MASTER THESIS TRANSNATIONAL COMPENSATION OF MNC’S IN THE NETHERLANDS & GERMANY

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MASTER THESIS

TRANSNATIONAL COMPENSATION OF MNC’S IN THE

NETHERLANDS & GERMANY

“Compensation is just like clothing, if it’s a ‘one-size-fits-all’, it usually does not look very nice”

by

SJOERD DIJKSTRA

University of Groningen Faculty Economics & Business Organization & Management Control International Business & Management

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2 Abstract

In this thesis the role of cultural, institutional and resource dependency factors on transnational compensation strategies in multinational companies is investigated by means of two exploratory cases in both the Netherlands and Germany. Findings demonstrate how national culture, institutional factors, and power relations influence the design of transnational compensation of managers, and whether multinationals standardize compensation elements or adjust them locally. Findings contribute to the theoretical knowledge of international compensation and to the issue of converging and diverging compensation systems. They also contribute to managerial knowledge of standardizing or locally adapting transnational compensation systems.

Key words: transnational compensation, Netherlands, Germany, managers, resource dependency, national culture, institutions, power relations, case study

Word count: 14,990 (plain text)

Acknowledgements

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1. Introduction

In times of globalization, companies expand cross-border and establish business and subsidiaries in foreign markets (Rehu, Lusk & Wolff, 2005). In their expansion, these multinational corporations (MNC’s) develop transnational strategies combining levels of high globalization and local responsiveness to support their practices (Engle et al., 2001). Companies install (transnational) strategic compensation systems to link compensation to business context, corporate strategy, employee values and, hence, performance (Kaufman, 2007). Compensation supports the organization’s strategic goals and has a large impact on employee values (Festing et al., 2007). Human resources are “the policies, practices, and systems that influence employees’ behaviors, attitudes, and performance” (Noe et al., 2006, p. 462). In an international setting, successfully aligning rewards to human resources is an important challenge (Chiang & Birtch, 2005).

Compensation, i.e. incentive and reward systems are contingent on national differences (e.g. Budhwar & Sparrow 2002; Newman & Nollen, 1996). Variations in cultural values may enhance or diminish the impact of incentive and reward systems on job attitudes and behaviors, depending on the perception of appropriateness by employees (Stone & Stone-Romero, 2008). Distinct institutional frameworks also appear to determine managerial practices. Something that ‘works’ in one country does not necessarily work in another, thus managers adapt their practices across national environments, focusing on local adaptation of transnational strategies (e.g. Jansen et al., 2009; Allen et al., 2004).

On the other hand, scholars suggest that a set of ‘global best practices’ exists, independent of national environments (e.g. Carr & Pudelko, 2006; Alvesson & Willmott, 1996). Globalization and industry consolidation increase size and scale of businesses, while talent is also globally converging. Moreover, regulatory environments are evolving around the globe leading towards greater regulation, and other institutional pressures (Van der Stede, 2003; DiMaggio & Powell, 1983) point towards more convergence and more discretion in designing practices on global level as national culture does not appear to be as strong as hypothesized (Gerhardt, 2008; Haddad et al., 1999). Since everyone is searching for Leibniz’ “best of the world”, international convergence is happening (Gunkel et al., 2008, p. 308).

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6 relations within and between subsidiaries imply that subsidiaries or (groups of) managers influence the design of compensation practices (Pfeffer & Salancik, 2003).

The purpose of this paper is to clarify choices regarding transnational compensation packages of MNC’s. Combining theories of new institutionalism, culturalism, and resource dependency comprehensively explains the design of transnational compensation and the strategic balance that must be maintained in light of global consistency and local adaptation (Dickmann et al., 2008; Tregaskis, 2003). Theory in this area is lacking and sparse as studies mostly tend to be conceptual in nature (Dickmann et al., 2008; Harzing, 2003). Theories also provides conflicting predictions as to whether international practices should reflect a situational fit or global best practices (Jansen et al., 2009; Long & Shields, 2005). Progress in academic research has been slow because of the inherent difficulties of cross-cultural research (Chiang & Birtch, 2005).

In this thesis, two multinationals with locations in the Netherlands and Germany are studied. Germany is chosen because it is large and leading European economy, and sometimes used as a role model (Smith & Meiskens, 1995). It reflects a social or coordinated market economy, and is characterized as institutionally rigid and formalized, making transfer of practices (from free-market economies) difficult (Hall & Soskice, 2001). Being member of the European Union, Germany experiences political and economic changes. The Netherlands on the other hand is free-market economy; being an open and small country the Netherlands is likely to be influenced by others and therefore it can be seen as symbolically representing Europe (Carlori & De Woot, 1994). Also it is likely that ‘best’ (American) practices are adopted whereas Germany has the figurative status “as antithesis to the Anglo-American approach” (Warner & Campbell, 1993, p. 92). Significant cultural and institutional differences exist between the two countries despite the fact that they are neighbors and both member of the EU. However, due to historic ties and geographic location, if convergence were to be happening, it is expected to occur between them.

The focus is at firm level, since ‘playing the game’ takes place in the organizational context, where employees and employers act, put forth effort, and exchange rewards (Gunkel et al., 2009). Compensation strategies for managers are analyzed because they have national as well as international responsibilities, and they are highly involved in cross-border activities and transfer of best practices across subsidiaries (Engle & Mendenhall, 2004). MNC’s holding transnational compensation systems usually have dual systems: managers and key personnel are subject of transnational compensation strategies, whereas local employees are facing local compensation systems (Evans & Lorange, 1989).

