LABOR COMPENSATION
LABOR COMPENSATION
Importance of Differences
Compensation policies and practices directly affect a firm's competitive viability because they influence the competitive ingredient of attracting, maintaining, and motivating personnel. Labor cost differences among countries sometimes lead to competitive advantages and motivate many firms to establish foreign production facilities. The amount of compensation people receive depends on the estimated contributions made to the business, supply and demand ("going wage") for particular skills in the area, cost of living, governmental legislation, and collective-bargaining ability. The methods of payment (salaries, wages, commissions, bonuses, and fringe benefits) depend on customs, feelings of security, taxes, and governmental requirements.
International firms usually pay slightly better than their local counter-
parts m tjje lower-wage countries, but far below the salary paid for similar
„
J°bs in the highest-wage countries. Some factors leading to higher wages by
international companies relate to their management philosophy and structure: For example, techniques that lead to greater efficiencies allow for higher employee compensation. The international company's management philosophy, particularly in contrast to local, family-run companies, is often to attract high-level workers by offering higher relative wages. Furthermore, when a firm first comes into a country, experienced workers may demand higher compensation because they have doubts about whether the new operation will succeed.
Fringe Benefits
Fringe benefits differ radically from one country to another. Direct-compensation figures therefore do not accurately reflect the amount a company must pay for a given job in a given country. The types of benefits that are either customary or have been required are also widely divergent. In Japan, for example, workers in large firms commonly receive such benefits as family allowances, housing loans and subsidies, lunches, children's education, and subsidized vacations, meaning that fringe benefits make up a much higher portion of total compensation than is the case in the United States. In the United Kingdom about 70 percent of automobiles are corporate-owned because of the personal tax advantages of using a company car rather than receiving income to buy a personal car. Other types of benefits such as end-of-the-year bonuses of up to three months' pay, housing, payments based on the number of children, long vacations, and profit sharing are common in many countries.
Job-Security Benefits Firing or laying off an employee may be either impossible or very expensive in many countries, resulting in unexpectedly higher costs for a company accustomed to the economies of manipulating its employment figures. In the United States, for instance, layoffs are not only permitted but have grown to be expected when demand falls seasonally or cyclically. In many countries a firm has no legal recourse except to fire workers—and then perhaps only if the firm is closing down its operations. In Germany, for example, a fired worker may get up to eighteen months' salary. To curtail operations there, a company must come to an agreement with its unions and the government on such issues as extended benefits and the retraining and relocation of workers.
Liability for Injuries Company, worker, or third-party neglect may lead to various types of worker or company injury. Physical injury may result from negligent driving by transport workers, faulty maintenance of equipment, and lack of safety equipment. The firm may be injured monetarily from careless handling of cash, embezzlement of funds, and breakage of product and equipment. There are widespread variances in the extent to which companies or workers are held responsible for injuries.46 The determination of responsibility should dictate how firms handle these contingencies. The amount and allocation of expenditures for insurance, training, and safety equipment thus vary substantially by country.
How to Compare Too often, compensation expenses are compared on a per-worker basis, which may bear little relationship to the total expense of the employment of these individuals. People's abilities and motivations vary widely; consequently, it is the output associated with cost that is important. Seemingly cheap labor actually may raise the total compensation expenditure because of the need for more supervision, added training expenses, and adjustments in the method of production.
Labor-Cost Dynamics
Differences among countries in amount and type of compensation are not static. Salaries and wages (as well as other expenditures) may rise more rapidly in one locale than another. Therefore, the relative competitiveness of operations in different countries may shift. Since it is the output associated with cost that is most important in comparing labor competitiveness, an example will illustrate shifting capabilities. Assume U.S. productivity per worker in manufacturing increased by 2.8 percent, whereas hourly compensation rates went up by 10.2 percent. The result was a unit labor cost increase of 7.2 percent (1.102 -f- 1.028). Meanwhile, productivity in the United Kingdom increased by 5.9 percent and hourly compensation in pounds sterling by 16.2 percent, amounting to a unit cost increase of 9.7 percent (1.162 1.059) when measured in pounds sterling. This meant that labor costs were rising more rapidly in the United Kingdom than in the United States in terms of local currencies. Because sterling fell substantially in relation to the dollar, however, the unit labor cost measured in dollars could actually have become more favorable in the United Kingdom as compared to the United States.47
Importance of Differences
Compensation policies and practices directly affect a firm's competitive viability because they influence the competitive ingredient of attracting, maintaining, and motivating personnel. Labor cost differences among countries sometimes lead to competitive advantages and motivate many firms to establish foreign production facilities. The amount of compensation people receive depends on the estimated contributions made to the business, supply and demand ("going wage") for particular skills in the area, cost of living, governmental legislation, and collective-bargaining ability. The methods of payment (salaries, wages, commissions, bonuses, and fringe benefits) depend on customs, feelings of security, taxes, and governmental requirements.
