How many success stories start with the phrase, “I took the easy road”?

Most companies with global operations tend to pay their internationally-based top level executives in accordance with some form of global compensation structure – in order to level the playing field for those with multiple country responsibilities.

However, for the rest of their international population it’s not as straightforward.

The Challenge

Companies with local national employees face a challenge and a risk when it comes to their decision as to how to reward (pay) in each of their operating countries.    Do they “do as the Romans do” and follow local practice, or do they seek to create a standardized global framework in an effort to standardize pay practices?

For those developing strategies to effectively pay employees across the globe, the headache is in dealing with a diverse collection of economies, cultures and competitive pressures – some of which may be moving in different directions.  However, the strategy of recognizing country-specific differences in pay methodology often comes up hard against the interests of corporate staff administrators, those who traditionally look for the easy way, the simple way, the one-size-fits all way of dealing with far-flung employee groups.  For many international compensation practitioners it is actually the administrators whom you have to overcome.

The headquarters staff will ask, what difference does it make?  Unless otherwise required by legislative action or representation, why can’t we be fair to all our employees in the same way?  The metrics below illustrate what they would wish to standardize:

• Value (price) jobs irrespective of locale
• The pay mix of base salary and incentives
• Universal date pay increases
• Average pay increase percentages
• Pay-for-performance vs. general adjustment increases

Why Not?

Why doesn’t one size fit all?  Why can’t you treat all employees in the same fashion – because they all belong to the same company, right?  Consider the following before using that cookie cutter.

• Economy:  When you’re dealing with country-specific inflation rates that range from flat to 20%+, do you really want to offer the same percentage salary increase?  What if one country is in the grip of recession (US), while another remains relatively unscathed (Australia)?

• Culture: in some areas of the world job and income security needs command paramount interest over pay-at-risk, so in the pay mix the base salary dominates the variable portion.  For example, while China has a very aggressive sales compensation environment, in India there is more interest in base salary and their CTC (cost-to-company) package than variable compensation.

• Competition: companies react to the cost of labor vs. the cost of living.  If the market they are in rewards in a certain fashion (pay mix, commission vs. bonus, quarterly vs. annual rewards, etc.), companies who provide a different approach risk lower employee engagement as well as a talent drain.

• Representation: National unions often dictate pay actions that could reverberate up the hierarchy as companies strive to maintain equitable treatment with their other employees.  Works Councils will have their impact as well.

On the other hand, varying your practices according to country-specific conditions could cause a degree of consternation with the back office staff and their computerized systems.  These are folks who like things neat and pretty.  In their defense though, senior management often asks for standardized metrics that may be difficult develop and compare:

• Tabulating global statistics when definitions or methods vary

• Identifying global trends based on diverse conditions

• Balancing the impact of cross border movement

If you force international operating units to convert their practices to an common format and methodology, the result could be more than just confusion and local administrative difficulties.  It could also mean the greater likelihood of over payments in some quarters while paying less in others – all for the sake of sameness and common report generation. This would offer up a combination of hurting employees while also hurting the business.

Remember that ease of administration is rarely an effective rationale for making good business decisions.

Anyone who has ever been involved in a merger or an acquisition team remembers their first time; how green they were, how much they didn’t know and how much of a challenge it was just getting up to speed.   They didn’t know what they didn’t know.  Most neophytes are shell-shocked by the complexities involved, the myriad moving parts – and when the business target is an international concern, or has a foreign footprint, then it’s often a case of “what do we do now”?

So here’s a due diligence checklist for international M&A deals, one that I wish I had when I was thrown to the wolves for my first overseas acquisition.  This is not breakthrough material, and is likely a derivation of thinking that has evolved for years, starting from the first time one company decided to take over another.   If you’re new to the process, it is a reminder of critical research steps, what mustn’t be forgotten.

This particular list comes via my friends at White & Case LLP (www.whitecase.com), who make this information available as a service to the profession.  What follows is the first of a two-part posting.  It is thorough (some might say “exhausting”), and some search elements may not be warranted in every case, but I think you’ll find it excellent preparation material.

• Compensation & Benefits: Using a separate compensation / benefits checklist, check the seller’s compensation philosophy, compensation / benefits “schemes” or plans, severance plans, retirement plans, bonus plans and perquisites (like meals, housing, country clubs and company cars).  Check individual pension promises, special agreements, grandfather clauses, death / disability benefits, cafeteria plans, service awards, profit sharing, savings plans, employee loans and unusual expense reimbursements.  Check compliance with local laws that mandate extra payments and benefits.  Get an accounting of any transferring plans, and study funding: unfunded, underfunded and “book reserve” plans can cause huge problems.

