- Email: [email protected]
The international remuneration monster
and Editor
studying maps of Monroe County, and we know a few spots out in the hinterland which have been abandoned for years. If we come up with anything useful, like an 1875 silver dollar, I'll let you know. Richard N. Farmer Chairman, International Business Indiana University
THE INTERNATIONAL REMUNERATION MONSTER
To the Editor: In their article "Structuring the International Compensation Program," authors Lesher and Griffith [John L. Lesher and Ralph E. Griffith, Business Horizons, December, 1968] provide an excellent overview of the concerns of those forward thinking U.S. compensation specialists who have recently discovered the "international remuneration monster." Unfortunately, in our opinion, they also fall prey to several of the major errors and misconceptions that make the monster what it is. First, the article gives still another thrashing to the poor old overpaid U.S. expatriate. Although it does go on to point out cogently some of the barriers to transferability of managerial skills posed by a lush overseas pay package, there is no consideration of the expatriate's own point of view-that he is often severely undercompensated in the more meaningful, intangible rewards of work: promotion potential, job satisfaction, social esteem, professional success and growth, and so on. Fat pay programs are often management's only answer to justifiable expatriate complaints which are totally noncompensation related. Before reducing expatriate allowances or initiating a complex international manpower planning scheme, management should first rigorously examine its corporate attitude toward the international operation. Are expatriate jobs promotional dead-ends? Are expatriate job
APRIL, 1969
responsibilities and reporting relationships fuzzy? Are only a small percentage of overseas personnel and their wives fluent enough in the local language to do their own shopping? A "yes" answer to these questions can indicate symptoms of the poor planning and organization typical of international operations set up ten or twenty years ago to exploit then technologically or managerially unsophisticated markets. In these days of increasing international competition, top management would be well-advised to examine over-all objectives ~nd organization of its overseas operation, to find out why the U.S. expatriates are overpaid and/or discontented before doing anything about it. A second very real barrier to international executive transfer cited in the article was the three-way confusion of pay differentials between U.S. and "third-country-national" expatriates and local nationals. The article, however, neglects to probe into the most complex part of the Remuneration Monster, the jungle of government benefit programs, tax laws, pay and social customs that determines what the real differentials are-the differences in total remuneration cost and the actual motivational, compensatory impact of pay. For example, research shows that a "typical" local national manager in Venezuela earns a base salary of $22,500 (U.S.) while his U.S, expatriate counterpart gets roughly $36,000. Quite an apparent difference, but less dramatic when we add on the cost of the broad program of statutory benefits and bonuses plus a conventional private benefits package. This brings the Venezuelan's total remuneration to $38,000. A typical U.S. benefit package would add 15 to 25 percent to the expatriate's total pay, and he does get a $20,000 or $25,000 exclusion from U.S. tax, but even then, the Venezuelan can come out ahead. His top income tax rate is less than 10 percent. The point is, pay differentials are seldom what they seem at first glance, and with proper analysis and good communication to employees, many apparent pay discrepancies can be rationalized. The details of an international remuneration program are terribly complicated and
17
READER
18
continually changing; the key word must be flexibility. For example, management can often find trade-offs that make a pay package more attractive at the same or even less cost. An Englishman might prefer a moderate increase in pension contributions to a larger salary hike under his rapidly escalating tax structure; on .the other hand, a currently funded pension offers little attraction to executives in much of Latin America, with its chronic inflation and limited securities investment opportunities. Finally, our primary disagreement with the article is in its advocacy of standard job evaluation and salary administration techniques in the international environment. Adoption of such a program would rest on acceptance of a whole body of assumptions which can best be described as "Ugly American" and which are utterly false. Some examples of these assumptions follow. Pay has a uniform motivational/reward value the world over. Ever hear the story of the little Japanese shop girl who committed suicide after losing face when she failed to "make standard" under a new (U.S.--designed) piecework incentive system? Current cash has more immediate incentive value than fringe benefits. Check your international income tax schedules and see if this would be true for a Jamaican earning $9,500 per year who is offered the choice between a pay raise of $1,000 (U.S.) a year or half that amount invested in a deferred retirement plan. Employees everywhere react negatively to pay inequities. But how do you define equity or inequity? In France and Belgium, a "gentleman engineer" with a brand new theoretical science degree from a "name" school would demand-and get-a much higher starting salary than a "technical engineer" graduate of a school with less status. And this despite the fact that the latter is a better practical engineer. The gentleman engineer, however, is from the higher social order and is a candidate for managing director. His coworker traditionally will remain a technician all his career at much lower pay. This concept of equity is based on ingrained social distinctions, not on job content, performance, or distinctions used in the usual U.S. "objective" job evaluation criteria. Firms can
