Benefit Packages in a Global Business Environment

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Today’s globally competitive business environment has caused many U.S. businesses to reduce the value of their employee benefit packages. In 250 words, Examine how an organization can maintain its costly benefit structure while remaining competitive against countries whose companies do not offer such benefits.

Be sure to cite at least two sources in addition to the course text.


Weathington, B. L. & Weathington, J. G. (2016). Compensation and benefits: Aligning rewards with strategy [Electronic version]. Retrieved from

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10 Compensation and Benefits from an International Perspective A collection of international flags. iStock/Thinkstock Learning Objectives After reading this chapter, you will be able to: Understand how globalization and international competition influence compensation and benefits practices. Differentiate among expatriates, host-country nationals, and third-country nationals in terms of pay practices. Identify the different types of international compensation relationships and the procedures used by companies in setting pay levels. Discuss base pay and benefits in relation to international compensation. Discuss the impact of organizational size in the context of international employment. Introduction Consider the following quotes: A global economy is characterized not only by the free movement of goods and services but, more important, by the free movement of ideas and of capital.— George Soros, business magnate, chairman of Soros Fund Management My guiding principle is that prosperity can be shared. We can create wealth together. The global economy is not a zero-sum game.—Julia Gillard, former prime minister of Australia Instead of saying that globalization is a fact, that it’s inevitable, we’ve also got to demonstrate that while the growing interdependence of the world economy is indeed a fact, it’s not uncontrollable.—Peter Mandelson, British Labour Party politician Now consider the following: Many cars assembled in the United States are made using parts produced in other countries, such as Japan, Germany, or Korea. Many of the American flags for sale in the United States were manufactured in China. McDonald’s® Corporation operates restaurants in over 100 different countries. It is possible to travel from Chicago to Hong Kong, a distance of 7,793 miles, in just 15.5 hours. A common theme among these quotes and facts is that the world is continuing to become more interconnected. It is no longer a time of working and living in the same area you were born with people who are the same as you in terms of appearance, values, personalities, and so on. Even if you yourself do not travel to another country or region, others you interact with have. While geography remains the same (although more quickly traversed), the gaps between countries and regions are getting smaller and smaller. Therefore, the world is becoming more accessible to both individuals and businesses. As aptly said in the Disney song, “It’s a small world after all.” The physical space available for living and working has increased due to the advent of technologies such as improved building and farming techniques as well as air conditioning and heating to counter climate extremes. Improved transportation and safety have opened up areas that were previously inaccessible or very difficult, even dangerous, to access. These improvements have also decreased the time needed to travel between locations. More importantly, improved communications have linked various locations, even remote ones, throughout the world in ways not seen before. This connectivity is causing companies to have to make adjustments in how they conduct themselves. Even companies that are not international in scope must deal with customers, suppliers, and competitors that are. What this means is that, for both good and ill, the modern workplace is truly international. As a result, globalization must be considered when designing compensation and benefit programs and policies. As an example, consider the modern cruise ship industry. Administering a cruise ship involves issues of international compensation, language differences, and the employment of individuals of many different nationalities. In this chapter we will begin with a discussion of globalization and the global economy, including cultural, economic, and language differences across countries. This foundational information will then set up our discussion of types of international compensation arrangements, different roles employees can play in international assignments, techniques for setting base pay, and how international assignments affect the provision of employee benefits. 