Employee Benefit, Compensation, Salary Survey July 21st, 2017  

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The Impact of Culture on Compensation Design

by Gary L. Parker

All compensation systems are affected by two cultural issues: corporate culture of the organization and the local culture in which the organization operates.

Compensation programs that might be extremely effective in a home-country location will fail if they violate local cultural values. Industries which tend to use individual rewards and pay-for-performance as both a motivator and core compensation component around the world risk their compensation strategies backfiring. Successful compensation approaches differ according to the type of organization.  For example, compare the compensation approach of the ownership driven structures of small, high-technology groups with the more traditional service and responsibility driven structures in the "smokestack" industry.

The effectiveness of using reward as a motivator is influenced by cultural attitudes about motivation. In group-oriented societies, it is not clear that individual pay relativities are high in society's hierarchy of needs. More powerful motivations are those centered on the fulfillment of group aspirations and potential. Incentive programs, such as employee-of-the-month, are likely to create embarrassment.  Motivation needs to be based around rewards that recognize the group rather than the individual. Programs that are aimed at differentiating individual performances are likely to be far less welcome in these group-oriented  societies where fear of loss-of-face may turn an employee program that may be successful in the U..S.  into a demotivator. Such programs may be equally unwelcome in nurturing societies which attach

greater importance to solidarity among colleagues, and individual prominence could  provoke resentment and jealousy.

Anglo-Saxon culture tends to have the following impact on compensation design:

  • Pay for performance measured in financial terms with a relatively short-term horizon;

  • Differentiation – both by responsibility level and within equivalent job responsibilities;

  • Flexibility in benefit provision allowing for individual choice; and

  • Little emphasis on perquisites.

It is interesting to contrast this approach with the Northern European approach, which also offers pay-for-performance, but concentrates less on individual differences and has a much more nurturing approach to benefits with strong standardized state provisions. The relatively hierarchical social structure emphasizes recognizable perquisites, sometimes even  beyond their intrinsic financial value.

In Japanese society, culture has a different effect again. Pay-for-performance is linked to the whole company’s success and long term horizons.  In addition, differentiation may be constrained by respect for age and rewards may have to operate around a built-in age escalator; benefit provision is often inflexible; and perquisites play a strong role in reward but, typically, much less overtly than in Europe. Within the recent past there has been a strong trend among the more progressive Japanese companies to move towards variable incentives/bonuses.

Designing Compensation for Local National Organizations

When looking at designing structures for local national organizations, it is important to identify which aspects of these culturally determined approaches fundamentally reflect the organizations' business culture and which are merely a reflection of the presence of a home-country cultural norm.

For example, take  the issue of "reward at risk."  Is the presence of a performance bonus system in the U.K. reflective of a precise relationship between the success of certain behaviors

and the success and survival of the organization?  Or is it simply a response to the cultural drive to differentiate between individuals?  If it is the latter, will imposing such a system enhance or damage performance in a culture such as Japan where collective success is highly prized?  If it is the former, can it be adapted to a society in the developing world where discretionary income may be very limited and the imposition of an "at risk" strategy may make base salaries dangerously non competitive?

Similarly, differentiation may have unexpected effects both quantitatively and qualitatively.  Cultural norms mean that the transposition of such salary norms as a 20% salary progression for job levels may be entirely inappropriate in both directions.  For example, in Scandinavia where differentials are commonly smaller and in Southern Europe where they are frequently significantly larger. Similarly, those systems which differentiate between responsibility levels (e.g. by merit or bonus awards) may be entirely inappropriate to a culture which traditionally rewards either age or length of service. In some cultures, the award of a new status level may have the most impact.  For example, the significant effect of being made "dirigenti" (senior management cadre) in Italy can be very important.

Again, many cultures have little appreciation of the often-touted advantages of flexible benefits. Their norm is a single state or corporate provided structure and the recognition of flexible approaches will either be rejected or accepted only as an unnecessary "add on"  to an already sufficient provision.  This frequently happened to foreign corporations in Italy with regard to pension provisions where attempts were made to mirror "top-hat" pensions plans.

It is dangerous to underestimate the importance of perquisites in many cultures.  From the designated office or parking space in France to the overseas "training course" in Russia, these provisions may have a perceived value far in excess of their cost, and at a level unappreciated in an aggressively egalitarian society such as the U.S.  Their absence will damage both competitiveness and productivity in the local environment.

The new global business manager needs to be just as adroit in understanding Italian labor unions  as with the managing of the TGWU (Transportation General Workers Union). That manager needs to also understand what impact local cultures will have on the acceptance of products and services.  As we know, what works well in one society can cause a complete disaster in another. For example, the collectivist culture of Japan determines how Japanese conduct meetings, how they make decisions, and how their teams work together. When we send Europeans to Japan with their standards of individual achievement, we're courting trouble. When we use our yardstick to recognize a team leader by singling him or her out for an award, it is inevitable that it is going to get a negative reaction.

It is also important to understand the impact of culture on national legislation -- and through legislation -- on company compensation strategies.  It is best not to agree to pay an employee a monthly salary unless you know the number of months that constitute an annual salary.  Also, do not offer bonuses unless you are certain they will remain as a variable "add-on" to base pay.

Many corporations are trying to spread stock options across the globe, but it can have unfortunate and unintended effects. In Holland, options are taxed at the point of grant; in France, at the point of exercise, and in the United Kingdom, at the point of sale. Thus, your

plan will be perceived very differently in each country. Indeed, if the employee who is unfortunate to be granted stock options in Holland moves to France when he or she needs to

exercise those options, and to the U.K. when liquidating his or her profits, the benefits of the plan will not be apparent. Conversely, he or she would be delighted to move in the opposite direction !!!

Blend Corporate Culture With Local National Culture

Organizations should always consider those aspects of compensation design which they regard as fundamental to their own company culture.  All cultures comprise a spectrum of individuals and, provided all cultural norms are not disregarded, a non-conforming aspect which is key to a strong corporate culture will still attract a number of individuals in any culture.  Research at INSEAD has shown that in the "old" IBM, the corporate culture was strong enough to have as much influence over behavior as the national cultures it operated within.

The key is to be aware of the impact of corporate pay philosophy in different national cultures.  Success will come to companies that recognize that local cultural factors must be factored into many national cultures. 

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