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Making Global Pay Pay Off

For some corporations, globalizing pay is a smart way to standardize compensation, retain talent and add to the bottom line. But there are logistical and training hurdles to consider before implementing the plan.

Thursday, October 16, 2008
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It was in 2005 when General Motors began to globalize pay for non-executive employees around the world. The effort was an outgrowth of the broader "One Global Team" strategy the company inaugurated at the dawn of the new millennium in an effort to help leverage its geographical brands around the world. A global, functional HR organization was born and implemented over the next half-decade, extending to human resources and its seven practice components.

The drive to develop a common global-salary framework meant, among other things, getting managers, engineers, and marketing and sales professionals at Vauxhall in the United Kingdom, Opel in Germany, Saab in Sweden, Holden in Australia and, of course, GM's many U.S. brands all on the same page by adopting common global pay grades so that an auto-design engineer in the United States was on the same level as an auto-design engineer in China or France.

GM's top executives -- about 1 percent of the global workforce -- had already sat in the same salary grade saddle for many years.

"It was not uncommon to have a German director of engineering sitting in a U.S. office with expatriates from all over the world," says Deborah Voyt, GM's global-compensation consultant, who has worked for the company for more than 20 years. "But they couldn't tolerate having differences in pay philosophy, pay grades or merit timing."

Moreover, the company realized it was spending considerable time and money trying to explain to human resource managers around the world why a level 10 at Holden was the same as a level eight in the United States, or why salary grade nine in Mexico was the same as 10 at Holden. "That [was] a lot of cost going back and forth," Voyt adds. "So we needed a different approach."

GM has been ahead of many U.S. multinationals in globalizing its pay structure and reaping the benefits. Now, according to the most recent annual Global Compensation Strategy and Administration Survey, conducted between the fourth quarter of 2006 and the first quarter of 2007 by New York-based HR consultancy Mercer, many more corporations in a variety of sectors are starting to follow the auto giant's pay path.

The Mercer survey includes responses from 168 multinational companies based primarily in the United States and Europe. Spanning a variety of industries, these companies have an average of 20,000 employees and revenues between $1 billion and $5 billion.

"While the majority of global compensation programs are for executives and are defined at the corporate level, strategies for other employee groups are often determined regionally or locally," says Darrell Cira, principal with Mercer's human capital consulting business in Philadelphia and global leader of the study. "However, this trend is changing rapidly, especially among U.S. multinationals. As these employers continue to focus on facilitating talent mobility and reinforcing common organizational cultures and values over the next two years, they will need to globalize pay programs for their management and professionals."

Of the 39 percent of respondents in the Mercer study who did not have a global compensation strategy, 63 percent were considering establishing one. Broken down between U.S. and European companies, 54 percent of the former and 74 percent of the latter had global programs, with 28 percent of the former and 13 percent of the latter considering them.

The Mercer data didn't look at which of the three job categories -- management, professional and sales -- are globalizing fastest, although more companies currently have global strategies for management (53 percent) than for professionals (30 percent) and sales people (26 percent).

Nevertheless, while multinationals are clearly moving toward at least considering global pay strategies, that does not mean companies are rushing headlong into the global design and administration of strategies dictated by corporate headquarters. Asked to estimate the likelihood of globalizing infrastructure, pay delivery and talent management -- the three components of compensation design -- only 25 percent to 35 percent answered "yes" for each of the five or so elements with each of the three components.

Even where companies are globalizing pay design and delivery, for example, some decisions, such as pay levels and incentive plans, may be set locally. And there is often good reason for that.

Laura Sejen, Watson Wyatt's global head of strategic rewards consulting, based in New York, suggests a multinational has to also look at such things as prevailing country-specific statutory regulations and agreements with bargaining units or work councils. "Outside the United States, work councils tend to have fair amount of influence," she says. "There is a limit to how far we can go on the path to globalization." 

Looking at infrastructure design more closely, with regard to the market-pricing-standard component, that is determined globally in 27 percent of the cases for managers, but just 16 percent for professionals and sales. Thirty-six percent of respondents said it was set at the regional level for managers while 31 percent said it was set locally for both professionals and sales.

