Lecture 8 Compensation and International HRM PDF

Lecture 8 Compensation and International HRM The importance of compensation  No matter how much we like our jobs, would not do them without a compensation package.  When we think of compensation, often we think of only our paycheck, but compensation in terms o...

Lecture 8 Compensation and International HRM The importance of compensation  No matter how much we like our jobs, would not do them without a compensation package.  When we think of compensation, often we think of only our paycheck, but compensation in terms of HRM is much broader  An organization that does not compensate as well as others within the same industry will likely be unable to attract the best candidates, resulting in a poorer overall company performance.  Best Companies to Work For by Fortune magazine, all the companies who topped the list (SAS and Boston Consulting Group, for example) had satisfied employees—not only with their pay but their entire benefits package. Factors Affecting Employee Compensation Egyptian laws & regulations: A. Labor law: Annual increment, overtime payment, paid holidays, deductions, penalties and etc. B. Social insurance law: Minimum insured salary, social insurance shares. C. Tax law: Income tax. D. Other laws & Ministerial decrees: Profit share, etc. Company competitive strategy, company size, profit margin. Profit status, company size, industry and compensation strategy “to be market leader or market follower”. Work location: Cost of living, cost of housing and etc. So this is why salaries in some areas are generally higher than salaries for similar positions in more rural locations. Definition of Compensation & benefits  Compensation is all the monetary and non-monetary rewards an organization provides to its employees in exchange for their work. This can include base salary, bonuses, commissions, benefits, and other perks.  Guaranteed pay – a fixed monetary (cash) reward paid by an employer to an employee. The most common form of guaranteed pay is base salary.  Benefits – programs an employer uses to supplement employees' compensation, such as paid time off, medical insurance, company car, vacation pay, holiday pay, maternity leave, retirement contribution (pension pay), and stock options. Extrinsic Rewards System : Direct Financial Payments ① Wages Compensation in the form of money paid for time worked Ex: 1Hr= 7$  ② Salaries Compensation in the form of money paid for doing the responsibilities of the job Ex: monthly salary: 8000 EGP ③ Project-based Employees are paid based on the number of projects that are produced. ④ Incentives program Programs designed to motivate high-performance Ex: individual and company-wide incentives ⑤ Individual Incentive programs I. Bonus: Special payment over and above the salary for sales job. II. Merit Salary System: Linking compensation to performance, used for non-sales job. III. Pay For Performance: Rewarding managers for productive output. 6 Company Wide Incentive programs I. Profit Sharing: Distributing bonuses to employees when company profits rise above a certain level. II. Gain Sharing: Rewarding groups who do productive improvements by cutting costs. III. Pay for Knowledge: Encouraging employee to learn new skills or become proficient at different jobs. Indirect Financial Payments ① Benefits :Compensation other than wages and salaries Ex: Workers compensation insurance ◆ Workers Compensation insurance: Legally required insurance for compensating workers injured on the job.  Supplemental pay: sick leave and vacation pay  Insurance: workers’ compensation  Retirement: Pensions  Employee services: child-care facilities Due to employees' changing needs its hard to satisfy all employees, also to limit companies costs, companies decided to use Cafeteria Benefit Plan ▪ Cafeteria Benefit Plan Plan that sets limits on benefits per employee and each employee will choose from a variety of alternatives. Elements of Equity External equity  ◦ How a job’s pay rate in one company compares to the job’s pay rate in other companies. Internal equity ◦ How fair the job’s pay rate is when compared to other jobs within the same company. (for instance, is the sales manager’s pay fair, when compared to what the production manager earns?). Individual equity ◦ How fair an individual’s pay as compared with what his or her co-workers are earning for the same or very similar jobs within the company. Procedural equity ◦ The perceived fairness of the process and procedures to make decisions regarding the allocation of pay. Methods to Address Equity Issues Salary surveys ◦ To monitor and maintain external equity. Job analysis and job evaluation ◦ To maintain internal equity. Performance appraisal and incentive pay ◦ To maintain individual equity. Communications, grievance mechanisms, and employees’ participation ◦ To help ensure that employees view the pay process as transparent and fair. Salary Survey Why we do salary survey? - To observe the market salaries. - Ensure and maintain external equity. - To perform compensation benchmarking. - Set or update pay rates. Methods of salary survey: 1 Formal salary survey: Buying A salary survey (Job Master / Hay). 