10.1 The Global Economy As we mentioned in Chapter 8, globalization is the process of opening communication, business, and culture between nations. This integration and exchange of ideas and cultures has helped produce a substantial global economy, which is composed of the overall economic output of the world as a whole. The global economy deals with the interconnected nature of the modern economy such that economic and workplace issues are influenced by international, and not just local, issues. Currency conversion, tariffs, embargos, sanctions, politics, and cultural differences all play a role in influencing the global economy. The global economy takes into account all countries and is composed of national economies, companies, and individuals. While all economic activity contributes in some form to the global economy, there are certain countries, companies, and individuals that account for a substantial share. See Figure 10.1 for a list of the world’s largest economies as of 2013. Figure 10.1: World’s largest economies as of 2013 In some reports, the United States accounts for one-fifth of global gross domestic product (GDP), making it the world’s largest economy. A bar graph that shows the largest economies based on percentage of world GDP. The United States has the highest percentage at 19.31%, followed by China at 15.4%; the rest have much smaller percentages, near 5%. Source: Quandl The United States currently has the world’s largest economy. Some estimates indicate that the United States alone accounts for almost one-fifth of global gross domestic product (global GDP) , or the value of all goods and services produced in the world. This number, of course, has changed over time, with different countries and geographic regions contributing varying amounts to global economic activities. Figure 10.2 illustrates the changing relationship among the major economies from the early 1800s to modern day. Figure 10.2: Changing top economies over time The relationship among economies from the 1800s to today has seen dramatic change. A line graph that plots the changes in the economies of India; China; the United Kingdom, France, and Germany; Japan; and the United States. The United States experienced growth until 1950 and since then has been steadily declining. China has experienced a sharp decline and then rise. As can be seen in the figure, there have been drastic changes in which country or region had the top economy throughout the years. The most dramatic are the sharp decline and then rise of China and the ascent and drop of the United States (even though the United States is still the largest economy in the world). Correspondingly, the largest companies in the world are predominantly based in the countries with the largest economies. The United States and China are home to the greatest number of the world’s largest companies in addition to having the top two economies. Not surprisingly, the largest companies in terms of revenue also tend to have a large number of employees (see Table 10.1). Table 10.1: Largest companies in the world, as of fiscal year 2015 Ranking Name Industry Revenue ($ billions) Employees (in thousands) Headquarters 1 Walmart Stores Retail 486 2200 Bentonville, Arkansas 2 Sinopec Group Oil and gas 447 897 Beijing 3 Royal Dutch Shell Oil and gas 431 94 The Hague; Netherlands 4 China National Petroleum Oil and gas 429 1,637 Beijing 5 ExxonMobil Oil and gas 383 84 Irving, Texas 6 BP Oil and gas 359 85 London 7 State Grid Corporation of China Electric utility 339 922 Beijing 8 Volkswagen Group Automotive 269 593 Wolfsburg, Germany 9 Toyota Motor Automotive 248 344 Toyota, Japan 10 Glencore Xstrata Commodities 221 107 Baar, Switzerland Based on Fortune: Global 500—2015, The largest company in the world, Walmart, employs over 2 million workers. Three Chinese companies—Sinopec Group, China National Petroleum, and State Grid Corporation of China—are among the top ten largest employers of the world. Turning to individuals, as of 2015, there are almost 2,000 billionaires in the world. Many of these billionaires acquired or inherited their wealth through business affiliations, often as the founder. Walmart, for example, is responsible for the wealth of four of the top 12 richest people in the world (see Table 10.2). Table 10.2: Top 12 richest people in the world Source of wealth Net worth Nationality 1 Bill Gates Microsoft$79.2 B United States 2 Carlos Slim Helu telecom $77.1 B Mexico 3 Warren Buffet Berkshire Hathaway $72.7 B United States 4 Amancio Ortega Zara $64.5 B Spain 5 Larry Ellison Oracle $54.3 B United States 6 Charles Koch diversified $42.9 B United States 7 David Koch diversified $42.9 B United States 8 Christy Walton Walmart $41.7 B United States 9 Jim Walton Walmart $40.6 B United States 10 Liliane Bettencourt L’Oreal $40.1 B France 11 Alice Walton Walmart $39.4 B United States 12 S. Robson Walton Walmart $39.1 B United States Based on “Forbes Billionaires: Full List of the 500 Richest People in the World 2015,” March 2, 2015 by Chase Peterson-Wlthorn As with the largest companies, most of the world’s richest people are from the countries with the largest economies (only three of the top 12 are from outside the United States). Consider, however, that Carlos Slim Helu (#2 on the list) is from Mexico, a country that is not one of the wealthiest nations nor home to many of the most prosperous companies. Despite this, he has been able to obtain the wealth that he has. He achieved this because of the global economy and interdependence across national borders. He has been able to capitalize on globalization and benefited greatly from it—landing in the number-two spot on the list. What