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7 further depth. Human capital investments are likely to highly influence performance and is therefore associated with appropriate pay, constituting a more useful determinant of transnational compensation than agency theory (Cerhart & Milkovich, 1990). It provides managers with information on the effects of national culture and local institutions on these systems, and it shows cases where and why either best ‘fits’ to the national and local settings are made or systems have been adjusted to globally consistent ‘best practices’ of the company, or even towards international standards. MNC’s could use this knowledge to design their systems accordingly. Theoretically, this research contributes to the academic fields of management control, cultural, institutional and resource dependency research. It also attributes to the debate on factors impacting the global convergence of compensation practices (Björkman et al., 2007), and it delivers insights into the use of compensation practices for managers. Theoretical knowledge in this area is scarce (e.g. Gomez-Meija et al., 2015; Engle & Mendenhall, 2004).

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2. Literature review

The relationship between national cultures, institutions, and power relations on the one hand and transnational compensation strategies on the other is studied. Two major categories of differences between countries, explaining the external environment most properly are discussed, i.e.cultural factors and institutional factors, external forces that either coerce or motivate specific types of behavior (Gooderham et al., 1999). Additionally, power relations are examined from a resource dependency theory point of view.

2.1. Transnational compensation strategies

2.1.1. Transnational compensation

Transnational systems are the final stage in the development of MNC’s, being simultaneously nationally responsive and globally effective (Dowling et al., 2008). The concept of transnational compensation strategy means that in cases of high internationalization, companies adjust their systems towards two different ends: standardization or local adaptation (Festing et al., 2007). A (transnational) strategic compensation system is the collection of decisions concerning compensation mixes and levels supporting the overall business strategy while increasing its overall effectiveness (Bloom et al., 2002; Gomez-Mejia & Welbourne, 1991).

These incentive and reward systems are important in MNC’s as they provide the crucial means by which organizations elicit and reinforce desired behaviors, triggering employees to contribute to organizational goals (Cummings & Worley, 2014). They have the function to attract, motivate, reward, and retain employees (Swagerman, 2007).

2.1.2. Globalization versus local adaption / Convergence & divergence

Adhering to global or local pressures means leaning towards either convergence (global consistency), or divergence (local adaptation). Along with convergence, the phenomenon of complete global convergence of compensation practices among companies worldwide exists (Vance & Paik, 2015).

Convergence

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9 The issue of international convergence of compensation systems plays at a broader level. The universalist paradigm suggests that there is one best way to do business, due to market forces, improving cost management, quality and productivity, and similar research and education in business schools (Pudelko & Harzing, 2007). Therefore, MNC’s carry globalization through the diffusion of best practices by spreading knowledge (Quintanilla &. Ferner, 2003). These ‘principles of management’ are invariant of national differences. The US model of compensation is often seen as a successful exemplar, which specifically includes the use of incentives (Smith & Meiksins, 1995). Additionally, ‘competitive isomorphism’, is driving companies toward consistency and standardization of management practices. Drawn from standard economic theory, all people are alike, so similar incentive practices could be expected to stimulate managers’ to exert effort (Baker et al., 1988). However, this universal approach is also regarded as a lingering ethnocentric attitude and inexperience with international business (Dowling et al., 2008).

Divergence

Contrary to the universalist paradigm, the contextualist paradigm acknowledges country-specific compensation practices due to differences in cultural and institutional environments (e.g. Festing et al., 2012; Grainger & Gatterjee, 2007), to avoid mismatches between them leading to dysfunctionalities in terms of attracting, rewarding, and dealing with employees (Bloom et al., 2002). Market and technological forces do not have similar (convergent) effects on compensation systems in each country (Brewster, 2004). The regulatory environment, but also demands from interest groups in the environment, professional norms, and public opinion play a role in determining appropriate compensation (Gooderham & Nordhaug, 2010; Meyer & Rowan, 1991). Even if the environment changes, it is still path-dependent and does not take the same route as other countries (Festing & Sahakiants, 2011). Therefore, copying a system does not work, and transnational compensation systems should account for local institutions and national cultural specific values when determining the strategic balance (Aycan, 2005).

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Figure 1: Model of convergence and divergence (adapted from Pudelko & Harzing, 2006)

Global and local components of transnational compensation strategies and the subsequent balance, are analyzed, providing a holistic understanding of variables influencing transnational compensation strategies.

2.2. National culture

2.2.1. National culture

National culture influences organizations by forming the ‘playing ground’. National culture distinguishes groups of people with common assumptions, beliefs, norms and values. Culture is set by the most important values. The difference in values, beliefs, assumptions, and norms drives many cultural factors (Kattman, 2014). Culture specifies how things are ‘done’ and evaluated in an environment, including organizational practices, procedures and policies, by influencing normative behavior, assigning roles and responsibilities, and prescribing principles and values (e.g. Triandis et al., 1994). Culture is seen as acting as a ‘filter’ through which individuals interpret and react to managerial activities, such as the design of incentives and rewards (Erez, 1994).

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11 2.2.2. Frameworks measuring national culture

Hofstede (1980, 2001) and others (Jimenez et al., 2009; House et al., 2004; Kayis et al., 2003) studied cross-cultural differences in relation to HRM, by breaking down social differences into various cultural factors.

Hofstede’s framework is the most used cultural typology in management literature (e.g. Allen et al., 2004; Chow et al., 1996; Merchant et al., 1995) and also most credited as setting criteria for measuring cultures and their differences (e.g. Choe & Langfield-Smith, 2004; Jimenez et al., 2009; Krumwiede et al., 2009). Hofstede conducted from 1967 to 1973 research at IBM, by interviewing over 117.000 employees. National culture was defined as “the collective programming of the mind which distinguishes members from one category of people to those of another” (Hofstede, 1994, p.1). This study resulted in the development of six dimensions, dealing with six issues present in every country, but solved differently: social disparity, relation between individual and groups, desired distribution of roles between men and women, ways to overcome uncertainty, focus on long- or short-term, and the extent to which people try to control their desires and impulses. An overview of the dimensions and its implications is given in Appendix 2.