2 Informal Salary Survey: Conducting in-house salary survey. ( Job ads/networks /exit interview/ job applicants_ A)Market Compensation Policy: refers to the organization's approach to determining employee pay and benefits based on prevailing market rates. It involves analyzing external market data to ensure that the company's compensation packages are competitive and aligned with industry standards. Key Features: Benchmarking: Comparing the organization's compensation levels with those of similar companies in the industry. Market Surveys: Conducting surveys to gather data on salary ranges, benefits, and other forms of compensation offered by competitors. B) Market Plus Philosophy: involves paying employees above the market average to attract and retain top talent. Organizations adopting this philosophy are willing to invest more in their workforce to gain a competitive advantage in terms of skilled and motivated employees. Key Characteristics: Premium Compensation: Offering salaries and benefits that exceed industry standards to attract high-performing individuals. Talent Differentiation: Recognizing and rewarding exceptional talent with additional incentives or bonuses. Competitive Edge: Seeking a competitive advantage in the market by having a workforce that outperforms competitors. C) Market Minus Philosophy: involves paying employees below the market average. Organizations adopting this approach may focus on cost-cutting measures and may believe that they can attract and retain employees through other non-monetary factors such as workplace culture, flexible schedules, or career development opportunities. Key Characteristics: Cost Containment: Emphasizing cost efficiency by offering compensation packages below industry averages. Non-Monetary Incentives: Relying on factors other than salary, such as a positive work environment, experience for employee attraction and retention. What is Job Evaluation?  the systematic process of determining the relative value of different jobs in an organization.  The goal of job evaluation is to compare jobs with each other to create a pay structure that is fair, equitable, and consistent for everyone.  This ensures that everyone is paid their worth and that different jobs have different entry and performance requirements.  Helps solve internal equity A) Job Evaluation: Ranking method/ Paired comparison Jobs are paired and for each pair, the most impactful job is chosen. This results in a forced ranking of different jobs based on their seniority. This approach is only recommended for smaller organizations with fewer than 100 jobs B) Job Evaluation Job Grading Method: Jobs are grouped into categories or grades based on factors like the level of skills or experience needed. Each grade has a salary range. Example: In an office, you might have three grades: Entry-Level, Intermediate, and Senior. Entry-level roles might include Receptionist or Junior Analyst, Intermediate could be Project Manager or Senior Analyst, and Senior might include Department Head or Senior Manager. C) Job Evaluation: Factor-comparison method Jobs are ranked on a series of factors, the most frequently used factors being knowledge & skills, communication & contacts, decision - making, impact, people management, freedom to act, working environment, and responsibility for financial resources. Each factor is assigned points and the total number of points indicates the salary range Procedural equity:“Open pay” policies : Open pay is a policy where management publishes full compensation information for all employees to all employees  International HRM Definition The process of procuring, allocating and effectively utilizing human resources in an international business is called international human resources management (IHRM). Need for IHRM Managing expatriates Globalization has forced HRM to have an international orientation Effectively utilize services of people at both the corporate office and at the foreign plants To reduce the risk of international human resource To avoid cultural risks To manage diversifies human capital Differences between Domestic HRM and IHRM Business activities e.g. taxation, international relocation, expatriate remuneration, performance appraisals, cross Cultural training Increased complexities e.g. currency fluctuations,foreign HR policies and practices, different labor laws Increased involvement in employee’s personal life e.g. personal taxation, voter registration, housing, children’s education, health, recreation and spouse employment Complex employee mix – cultural, political, religious, ethical, educational and legal background Increased risks e.g. emergency exits for serious illness,personal security, kidnapping and terrorism Repatriation The activity of bringing the expat back to the home country Can cause re-entry shock or reverse culture shock Reasons ◦ Posting period over ◦ Children’s education ◦ Not happy with an overseas assignment ◦ Failure to do a good job  Hofstede’s cultural model The most useful information on how cultural values influence various types of business and market behavior comes from seminal work by Geert Hofstede. who studied over 90,000 people in 66 countries, found that the cultures differed along four primary dimensions Individualism/Collective Index (IDV), which focuses on self-orientation Power Distance Index (PDI), which focuses on authority orientation Uncertainty Avoidance Index (UAI), which focuses on risk orientation 1. Individualism/ Collectivisms (IDV) Refers to the preference for behavior that promotes one’s self interest. High IDV cultures reflect an “I” mentality and tend to reward and accept individual initiative Low IDV cultures reflect a “we” mentality and generally subjugate the individual to the group Collectivism pertains to societies in which people from birth onward are integrated into strong, cohesive groups, which protect them in exchange for unquestioning loyalty 2. Power distance (PDI) 1. The Power Distance Index measures power inequality between superiors and subordinates within a social system 2. Cultures with high PDI scores tend to be hierarchical and value power and social status 3. In high PDI cultures those who hold power are entitled to privileges 4. Cultures with low PDI scores value equality and reflect egalitarian view 3.Uncertainty avoidance (UAI) The Uncertainty Avoidance Index measures the tolerance of uncertainty and ambiguity among members of a society 1. High UAI cultures are highly intolerant of ambiguity, experience anxiety and stress, accord a high level of authority to rules as a means of avoiding risk  2. Low UAI cultures are associated with a low level of anxiety and stress, a tolerance of deviance and dissent, and a willingness to take risks Objective of a Compensation Plan