How to develop a Global Reward Strategy
My definition of Reward Strategy is “an approach to reward based on a set of coherent principles in support of the organisation’s aims.” This works equally well if it is for one location or many.
But why introduce a global reward strategy? To the extent that the organisation has a brand and approach to its clients and stakeholders it will want to ensure some consistency in reward as with other HR programmes. There may be some element of control or at least monitoring from the centre to help ensure the reward spend is reasonable and reinforces the values.
When developing a reward strategy for one organisation in one country there will be some differences across the population of employees and in-country locations but the environmental factors are the same. There are no material differences in the legal or tax frameworks etc. However, as soon as you move to other countries it all changes. Differences will include:
- Centrally agreed pay levels and increases
- Market practice on reward mix
- Forms and frequency of payments
- Levels of state provision of benefits compared with employer
- Types of benefits and allowances
With all of these differences there is no point in trying to impose a standard approach across other countries just because that happens to be the way things are done in the home country. Consistency may appear to be a reasonable aim, but we need to ask what is the value in doing so. In developing a global reward strategy, I do not believe in being neat and consistent just for the sake of it. So this leads to what I see as the key question. I believe that the single most important question you must ask as you develop a global reward strategy is:
What should be the same and what may be different?
I have seen organisations who have not addressed this question and simply tried, unsuccessfully, to apply the home country approach to the other territories. Rather, be clear what are the red lines, those things which must be the same across the whole organisation and what may be different which will be developed by the region or country. Here are two examples. You may want every country head to have some form of long-term incentive. However, the form and value will differ from country to country to meet the local legislation and tax rules. Grade structures are normally common globally, but the countries pay structures will differ considerably.
But throughout the process of developing a global reward strategy keep asking this key question.
In the rest of this paper I summarise the issues of differences typically found in reward and associated programmes between countries as well as some approaches and questions. I do not recommend specific solutions or programmes as all organisations are different and I believe that it is better to aim for ‘best fit’ rather than ‘best practice’.
Values, fairness and culture
Where the organisation has a set of values it is normal to seek to apply them across the whole organisation. It will take some work to embed them in a global business as they will need to be interpreted to fit the local context. Nevertheless, the values should influence the reward strategy and help drive common reward principles.
Fairness and treating people in a fair non-discriminatory manner may well be reflected in values and policies. Fairness in reward has two dimensions. Firstly, the extent to which in-country reward is applied. For example, relating pay levels to the relevant pay market and ensuring that it conforms to local legislation. But there is also the global dimension. You need to be clear about what fairness means in the organisation. Potentially you will have some very large differences between the pay level of similar jobs in different countries. Is that fair? Well yes it certainly is if you are paying at a similar point against the local market.
I have seen situations where this simple point about different pay markets (actually within countries as well as) between countries has not been explained which have led to claims of unfair treatment. So, I suggest you establish your position and be very clear in communications.
Currencies are different and whilst the parent organisation may need to consolidate and report using a single currency, employees have to pay their costs in their local currency. Whilst it is normal practice to quote stock plans in the currency of the issuing country, this is not appropriate for other elements of reward. Care needs to be taken to ensure the competitive position is not damaged by using the parent country currency. Look at this sort of issue from the perspective of the recipient.
I have seen allowances and awards quoted by the parent organisation in their currency, which may appear fair to them, certainly neat. But they have to be converted by each country into their currency which can give inconsistent and uncompetitive local reward which no longer seem fair.
Culture gets a bit more complex as of course the culture of each country will have a material impact on how reward works. The culture may be such that it is not appropriate to try to implement an element of reward used elsewhere as it will just fail.
You need to be clear how these three issues in your organisation will impact on the reward strategy.
The approach to salary can vary considerably. For example, in some counties, it is common to use a 13th and even 14th month salary. This is often found in Latin America where it is mostly mandatory, as well as some European countries where it is market practice. Is this really salary or should it be considered a bonus? It is normally contractual (and sometimes mandatory) and not contingent so not a bonus in the way most Reward people would think. But it will be important that material differences are reflected in the pay data and that total cash is considered. Looked at from outside a 13th month salary may seem unfair, but it is just a single difference.
Salary may be paid weekly, fortnightly or monthly. But with local payrolls this should make no difference if it is common practice in the country.
Availability of salary market data varies considerably between countries. Generally, the larger and more developed countries will have more readily available data. The handful of global data providers run surveys across many territories and it is worth considering using one of them to provide market data if it fits many of your countries. This may be by each country having a relationship with the local office of the data provider but give greater consistency in job matching etc and you should get a global discount! Also, there are often local salary data providers that will be useful.