An in-depth assessment (e.g. McSweeney, 2002; Williamson, 2002; Harrison & McKinnon, 1999) of the validity of the dimensions is beyond the scope of this research. It will be examined how aspects of national culture might contribute to differences in the design and usage of compensation systems. A broad view will be taken to include not only values but also other aspects. Values are analytical constructs and do not address “the concrete thoughts, feelings and emotive responses” (Alexander & Smith, 1993, p. 155).

2.2.3. Contingency theory

The contingency approach is a meta-theory stating that optimal functioning of incentives and rewards depends on particular elements of the environment the company is embedded in (Merchant & Van der Stede, 2007; Otley, 1980). It suggests that managerial practices must be aligned or ‘fit’ with environmental demands in order to promote the desired work attitudes and behaviors (Schuler & Jackson, 1987). The environment is determined by national culture, arising from a wide set of forces, i.e. nation’s history, geography, resources, climate, and other factors (Tosi & Greckhamer, 2004).

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Figure 2: Contingency theory (adapted from Stone & Stone-Romero, 2008)

Money is perceived and valued differently in distinct cultures (Bloch & Parry, 1989). Differences across cultures are a result of the “culturally constructed notions of production, consumption, circulation, and exchange” and can be best understood by knowing the nature of the “cultural matrix into which money is incorporated” (Bloch & Parry, 1989, p.1). Depending on society, money is differently obtained, used, and perceived. Each form of payment has its own symbolic value (Zelizer, 1989). Therefore, the combination of base salary, bonus, incentives, and long-term incentives is said to be contingent on national culture.

2.2.4. National culture in the Netherlands and Germany

With respect to the most credited and used cultural framework of Hofstede, the two countries are pretty similar except for the level of masculinity (14 vs 66) and the (later added) sixth dimension ‘indulgence’ (68 vs 40) (Figure 3). Masculine cultures, such as Germany, see leaders as masculine heroes. On the contrary, feminine cultures, such as the Netherlands, see leaders as modes. Therefore, German employees value earnings, recognition, advancement, and challenge, more whereas employees in the Netherlands attach importance to good working relationships with the managers (Gunkel et al., 2009). Also, indulgence differs slightly (68 vs 40), explaining that the Dutch focus more on leisure time and fun, and are more optimistic and positive than Germans (Hofstede, 2001).

Figure 3: Differences in cultural dimensions between Netherlands & Germany (Hofstede, 1999)

However, cultural factors are not sufficient in explaining the precise origin and nature of both global and local effects. Another dominant perspectives of analyzing country-specific and

0 20 40 60 80 100

Power Distance Individualism Masculinity Uncertainty Avoidance Long-term orientation Indulgence Netherlands Germany

National cultural values

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13 comparative HRM (compensation) practices is the (neo-)institutional perspective (DiMaggio & Powell, 1991).

2.3. Institutional factors

Organizations, because they correspond to institutionalized expectations, possess different systems due to their institutionally different environment (DiMaggio & Powell, 1983; Scott, 2001). The institutional view builds on various approaches such as the business systems approach: a set of interlocking structures and institutions in different spheres of economic and social life that combine to create a nationally distinct pattern of organizing economic activity (Whitley, 1992, 2000) But also the varieties of capitalism approach: based on ‘institutional complementarities’ where a particular type of coordination in one sphere of the economy leads to the development of complementary practices in other spheres (e.g. Hall & Soskice, 2001).

Institutional factors that could shape incentive and reward systems include any relevant, reasonably stable conditions or systems that can affect (e.g. coerce) people’s behaviors (Sparrow, 2004), such as systems of laws, regulations and institutions, education and training levels and norms, labor rights and relations, market structure (free or controlled), and business conditions (e.g. labor and capital mobility) (Jansen et al., 2009).

2.3.1. New Institutionalism / New Institutional Economics

The main point of the institutional perspective is that organizations adopt to their institutional environment, to acquire legitimacy and recognition by adopting practices that are regarded as appropriate (DiMaggio & Powell, 1991, Scott, 2001). Three main types of ‘isomorphisms’ exist, mimetic (copying others), coercive (compelled to adopt) and normative (claimed to be superior) isomorphism. Through the phenomenon of ‘institutionalization’, these processes are repeated and given common meaning (Scott, 2001). In case of a subsidiary in a foreign country, two contradictory pressures exist (Björkman et al., 2007). On the one hand, the need for local adaptation results from pressures to adapt local practices and become isomorphic with the institutional environment, through legislative pressures and also through characteristics of the labor market (Kostova & Roth, 1999; Greenwood & Hinings, 1996). On the other hand, a current towards international convergence exists, in order to be able to use organizational capabilities worldwide (Tempel et al., 2006; Rosenzweig & Singh, 1991). Organizations ‘mimic’ others who supposedly have superior systems, as this format is ‘the norm’ in the industry. Because employees talk with each other, and might find features of other compensation systems attractive, a tendency towards homogenization of reward and incentive systems could exist.

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14 (Williamson, 1996). The formal framework focuses on the legal corpus of rules and laws, whereas the informal framework is formed by social, cultural, and religious values (North, 1990). Distinct institutional frameworks imply different compensation settings. To achieve an optimal benefit/cost trade-off and satisfy their own goals employees could prefer a larger portion of their rewards in benefits instead of salary due to tax reasons (Gunkel et al., 2009). For the organization it could also be beneficial to reward the employees with benefits, as it is more subject to negotiation (Backes-Gellner et al., 2001).

