Payment and Reward Systems: An Argument for Localizing HRM Practices Essay

As the world is becoming more interconnected, many companies find themselves having to make a decision regarding further expansion across the borders. According to statistics, 79% of private companies rely on foreign markets for at least a part of their revenue, while a little less than a half (43%) generate more than one-quarter of their revenue overseas (Nanney 2018). The World Trade Organization projects a 3.2% annual growth rate of global trade for the next few years (World Trade Organization 2018).

Payment and reward systems are a significant aspect of HRM because, as indicated by recent evidence, both intrinsic and extrinsic rewards are associated with work engagement, trust, and employee retention (Victor & Hoole 2017). At this stage, the problem arises whether to set similar payment and reward standards in all host countries or localize HRM practices. This essay argues that consideration for cultural differences will make HRM more robust.

One of the major challenges that multinational corporations (MNCs) face is the tension between two forces: the influence of the host country (push force) and the vision and the strategy propagated by the headquarters (pull force). Chiang, Lemański, and Birtch (2017) argue that at the moment, there is a general consensus regarding host countries’ influence on MNCs’ HRM. MNCs exercise control over the subsidiaries to the degree that allows for steering them in a direction that is consistent with MNCs’ objectives (Yahiaoui, 2015).

However, what often happens is the emergence of hybrid HRM in each host country that adopts the larger vision passed down by the headquarters but adapts it to its social, political, legal, and cultural realities (Thite, Wilkinson & Shah, 2012). In this case, a middle ground is found between the exportive and ethnocentric approaches, and HRM becomes rather polycentric (Thite et al., 2012).

Regardless of the selected approach, HRM transfer is a complex process that is shaped by a number of factors. Nakhle (2011) notes that on the whole, HRM varies from country to country based on business structure, the legislative contexts, HRM competence and decision-making, and the national cultures. When it comes to its transfer, in particular, Thite et al. (2012) classify all factors into external and internal. External factors include home vs. host country factors (economic strength, national culture, global image), host country management practices, environmental variables (legislative context, the openness of business systems, bureaucracy), and industry-specific factors (Thite et al., 2012).

Emerging economies experience a “double hurdle” due to the “liability of foreignness” and the liability of having a poor global image (Engardio 2008, p. 100). As for internal factors, Thite et al. (2012) point out corporate strategies, organizational culture and leadership, roles played by subsidiaries, headquarters’ diffusion capacity, ease of knowledge transfer, and the ability to involve expatriate managers.

First and foremost, the objective of payment and non-monetary rewards is to make employees feel recognized and cover their needs, from the most basic to high-order ones, such as self-actualization. Managers who lean toward standardizing compensation may be ignoring the fact that different cultures have different ideas about happiness and satisfaction in the workplace (Flamm & Kihl 2010).

Eskildsen, Kristensen, and Antvor (2010) utilize Hofstede’s (1993) cultural dimensions to understand the association between job satisfaction and national culture. For instance, the power distance dimension signifies the level of acceptance for unequal distribution of power by the less-powered of the organization (Hofstede 1993; Eskildsen et al., 2010). Another relevant dimension is uncertainty avoidance, which means a culture’s attitude toward uncertainty and unpredictability (Hofstede, 1993).

Cultures have different combinations of these dimensions, and it is hypothesized that their intersections may predict employees’ reactions to payment and compensation. Eskildsen et al. (2010) have found that cultures that score high on power distance and low on uncertainty avoidance, such as Asian (Japanese, Korean) cultures, lean toward seniority-based pay. In this way, people gain more confidence from the fact that their pay will be proportional to the years of experience. Conversely, in countries, such as the USA and Canada where power distances are shorter and uncertainty is more accepted, seniority-based pay may face reluctance among employees (Eskildsen et al., 2010). They would rather not equate the time a person has spent in a specific role or field with accomplishment.