challenge the established order only at considerable risk. Employees everywhere agree in essence as to what a given lob entails, and how individual contribution is measured. This is simply not so. If asked to state his majo r job objective, a U.S. top manager would surely say, " T o make a profit." A continental European, on the other hand, would probably say, "To create jobs"; a Latin American or African would answer, "To build my nation's economy." With such differences in the accepted definition of major top job responsibility (indeed, in definition of basic corporate objectives), how can any but the most mechanical jobs and performance standards be def'med or evaluated consistently from culture to culture? Certainly not with the traditional tools, though research is turning up some promising new developments, most notably Elliott Jaques' "time span of discretion" method which measures basic job structure, not supposed minimum skill and responsibility requirements. In sum, despite its considerable merits, the article in question reiterates explicitly or by implication (and, in so doing, reinforces) some of the major fallacies in international compensation-U.S, style. Even use of the term "compensation" is questionable. In its various transliterations it means "indemnity for damage suffered" in every Western language except U.S. English. Our usage, "pay for services rendered," is found in the less familiar term "remuneration" and its variants. U.S. business is more and more in an internation buyer's market. LAFTA, EEC, the new Scandinavian Common Market, and so on, are going to make profits increasingly elusive in the years ahead. We don't have tO make it even harder on ourselves by continuing to foist off our U.S. remuneration techniques on societies and economies to which they are not adapted.
John M. Vivian President, Kilgour Associates, Inc. Petersham, Mass.
Carlos Z Michelsen-Terry Consultant, Peat, Marwick, Mitchell & Co. Houston, Tex.
,BUSINESS HORIZONS
studying maps of Monroe County, and we know a few spots out in the hinterland which have been abandoned for years. If we come up with anything useful, like an 1875 silver dollar, I'll let you know. Richard N. Farmer Chairman, International Business Indiana University
THE INTERNATIONAL REMUNERATION MONSTER
To the Editor: In their article "Structuring the International Compensation Program," authors Lesher and Griffith [John L. Lesher and Ralph E. Griffith, Business Horizons, December, 1968] provide an excellent overview of the concerns of those forward thinking U.S. compensation specialists who have recently discovered the "international remuneration monster." Unfortunately, in our opinion, they also fall prey to several of the major errors and misconceptions that make the monster what it is. First, the article gives still another thrashing to the poor old overpaid U.S. expatriate. Although it does go on to point out cogently some of the barriers to transferability of managerial skills posed by a lush overseas pay package, there is no consideration of the expatriate's own point of view-that he is often severely undercompensated in the more meaningful, intangible rewards of work: promotion potential, job satisfaction, social esteem, professional success and growth, and so on. Fat pay programs are often management's only answer to justifiable expatriate complaints which are totally noncompensation related. Before reducing expatriate allowances or initiating a complex international manpower planning scheme, management should first rigorously examine its corporate attitude toward the international operation. Are expatriate jobs promotional dead-ends? Are expatriate job
APRIL, 1969
responsibilities and reporting relationships fuzzy? Are only a small percentage of overseas personnel and their wives fluent enough in the local language to do their own shopping? A "yes" answer to these questions can indicate symptoms of the poor planning and organization typical of international operations set up ten or twenty years ago to exploit then technologically or managerially unsophisticated markets. In these days of increasing international competition, top management would be well-advised to examine over-all objectives ~nd organization of its overseas operation, to find out why the U.S. expatriates are overpaid and/or discontented before doing anything about it. A second very real barrier to international executive transfer cited in the article was the three-way confusion of pay differentials between U.S. and "third-country-national" expatriates and local nationals. The article, however, neglects to probe into the most complex part of