The numbers switched around, though, when the grade, band and level of the structure component were examined. In such cases, 61 percent said they set it globally for managers while 48 percent said they set it globally for professionals, which was about the same for sales.

One counter-intuitive finding in the survey was that infrastructure for managers and professionals was more likely to be locally designed while pay delivery and talent management was set at corporate headquarters. "In this case, many organizations appear to put the cart before the horse," the Mercer study states, "first implementing global incentive plans and then implementing global-level structures."

Besides leading to the advantage of creating a common global employment brand across different countries, globalizing pay has another benefit, according to Ravin Jesuthasan, the Chicago-based managing principal and leader of Towers Perrin's Rewards Practice.

A global pay philosophy provides organizations with an explicit framework for managing talent and ensuring that decisions about pay are made in a structured fashion.

Consider the many organizations that have entered the Chinese and Indian markets. Wage inflation in a number of industries in those countries is running in the double digits. Employees can often walk across the street after a year and double their salary.

For Jesuthasan, a global pay structure means a globally consistent approach to rewarding talent that is sensitive to local market conditions. This might involve paying a worker in India, the U.S. or Germany at the median of the local market in each country.

It ensures that local conditions are explicitly considered but not the primary drivers. He notes that 10 years ago, many Japanese and Asian companies, because of cultural differences, did not consider individual performance when establishing pay levels. However, the latest Towers Perrin compensation study shows a dramatic shift toward performance-based pay among many Asian companies over the last few years.

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Where a worker threatens to take advantage of a soaring local market, and go across the street for a higher paying job, the multinational with the global structure must stick with the global strategy but emphasize the total rewards of working for a global company. "Let's not just talk about the pay piece, let's talk about what the deal looks like for that employee over the course of a career, what the total value proposition is," Jesuthasan says. "That includes things such as career mobility, the opportunity to take on a position in another country and work/life balance."

Jesuthasan sees a purely local pay strategy as a potential risk factor, putting multinationals at the beck and call of each high-pressure location. "The mobility of work and talent has increased dramatically over the last few years," he says. "India and China are rapidly losing their cost advantages as economies like Thailand and the Philippines come on line."

Of course, there are risks inherent in globalizing pay, too. There was push-back at GM when Detroit announced the pay globalization initiative in 2005. HR managers around the world voiced distrust with centralization.

Kathleen Barclay, GM's vice president of global human resources, moved to enhance buy-in of the best global HR practices by bringing regional HR managers to Detroit for a kick-off meeting; they then returned to their countries and, via WebEx teleconferences, continued to meet over the next year. Those regional managers became proselytizers in their regions for the pay-globalization effort.

In terms of developing its globalized approach, the first issue GM had to face was the use of different job-evaluation tools outside the United States.

The Global Compensation Team brought in all the vendors of those tools and settled on Mercer's International Position Evaluations (IPE) tool. Voyt notes GM had been using market pricing inside the United States.; so the adoption of IPE for global use, including in the United States, was, in some sense, recognition of the outside-the-U.S. business units, some of which (in Europe) were already using IPE. 

GM signed one licensing agreement with Mercer, canceling all the others that local organizations had agreed to -- thereby saving a considerable amount of money. A single contract was signed by Detroit headquarters with a number of companies, all of whom agreed to the volume discounts based on the number of countries they worked in.

"This resulted in immediate cost savings of 20 percent for surveys and job-evaluation license agreements," notes Voyt.

Using IPE, GM created more than 200 benchmarks in 30 job categories. "We wanted to be sure we were looking at jobs consistently across the world," Voyt states.

The result was that GM established eight pay grades for all its workers below the executive level. That meant a supervisory engineer in Germany was at the same grade as a supervisory engineer in the United States or in China. That doesn't mean that all three get paid the same, though. Pay within the grades varies based on local conditions.

HR generalists at GM facilities around the world had to learn the new global compensation scheme, so there was an effort to build their skills through WebEx training. They were also encouraged to go to WorldatWork conferences in places such as Dubai and in Europe. 

Having overcome their initial resistance, local HR managers and employees at most GM locations around the world have gotten the globalization religion.

"But we worked very hard at it," says Voyt. "It is critical how you get the message out, and get buy-in from local HR professionals who might be doing compensation."

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