The liberalization of the international financial system Essay

The age of globalization has ensured that businesses are focusing more and more on international trade as the primary means of enhancing their competitiveness. For example businesses en masse are moving their operations offshore to China and India to take advantage of the low cost of operation in those countries. The liberalization of the international financial system has also facilitated the growth of this trend for foreign direct investment. However this investment takes place in more than one form. It can be in the form of money or it can also be in the form of employees. When it comes to relocating employees, the human resource department of the company which is sending its employees abroad must take into account as to how they are going to determine the international compensation system. The scenario under analysis is of that an US national going to Japan to work there as an expatriate. In order to determine what the compensation of the US national should be, the parent company based in the US must take several issues into account. Of course there are some cost categories that will have go into the calculations such as allowances for goods and services, housing, income taxes and reserve. Under the heading of goods and services are the basic needs such as food, clothing, transportation, furniture, recreation etc. An important part of the calculations is also the cost category associated with housing in the host country. There are differences between the income taxes in the parent country and those in the host country and these differences the international pay system will have to take into account. Last but not the least, the parent company has to make significant contributions in the form of reserve such as pension funds, benefits schemes, education taxes, social security taxes etc. So these are the four major elements that will have to go into determining the pay for Robert Lords in Japan. The human resource department of Riordan Manufacturing does not have problems determining what the components of the international pay system will be as they are all specified in the company policy. Usually companies sending their employees abroad in the form of expatriates have to decide between the going rate approach and the balance sheet approach (http://www. rocw. raifoundation. org/management/bba/IHRM/lecture-notes/lecture-21. pdf). According to the going rate approach, the parent company conducts a survey in the host country and develops a grasp of the cost of living in the host country. The approach is basically to match the pay of the parent country national to the host country national. If Riordan Manufacturing were to follow the going rate approach, then it would probably have to hire an international consulting firm to conduct a survey in Japan that would determine what the salary of a Japanese national would be. This is a Japanese national working in the same position with similar duties and responsibilities to those addressed by Robert Lords. However Riordan Manufacturing does not follow the going rate approach. The going rate approach has several disadvantages. For example, managerial salaries in the US are the highest in the world. Therefore, according to the going rate approach, expatriates to China from the US would be given a much lower level of compensation. The nature of the assignment also varies from one country to another. The going rate approach would not take those differences into account but the employees are very sensitive to these differences. In such cases, the application of the going rate approach in structuring an international pay system can result in loss of employee morale. In fact, if the management of Riordan Manufacturing were to follow the going rate approach, it would have a hard time persuading any of its employees to take off to China because Chinese managerial salaries are much lower than they are in the US. The approach followed is the balance sheet approach. The result therefore is one of equity in the international pay system at Riordan. However this equity exists from the perspective of the employees of the company and not from the perspective of the host country nationals. As a result Robert Lords’ pay would not be equitable with the pay of a Japanese national. The balance sheet approach is the exact opposite of the going rate approach in that the company does not have to undertake surveys in the host country to determine what the pay of nationals in that country in similar positions is. Under this system the pay that Lords is going to receive in Japan is going to be exactly the one that he was receiving in the US. Of course there would be a few adjustments to take into account the differences of living in the host country. For example, if the cost of housing in the host country is higher than it is in the parent country, then Riordan Manufacturing would pay for the difference in the compensation to the parent country national. Under this approach therefore, the pay that Lords is going to receive will not be equitable with that of a Japanese national in a similar position. However when Lords comes back to the states, his salary will be readjusted back to its former level and the element of equity will be maintained. What determines equitable pay is a valid question in this respect. Maintaining purchasing power of the expatriate is one measure of maintaining equity. The purchasing power that the expatriate used to enjoy in the parent country remains the same when he moves to the host country. Therefore, the employee enjoys the same level of compensation regardless of the national compensation system of the country he moves to. Managerial salaries in Japan are lower than they are in the US. As a result, Japanese nationals working in a position with duties and responsibilities similar to those relevant to Lords’ position will have lower pay. Previously businesses used to perform within the confines of their own national boundaries. But now, because of globalization, they are operating across national borders. For example, Riordan Manufacturing performs production activities in China. However strategic flexibility still remains the most important concept in achieving a sustainable competitive advantage. In fact it has grown in importance inasmuch as different marketplaces internationally have different factors driving supply and demand. Therefore, the organizational culture of a multinational company must develop passion for strategic flexibility. This is the duty of the human resource department. The human resource department is responsible for motivating employees to behave in a way that will contribute to overall organizational effectiveness. The most effective means of doing that is to design a compensation system that values employee behavior that values strategic flexibility (http://digitalcommons. ilr. cornell. edu/cgi/viewcontent. cgi? article=1164&context=cahrswp). As mentioned before, strategic human resource management has the two options of the going rate approach and the balance sheet approach in designing an international pay system. However none of these approaches are appropriate for promoting strategic flexibility or, in other words, for promoting business practices tailored to the cultural and economic values of the country it is operating in. On the one hand, there is the going rate approach which in Lords’ case would simply calculate the pay of a Japanese national in a similar position and on the other hand there is the balance sheet approach which would simply calculate pay based on what Lords would earn in a similar position in his home country. Both follow national characteristics. The going rate approach follows the Japanese national system while the balance sheet approach follows the US national system. As a result neither of these approaches is geared towards promoting strategic flexibility. If the objective of the management is to develop the kind of compensation system that would emphasize certain characteristics of the national culture that are better aligned with the organizational strategic map, then it would have to develop different compensation systems for different countries. In this respect, the management of