Asia Pacific
HR Connect Asia Pacific: Globalization of Compensation

By Sandeep Chaudhary, Regional Compensation Consulting Practice Leader, Aon Hewitt

In this article

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 epicentre 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 become 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 as 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 we developed to study 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 panel discussion 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 by technological 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 consumers.

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. In fact, 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 homegrown organizations have moved beyond traditional destinations to increasingly create outposts in emerging/developing countries in South Asia, the Middle East, Africa and Latin America.

Destinations of Outbound Expatriates 

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 translate into the 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 in 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-thought-out game plan. Hardly surprising then, that compensation has remained one of the most underdeveloped aspects 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.

The BWCS Approach 

Cisco Systems 

As mentioned earlier, on the basis of its years of experience in working with multinationals across the globe, Aon Hewitt has developed a simple, yet effective construct known as the BWCS approach. This entails studying the mix of Business, Workforce, Culture and Strategy and it provides the framework for organizations to start defining global compensation.

Business

Different markets have different business compulsions that consequently demand different talent priorities.

First and foremost, a rewards strategy needs to be relevant to the market in which an organization is operating.

For example, in a developed market, growth is hard to come by, and is essentially a factor of eating  into the competition's share; while in an emerging market, there is tremendous potential in penetrating the market and tapping new customers. In addition, what may constitute a traditional business in a developed market may be a sunrise industry in an emerging market, creating different priorities such as "war for talent", higher attrition rates, and the need to manage a better return on investment.

There is no magic bullet that can provide answers to the diverse challenges an organization faces in different markets. In fact, organizations have to be sensitive to variations and appropriately fine-tune their strategies around attracting and retaining talent, goal setting and identifying real performance.

Workforce

Talent availability, capability and differing demographic patterns dictate the motivators of a workforce in a market.

Compensation strategies need to align with the top talent needs across markets. This begins with the imperative of identifying the talent profile in the target market. In a high growth market like India, where the talent readiness is high and there is healthy competition to deploy talent across industries, an organization's priorities revolve around attracting and retaining talent.

In other high growth markets, such as Latin America and Africa, where talent readiness is relatively low, organizations focus on acquiring and readying that talent. Training the talent becomes imperative across these markets. Conversely, in flat growth economies, such as the UK, US and Western Europe, there is a growing need to re-skill talent to drive differentiation and growth. In these markets, organizations find that their priorities revolve around motivation and readiness of critical talent. The compensation programs under the overall umbrella of a global compensation philosophy, need to ensure that they are addressing the right talent need in every specific market.

Identification of Talent Profile in the Target Market 

The significance of distinguishing the nature of workforce becomes doubly essential, given the vast difference in the demographics of a developed vs. an emerging market. A younger workforce in countries like India vs. an ageing population in developed countries will possibly lead to differing employee preferences and hence, different rewards structures.

Culture

Looking beyond regional differences to some globally consistent shifts

Diverse markets mean diverse regional and cultural nuances. Traditionally, factors that drove pay increases differed widely across different cultures – from performance in North America, to role and scope of responsibility in Europe, to age and years of service in many parts of Asia.
While the jury is still out on whether globalization has made the world flat and rewards have become culture-neutral, we have noticed some globally significant shifts:

  • a greater focus on differentiating and rewarding performance
  • increased prevalence of variable pay programs
  • importance of market competitiveness.

Echoing the fact that there are some rapidly converging similarities across markets is Cisco. The organization feels that the talent pool itself is increasingly becoming global in its perspective. Employees above a certain level are, in fact, oblivious to where they are placed in the organization, but more conscious of what their responsibilities are. So, an employee may be based in Mumbai or Bengaluru, but still capable of pursuing a global career. In fact, with the workforce in developing economies becoming more dynamic and aspirations becoming more assertive, these markets are second to none. The organization also adopts a fundamental philosophy of paying for performance that remains consistent across regions. Mahindra & Mahindra, on the other hand, strives hard to understand the cultural nuances of new markets they enter and then align their pay philosophies accordingly.

Quote - Mahindra & Mahindra 

Strategy

The eternal debate to decentralize vs. consolidate

Globalization often forces organizations to confront the crucial issue of how best to balance the desire for global consistency and control with the desire for local effectiveness and efficiency. In resolving this issue, it is important to note that there is no single "correct" approach. Rather than focusing on the most appealing approach theoretically, well-managed global organizations need to identify the strategy that makes the most sense for their business and then rigorously review, redesign, measure and re-adjust to make sure that the strategy is being faithfully applied.

Defining the Rewards Strategy 

Quote - ICICI 

Leading organizations are learning to become more strategic and deliberate about what can and should be managed in global Centers of Excellence (CoE), while leaving to local markets, programs that need to be governed by local governance and regulations, cultural norms, and local considerations.

Defining the Rewards Strategy 

Finally, the rewards strategy is one that allows an organization to avoid "reinventing the wheel" in different markets and, at the same time, keeps itself open to local core competencies, thus facilitating an exchange of best practices and building a strong value proposition for the brand.

Conclusion

The rewards function is truly the conscience-keeper of the organization. No longer is it bound by the considerations of local managers, but rather embodies a well-thought-out product of global and regional perspectives.

The key deliverables of creating a global rewards framework should be reflected in a corporate architecture that is agile, rather than just lean; responsive, rather than just standardized; and internally and externally optimized, rather than centralized.

Starting with imbibing the BWCS approach, as the world becomes more interconnected, organizations can anticipate additional progress in an HR model that resonates with all.

Contact us

For more information about Aon Hewitt Compensation Solutions in Asia Pacific, please contact Sandeep Chaudhary, Compensation Consulting Practice Leader, Asia Pacific at totalrewards@aonhewitt.com.

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