all of this information indicates is that the world is more economically related than ever before. As Mann (2011) details in his book 1493, this is a process that has been building since antiquity, but technological and societal advancements have accelerated integration. Globalization is the result of this integration, and today, events in one country or company around the world may, and often do, have an impact in other areas—even when the direct connection between events is not immediately obvious. In science, this can be explained utilizing chaos theory. Chaos theory proposes that nonlinear relationships exist such that seemingly random events are actually predictable when considering deterministic causes (Gleick, 1987). In other words, seemingly unconnected events often have similar causes. In terms of the global economy, the process by which these relationships spread is via increased trade in conjunction with a reduction in limits on the transportation of goods, services, and individuals across geographic and political borders. Critical Thinking What does it mean when we talk about a global economy? As a result, companies and individuals are able to sell their products and services in virtually any market across the world. Correspondingly, individuals, companies, and governments have access to a larger and more diverse variety of merchandise. All of this variety and interconnectedness results in advantages and disadvantages. Advantages of a Global Economy The positive benefits of a global economy revolve around connections and competition. With a global economy, goods and services can be transported more easily, which promotes an increase in both the quantity and quality of those goods and services, although this doesn’t necessarily occur at the same time. Local manufacturers are forced to compete with a broader range of competitors and must adapt their business strategies accordingly. This can result in higher quality or lower price but rarely both together. Some consumers will value quality while others will prioritize price. The key to capitalizing on consumer desires is to develop a clearly defined strategy that results in performing up to the expectations of customers. Competition means that if an organization fails to deliver, there is probably another company that will happily sell to any disappointed clients. This means companies must constantly stay “on their toes” and be in tune with the global environment and its ever-changing aspects. An advantage to a global economy is increased growth opportunities. A larger market of potential customers means that there are more potential outlets to sell a product or service. Building on the strategy considerations mentioned earlier in the book, this allows companies to develop a niche or area of recognized expertise in which to do business. Compensation practices can then be designed to promote employee behavior that supports this strategy. Global competition also leads to standardization in terms of production and pricing. For example, you can order from any McDonald’s- restaurant anywhere in the world and expect similarities in price and menu. While regional preferences, expectations, and economic considerations will modify specific offerings, an international company will provide a more similar experience than will a competitor that is only local. People crave predictability, so globalization makes it easier to achieve that through set standards for goods and services. This also facilitates trade and reduces the exploitation of workers and resources in less developed areas by holding larger and more advanced countries to a common standard of working arrangements. (Exploitation does—and in all likelihood will continue to—occur, but to a lesser than degree than before, with the hope that it will eventually be eliminated). Disadvantages of a Global Economy The disadvantages of a global economy deal with inequity. The more affluent members of society are typically better positioned to take advantage of opportunities presented via globalization. This can lead to growing income inequality and sharp divisions in standards of living and growth opportunities across socioeconomic classes. As an example, outsourcing involves moving labor from one country to another country where the cost of labor is cheaper. The economic benefits to companies are obvious. Compensation and Benefits in The Real World: Kerr Group Not all outsourcing is from the United States to other countries. The Kerr Group operates textile mills throughout Asia, yet it opened a cotton-processing plant in South Carolina. Labor costs in China are rising with the growth of its middle class at the same time that costs have decreased in parts of the United States. By having a global perspective and not being tied to a local geographic area, the company is able to locate its operations in the place that offers the greatest benefit. With global conditions continually changing, the discussion of outsourcing is not as simple as it used to be. For more information on the Kerr Group’s outsourcing to the United States, see http://www -cotton-was-king.html?ref=international&_r=1. Companies will announce when building a facility in a different country that one of the