the Remuneration Monster, the jungle of government benefit programs, tax laws, pay and social customs that determines what the real differentials are-the differences in total remuneration cost and the actual motivational, compensatory impact of pay. For example, research shows that a "typical" local national manager in Venezuela earns a base salary of $22,500 (U.S.) while his U.S, expatriate counterpart gets roughly $36,000. Quite an apparent difference, but less dramatic when we add on the cost of the broad program of statutory benefits and bonuses plus a conventional private benefits package. This brings the Venezuelan's total remuneration to $38,000. A typical U.S. benefit package would add 15 to 25 percent to the expatriate's total pay, and he does get a $20,000 or $25,000 exclusion from U.S. tax, but even then, the Venezuelan can come out ahead. His top income tax rate is less than 10 percent. The point is, pay differentials are seldom what they seem at first glance, and with proper analysis and good communication to employees, many apparent pay discrepancies can be rationalized. The details of an international remuneration program are terribly complicated and
17
READER
18
continually changing; the key word must be flexibility. For example, management can often find trade-offs that make a pay package more attractive at the same or even less cost. An Englishman might prefer a moderate increase in pension contributions to a larger salary hike under his rapidly escalating tax structure; on .the other hand, a currently funded pension offers little attraction to executives in much of Latin America, with its chronic inflation and limited securities investment opportunities. Finally, our primary disagreement with the article is in its advocacy of standard job evaluation and salary administration techniques in the international environment. Adoption of such a program would rest on acceptance of a whole body of assumptions which can best be described as "Ugly American" and which are utterly false. Some examples of these assumptions follow. Pay has a uniform motivational/reward value the world over. Ever hear the story of the little Japanese shop girl who committed suicide after losing face when she failed to "make standard" under a new (U.S.--designed) piecework incentive system? Current cash has more immediate incentive value than fringe benefits. Check your international income tax schedules and see if this would be true for a Jamaican earning $9,500 per year who is offered the choice between a pay raise of $1,000 (U.S.) a year or half that amount invested in a deferred retirement plan. Employees everywhere react negatively to pay inequities. But how do you define equity or inequity? In France and Belgium, a "gentleman engineer" with a brand new theoretical science degree from a "name" school would demand-and get-a much higher starting salary than a "technical engineer" graduate of a school with less status. And this despite the fact that the latter is a better practical engineer. The gentleman engineer, however, is from the higher social order and is a candidate for managing director. His coworker traditionally will remain a technician all his career at much lower pay. This concept of equity is based on ingrained social distinctions, not on job content, performance, or distinctions used in the usual U.S. "objective" job evaluation criteria. Firms can
challenge the established order only at considerable risk. Employees everywhere agree in essence as to what a given lob entails, and how individual contribution is measured. This is simply not so. If asked to state his majo r job objective, a U.S. top manager would surely say, " T o make a profit." A continental European, on the other hand, would probably say, "To create jobs"; a Latin American or African would answer, "To build my nation's economy." With such differences in the accepted definition of major top job responsibility (indeed, in definition of basic corporate objectives), how can any but the most mechanical jobs and performance standards be def'med or evaluated consistently from culture to culture? Certainly not with the traditional tools, though research is turning up some promising new developments, most notably Elliott Jaques' "time span of discretion" method which measures basic job structure, not supposed minimum skill and responsibility requirements. In sum, despite its considerable merits, the article in question reiterates explicitly or by implication (and, in so doing, reinforces) some of the major fallacies in international compensation-U.S, style. Even use of the term "compensation" is questionable. In its various transliterations it means "indemnity for damage suffered" in every Western language except U.S. English. Our usage, "pay for services rendered," is found in the less familiar term "remuneration" and its variants. U.S. business is more and more in an internation buyer's market. LAFTA, EEC, the new Scandinavian Common Market, and so on, are going to make profits increasingly elusive in the years ahead. We don't have tO make it even harder on ourselves by continuing to foist off our U.S. remuneration techniques on societies and economies to which they are not adapted.
John M. Vivian President, Kilgour Associates, Inc. Petersham, Mass.
Carlos Z Michelsen-Terry Consultant, Peat, Marwick, Mitchell & Co. Houston, Tex.
,BUSINESS HORIZONS