2.3.2. Institutional factors in Germany and the Netherlands

Following the institutional perspective, the business system approach, state regulations, industrial relation systems, education systems, and the financial system influence employees’ behavior in organizations (Dickmann, 2003). Germany is strongly typed as a Coordinated Market Economy (CME), possessing typical CME institutions that shape the business system: long-termism and a long-term focus partly due to ownership structures of companies, management-employee cooperation characterized by high-levels of labor regulation and legislation, and development orientation which means a high focus on development of employees (Festing et al., 2012; Dickmann, 2003). The German business system is said to be too rigid, hampering innovative compensation practices to arise (Lawrence, 1993). Codetermination and presence of work councils provide job security and employee retention, and make job switch less likely. Financial participation, money or assets linked to financial performance of the company, is unlikely due to law regulations, formalized workplace, and attitude of the government (Festing et al., 2012).

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15 Summarizing, seen from the contingency theory, new institutionalism, and new institutional economics, national and institutional country-specific factors determine the appropriateness, and hence the design of transnational compensation practices. Appendix 3 describes a visual model of the home- and host-country relationship: subsidiaries are influenced by both home-country as well as the host-country circumstances and influences. A particular note should be made on the relation between national culture and institutions. Most certainly, national culture has influenced institutions, as they are designed by nationals .

2.4. Power relations

The actual effect of country-specific factors is strongly determined by internal factors, resource dependencies, and is not a result of rational calculation by managers but a continuous struggle between global and local pressures which repetitively shifts over time (Edwards & Kuruvilla, 2005). MNC’s are characterized as a ‘transnational social space’ which is inherently disordered (Morgan, et al., 2003).

MNC’s aim to benefit from global diffusion of innovations and practices, coordinating and leveraging capabilities to exploit national differences, and to reach economies of scope and of scale (Bartlett & Ghoshal, 2000; Doz & Prahalad, 1991). As such, subsidiaries can be seen as competence centers using their critical resources in the form of a network structure. Therefore, resources are able to develop and be dispersed in a company, creating distinct power relations (Pfeffer & Salancik, 2003; Goodrick & Salancik, 1996). An organization is unable to generate all resources necessary to maintain, and is therefore dependent on other actors. Crucial resources potentially determine strategic organizational behavior: when a few actors possess the (most critical) resources, the company becomes inherently dependent on these actors in obtaining these resources. Subsequently, the company aims to compensate them: more dependency means more power and better compensation (Taylor, 1996). Dependence is subject to three key factors: the criticality of the resource to the organization for operations and survival, the extent to which the group or the individual has discretion and control over the resource, and the extent to which alternatives or substitutes exist. Four attributes are said to affect employee control over resources: the degree of uncertainty surrounding the achievement of the task, the importance of task achievement (centrality), the ease with which work can be observed and measured, and the level of skill specialization (Tremblay et al., 2003; Thompson, 1967).

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16 autonomy, and resource dependency (Tsai et al., 2006). MNC’s pursuing transnational strategies are highly involved in this prevailing issue: if a subsidiary acts as a strategic competence center, and has an important market position for the company then it controls essential resources (Roth & O’Donnell, 1996). These resources are expected not to be equally distributed over subsidiaries in a transnational network: this explains why certain managers would have more influence in decision-making and hence the balance of transnational pay. More control of resources might indicate more local adaptation and conversely (Figure 4). However, contradictory reasoning is also possible: if the parent company relies strongly on the subsidiary, it could be trying to obtain more control over the subsidiary to ensure that it will keep control over the resources, lowering dependence by integrating the subsidiary in the overall structure and establishing strict guidelines (Ghoshal & Nohria, 1997; Taylor, 1996). The degree of dependence and hence control is influenced by the strategic role of the subsidiary, and the amount and direction of resources that flow from a subsidiary to the parent company (Gupta & Govindarajan, 1991).

Figure 4: Control of critical resources and power distribution

2.5. Compensation systems

2.5.1. Compensation: incentives and rewards

Compensation represents both intrinsic rewards, the psychological mind-sets of employees’, and extrinsic rewards employees receive for performing their jobs (Martocchi, 2004). Extrinsic compensation exists of both monetary and non-monetary rewards, usually referred to as ‘employee benefits’. Transnational compensation decisions must be made as to what kind of elements to include (mix) in compensation and to what level these elements need to be set (level), in comparison to a similar position somewhere. The components and bases examined are considered to be most relevant for managerial compensation in a transnational company, and are either standardized across the company or locally adapted.

The main compensational choice concerns fixed pay versus variable pay. The reason to install variable pay is to be able to reward performance of individual managers.

GLOBAL STANDARDIZATION

LOCAL ADAPTATION Control of critical

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17 - Base salary. Base salary is recurring, fixed pay for performing the job. It is set timely or based on the work that is performed, and determined by job content and market pay rates. Once base pay rates are set, monetary compensation periodically increases to reward job performance or the obtainment of job-relevant skills or knowledge, called merit pay (Stone & Stone-Romero, 2008).

- Bonuses (variable). Pay that fluctuates with the attainment of certain objectives or goals. Based on specific formula, individual or group, depending on nature of output and type of work. Bonuses sometimes have a threshold (performance) which has to be achieved for a ‘minimum bonus’ to be paid and a cap, which is the maximum of the bonus. In between lies the ‘incentive zone’, representing the range of performance realizations where incremental performance improvement is linked to incremental bonus improvement (Murphy, 1999).

- Long-term incentives. Short-term rewards are given frequent, closely linked to direct wanted behaviors whereas long-term compensation is based on a long-term vision including long-term elements (Noe et al., 2006). Countries characterized with high level of individualism, low uncertainty avoidance and power distance usually prefer long-term incentive plans.

- Benefits. Benefits are non-monetary rewards, including elements as protection programs (e.g. health insurance), paid time-off (e.g. vacation), and services (e.g. day care assistance).

