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Cornell University ILR School

DigitalCommons@ILR
CAHRS Working Paper Series

Center for Advanced Human Resource Studies
(CAHRS)

5-2-1998

A SHRM Perspective on International
Compensation and Reward Systems
Matt Bloom
University of Notre Dame

George T
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Looking at
SHRM from the ground up suggests that, to continue informing our understanding of the HRMorganizational effectiveness (OE) relationship, research will need to adopt richer theory and measures of
specific HRM systems and extrapolate important contextual factors that influence relationships between OE
and specific HRM systems
...
& Milkovich, G
...
(1998)
...
Ithaca, NY: Cornell University, School of Industrial and Labor Relations, Center for
Advanced Human Resource Studies
...
ilr
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edu/cahrswp/124

This article is available at DigitalCommons@ILR: http://digitalcommons
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607 255-9358
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Milkovich
Working Paper 9 8 –1 1

Advancing the World of Work

A SHRM Perspective on International Compensation

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A SHRM PERSPECTIVE ON INTERNATIONAL
COMPENSATION AND REWARD SYSTEMS

Matt Bloom
Department of Management
College of Business Administration
University of Notre Dame
Notre Dame, Indiana 46556-0399
(219) 631-5104
FAX: 631-5255
mbloom@nd
...
Milkovich
Center for Advanced Human Resource Studies
ILR School/Cornell University
Ithaca, New York 14850-3901
(607) 255-4470
FAX: (607) 257-6639
gtm1@cornell
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This paper has not undergone formal review or approval of the faculty of the ILR School
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ABSTRACT

We re-examine the efficacy of the SHRM perspective from the vantage point of a
specific HRM system, international compensation and rewards, to gain new insights into
existing conceptual models
...


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An accepted view of strategic human resource management (SHRM) is that there is a
large positive relationship between organization effectiveness (OE) and HRM practices
(Becker and Gerhart, 1996; Becker and Huselid, in press; McMahan, Virick and Wright in the
companion volume)
...
Gerhart (in
the companion volume) summarizes these studies; “
...
” However, he urges caution
before accepting or acting on these findings, noting significant methods (single HR manager
as rater) and measurement (random and systematic) error concerns
...
Addressing these concerns requires re-examining and challenging existing
conceptual models
...

We are studying the changes that international compensation and reward systems are
undergoing, seeking to understand what factors are contributing to these changes, and which
changes support organizational effectiveness and which do not
...
We take the search for synergies
among HRM practices into compensation and reward systems
...
Over twenty years ago Mahoney (1979) urged that compensation systems cannot be
understood abstracted away from the context in which they occur
...
Yet, context is overlooked in much SHRM research
...
Like the other papers in this volume, we pursue the core issue in
SHRM research — understanding the HRM-OE relationship
...

Going Deeper into HRM Practices: Is the Devil in the Detail?
One approach to increasing the usefulness of SHRM is to improve our understanding
of why OE may be related to HRM
...
” We suggest that one way to make that box more transparent is to
better understand, theoretically and empirically, what matters in each HR system and under
what conditions it matters
...
The notion
of group-based pay may be included in SHRM research, but only in the broadest sense
...

Compensation research (based primarily on U
...
data) has clearly demonstrated that
whether or not compensation is performance-based is only one of several relevant dimensions
of compensation and reward systems
...
Factors found to influence the pay-organization performance relationship
include organizations’ past profitability (Abowd, 1990), ownership and governance (Werner
and Tosi, 1995), financial risk (Beatty and Zajac, 1994; Bloom and Milkovich, in press) and
international marginal tax rates (Bognanno and Abowd, 1992)
...

Recently published evidence illustrates this concern
...
The “zero correlation” findings are based
only on measures of base salary plus annual cash bonus (Murphy and Jensen, 1990)
...
S
...
Our point is not whether CEO pay is or is not related to performance;
it is that including relevant variables and measures is a necessary condition for making the
HRM-OE black box more transparent
...
While parsimony may be required, including
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theoretically and empirically relevant variables is a necessary condition for specifying strategic
models
...
Patterns are important in SHRM
...
The logic is that HRM systems can contribute to organizational
success when there is a coherent pattern of links between systems and organizational
strategy
...
g
...

