Total Rewards Quarterly

Globalization of Compensation

Globalization as a concept has been around for two to three decades now. However, what makes the discussion current is the marked shift in the epicenter of the globalization activity. While it was the US and European organizations that took the world by storm in the early 80s and 90s, today it’s the turn of Indian organizations and their Asian counterparts to spread their wings on the global stage. As the world economy becomes increasingly integrated and entwined, the environment has started to get more uncertain and complex. Organizations are
grappling with innumerable issues ranging from diverse economic environments to varied cultural nuances, pronounced by the need to find a balance between global consistency & control and locally effective practices.

In this scenario, global compensation has emerged to be one of the key challenges for organizations today. And while there is much to learn from global multinationals, there are a number of opportunities and challenges that
are unique to an emerging market’s landscape such as India. In an attempt to demystify global compensation, Aon Hewitt espouses the BWCS approach – a framework that studies how Business, Workforce, Culture and Strategy intertwine to deliver an effective global compensation philosophy. With each organization interpreting the BWCS construct differently, Aon Hewitt’s recent paneldiscussion at the Annual Rewards Conference on ‘Growing Beyond Our Shores: Opportunities, Challenges and Learnings’ had leading organizations, sharing wide ranging points of view, and equally effective global compensation strategies that have helped them create the right value for their multiple stakeholders.

The West Rewrites the Rules of Competitiveness

Globalization in the early 80s was driven bytechnological advances but more importantly, it was driven by large organizations in the west looking for new ways to grow. With a flat growth rate in their home markets, organizations needed to venture beyond their shores in search of new consumption.  Not surprisingly, these organizations found Asia, with its large population and heavy proportion of younger demographics, their fastest growing region. Take the case of the fast food giant McDonald's – when it released its financial results for 2010 in January, operating income was up 8% in Europe, 7% in the US and a whopping 21% in Asia Pacific, the Middle East and Africa (APMEA). McDonald's is not an isolated example. Most international brands find that their home markets account for less than 10% of global profits today.

The Steady Internationalization of Indian Organizations

India with its large middle-class – more than the size of the population of some countries – quickly found favor with a majority of multinationals. Today over 125 Fortune 500 companies have already established their R&D bases in India, and India accounted for nearly 10% of all Foreign Direct Investment (FDI) inflows to the developing world in 2009. But what started out with cost savings in mind has slowly undergone a perceptible change. Organizations are no longer here simply from a cost point of view but from a value based and intellectual arbitrage perspective, resulting in an organization like Cisco establishing India as its parallel headquarters outside the US. Similarly, on a mission to diversify revenues and strengthen their business models, several home-grown organizations have moved beyond traditional destinations to increasingly create outposts in emerging/developing countries in South Asia, the Middle East, Africa and Latin America.

The Impact of Globalization on HR and Rewards

Globalization has been a definite turning point in the management of Human Resources. The recentralization of business activities, transnational mergers and strategic alliances, an increasing proportion of employees residing in non-headquarter countries and the global sourcing of talent translates to a need to manage a diverse, more mobile workforce and strike a balance between global strategy and local needs & constraints.

On the ground, organizations adopt varied strategies – while an organization like Mahindra & Mahindra propagates the importance of following a strategy of localization and not falling prey to the temptation of replicating the success of one market to another, ICICI Bank strongly believes that if an organization has a global management ethos in place, it is imperative to make it consistent across countries.

Whichever way organizations perceive the impact of globalization on HR, they realize the great opportunity to drive both strategic growth and cost efficiency with a global model. In fact, an increasing number of business leaders have begun to view HR as the function that can truly help organizations transition from ‘international’ to ‘global’ players.

We have thus seen modifications in training, recruitment and career development programs – while organizations continue to implement these at a local level, there is a concerted effort to develop a more strategic and integrated approach globally.

Unfortunately, relatively few organizations have considered the role that total compensation – pay and benefits – ought to play in supporting the efforts of globalization. This stems from the fact that devising global

compensation programs is fraught with challenges such as diverse economic situations, differing demographic patterns and conflicting talent management priorities. For most organizations, trying to navigate through this complex landscape has been a case of trial and error rather than a well thoughtout game plan. Hardly surprising then that compensation has remained one of the most underdeveloped sections of a global business today.

Rewards for a Global Organization

Going back to the drawing board, whenever there has been a significant change in business objectives, the rewards strategy has needed to undergo some transformation. Globalization is that significant shift in business strategy that demands a change from the way things were done before to a new way of looking at it.

To maintain their competitiveness in the global market, organizations need rewards programs that will enable them to:

  • Effectively ensure that their people strategy and
  • costs in the new location are aligned to the
  • business objectives
  • Facilitate global mobility for the required talent
  • Ensure competitiveness of the employment
  • offer in the new location and offer scalability
  • Treat employees comparably, irrespective
  • of their home country
  • Provide flexibility in order to balance global and
  • local needs
  • Be compliant with local requirements
We determine bonus as a mix of the following variables – company performance, customer satisfaction and individual performance. Since everyone is driven by the overall company performance, employees across geographies and functions are bound by one shared collective destiny.
Subash Rao, Director – Human Resources, Cisco Systems India
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