When Should Pay Go Global?

Global or local? That is a key question for organizations with operations in multiple countries. Should the organization manage employee compensation as a global whole or allow local compensation practices to predominate?

There is no one right answer to that question. Companies operating in multiple countries have many options for managing compensation:

• A truly global pay system that is as consistent as possible across all operations, regardless of the countries or regions involved.

• Homegrown pay systems that are completely customized to the location.

• Hybrid models that combine elements of both approaches.

Where to place compensation programs and systems on this continuum will depend heavily on the organization’s goals, strategy and overall approach to doing business globally. For example, some large multinational companies, like Procter & Gamble and McDonald’s, value consistency in operations and in customer experience.

“These companies leverage scale and scope, and that extends to hiring and paying people,” said Tom McMullen, rewards practice leader with Hay Group in Chicago. Therefore, such companies are likely to have global structures with pay grades that are common in all operations and incentive programs that are consistent across operations, while also adhering to local laws and regulations and market situations.

In this type of system, pay structures may be consistent across operations but the pay levels for each grade are likely to be pegged to the local market.

Other companies allow local operations leeway in developing their own pay systems, often in circumstances where local management has a large degree of autonomy in general. These systems may have developed organically as the company grew over time.

“This approach can be more responsive to local needs,” said Darrell Cira, a partner in the talent practice at Mercer in Philadelphia. Even if the company has grown large enough to consider having a larger centralized say in pay systems, “the resources required to change them may be disproportionate to the value generated,” said Cira. For instance, there may not be enough head count, revenue or investment in a location to warrant a change.

Making Global Changes

Of course, there are plenty of situations where shifting to a more global approach to compensation makes sense:

• If pay systems are misaligned across countries or geographies because managers in each location rely on a different approach to pay, the resulting misalignment could become too great, costly and generally detrimental to ignore.

• If pay levels are out of sync across operations, it could become difficult or needlessly expensive to move talent around the organization and to attract the necessary talent from outside the organization.

McMullen recalled a company with a patchwork of incentive plans in various global operations that had grown up over time, largely due to management preference at each site. However, the company was changing and “decided that it didn’t need this variation,” he said. “Instead, the company needed compensation to be more of a reinforcement mechanism for its business strategy.”

If a company decides to shift to a more global approach to compensation, it must manage the transition carefully. “Employers should consider the obstacles and barriers involved in any change, as well as the opportunities,” said Cira.

Given that so many countries have compensation-specific laws, regulations and customs, he suggested that employers find a common denominator in pay that will work across the enterprise.

For instance, a company could develop an overarching compensation philosophy but allow leeway for local management to make specific decisions about pay. This type of system could include consistency in pay mix (base salary and incentives), where to set pay relative to the market, job evaluation processes, pay bands and incentive eligibility. but allow flexibility when it comes to specific pay structures and ensuring that pay ranges are compatible with the local market.

Oversight will be key. For example, “if one country is paying directors at the vice president level, that is okay if it is based on local data,” said McMullen. “However, this type of situation would often have to be reviewed by corporate staff.” He suggested having guidelines for changes—such as allowing local managers to make automatic changes to compensation plans rather than wait for a corporate review if the change is something that at least 80 percent of local competitors for talent already offer.

Proceed with Caution

It is always important to remember that few elements of employment are more important to workers than compensation. “Pay is the most emotional part of the employer-employee relationship,” said McMullen. “It is the most direct way the organizations shows employees the perceived value of their contributions.” Employee perceptions of value are even more acute when changes to pay are accompanied by changes to the titling structure and perquisites.

Therefore, to gain the necessary support for global compensation changes, McMullen suggested asking executives in each country or geography for input on any new approach to pay.

“It is important to articulate the desired end state and tell them why you are doing this,” McMullen said. If changes are difficult for employees to accept, companies could consider grandfathering some employees at their current levels or phase in changes over a few years to minimize disruption and the risk of losing key talent.

Joanne Sammer is a New Jersey-based business and financial writer.

Related SHRM Online articles:

Avoid These Global Compensation and Benefits Plan Obstacles, SHRM Online Global HR, December 2015

How to Pay Employees Working Across International Borders, SHRM Online Global HR, April 2014