Huselid (1995) calls these patterns “systems of HRM practices” and MacDuffie (1995) and
Cappelli and Singh (1992) refer to them as “HR bundles
...
Thus, it
is basic to SHRM that there must be some underlying pattern that creates coherence among
HRM systems
...
Organizations typically offer a variety of returns,
both financial and non-financial, with the expectation that they will somehow contribute to
organization effectiveness
...
These can include, as Figure 1illustrates, total remuneration (cash, allowances,
and long-term incentives) as well as employment security conditions, flexible work schedules,
opportunities to learn, and so on
...
Extending
SHRM logic, coherence (a pattern) among the total returns may be more likely to send
mutually supporting signals and have congruent motivational effects
...
Financial returns alone may not extract the unique, valueadding ideas and behaviors possessed by employees
...
However, enumerating all the potentially relevant
contextual factors without support from empirically grounded theory is dangerous; “strategic
perspectives” may simply be determined by whoever can weave the best descriptions or
anecdotes
...

Our thesis is that examining the changes underway in international compensation and
reward systems can aid us in assessing the efficacy of adopting a strategic perspective on
HRM
...


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STRATEGIC PERSPECTIVES ON INTERNATIONAL COMPENSATION
Much of the existing work on strategic perspectives in international compensation takes
the contingent model—that compensation systems must fit with (support) organizational goals
and objectives—as a given
...
Applying the
strategic-contingent framework in an international setting increases the importance and
complexity of these issues
...
The first is to examine developments in a single nation
or region that the researcher implicitly or explicitly compares to their own
...
The second is to contrast a number of countries in a single study
...
Each has advantages and disadvantages
...
Comparative analysis of a set of countries gains
perspective but at a cost of depth of knowledge about any variability within countries
...
A “national business systems” view is that multinationals remain rooted in
their country of origin and their “national systems” are exported, insofar as local institutions
permit and can absorb them
...
Are the alleged long term and egalitarian policies of
Japanese and German organizations exported to their foreign compensation and reward
practices or do local cultural factors prevail? The dominant belief in the literature is that both
nationality of ownership and local cultures are significant contextual factors and hence must be
included in an extended SHRM model
...
They reported that cultural distance was not related to the percent of
incentives in subsidiary manager pay, but the extent to which they identified with their nation
relative to the company was related to pay
...

While studies of national culture and national business models of compensation may
be an important first step in understanding international compensation and reward systems,
they face the same serious limitations as traditional comparative models of HRM (Brewster,
Tregaskis, Hegewisch, & Mayne, 1996; Locke, Kochan, & Piore, 1995): that national borders
largely define the important contextual features (e
...
, national economic, demographic, and
cultural conditions) that must be considered when developing HRM systems that fit (i
...
,
support organizational strategy); that the differences between nations are greater and more
salient to understanding international compensation than differences within nations, and that
something called "national culture" or national HR systems exist and are a significant
determinant of international HRM (e
...
, compensation) approaches
...
In general, the pay packages provided
in state-owned enterprises emphasize services, benefit allowances (housing, food, health care,
child care, etc
...
Morishima’s (1995; this
volume) study of Japanese companies' HR strategies reports differences in compensation
approaches associated with organization profitability, size, degree of unionization, capital-labor
ratio, and exposure to global competitive forces
...
Lee, Scarpello, and
Rockman (1995) found that factors such as labor market conditions, customer and supplier
relations, economic conditions and technology accounted for differences in compensation
strategies among Korean chaebols
...
Yeung and Wong (1990) assert that organizational goals, political forces, labor
market conditions, and demographic factors explain differences in pay and other HRM systems
in Japan and the People’s Republic of China
...
Although the
recent evidence does not suggest national boundaries (national pay systems) can be ignored
or overlooked, it does suggest that sufficient discretion for individual organizations exists within
these national systems to allow organizations to adopt compensation and reward systems to
align them with the organization’s business strategies
...