• Equity and Loans: Look at seller stock options, employee ownership programs, officer / director stock ownership, and employee ownership in affiliates and entities doing business with the seller.  Also check into loans and guarantees to employees.

• Employee Insurance Coverage: Look at the employment-related insurance the seller provides, like employee life / health / accident insurance, hazardous duty / kidnap insurance, payments to state-mandated insurance funds (such as workers compensation insurance), expatriate coverage, and “key man” policies naming the employer as beneficiary.

• Performance Management: Study the seller’s performance management system.  Focusing on key employees, collect data on job evaluations, performance appraisals and problem employees.

• Labor Organization Relationships: What labor organizations represent workers?  Collect organizational data regarding in-house or company-sponsored labor organizations such as works councils, and “European Works Councils”, company unions, health / safety committees, staff consultation committees and ombudsman.  Collect meeting minutes and records memorializing labor disturbances and days lost to strikes.

• Collective Agreements: Look at applicable collective agreements and “social plans” with employee groups.  Go beyond trade unions and check agreements with works councils, worker committees and ombudsmen.  Get expired agreements with terms that still apply.  Do any industry (“sectoral”) collective agreements bind the seller as a non-signatory?  Does the seller participate in any multi-employer bargaining associations?

• Individual Employment Agreements: Look at individual employment contracts with employees, including agreements designated as statement of particulars, non-compete, confidentiality agreement, indemnification agreement, inventions agreement and expatriate arrangements – or at least check these for key executives and look at form / template agreements for rank-and-file employees.  Be sure to look at contracts with contingent workers (service providers like independent contractors, consultants, agents).

• Employee Consents: Check individual employee consent forms.  In jurisdictions like the UK and Korea, employees may have consented in writing to work overtime.  European employees may have consented to processing sensitive personnel data.  Employees may have acknowledged a code of conduct or work rules in writing.

In Part II of this International Checklist for M&A deals we’ll continue to break down the HR due diligence process and provide more reminders of what you should be looking for – what rocks you should remember to look under.

It’s a minefield out there, but now you have a map.

In recent months several of my US-based clients faced challenges overseas regarding high employee separations coupled with difficulty in recruiting qualified staff.   These companies were at a loss to understand the cause of their problems, as each felt that they were already providing a more generous reward package for employees then was normal practice in the US.

A quick study revealed that the clients’ international employees were indeed receiving a great deal more than their American counterparts.  However, in many areas they were in fact being given no more than the minimum benefit provisions mandated by statutory requirement.  They were receiving only what the company was compelled to grant.  How do you attract, motivate and retain quality staff when the message of your actions is that you are only willing to offer what government regulations say you must?

One client bemoaned having to grant four weeks of vacation upon hire, because it was the law, only to find out later that common practice indicated five or more weeks were the norm.   To employees and candidates they offered no more than what they were required.  By ignoring competitive practice they were now paying the price by struggling to build and keep a quality staff.  They had earned a reputation in the local market as a “minimalist employer.”

When American companies first establish operations overseas Human Resources faces a number of challenges that they are unaccustomed to dealing with at home.  Every country is a separate and unique entity, with differences in HR policies, practices, and statutory requirements, each of which must be acknowledged and addressed in order to develop and maintain a successful operation.  On top of that are the vagaries of the competitive marketplace, where the same job is paid differently from Rome to Oslo to Buenos Aires – usually coupled with differing social charges and benefit coverage.

Choosing to operate under the guidance of U.S employment law and US-based corporate practices is a failed strategy.  Maintaining such a US focus (usually for ease of administration) will bring you grief; grief from your employees, from those you hope to hire, and most of all from local governments whose laws you have ignored or bypassed.

Think how you would feel if elements of your own reward package, policies or procedures were based on European or Asian common practice.   Wouldn’t go over well, would it?

If you decide that your business strategy requires you to maintain a staff presence in a particular country, then I would advise you to treat that operation the way you would its US counterpart; provide competitive terms and conditions that will attract and retain the right caliber of employee in that country – and ignore how their packages might compare with US or other country counterparts.  If you are not willing to make that commitment, from an HR perspective you would be better off not to engage employees in that country.

What is the competitive market price for a particular position?

It’s a simple question.  If you work in Compensation, this is what you do.  And if you’re in the US the survey sources you can call upon are numerous and well stocked with participating companies and benchmark matches – the blessings of a large country.  In fact, it is a common practice to segment the data (report separately) on the basis of industry, revenue size, or geographic region.  In some instances you can further refine your analysis by operating budget, staff size or even years of experience.

