International pay systems

Technology has greatly assisted the globalisation of pay systems although there are many differences that still require a broad approach, says David Shonfield

Case Study: Cummins Inc

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We live and work in a global economy but what globalisation actually involves is far less obvious, especially for the management of pay and reward. Companies operating in different cultures and economic environments used to leave most things to be determined at local level.

That has changed quite significantly over the past few years, especially in the last 18 months. There is now a strong tendency towards centralisation and the harmonisation of policies and practice in large firms. There are various reasons: convergence of management salaries internationally, the Americanisation of reward, and the fact that there is now a genuinely international marketplace for certain jobs, notably in telecoms and IT.

But the driving factors are the need for operational efficiency, the fact that HR IT now exists and centralisation is feasible. To an extent, such systems are themselves responsible for driving change. There is also a logic to common policies and common grading structures, at least for professionals and managers. Assessing internal equity becomes easier, and so do international transfers.

A common pay structure is also a valuable tool for career progression, and for making a unified statement to staff. The fact that harmonisation has become easier to achieve should not lead managers to ignore the very real obstacles to common arrangements for pay and reward that still exist, even within the European Union. As Mike Edkins, director of global compensation at consultancy ORC, explains: "The most obvious issue is the massive disparity in gross and especially net pay between different countries. It’s a perpetual problem and one that can’t be solved with a single system." Convergence is also a moving target. "While inflation may be generally low – at least in Europe – pay increases still diverge in different economies.

Ten years ago, people talked as if there would be EU-based pay. That seems absurd in retrospect, but even with the euro in place and different countries actually using the same currency, there is still no sign of genuine euro pay scales," he adds. The euro has undoubtedly made salary differences much more obvious, causing concerns about pressures for parity.

Against this, differences in the cost-of-living are also more apparent, so employees across Europe tend to understand pay differences, rather as staff in the UK generally accept the idea of pay differentials between London and the rest of the country. Benefit packages in particular are very hard to compare because of the different national pension regimes that exist. However, a significant number of employers have moved to a form of broadbanding, at least as far as their European operations are concerned. This is an attractive idea because it provides some coherence, while retaining flexibility.

However, as the experience of broad bands in the UK indicates, it is hard to ensure the system is applied consistently, which is even more tricky when operating across national boundaries. In addition, the salary ranges required to accommodate national pay differences, even within Europe, are too wide for the system to be transparent. However, as Edkins points out, things are different when it comes to pay philosophy: "This is where you can harmonise your IT, for example, with grading structures, job evaluation, performance pay, and market positioning." A common approach is to fix base pay at a similar level in each country with performance pay elements aimed at bringing total remuneration to the upper quartile.

There are some well-established systems which can be applied across borders. This certainly provides coherence, although some organisations have found that some systems are more robust in the UK than in certain other countries. Adopting a cross-border system also means that employers align themselves with a group of other organisations, some of which may well not be right for the business a particular country. Almost every provider, however, agrees that ready-made solutions don’t work. Malcolm Aldis, managing director at Northgate HR, says: "The most common cause of failure for an e-HR project is trying to impose a simplistic model copied from elsewhere." Introducing new systems involves a cultural shift as much as anything else, and although the whole world is now familiar with web-based products, the cultural shift is bound to be more complex when different nationalities and HR traditions are involved.

Regulatory systems differ widely, not only about pay and conditions but also about confidentiality and data protection. However, the new generation of software has alleviated many of the problems. Ron Schaeffer, senior consultant with ORC Worldwide in Washington, explains: "In terms of setting up truly global systems, there has been an incredible progress in the last 18 months." Employee resource platforms (ERP) are improving all the time but "there is a still a tension between the ERPs and the ‘best of breed’ solutions that provide managers with the sophistication they want".

So providers, and the tools offered by HR consultants have an important role to play, especially when it comes to the key problem areas of pay and benefits, talent management and e-learning. "A key choice for management is to what extent they want to rely on the functionalities provided by an ERP. If you just want a vanilla approach to compensation then your ERP can deliver. But international compensation is an area of great complexity, especially when it comes to total remuneration, because of all the national differences.

To be useful, your IT needs to be able to take all the exceptions and regulations into account," says Schaeffer. Jim Crawley, a principal with Towers Perrin, emphasises that to use the technology effectively it is essential to have standardised or harmonised HR processes in place (and working) beforehand. And although an ERP is an important factor driving the introduction of consistent systems, it will not do the harmonisation for employers. When it comes to pay and benefits it is not necessary – and is often not possible – for every process to be standardised. But, as operational efficiencies call, it is vital to have IT that dovetails with payroll.

Crawley also emphasises the importance of being able to integrate external pay information with employers’ own data. "The ability to make proper external comparisons is essential when you are operating in different countries. You need a bridge between the internal hierarchy and the external market."

The decisive factor is that HR and IT should be working together as a team. This requires more than just people talking to each other. "Your IT people have to be in a position to understand fully what HR needs, and for this to happen HR has to be able to define very specifically what it wants from the system," says Schaeffer. It is also of value for HR managers to get involved in users’ groups and forums. There is much more willingness to share information and experience these days, even between companies competing in the same markets, and such forums, whether run by providers or consultants, can provide real knowledge, both about the software that is available, and about what to avoid. Some companies are now moving away from analytical points-based evaluation systems towards looser job classifications or market-based systems, at least at professional and managerial levels.

These have the advantage that they can be adapted to company needs and can be applied across national boundaries. The danger is that in some countries they might also result in legal challenges, as with equal pay legislation in the UK. Edkins also points out that US and UK attitudes towards incentives and bonuses can be different: "A good illustration is the leverage on sales plans. While business in the UK on the whole shares American attitudes, most of the rest of Europe does not.

In some countries, there are regulations which effectively restrict the variable element. Elsewhere, a regular bonus may legally become part of normal pay after a short period. National regulations remain important and whatever system you use will need to allow for such differences."

Case Study: Cummins Inc

With a workforce of 28,000 Cummins Inc has 56 manufacturing locations in 17 countries, including China, India, Brazil and Japan as well as the US and the UK. The power engineering firm has a worldwide grading structure covering staff down to senior professional levels.

A new pay information system was introduced two years ago. Jose Pottinger, HR director for Europe, Middle East and Africa, says: "You can’t say you won’t need more than one [provider] resource, because the data for a given country could be thin. The main purpose is towards model pay outcomes.

"Our primary concerns were that the comparative data should be robust, and flexible of use. We don’t compare total reward, and realistically I don’t believe that’s possible given the huge variations there are in benefits, especially pensions, in different parts of the world," adds Pottinger.

However, the primary need is internal. "The key thing is to have some arrangement to draw up job specs for comparative purposes. Whether these specifications are detailed or broad brush depends on the firm, but they need to instill confidence." Cummins does not have a global payroll system, or provider, and does not feel that this an obstacle. "We don’t need to compare all jobs and review all data. We have benchmark jobs in different grades for which we make comparisons.

The only exception would be if we were concerned about a particular hotspot, when we would have to input the data. "The issue to beware of is inadequate comparative data, for example, the population in the different countries, as you would with a printed salary survey (always remembering that in some locations the number of comparators is bound to be limited). But you do need to be comfortable that you have your own data properly aligned," she adds.