Another way to look at the problem of localizing payment and reward practices involves drawing a line between collectivists and individualistic cultures. In collectivist cultures, the needs of the group are emphasized; its interests take precedent over the interests of an individual (Triandis, 2018). Conversely, individualistic cultures revolve around the self, personal interests, and independence, therefore, the interests of the group come second to the interests of an individual (Kyriacou, 2016). Andreassi, Lawter, Brockerhoff, and Rutigliano (2012) found that depending on where a country stands on the individualism-collectivism spectrum, its residents will expect different benefits from work. For instance, Asian cultures are largely collectivistic, which means that they give priority to group interests (Andreassi et al., 2012).

Therefore, HR managers would not miss if they introduced a system of variable payments based on group performance. However, as noted by Singh, Amish, and Singhi (2015), individualistic cultures, especially Anglo-Saxon ones, often prefer to have individual performance as a basis for employee appraisal and compensation. Therefore, if attention is not given to the cultural determinants of happiness, reward systems may as well fall flat and have little to no effect on employees’ satisfaction, engagement, and, ultimately, retention.

Some other issues that HR managers may encounter when establishing payment practices overseas are the degree of involvement from employees and the time factor in shaping compensation patterns. To address these questions from a cultural standpoint, Yeganeh and Su (2011) peruse Hofstede’s (2001) definition of culture as “the collective programming of the mind, which distinguishes the members of one group or category from another” (p. 131). However, they utilize dimensions developed by Kluckhohn and Strodtbeck (1961) when carrying out their research.

Yeganeh and Su (2011) found out that the time orientation of culture may serve as a predictor of the preferred compensation structure. The USA has a future time orientation, which is why Americans prefer the payment to be based on skills and individual performance and lean toward incentives. Japan, on the other hand, has a past orientation leading to job-based, hierarchical, short-term, and fixed compensation policies. This information may be perused when deciding on which share of the salary will become variable. The future orientation countries may appreciate a little uncertainty but an emphasis on a personal effort. Future-oriented employees will not mind calibrating their work capacity to yield a higher income. However, if employees are rather past-oriented, they want stability here and now. Having guaranteed remuneration gives them peace of mind as it is more in line with their values.

The question arises as to, given that compensation preferences vary this much, whether it makes sense to include employees in the decision-making process. Yeganeh and Su (2011) associate the involvement factor with Kluckhohn’s and Strodtbeck’s (1961) “good” and “evil” cultural orientations. The “good” orientation suggests that people are generally trustworthy. In the workplace, the said orientation manifests itself through the flattening of organizational structures in which employees of all levels can have a say. On the contrary, countries leaning toward the “evil” orientations do not see employees as reliable, therefore, preventing them from accessing the decision-making tools. It is readily imaginable how the headquarters could meet reluctance in host countries with an “evil” orientation when trying to promote organizational democracy.

Lastly, compensation policies should be in line with not only the wants but also the needs of employees. Kapur (2018) describes two content theories – Maslow’s pyramid of needs and Clayton Alderfer’s Existence-Relatedness-Growth theory in relation to job satisfaction. Based on these two theories, it is safe to suggest that humans have existence, psychological, and relatedness needs. In developed countries, existence needs are often covered, which makes compensation and benefits aim toward offering valuable intangibles (Pyrillis 2011). However, as explained by Pyrillis (2011), in developing countries, employees may appreciate benefits that cover their more basic needs. For example, a toaster may be a good gift in India but a misunderstood one in the United Kingdom(Pyrillis 2011). Therefore, HR managers have to understand the realities of host countries when deciding on compensation policies.

Conclusion

Global trends imply that even more business entities will consider expanding their operations and tapping into foreign markets. Going multinational is a serious step for any corporation as it requires thoughtful planning of human resources management (HRM) practices transfer. Payment and reward systems are subject to the impact of cultural factors, which is why HRM should be localized. Compensation is closely tied to job satisfaction; however, the understanding of job satisfaction varies from culture to culture. Besides, there are many cultural dimensions, such as power distance and uncertainty avoidance, that impact compensation preferences. Lastly, payment and benefits should cover the needs of different orders, which may also be contingent on the host country and its culture.

Reference List

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