For those accustomed to such robust analysis it can be a real wake-up call when asked to conduct a similar analysis for operations in another country.  Suddenly your content-rich environment has disappeared, and in its place you find that the availability of good information can no longer be taken for granted.  Now what do you do?

Your large country database is gone.  Instead, you face a limited selection of survey sources and each offers only a fraction of your normal participant count – a far cry from business as usual.

Such is the key challenge when pricing international jobs – the limited number of companies included in surveys, even by the major vendors.  For example, Mercer Netherlands has 81 participating companies.  So it is not unusual for a market pricing analysis to include only 4 – 5 “matches” – but is that representative of common practice?

If you’re the one on the asking end of the original question, let me share the challenges that your analyst is likely to encounter.

Impact of Reduced Participation

• Limited industry segmentation: reported data will likely cover multiple industries, with limited or no segmentation.  If you’re in either a high or low paying industry, surveys will provide inflated or discounted  information

• Hard to segment by revenue size: to the extent that larger companies pay more than smaller you lose that distinction as well.  This can be especially problematic if you’re a small company.

• Global responsibilities vs. strictly national: the distinction is often blurred between national, regional and global responsibilities

• Combination jobs not well represented: you will find yourself matching against jobs “close to” your own, just to gain a “feel” for pay levels.  If your job content varies from benchmark descriptions, reported data might not capture such idiosyncrasies.

• Poor matches and / or no data when less than 5 respondents: surveys tend to provide an “n/a” when they do not have enough participants.  When you start with limited companies it’s not unusual to find unreported jobs.

• Forget Regional variations:  while it is often the case that certain geographic regions have higher pay levels, the reported data is usually national.  You may assume that participants are in the higher paid region, at your risk.

What to do?

Frustrating, isn’t it?  You can’t very well throw your hands into the air, complain about poor survey quality and move on to something else.  The limitations are there and you have to play with the cards you’ve been dealt.  Management is waiting, wondering what is taking you so long.

Working with limited resources is a test.  Your challenge is to balance an understanding of the subject position, the industry and the vagaries of limited data points in order to determine which figure best represents your position’s competitive value.

To succeed you must utilize subjectivity and your professional judgment to consider the available data and gauge which figures best reflect the job under review.  The correct answer will no longer jump off the page at you.  Compensation has become an art, not a science.

• To improve your matching, consider either the 25^th or the 75^th percentiles instead of the median or 50^th percentile to reflect your position: this can be effective with poor matches, or concerns that the reported job is either larger or smaller than your own.

• You may have to add or subtract from a benchmark job to gain a more appropriate figure for your position.  For example, if your job is a VP but the survey matches stop at the Director level (or converse), you may have to adjust up or down to create a better “guesstimate.”  Note: in such a case don’t forget that the incentive percentages will likely differ as well.

• There is no formula in making adjustments, but changes in organizational level are usually around 15% – 20%.  Within-level description changes are usually around 5% – 15%.

• If dealing with only a few positions you might have greater success by individually pricing jobs through a vendor’s database of multiple surveys, government sources and local surveys.  Vendors like ORC, Birches Group and a few others offer this select service.

• Be careful of the arithmetic exercise (averaging averages, inappropriate matches, assuming numbers, etc.) that delivers a figure you cannot validate later.  Caution: a number is remembered, while often the qualifiers that follow are forgotten.  Make sure that you document such concerns before providing specific data.

All this subjectivity means that your judgment might suffer from more skepticism, even criticism, as you cannot simply point to a survey page and say, “there it is.”

Does all this subjectivity ruin the value of your analysis?  Not at all, as long as you inform management about how limited survey resources have impacted your analysis.  They expect an answer to their question (market value?) and you need do the best that you can with the resources you have available.

Many companies with international operations are reluctant to purchase compensation surveys covering their multiple countries, on account of the cost.  To them it’s like having to survey multiple USAs, no matter the headcount involved.  As discussed in an earlier post, Shock and Awe, the cost of these international surveys can be prohibitive.

For example, if the US-based Acme Manufacturing Company has operations in Germany, India and Argentina, survey costs for these three countries would be 2-3 times the cost of comparable US surveys.  As most compensation experts recommend using multiple sources to better gauge market trends, the cost factor very quickly becomes an eye opener.  The more countries you operate in – well, you get the point.

Hence the hesitation.

However, is putting off a competitive pay analysis a good business decision?   What is gained by keeping ignorant of whether your compensation packages are competitive or not?  Of course, by happenstance you may be lucky and are already providing compliant and competitive rewards.  More likely though, the odds favor that you’re either overpaying or underpaying your employees.

