2008

Managing the Challenges of Global Compensation Employment Relations Today DOI 10.1002/ert

57

Robert Mattson is a senior product marketing manager at Workscape, Inc., in Marlborough, Massachusetts. He has been involved in Web and HR-focused technology with responsibilities ranging from developer to evangelist for companies such as Allaire, Applix, and Performix Technologies. He has spoken at seminars and conferences around the coun- try, and his articles have appeared in publications ranging from the Java Developer’s Journal to Talent Management Magazine. He can be reached via e-mail at robert.mattson@ workscape.com.

ert352_09_20201.qxd 6/23/08 5:45 PM Page 57