Another closely related decision forms pay based on group- or individual performance. Group-based performance generally works better when goals are related to team performance, or demand teamwork (Gomez-Meija et al., 2015), and in countries scoring high on collectivism. On the contrary, if individual performance can be exactly measured, and people prefer rewards linked to their individual contributions for reasons as self-orientation and independence, then individual performance pay is desired. Closely related is the decision of rewarding on corporate or divisional performance. Rewarding managers solely on corporate performance implicates that some managers are over- and under rewarded (Gomez-Meija & Welbourne, 1988).

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18 2.5.2. Evidence of compensation practices

In favor of local adaptation, scholars have found a positive relationship between national culture and design of incentive and rewards systems (e.g. Jansen et al., 2009; Schuler & Jackson, 2007; Pennings, 1993). For example, people high on the dimension ‘uncertainty avoidance’ prefer base salary, as well as seniority-based salary. Risk-taking managers are probably more eager to accept (larger) incentives and high-income variability, which is involved in performance-based pay (Schuler & Rogovsky, 1998).

Evidence for international convergence also exists. Incentive compensation practices of US, Japanese, and European subsidiaries were found not to vary (Björkman et al., 2007). Budgetary control and incentive compensation systems among multinationals was found to differ more across firms than within firms (Van der Stede, 2003) and diversity of management practices in Europe has converged in the last years mainly to the ‘American model’, which is seen as containing best practices (Pudelko & Harzing, 2007).

Netherlands. In general, most Dutch firms do not use bonuses (based on performance)

(Jansen et al., 2009). Overall, growth in salary and compensation is not tied to market performance or return on investment, or another measure of company performance. Bonuses were found to have non-existent or even negative effects on firm performance and to weaken pay satisfaction, as it stimulated competition instead of trust and cooperation (Duffhues et al., 2008; Otten et al., 2008). Other types of non-variable compensation is used to attract, retain and motivate managers, in order to establish a long-term relationship. Managers also seemed to influence their own compensation: in cases of high managerial autonomy, higher pay is awarded even when performance of the firm is not enhanced (Duffhues & Kabir, 2008).

Research also shows that pay inequality across high-end and low-end jobs is increasing due to technological change, globalization, and weakened institutional differences (Kremer et al., 2014).

Germany. German employees value security, fringe benefits, and ‘getting ahead’ as very

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19 found to be more used than in the US, as well as certain benefits such as childcare, pension schemes, and private health. Overall, performance-based compensation practices were used in German companies, indicating that employees are rewarded based on their own productivity and success. Generally, compensation is focused on long-term career planning, job security, individual rewards, profit sharing, but not as much as compared to the US (Festing et al., 2012).

In terms of international convergence, the American model is seen as exemplary for the rest of the world. American compensation is usually characterized by low protection, significant responsibilities and autonomy for the firm regarding pay and contracts, individual orientation, and low union influence (Brewster, 2004).

An emerging and relatively new European stream is ‘crossvergence’: every country shapes path dependently its own typical national business system within the supranational institutional framework of the EU (Brewster, 2004; Gooderham et al., 1999). Due to significant institutional differences companies are simply not able to converge to the American model, since they lack managerial autonomy (Gooderham & Nordhaug, 2010). Evidence of convergence of practices on European level is mixed, but whereas some countries did appear to follow the same trends, countries are generally speaking not becoming alike (Mayrhofer et al., 2011).

2.6. Research gap, questions & framework

Conflicting theory and evidence make it difficult to predict whether MNC’s rely more on global consistency or local adaptation. Differences in national culture do exist and tend to lead to differences in use of incentives. However sometimes these are claimed to be not as strong as industry, management style, or corporate culture (Solli & Demediuk, 2007; Gerhart & Fang, 2005). MNC’s continuously face a trade-off between global (HQ pressures as well as the increasing globalization) and local pressures that need to be balanced in designing pay systems (Vance & Paik, 2015). This study investigates the influence of national culture, institutions, and power relations in transnational compensation strategies of MNC’s:

What is the influence of national culture, institutions, and power relations on transnational compensation systems in MNC’s in Netherlands and Germany?

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Figure 5: Conceptual model of transnational compensation strategies

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3. Methodology

This chapter describes the research method and the choices that have been made during the research.

3.1. Research method

This is an empirical research, as it examines an object in social reality (De Leeuw, 1996). It is exploratory grounded although it has explanatory elements. Through an examination of the mix and outcomes of transnational compensation in two MNC’s, this research contributes to this new area wherein empirical evidence is scarce (e.g. Dickmann et al., 2008).

The literature review provided the background, gap and underlying theories on this subject. This research involves a qualitative case study, which is exploratory grounded and closely linked to theory development. This type of research follows the four steps of Van Aken (2012). The business problem is on an aggregate level and its primary goal is to determine the influence of national culture, institutions, and power relations on the type of incentive and reward systems in companies in the Netherlands and Germany. Results will provide the basis for testable propositions, which “are changes of or additions to existing theories” (Van Aken, 2012, p. 16; Charmaz, 2000).

Two case studies have been conducted to examine four different and specific organizational settings, which allows for cross-case analysis. “The case study is a research strategy which focuses on understanding the dynamics present within single settings” (Eisenhardt: 1989, p. 534). It forms the most appropriate strategy when dealing with ‘how’ and ‘why’ questions at multiple levels of analysis where the business problem is in the center of attention. Cases are used in an exploratory manner (Yin, 2002). The research gains in-depth insight in how national culture and institutions influence the design of incentive and reward systems. Also, other possible (unexpected) determinants for either diverging of converging cross-nationally of the reward systems can be found. Qualitative case study methods can provide a better picture because they are more effective in investigating how systems are implemented and actually work in a subsidiary (Tempel et al., 2006).