The Significance of National Cultures for Compensation and Reward Systems
The assumption that HRM systems must fit national cultures is based on the belief that
"most of a country's inhabitants share a national character
...
the collective
programming of the mind which distinguishes one category of people from another
...
” This belief leads to a search for distinct
national cultures whose influence is critical, if not the most important, for understanding
international compensation systems (Earley & Erez, 1997; Hofstede, 1993; Rousseau &
Tinsley, 1997)
...
S
...
Their strategic model relies on national
cultural attributes such as those proposed by Hofstede (1980; power distance, individualismcollectivism, uncertainty avoidance, and masculinity/femininity) or Trompenaars (1994;
individualism versus collectivism, achievement versus ascription, universalism versus
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particularism, neutral versus affective, specific versus diffuse)
...
(1997) explicate
this international HRM contingency model using national cultural attributes as the dominant
determinant
...
In nations identified
as individualistic (US, UK, Canada), compensation and rewards would support employability
and individual and performance-based pay
...
This literature on national culture models is implicitly prescriptive; it dictates that
compensation and reward policies must be developed to align with and reinforce national
cultural attributes
...
One reaction to such thinking is that it
engenders blatant stereotyping
...

It has long been recognized that compensation and reward systems, because of their
social as well as economic significance, exemplify and reinforce cultural norms (Mahoney,
1979; Tolles, 1964; Belcher, 1955; Schloss, 1898)
...
Indeed, 100 years ago, Schloss (1898) recognized that organizations (e
...
, mining
and textile companies) developed their own unique social norms, and that the compensation
systems of these companies were related to these norms
...
Geopolitical boundaries do not alone
determine cultural values and social norms
...
Anecdotal and empirical evidence
suggests that organizations and local cultural values within a nation are probably necessary
contextual variables to consider
...
The former
Czechoslovakia included Czechs and Slovaks; now each of these two republics includes
groups which are reported to exhibit Hungarian and Roman cultural characteristics
...
Listening to political
pundits during election time, one quickly realizes that the United States is comprised of many
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different subcultures which do not conform to geographic boundaries (for example, in the U
...

groups with strong cultures may include orthodox Jews, Amish & other Mennonites, jazz
musicians, professional athletes, and academics)
...
Even when viewed
at the national cultural level, revisions may already have occurred
...
S
...

Indeed, management research is beginning to present evidence that suggests national
cultures may not be the correct level of analysis
...
Bloom, Milkovich & Zupan (1997) studied values
toward individualism-collectivism and risk taking among employees from four companies, two
in the U
...
and two in Slovenia
...
The means of these intra-country distributions were slightly
different; Slovenian employees tended to be more risk-taking and individualistic than U
...

employees (We note that Hofstede’s [1980] work suggested that Yugoslavs, of which Slovenia
is a former republic, should be risk averse and collectivistic)
...
Thus, there is significant
overlap between the two distributions: One can find risk averse collectivists and risk taking
individualists in the U
...
, Slovenia, and most likely many other national cultures
...
Studies by Fahr, Early, and Lin (1997)
and Wagner (1995) show effects of cultural diversity (individualistic versus collectives, risk
aversion, etc
...
Consequently, it may
be erroneous to use national origin as a proxy for cultural attributes
...
, 1995; Pearce, et al
...
For example, U
...
workers want
two weeks vacation, not because of culture, but because that is the norm in the U
...
In
Germany, it is likely to be one month of vacation
...
S
...
Transfer a German to the U
...
and health care insurance, bonuses and options
become more important than vacation, which the worker couldn’t use anyway
...
g
...

Comparative description and analysis continues to dominate the international
compensation literature (see chapter 18, Milkovich & Newman, 1996; Freeman & Katz, 1995;
Katz, forthcoming)
...
Consequently, the research involves understanding differences, such as
comparing Sweden’s and Australia’s (until recently) national settlements to industry-wide
settlements in German trade union association agreements to Korean and Japanese
conglomerate and company union settlements
...
Under the comparative model, international compensation seems more a
strategic issue for national public policy than for understanding and informing the HRM-OE
relationship
...
Differences in
marginal tax rates are directly associated with the use of variable-based pay schemes
...
In the U
...
,
many benefit forms are not subject to income tax and are, therefore, a relatively tax effective
way to increase the value of employment for people
...
Except in rare cases, firms usually have alternatives about the strength and
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pervasiveness of their response to governmental actions
...
S
...
g
...
Gerhart & Milkovich (1990),
Groshen (1988), Levine (1991), and others have found the persistence of firm effects when
studying the structure of compensation systems
...
This evidence raises the possibility of equifinality in
compensation system design and suggests that the way organizational decision makers meet
public policies is a strategic choice
...
g
...
Schnieder’s (1987) attraction-selection-attrition (ASA) model
asserts that the human resource management policies and practices at the organizational level
create a distinctive and unique culture of people with homogeneous work values, norms, and
tastes
...
Those that do not fit the
culture because they possess different values and tastes will either not join or will soon leave
the organization
...
As such, the compensation system contributes to creating a culture of homogenous
values which is different and distinct from the culture and values of other competing firms
...
The same logic
applies to Toyota and Toshiba—the same national culture, different organizational cultures,
and different compensation and reward systems (Milkovich & Newman, 1996)
...
When considered from a strategic perspective, organizations could
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structure compensations systems that help create a culture, and thus a work force, that
possesses the values, knowledge, skills, and abilities that support its strategic goals and
objectives
...