International firms usually pay slightly better than their local counter-
parts m tjje lower-wage countries, but far below the salary paid for similar
„
J°bs in the highest-wage countries. Some factors leading to higher wages by
international companies relate to their management philosophy and structure: For example, techniques that lead to greater efficiencies allow for higher employee compensation. The international company's management philosophy, particularly in contrast to local, family-run companies, is often to attract high-level workers by offering higher relative wages. Furthermore, when a firm first comes into a country, experienced workers may demand higher compensation because they have doubts about whether the new operation will succeed.
Fringe Benefits
Fringe benefits differ radically from one country to another. Direct-compensation figures therefore do not accurately reflect the amount a company must pay for a given job in a given country. The types of benefits that are either customary or have been required are also widely divergent. In Japan, for example, workers in large firms commonly receive such benefits as family allowances, housing loans and subsidies, lunches, children's education, and subsidized vacations, meaning that fringe benefits make up a much higher portion of total compensation than is the case in the United States. In the United Kingdom about 70 percent of automobiles are corporate-owned because of the personal tax advantages of using a company car rather than receiving income to buy a personal car. Other types of benefits such as end-of-the-year bonuses of up to three months' pay, housing, payments based on the number of children, long vacations, and profit sharing are common in many countries.
Job-Security Benefits Firing or laying off an employee may be either impossible or very expensive in many countries, resulting in unexpectedly higher costs for a company accustomed to the economies of manipulating its employment figures. In the United States, for instance, layoffs are not only permitted but have grown to be expected when demand falls seasonally or cyclically. In many countries a firm has no legal recourse except to fire workers—and then perhaps only if the firm is closing down its operations. In Germany, for example, a fired worker may get up to eighteen months' salary. To curtail operations there, a company must come to an agreement with its unions and the government on such issues as extended benefits and the retraining and relocation of workers.
Liability for Injuries Company, worker, or third-party neglect may lead to various types of worker or company injury. Physical injury may result from negligent driving by transport workers, faulty maintenance of equipment, and lack of safety equipment. The firm may be injured monetarily from careless handling of cash, embezzlement of funds, and breakage of product and equipment. There are widespread variances in the extent to which companies or workers are held responsible for injuries.46 The determination of responsibility should dictate how firms handle these contingencies. The amount and allocation of expenditures for insurance, training, and safety equipment thus vary substantially by country.
How to Compare Too often, compensation expenses are compared on a per-worker basis, which may bear little relationship to the total expense of the employment of these individuals. People's abilities and motivations vary widely; consequently, it is the output associated with cost that is important. Seemingly cheap labor actually may raise the total compensation expenditure because of the need for more supervision, added training expenses, and adjustments in the method of production.
Labor-Cost Dynamics
Differences among countries in amount and type of compensation are not static. Salaries and wages (as well as other expenditures) may rise more rapidly in one locale than another. Therefore, the relative competitiveness of operations in different countries may shift. Since it is the output associated with cost that is most important in comparing labor competitiveness, an example will illustrate shifting capabilities. Assume U.S. productivity per worker in manufacturing increased by 2.8 percent, whereas hourly compensation rates went up by 10.2 percent. The result was a unit labor cost increase of 7.2 percent (1.102 -f- 1.028). Meanwhile, productivity in the United Kingdom increased by 5.9 percent and hourly compensation in pounds sterling by 16.2 percent, amounting to a unit cost increase of 9.7 percent (1.162 1.059) when measured in pounds sterling. This meant that labor costs were rising more rapidly in the United Kingdom than in the United States in terms of local currencies. Because sterling fell substantially in relation to the dollar, however, the unit labor cost measured in dollars could actually have become more favorable in the United Kingdom as compared to the United States.47
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