3.2. Data collection

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22 Interviews were held with HR employees having in-depth knowledge of the systems as well as with (international) managers who are subject to these systems. Interviews are well suited for the exploration of the perceptions, opinions, attitudes, feelings, and knowledge of the interviewees in case of complex and sensitive issues (Cooper & Schindler, 2003). Also, it allows for a better understanding and more information due to the possibility of clarification of answers (Barriball & While, 1994). The close connection with reality guarantees development of relevant, testable, and valid theory (Glaser & Strauss, 1967). Interviews are required when the goal is to gain an in-depth view of the topic being researched (Harrison & McKinnon, 1999). Interviews were transcribed, as it avoids losing important information (Golafshani, 2003). Expect for one person, all interviewees agreed on recording and offered the opportunity to contact them afterwards for more clarification on the answers.

18 interviews were conducted. Interviews were semi-structured, to permit elaboration and clarification on certain topics and provide room for improvisation. Questions were developed around the concepts of national culture, institutions and transnational compensation. Background information on the interviewees and the guideline for the interview is presented in Appendix 4 and 5 respectively. To prevent interviewer bias and improve quality, topics were sent beforehand, questions were clearly formulated, sharing in-depth views was encouraged, timeframe, recording and confidentiality matters were clearly explained, and feedback was asked afterwards to improve quality (Valenzuela & Shrisvastava, 2002). Lastly, secondary material involves company-specific documents, such as project manuals, presentations, annual reports, etc. This material contains information about strategy of the company, HR strategy, and transnational compensation systems and policies.

3.3. Participants

The participants in this study are two multinational corporations. Case studies have not been selected randomly (Eisenhardt, 1989), but according to theoretical sampling logic (Pauwels & Matthyssens, 2004). Requirements were that the companies pursued transnational corporate strategic orientations. Taking into account that this issue varies per industry, two different sectors were chosen, i.e. publishing and manufacturing (Nazarian et al., 2013). Limitations of the case study include that the results are only valid for these specific case studies and generalizations cannot be made (Strauss & Corbin, 2007). Particular focus is placed on how these systems are designed and how they work. The participants are hereinafter referred to as Publishing and Manufacturing.

3.4. Data analysis

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23 of data (Miles & Huberman, 1994). By performing three different steps, the large amount of data is analyzed. The first step involves categorization. Data are organized in different categories according to literature and relevance, similar to the coding process of the work of Miles & Huberman (1994). First-level coding is used to summarize data, and to identify and categorize important topics. The second step is unitizing, reducing and rearranging the data in smaller categories to be able to manage them. This second-level coding comprises pattern coding, which is a way of grouping first-level summaries into a smaller number of sets, themes, or constructs (Miles & Huberman, 1994). Data are analyzed by the software atlas.ti, the codebook can be found in Appendix 6. Both inductive and deductive approaches are developed. Thereafter, pattern matching is used to compare the theoretical results with the qualitative results. This is a useful technique for connecting data to propositions (Dul & Hak, 2009). Patterns and relationships in data are looked for and presented.

3.4. Additional issues regarding research criteria

As stated before, the research process is intensively documented through field notes and memos to provide the possibility for control (Strauss & Corbin, 2007). Also, results are presented as precise as possible (Swanborn, 1996).

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4. Results

Chapter 4 describes the factual results of the research and chapter 5 analyzes and discusses these findings in light of the literature. Italicized sentences are quotes from interviewees to clearly illustrate results.

4.1. Company situation

Manufacturing

Manufacturing is an international heavy industry company with headquarters in Asia and Europe, and subsidiaries worldwide, employing 80,000 people in 50 different countries. Net sales have been 24,81 billion US dollars in 2014. In Europe, the company has three important hubs: two in the UK and one in the Netherlands. Germany is characterized as a strategically growth market.

Manufacturing Europe was acquired by an Asian company, and merged from a large producer in the Netherlands and a group of smaller companies in the UK. Recently, the company introduced a ‘one-company model’ where the independent different subsidiaries were incorporated into a global structure, international teams were installed and knowledge exchange improved. As such, the company is in a process of increasing standardization of compensation elements and processes, to better support the company’s strategy. Changes in the environment such as reducing demand and increasing pressure on prices have made Manufacturing change their focus to produce a more differentiated product mix.

Publishing

Publishing is a worldwide publishing company located in 26 different countries. Global turnover is 959 million euros and Publishing employs over 8,500 people worldwide. Most important markets in Europe (Germany) and the United States, whereas Asia and Brazil are quickly emerging.

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4.2. Elements of compensation

Manufacturing

In Manufacturing, managers receive a base salary with a bonus component and possibly a long-term incentive. The (yearly) bonus for managers differs depending on their rank and function: GSM (Group Senior Manager) or BSM (Business Senior Manager). The GSM’s, slightly higher in rank, have a bonus component depending on the financial results of Manufacturing Europe as a whole, where all managers are responsible for the financial group result of the European locations, while the BSM’s usually have a more local agreement which is based on the company group result, the results of the business unit, and individual targets. A long-term incentive only exists for some top managers. Individual performance of the manager is incorporated in a possible salary increase, merit increase, depending on key performance indicators and targets that have been set up with their supervisor. Additionally, fringe benefits are served depending on country-specific circumstances.

Publishing

Compensation has both local and global elements. A global element is the (yearly) ‘global management bonus system’. The bonus structure is similar across the company in every country: 30% depends on global financial results and 70% depends on individual quantitative and qualitative targets, differing per function according to nature and type. Publishers mainly have quantitative targets while for example HR has qualitative targets. For this 70%, weights can be given to certain targets or projects. An on-target amount is defined, which is 2/3 of the total amount and a maximum that can supplement the amount with 1/3. Inconsistencies still exist worldwide, but these are increasingly equalized. Bonus percentage of base salary is still not similar worldwide, but in general, the higher up the ladder the more performance-dependent and the higher total compensation is. Lower levels are subject to a local bonus scheme. For extraordinary or unusual results a special bonus can be granted. Overall, an increasing tendency towards standardization is occurring, as can be seen from the global bonus system in comparison to the lack of bonuses in Germany in the past, but a clear categorization of functions and managerial compensation on a global level lacks.