ACHIEVING AND SUSTAINING COMPETITIVE ADVANTAGE THROUGH COMPENSATION
PORTFOLIOS
A strategic perspective to understanding global compensation and reward systems
focuses on organizational context
...
Rather, it is based on transforming
employment relationships, regardless of the country, in response to the changing product and
financial markets, manufacturing and distribution processes, technological innovations, the
revolution underway in information networks, and other relevant factors
...
That is, developing compensation and reward policies that are consistent with
organizational goals rather than those that match global competitors; policies that create a
unique, value-adding organizational culture rather than those that mesh with national cultural
norms; policies that meet public policies but first support organizational goals rather than those
that are simply most efficient in meeting legislated rules
...

This perspective flows from the dominant models in current strategic management
thought which assert that firms achieve competitive advantage by capitalizing on their unique,
inimitable (difficult to copy or substitute for), value-adding assets (Barney, 1991; Rumelt, 1984;
Wernerfelt, 1984)
...
When
prescribing optimal management practices, these models turn attention inside the organization
first, seeking to understand how to draw out and utilize unique, inimitable, value-adding
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resources
...
The
SHRM model flows from an acceptance that organizational strategy is useless unless it is
logically linked to activities at lower levels in the organization
...
Simply buying those assets on the open
market, if they can be purchased, does not create uniqueness nor does it allow firms to build
the coherence and interrelationships among various value-adding, firm specific assets that is
thought to be the source of competitive advantages (Black & Boal, 1994; Teece, et al
...
These models suggest that optimal human resource
management should focus on creating a shared mindset, extracting tacit knowledge,
encouraging innovation, creativity, and responsiveness, and stimulating the development of
important relationships among people rather than strictly focusing on motivating high
performance on a specified set of tasks (Cappelli & Singh, 1992; Simon, 1991, 1993)
...

We think about these issues in terms of their implications for compensation and reward
decisions
...
The notion of a ‘portfolio of returns’ directs
attention to all elements of the compensation and rewards system offered by an organization,
and how the effects of any one return (e
...
, incentive pay) might be influenced by the other
returns; we seek to understand if the pattern of returns matters
...
According to this view, both the
employer and employee make contributions and extract returns from the exchange
relationship
...
That is, what
employees are willing to contribute to the organization is determined in large part by what the
employer is willing to give to the employee
...
However, once this
relationship is underway, it becomes dynamic and recursive
...
These frameworks explicate how
organizational goals and context may require different types of employment relationships
...
(1995) suggest that organizational requirements for different types of
flexibility will require different types of employment relationships
...
Flexibility in work assignments will require longer-term, organizationbased employment relationships that build and maintain commitment and loyalty to the
organization
...
(1995), we take the position that the search for employment
relationships will inform our understanding of how to structure compensation and reward (and
other HRM) systems for competitive advantage
...

Compensation and reward systems are central elements of employment relationships and,
thus, are important determinants of employee behaviors (Gerhart & Milkovich, 1992b; Milgrom
& Roberts, 1992, Simon, 1991, 1993)
...
Compensation
and reward systems influence the type of employment relationships an organization obtains
and may determine, in part, whether those relationships support or fit the organization’s goals
...
He argues that
economic rewards are ineffective because they cannot create the organizational attachments
necessary to achieve the requisite common mindset that directs thinking, decision making, and
action choices
...
Tsui, et al
...

Economic-based, transactional exchanges are limited to the performance of clearly articulated,
proscribed responsibilities and focus only on highly monetizable exchanges
...
Tsui, et al
...
rewards [are] based entirely upon the employee’s performance of
specific tasks
...
” As such, they are conceptually antithetical to the
exchanges needed to extract tacit knowledge (Simon, 1991; 1993; Tsui, et al
...