Riordan Manufacturing must study the social contract in the Japanese national system and design the international compensation system in a way that stimulates aspects of Japanese culture in employee behavior most suitable for organizational effectiveness. The age of globalization means that a multinational company like Riordan Manufacturing must take into account the different cultural attributes of the country it is operating in. This is because demand is greatly influenced by cultural expectations. Therefore the product that the multinational company is producing must conform to the cultural expectations of the country in which it is selling the product. If it is important for product development to conform to cultural expectations around the world, then it is vital for the compensation system to conform in the same manner. The compensation system lies at the core of the employee motivation system. Previously, compensation consisted of solely financial gains. However financial gain can be easily matched by other companies. In a globalized system of free trade where money can flow from one country to another without friction, merely financial gains are no longer sufficient to motivate the employees to stay with the company. As a result, modern compensation systems emphasize the development of relationship between the employer and the employees. If Riordan Manufacturing is going to move to Japan with its operations, then it must develop that relationship between the employer and the employee and developing that relationship means that the management must carefully study the social contract that governs the organizational culture in Japan. International compensation systems have multiplied in complexities precisely because the measures of organizational effectiveness must inevitably vary from one country to another. The measures of organizational effectiveness have changed. In today’s business world, availability of information is the most important competitive advantage that a company might have. An example of the value of information in enhancing organizational competitiveness is the process of internal benchmarking that has recently been gaining popular support. Internal benchmarking compares the different organizational procedures across operations around the world and prepares a lit of best practices which might be applicable organization wide. A critical aspect in successfully performing internal benchmarking is the tacit knowledge that lies hidden in employees. This is valuable intellectual capital that an organization would lose if the compensation system were to emphasize solely financial gains. In the interests of organizational effectiveness, the management of that organization must make sure that practices are undertaken so that there is minimal turnover in the company. As a result, particularly in developing an international pay system, the management in multinational companies has been introducing an element of choice in their compensation systems. The international pay systems have three levels of pay: one is core which includes cash and basic benefits. Then there are crafted choices such as training, flexible scheduling, base/bonus mix and stock options and finally there are the choices given employees such as assignments, tax deferrals, stock purchases etc. It is in the aspect of crafted choices that we must consider the role that the social contract plays in the Japanese national compensation system. Designing a compensation system in the US and in Japan must necessarily include differing challenges because the cultures in the US and in Japan are greatly different. The Japanese system values the collectivist approach more. Therefore the performance-based or the ability-based approach followed in the US emphasizing individual risk-taking is not very effective in Japan. Group based policies have greater value in Japan. Status is an important aspect of the social contract in Japan. Therefore if the element of strategic flexibility means motivating employees to think and act in the best interests of organizational effectiveness as applicable to the host country, then an American company must design the compensation system applicable to its operations in Japan in a way that maintains employees’ group status. This is an example of the role that the social contract in Japan plays in designing international pay systems. From the above it will be clear enough that designing an international pay system is no longer so simple as selecting between the going rate approach or the balance sheet approach. If Riordan Manufacturing is moving to Japan with its operations then blindly following the balance sheet approach is no longer a feasible approach. The management of the company must do the additional homework of studying the social contract in Japan. An important feature of the social contract in Japan is the lifetime employment contract in Japan where the management ensures job security for the employees. Any American company attempting to design a pay system that is in alignment with the strategic map in Japan must necessarily take the lifetime employment guarantee into consideration. The Japanese management system follows this system because it is an effective means of developing company loyalty. Both the employees and the management have a sense of ownership in the long term performance of the company. As a result, the Japanese compensation system emphasizes the long term rather than the short term in offering bonuses. Rewarding systems in Japan are tied to the long term maximization of market share. The Japanese system also values bonuses more because they are not taxed to the same extent that regular salary is. Trade unions have always had a strong effect on employee benefits. In the US, unionized workers enjoy a greater level of employee benefits than non-unionized workers. However the trade union system in Japan is different because unlike the US, trade unions are formed not industry-wide but on the basis of organizations that the workers are tied to (http://japanhop. com/prosper/070-japanese-labor-unions. html). For example, Toyota employees will form a corporate trade union that is specific to the company itself. In the US, the employees from the auto manufacturers would form a trade union that represents the entire industry. In that respect the social contract in Japan is different. Because trade unions in Japan are company specific, there is a greater level of cooperation between the employees represented by the trade union and the management of that organization. Trade union strikes are rare in Japan and when they do occur, the management and the union cooperate on finding a solution that minimizes negative consequences to the company. Therefore pay systems are not adversely affected by the presence of trade unions formed along corporate lines. There is a minimum wage regulation in Japan that must be taken into account in structuring the international pay system. Mostly importantly, the management of an organization and the trade union of that organization collaborate in designing the salary system of that organization. Such a salary system emphasizes the role of overtime pay which in Japan represents a large percentage of the annual pay. Allowances also are a strong feature of the Japanese national compensation system. These are some of the example of the differences between the American compensation system and the Japanese compensation system that have arisen as a result of the different social contract prevalent in Japan. BIBILIOGRAPHY Workforce (Jan, 2001). Three ways to design international pay: Headquarters, Home country, host country – human resources employment abroad strategies. Retrieved January 12, 2008 from http://findarticles. com/p/articles/mi_m0FXS/is_1_80/ai_69294699. Executive Resources Limited (2002). Compensation, employee benefit, and organizational consultancy. Retrieved January 12, 2008 from http://www. erlimited. com/expatriate_services. php Rethinking International Compensation. Retrieved January 12, 2008 from http://instruct1. cit. cornell. edu/courses/ilrhr769/97_24. pdf Winston J.Brill & Associates (2006). Fundamentals of International Compensation. 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