In general, in both companies the bonus component was quite modest (around 10% usually up to 20 or 30%), where only top managers could earn a high proportional variable salary, which is common in both industries.

Netherlands versus Germany | Global versus local

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26 benefits in terms of pensions and social security. In the Dutch pension system the company significantly contributes in building up the employees’ pension, in consultation with trade unions, the company and the government. The same applies for social security. Publishing also pays for pension schemes in Germany, but this is a decision of the company and not legally required. In comparison, the Germans offer lucrative car arrangements with company cars offered to lower level managers. Pension systems are also offered but not standardly given. Therefore, some additional industry arrangements exist regarding pension, such as the ‘Essenerverband’ in Manufacturing. Germany also offers yearly medical check-ups. Bonuses were not likely to be given at all, if given it is only at hindsight, subjectively determined, and on top of the base salary due to tight CLA’s and rigid structures.

In both companies, pay is set locally according to institutional and market standards. Only the bonus structure is globally standardized, although the balance of fixed versus variable compensation can still differ between countries. Overall, fixed pay is said to be slightly higher in Germany, but both systems are fairly egalitarian.

4.3. Determinants of compensation

Market comparison, the ‘market median’, is the main determinant in setting compensation. Knowledge about market conform pay is acquired through benchmarking. Consultancy services are frequently requested to perform a market comparison with a selected number of other companies. Complemented with a global grading system in case of Manufacturing, on a global scale, functions and corresponding compensation (bandwidths) can be determined. Besides the fact that Publishing is dealing with another merger, the nature of its business decreases opportunities to standardize functions, as they are more different and less comparable. The system however is not tightly attached to compensation levels. Usually, these types of functions fall outside of the CLA’s. It is aligned with cultural and institutional factors and is likely to match the expectancies of employees. Bonuses are implemented to trigger managers to put in more effort and make them feel responsible for (international) group result. In case of Manufacturing, it has been noticed that bonuses (for GSM’s) are too much based on financial results due to the financial crisis and focus on EBITDA improvement. In the future, this will change towards a focus on financial results, safety standards, and customer focus. A long-term incentive programme is implemented to retain highly valued employees and give them a sense of appreciation.

4.3.1. External elements

National culture. Cultural differences among the countries do still exist, drawn from

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27 and receive promotion. Dutch managers also appear to desire compensation related to equality, requesting for compensation similar to someone else on that position, which has an individualistic tendency. Furthermore, the Netherlands was characterized as a caring state, with elaborate social security and pension systems.

Germans were said to be more planned, focused on long-term, hierarchical, centralistically organized, introvert, deliberate, and calculative. Uniformly, people stated that Germans are tied to their job, loyal, and like to stick with what they have: “I live here, I marry here, I die here.” They are loyal to their job, might even ‘get stuck’: “verbissen”. These characteristics manifest themselves through compensation that is characterized by high base salary, a strong focus on job security and length of employment.

Three cultural dimensions jump out. Power distance – hierarchical importance – was an item that emerged: Dutch were less obedient and dutiful, compared to “distances in leadership in Germany”. The higher up the ladder the more is expected in terms of going to meetings, giving presentations, being evaluated by top management. Germans “love that”, as it means that they can portray their rank in the company, while the Dutch do not care about these status-showing things. Germans “do not want to be less than GSM’s”. Linked to compensation, rewards can be granted in the form of extra function titles, and office size and location. An example is ‘procura’, which means that you can sign official documents for the company. Germans “would give a party for family and friends” and granting ‘procura’ “can even avoid a raise in base salary”. Secondly, masculine values were more prevalent in Germany than in the Netherlands, expressed through the company car as it seen as a prestige object in Germany from which status can be derived. Thirdly, Germany was seen as a quite restraining society with long working hours whereas the Netherlands grants more leisure time and a healthier work-life balance.

On the contrary, cultural differences are also said to be leveled out, people are increasingly becoming more similar and alike. In Germany this was also noticed due to the more important becoming work-life balance they hold. The younger generations want two things: “They want to work hard, but also need a good work-life balance”, including the related compensation such as holidays. Historically argued, market conformity and hence expectancies of compensation result from cultural design.

Institutions. Institutional factors play an important role in both multinationals and are also

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28 on long-term work relationships and strong management-employee cooperation, supported by the idea of working voluntarism the Germans engage in, which often stems from an early relationship with a company. Germans also have more strict and rigid structures in place where work councils play a prominent role, as they need to accept new policies and protect employees. In the Netherlands, work councils have more the “role of a business partner”. Another example forms the popular Dutch bicycle plan: the institutional –physical– environment makes cycling attractive, and therefore bicycles are granted as benefits in the Netherlands. Lastly, compensation requests and subsequent offering changes along with governmental implementations as well. Benefits such as pension and social security schemes are sometimes offered by the employer because the state does not foresee the people and vice versa. The institutional environment influences the type of compensation, as managers seek to receive the highest ‘netto’ compensation, which is dependent on and achieved by adjusting to the institutional environment.

Cultural and institutional differences influence HR guidelines, but Dutch and German HR do not “work that differently from each other.” Cultural settings and institutions are interdependent and reinforcing each other. Other important external factors are the economic situation and characteristics of a country, such as inflation, workers productivity, and currency fluctuations. You need to pay according to market standards: “The economy always wins”, “it is all about supply and demand.”