I worked with a global company who operated in around 20 countries. Many of them used the same data provider but each contract was with their local office with no coordination. This relationship was made global with discounts to all countries and a more coordinated approach to analysis.
The strategic point here is that you may wish to have a principle that salary decisions are based on good data where it is available.
It is important to clarify which salary markets are relevant comparators. There is likely to be an approval process for salary increase budgets. Should the rest be left to the countries to apply individual salary changes as they judge appropriate? Typically, the most senior people will have their reward packages approved at a regional or top company level.
Large organisations may have a global HRIS and associated salary review process and system. This paper is not about the technology but it is an important consideration, as there is little point in having a global reward strategy without the infrastructure to deliver it.
In some countries different forms of fixed allowances are common. They may be mandatory or market practice. There may be some difference in the way in which they are taxed compared with salary. They may be categorised as equivalent to salary or may be considered part of benefits. There may be some opportunities to simplify them. What approach will you take?
Bonus practice varies between countries. For example, in the US and UK bonuses are widely applied and can be a significant part of total cash. In France variable pay using profit share is very common. There may also be mandatory elements in some locations. As discussed above, 13th and 14thmonth salary may seem like a bonus, although are normally just an additional division of the annual salary.
I have seen bonuses calculated in the currency of the parent company and then converted. This can give some odd and inequitable results. You need to be clear on how any variable pay will work, for example will it always be based on the local salary.
I once worked with a group of HR people from a number of countries where we identified seven or eight common principles of how bonus plans should operate in the same way in each country. This ensured that there was a common denominator for all that adhered to the approach of the parent but left plenty of discretion for each country to develop the bonus plans that would best fit their needs.
Given the differences of approach between countries on salary, fixed allowances and bonus, you may want to emphasis Total Cash (salary plus variable pay and fixed allowances) as a common way to come to a single figure for comparison. Would this work across the countries as a principle?
Many businesses want to apply some form of executive share plan (Long Term Incentive, LTI) for their most senior people in a country. However, this may not be possible or practicable because of the following issues I have come across in different countries:
- Stock plans are rare and are not expected in the market
- There may be a tax liability on the grant of a share plan
- Whilst there may be legislation that allows share plans and may have some tax advantages the set up cost and associated administration may be very significant with only one or two participants
One organisation I know wanted to introduce an executive stock plan for all of their country heads across over 30 countries. They determined a similar value for each based on the home country currency. But they did not take into account the very significant differences in salary market rates and costs of living. The result of which was that the heads of some countries received stock worth 20 times their salary whilst others received value of three times theirs.
Another organisation operated a share plan in the UK using the same rules as the home country. But it did not comply with UK legislation and so created a tax liability some time before the recipient received any value. This really is page one of How Not to Design Global Share Plans.
The approach you take on LTIs will depend on the circumstances. But you may have to frame the approach to clarify the factors you will take into account such as local legislation, taxation and market practice. You may need to operate some form of cash plan rather than using stock, perhaps a phantom share plan.
Benefits and allowances
The simple rule I recommend is that benefits should be based on the country practice and market. This should help ensure that benefits that are valued and are tax efficient are used. Very large organisations may be able to use global benefit providers to deliver different benefits to different countries.
Benefits vary hugely globally. For example, the balance of provision for financial and protection benefits between the state and the employer may mean a very different mix from country to country.
In some countries company cars are still common and have low tax. They may be important where there is poor public transport. How will you manage this against your environmental strategy?
Some organisations believe that they should provide some protection benefits that are greater than the local market. They believe that they have a moral obligation to all of their employees. They may also consider their reputation as a global business.
Moog Inc operate in 27 countries with over 11,000 employees. In some countries the local market may have relatively low levels of benefits, e.g. China where paid annual leave is often set at the statutory minimum of five days. As a global employer Moog decided that they should provide at least some benefits as a minimum standard regardless of the local market. They therefore set minimum standards globally for the following benefits as a part of their benefit policy:
- Retirement income saving
- Paid vacation time
- Paid sickness absence
- Medical insurance
- Life assurance
There may be some immoveable rules that reflect the core beliefs and approach of the organisation. But usually if examined these can be used to frame reward strategy across all countries that will work fine and allow local differences.
Keep remembering the key question, ‘What should be the same and what may be different?’
Seek to get the balance right between the minimum level of consistency needed from the centre and the needs of the global organisation in their local markets. This may include recognising material differences between operations with varying numbers of employees and internal infrastructure.
It is worth looking at getting local support and ongoing advice from a third-party provider particularly where you have small operations with no internal HR support.
Set the strategy taking into consideration some of the issues I have raised and implement pragmatically.