goals of the move is to provide economic and employment opportunities to local workers. This may be the case, and business investment can alleviate unemployment as well as represent an economic windfall for individuals and localities. Local workers, however, often do not receive this benefit directly because wages are kept low since companies are following a fundamental business goal of minimizing expenses while maximizing profit. When is this practice exploitation of workers and when is it simply good business sense? Communication, perception, and intentions all play a role in answering this question. Critical Thinking What are the advantages and disadvantages of a global economy? Globalization has the potential to improve the lives of workers and promote business success. Potential downsides, however, must be taken into account and a well-defined and -thought-out business strategy, including compensation and benefits practices, needs to be in place to maximize positive outcomes and minimize potential negative ones. Knowledge of the characteristics of and projected changes in the global workforce can help in developing this strategy. 10.2 A Global Workforce In addition to the economic, social, and technological changes related to globalization, it is also necessary to consider the increasing diversity inherent in the workplace (see House, Hanges, Javidan, Dorfman, & Gupta, 2004; O’Leary & Weathington, 2006) when designing a compensation and benefits plan. The workforce of today is quite different from that throughout much of history. Consider these key findings from a white paper by the Economist Intelligence Unit and sponsored by the Society for Human Resource Management (2015, pp. 5–6): The boost in global trade and the expansion of transnational companies have resulted in cross-cultural workforces. Global interdependencies increase exposure to risks. The global workforce is aging and becoming both gender- and ethnically diverse. Skilled workers from emerging countries will improve productivity while seeking higher wages across borders. Remote and temporary workers increase flexibility to meet labor needs but increase demands on management. Organizations struggle to balance societal culture and their corporate culture. Cultural differences affect management styles and employee development. Cultural diversity contributes to success. Corporate social responsibility helps manage risk while boosting the bottom line. A common theme, which we will reiterate again here, is that change has the potential to either benefit or harm both organizations and individuals. We must be aware of these changes and how they will impact business practices. This is especially true when dealing with cultural and geographic differences. As the saying goes, you must be careful about trying to compare apples to oranges. For example, as we discussed in Chapter 9, it is a common refrain that corporate CEOs are overpaid. Applied from a global standpoint, the CEOs of United States– based firms look to be particularly overcompensated. However, when you look beyond the base numbers, there is an identifiable reason for this difference that suggests that U.S. CEOs are not overpaid in comparison to other CEOs: Namely, these CEOs are more likely to have their compensation tied to corporate performance (Fernandes, Ferreira, Matos, & Murphy, 2013). This performance-based compensation is usually paid via stock options, which can lead to lucrative payoffs, as we’ve discussed in previous chapters. Therefore, this is not necessarily a case of one country arbitrarily paying its CEOs more; rather, it’s a case of different practices—in this case, pay practices—causing different results. Additionally, compensation practices and overall level of pay for international firms are becoming more similar to those of U.S.–based companies (Fernandes et al., 2013). That’s why it’s critical to have an understanding of the environment, including the business, strategy, goals, practices, and so on, in which a company operates. We must also be careful when accepting common perceptions and gut instinct as truth. Everyone has biases and preconceptions that influence perceptions and behavior. Having an awareness of how culture plays into those perceptions can result in better decision making. Cultural Differences Culturally different businesspeople in a conference. iStock/Thinkstock Hofstede has data on 76 countries and how they can be compared based on six different dimensions. One of the most commonly utilized frameworks for understanding cultural differences is the cultures and values identified by Hofstede (1983a, 2001). Currently providing d ...
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School: University of Virginia




Running Head: MANAGEMENT

Benefit Packages in a Global Business Environment


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It is indeed true that the inclusion of the benefits affiliated packages results to the
realization of increment in the overheads incurred by a multinational corporation. Relatively, the
existence of expatriates who are useful in aiding in the accomplishments of essential tasks calls
for the provision of subst...

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