Broader exchanges require broader portfolios, ones which are based on non-economic
and economic returns (Simon, 1993; Macneil, 1980; Tsui, et al
...
Non-economic returns
may bind individuals more strongly to the organization because they can meet individuals’
special needs which cannot be met as effectively with economic returns (e
...
, providing for
childcare via the non-economic return of flexible work schedules vs
...
The flexible schedule puts a parent, not a care giver,
at home)
...
These relational exchanges encompass a broad
range of actions, involve adaptation, create commitment to common goals, and foster the
pursuit of mutually beneficial long-term objectives (Macneil, 1974; 1980; Tsui, et al
...

Creating the common mindset, willingness to learn, adaptability, and innovation organizations
need to survive is not consistent with a transactional contract
...
Brief
and Aldag (1989) assert that affective reactions to work seem to be connected to noneconomic factors and that a focus solely on economic factors may not achieve the required
bonding
...
Kidwell & Bennett (1993) find that
compensation systems do indeed influence employee attachment and that this attachment
moderates their propensity to withhold effort
...
In fact, the best compensation systems transfer economic and noneconomic assets to the agent over a long period of time (i
...
, they consist primarily of longterm, ownership-based returns)
...

The development of trust requires that one party in a relationship extend an initial, although
risky, gesture of trust, hoping that the other party will reciprocate
...
Organizations have more resources to take risks and withstand defects
...

Organizations are, therefore, in a position to make compensation decisions that build trust
...
The risk for the
organization is that employees will not use their unique, inimitable, value-adding human capital
on the organization’s behalf
...

Properly structured and aligned compensation and rewards may help create and foster
trust-based relationships, ones which help extract unique, inimitable, value-adding human
resources and directs them toward the organization’s objectives
...
An organization may first analyze its culture and
the human resource requirements of its strategic goals and objectives, then select a portfolio
of compensation returns that creates employment relationships that support its goals and
objectives and are consistent with and fosters its culture
...
National culture is not a major issue when
members of the organization express values which are consistent with the organization’s
strategy
...
The
strategic portfolio model shifts thinking from differences between countries to differences
within countries
...
Compensation and reward systems are
designed to help create and motivate a workforce with the values and capabilities necessary to
achieve an organization’s unique goals and objectives rather than being designed to meet the
national values exhibited by a work force
...
Yet the logic is that
understanding differences and variability within as well as between nations is the critical point
...
So an adaptive, more flexible approach is required which creates employment
relationships that allow organizations to conform to local conditions when necessary while at
the same time creating the common mindset among employees required to direct their efforts
toward organizational goals and objectives
...
The strategic portfolio model is consistent with the
idea that effectively managing human resources requires inculcating a common mindset within
an organization that articulates what are the important strategic goals and priorities and
provides a guide to employees about how to achieve them (Simon, 1991; 1993)
...
The compensation system is viewed as
shaping a culture that influences employees rather than being shaped by a national culture
...

The strategic portfolio model suggests that the notion of compensation system “fit” may
be a messy construct
...
In fact, these systems seem to exist on the edge of chaos
...
These models
may inform our understanding of how organizations can achieve sustained competitive
advantage through strategic employment relationships (Brown & Eisenhardt, 1997)
...
It may also suggest that we change our search from one
where we are looking for the ideal fit between compensation systems and organizational
strategy and context (of which there is likely to be only one and, therefore, one that is very
hard to find), to a search for an effective fit (of which there are likely to be many; Kauffman,
1995)
...
Yet, there may not be a single compensation system (or portfolio of returns) that
creates flexible employment relationships
...
This
suggests that, rather than finding a single best compensation system that perfectly matches
organizational context, we might find multiple compensation systems that are "aligned" in the
same context
...
Companies may find it difficult to overcome the
inertia of the national culture and balance sheet approaches so these factors need to be
considered in studies of international and strategic compensation
...

Measuring the extent to which these links are identified and articulated is central to assessing
the degree of fit between organizational strategy and compensation and reward systems
...
Like many others, we have attempted to create a framework to help
constrain the inherent contingency in SHRM models by pointing to when certain portfolios of
compensation and rewards might be used and also be more effective
...
We believe that existing models of employment
relationships, strategy, and management may not be culturally-laden and may provide the
basis for a better understanding strategic human resource management systems
...
(1997)
...
Paper presented at
Enterprises in Transition conference, Split, Croatia
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Ferris (Ed
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