Long term Impact of the Status Quo

Let’s look at the scenarios that can be playing out while you remain unaware.

Over Payments:

• Where local compensation costs are higher than the competitive market, without a corresponding ROI in productivity or performance (more pay is not a 1:1 correlation).  You are wasting money.

• Most employees will not recognize that they’re being paid above average, so any presumed positive perception is only an illusion.

If you’re overpaying, but don’t realize it because you haven’t obtained credible survey data, you will likely presume that everything is okay.  In other words, you’ll think that your pay is on par with the market, when in fact you are paying at above market rates.  How much money (the differential) will you be needlessly paying out on account of this presumption?  Chances are, the cost of finding out – of potentially identifying a key problem – would be a small fraction of the money being misspent.  Is this an efficient use of your reward dollars?  I don’t think so.

Underpayments:

• Employees feel that they are not being compensated fairly

• Your ability to attract the right caliber of employee for your operations will be weakened by low compensation rates

• Employee engagement, productivity, morale, attendance etc. will be less than what they should be, feeding off negative employee perceptions

If you’re underpaying, but don’t realize it because you failed to obtain credible survey data, you may also blindly consider that everything is okay.  After all, anyone who leaves does so for more money, right?  But doesn’t everyone?  So you may not learn much through staff defections.  Have you considered the annualized cost of losing just one experienced staff member?  And should you lose more?

Choosing instead a course of hesitation and delay will not rectify any festering issues; they don’t go away or fix themselves.  Instead, your inaction will worsen the situation and make eventual corrections more painful.

Cost of doing business

Do you remember that ad line, “you can pay me now, or pay me a lot more later”?

While squirming to avoid costs the company might try to obtain free data off the internet.  Good luck there.  Pundits will tell you that the value of free data, even if available is usually less than what you paid for it.

Instead, ask yourself if you would spend a dollar today to save three tomorrow?  That’s the question you must answer, to gauge the economic value of knowing the competitive position of your international employees.

Your financial folks might see it another way.  They might see only a finite dollar amount being spent, against a “maybe” savings estimate.  They will ask you for guarantees you cannot give.  It’s not like buying a machine that will increase productivity, lower production costs, raise profit margins and lower the cost of sales – all measurable.

Would you pay to learn how competitive are your services and product lines?

To make informed and effective business decisions, management requires knowledge of present circumstances, the challenges being faced, the import of the status quo and the implications of change.   When dealing with the single greatest cost to your organization, employee pay, it would be well worth your effort to spend what is necessary to give senior management the proper ammunition for decisions that could drive the business forward.

Yes, it would be well worth the cost.

How many success stories start with the phrase, “I took the easy road”?

Most companies (@85%) with global operations tend to pay their internationally-based top level executives in accordance with some form of global compensation structure – in order to level the playing field for those with multiple country responsibilities.

However, for the rest of their international population it’s not as straightforward.

The Challenge

Companies with local national employees (hourly, professional, management) face a challenge and a risk when it comes to their decision as to how to reward (pay) in each of their operating countries.    Do they “do as the Romans do” and follow local practice, or do they seek to create a standardized global framework in an effort to equalize pay practices?

For those developing strategies to effectively pay employees across the globe, the headache is in dealing with a diverse collection of economies, cultures and competitive pressures – some of which may be moving in different directions.  However, the strategy of recognizing country-specific differences in pay methodology often comes up hard against the interests of corporate staff administrators, those who traditionally look for the easy way, the simple way, and the one-size-fits all way of dealing with far-flung employee groups.  For many companies and international compensation practitioners it is actually the administrators whom you have to overcome.

The headquarters staff will ask, what difference does it make?  Unless otherwise required by legislative action or representation, why can’t we be fair to all our employees in the same way?  Here are a few metrics to illustrate what they wish to standardize:

• Value (price) jobs irrespective of locale
• The pay mix of base salary and incentives
• Universal date pay increases
• Average pay increase percentages
• Pay-for-performance vs. general adjustment increases

Why Not?

Why doesn’t one size fit all?  Why can’t you treat all employees in the same fashion – because they all belong to the same “XYZ Corporation”, right?  You should consider the following before taking out that cookie cutter.

• Economy:  When you’re dealing with country-specific inflation rates that range from flat to 20%+, do you really want to offer the same percentage salary increases?  What if one country is in the grip of recession (US), while another remains relatively unscathed (Australia)?

• Culture: in some areas of the world job and income security needs command paramount interest over pay-at-risk, so in the pay mix the base salary dominates the variable portion.  For example, while China has a very aggressive sales compensation environment, in India there is more interest in base salary and their CTC (cost-to-company) package than variable pay-at-risk compensation.

• Competition: companies react to the cost of labor vs. the cost of living.  If the market they are in rewards in a certain fashion (pay mix, commission vs. bonus, quarterly vs. annual rewards, etc.), companies who provide a different approach risk lower employee engagement as well as a talent drain.

• Representation: National unions often dictate pay actions that could reverberate up the hierarchy as companies strive to maintain equitable treatment with their other employees.  Works Councils will have their impact as well.

On the other hand, varying your practices according to country-specific conditions could cause a degree of consternation with the back office staff and their computerized systems.  These are folks who like things neat and pretty.  In their defense though, senior management often asks for standardized metrics that may be difficult develop and compare:

• Tabulating global statistics when definitions or methods vary

• Identifying global trends based on diverse conditions

• Balancing the impact of cross border movement

If you force international operating units to convert their practices to an uncommon format and methodology, the result could be more than just confusion and local administrative difficulties.  It could also mean the greater likelihood of over payments in some quarters while paying less in others – all for the sake of sameness and common report generation. This would offer up a combination of hurting employees while also hurting the business.

Remember that ease of administration is rarely an effective rationale for making good business decisions.

When you first look to purchase compensation surveys for your international population, it’s going to be a real wake-up call.  For those accustomed to only US surveys you will find that the available data in many countries is more limited than what you’re accustomed to seeing, as are the number of companies involved.  What won’t be reduced though is the expense.  Quite the opposite.  If you have multiple countries to deal with, your budget for credible compensation data will likely become a multiple of your US experience.

When I worked overseas my budget for compensation surveys was 3-4 times my previous US budget – and I only had to worry about Europe.  What a shock that was – spending much more and arguably receiving less.

Think on it, though: each country is a separate USA, a unique national entity having country-specific labor laws, employment regulations, tax structure, competitiveness challenges and variations of economic strength.  For each you will need a country-specific survey to assess the local competitiveness of your employees.

International HR practitioners will need to adjust their thinking to react effectively in smaller countries, where the working population is limited and so is the number of survey participants.  It will be difficult to slice surveys by geography, industry or employee segment, as the data points grow smaller and smaller with each criteria.  For example, a well-regarded Mercer survey for Sweden showed 202 participating companies, while the Netherlands counted 81.  Meanwhile the US survey totaled 500 companies.

To compound this dilemma of accessing credible data you will typically be required to pay “list” costs for each survey, as compared to the US where I was able to gain lower 2^nd copy costs and often times managed to wheedle discounts or “anticipated” participation rates.  Such tactics are not as readily available overseas.

Availability of locally-grown survey data is another challenge.  I have tried to locate such sources, even those provided in the local language, in order to create a greater “buy-in” sense from management, but with very limited success.   Even global companies with non-US headquarters tend to use the multi-national consulting firms.

Accessing International Resources

Should you require information for international compensation practices, below are a number of useful sources, each of which can be tapped via a Google search.  Note: many of the non-US sources focus on limited employee segments or functional areas, which may limit their usefulness during a general search.

Should you only have a few positions (2-3) in a given country you can reduce costs through individual job pricing, vs. the purchase of an entire survey.  More than a few positions though, would render this tactic economically unfeasible.  A few notable sources (though others from the above list may also be able to help):

• ER Limited
• ORC
• Birches Group

Note that I have not included sources from the current vogue of online surveys, like PayScale and Salary.com.  To my mind these sources still have credibility problems to overcome before they would be accepted by senior management as a viable resource.

Another effective strategy for reducing costs is to age current data forward, coupled with the use of biennial purchasing.  However, if utilizing this strategy have a care to limit its use to countries with stable economies.  Using such standard growth figures would miss the mark in countries showing greater volatility.

The Cost of International Operations

Too many HR practitioners and their Managers fail to take into account the expenses involved in keeping their international compensation programs competitive, especially where the organization has a small footprint in a given country.  For companies new to the international scene, and for those with small populations in several countries, the shock of survey costs could be daunting.  Many times the result is a reluctance to purchase the data, in some cases letting matters on the ground continue to fester – potentially overspending and / or creating debilitating equity problems for themselves.

Call it the cost of doing business, but if you’re going to maintain effective operations overseas, and you want to provide a competitive reward package (of course you do!), it would be unwise to shortchange the process by guesstimating or otherwise trying to make-do without credible information.

The cost of surveys is a fraction of the possible financial impact that could result from retaining non-competitive reward programs.