4.3.2. Internal factors

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29 Despite the process of globalization, exceptions need to be made. “If you make a rule, something happens that breaks that rule to stimulate improvement.” Important is that the number of exceptions needs to be remained extremely small, so it is usually decided by the highest HR director. Both companies try to avoid relying too much on a person, especially due to undesired but unavoidable job switches in for example IT. Criticality of a person depends on the value for the company due to experience, knowledge, skills and assets, such as a senior publisher with a large network, or a senior manager with excellent management skills. Function-specific skills, with a small labor market and high critical importance for the organization, are also more likely to be exempted from the system. “The smallest you find in R&D.” These functions are also less likely to fit within the CLA, because higher pay is requested. Compensation is usually offered as one-time payments for expenses, one-time benefits, or as additional compensation in private life to stick with the system as much as possible.

With regards to a symbolic anecdote, in consultation with the management board an English managers was granted a 20% salary increase due to independency and isolation of the company and market, geographic distance to maintain control, strategic importance of client-supplier relationship and business continuity, and reduction of compensation due to legal restrictions in relation to earnings of the spouse and loss of 30% tax discounts. “There are all pigs, but some pigs are more pigs than others”.

In regard to governance, top management plays a role in setting compensation, through establishing authority and setting company culture. The highest HR executive needs to get approval at the board for implementing new practices. HR “owns the system”. Changes are implemented top-down by informing the local HR person, but if it does not work within specific circumstances, it will be adjusted or rectified. Also top management possesses the opportunity to give some additional compensation now and then. Cultural values of top management play a role; in case of Manufacturing, top management is German and “is more about regulation.” Above a certain amount of pay, the remuneration committee also steps in to check whether the proposals are justified.

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5. Analysis & Discussion

5.1. Determinants

5.1.1. Transnational compensation and the company

Both companies in this study recognized the transnational compensation strategies, where international as well as local elements are incorporated. Importantly, both companies went through a merger or acquisition and realigned their focus to an international, global strategy where business units are increasingly interdependent on each other and collectively work together. The international focus, the increasing tendency towards a ‘one-company model’ (Manufacturing) and a global company (Publishing) fostered linkages among subsidiaries that resulted in an overall function-oriented structure instead of standalone, local, business unit-oriented structure with sometimes different privileges: “We have a matrix organization, we don’t care about country-borders from a team perspective.” It all runs on the same backbone and infrastructure: “Publishing is a network of subsidiaries. If one does not perform, all others would suffer.” Subsidiaries and headquarters have a symbiotic relation. In case of Manufacturing, the globalization of the company did not lead to a ‘global commodity chain’ or ‘global value chain’: international segmentation of processes due to differences in labor markets because institutional environments create a competitive advantage in that country (cf. Edwards & Kuruvilla, 2005; Kaplinsky, 2001; Gereffi, 1999). The global company aims to avoid that subsidiaries compete among each other in stating higher prices if they have a sequential relationship: “We stand for one result.” Result per subsidiary is calculated taking into account the price paid to the other subsidiary.

Concluding, it can be stated that both have developed transnational compensation strategies by globally integrating particular elements while leaving room for local adaptation, as they sustain the effectiveness of each organizational group without bias that favors a particular business, function or area management (cf. Bartlett & Ghoshal, 2000).

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31 compensation especially regarding fringe benefits they received in their home country (balance sheet approach) as it also makes it easier to send people abroad for some time. It also creates transparency –more availability of information– and makes sure that people stick to the rules: “You work with people that you can give good instructions but they do play with the amounts or just perform something else.” The HR department, the executive as well as local HR business partners, helped develop and implement the system, to maintain local adaptability and ensure smooth implementation, as HR involvement matches HR effectiveness (cf. Wright et al., 1997). The globalization of processes and matrix structure also contributed to higher levels of identification and trust, making implementations of global structures easier (Kostova & Roth, 2002; Tsai & Ghoshal, 1998). Amount and type of compensation eventually depends on market conformity, and agreements that are made in the country-of-origin from the expatriate, also because payment has its own symbolic value in each country (Zelizer, 1989).

Although neither explicitly recognized nor revolutionary, managerial pay did change over the years characterizing global standardization and performance-dependency conform to trends in Dowling et al (2008) and Stone & Stone-Romero (2008). The higher up the ladder, the more performance-dependent possibly because managers positioned at higher hierarchical levels face weaker implicit incentives to get promoted (Ederhof, 2011). International exposure is also likely to influence preference for incentive compensation positively (Brewster, 1991; Hutton, 1988). Remarkably, the strategic change Manufacturing realized towards a more differentiated product mix did not influence compensation significantly. A differentiated strategy does rely more on its people, more reliance on certain critical persons (in for example R&D) could affect compensation in a way but this has not been the case: “Retention is key, and it is important we keep an eye on them.” Interestingly, this does not correspond to common practice as a company’s strategic focus on innovation and differentiation significantly influences relative pay level (Yanadori & Marler, 2006). Compensation in high competitive and environmentally uncertain industries is usually characterized by incentives and pay-for-performance (Olson & Slater, 2001). An explanation could be that the industry is relatively stable and conservative.

5.1.2. External factors

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32 (Gunkel et al., 2009), among others through arranging shared agreements regarding compensation in different countries. Also, fringe benefits are dependent on the legal environment, which could be seen as ‘coercive isomorphism’. Consultancy services are frequently used to determine whether compensation is still competitive, pointing towards ‘mimetic’ isomorphism (DiMaggio & Powell, 1983). Companies pay according to market conformity, so they need to adapt to the circumstances of the market in order to recruit and also retain employees possessing these features, otherwise they would lose their competitive position (Tsai et al., 2006). Employee turnover and exchange in compensation practices are kept an eye on to ensure ‘competitive isomorphism’ (Van der Stede, 2003). Market conformity in itself is nationally, but also culturally bounded: it depends on isomorphism, public opinion, mindset of the country portrayed through governmental implementations that influence the way compensation is and legally should be set (Gooderham & Nordhaug, 2010). Characteristics of the national business system, including the influence of labor unions in countries significantly determine the design of compensation systems (Ferner, 1997; Whitley, 1992).

Cultural differences between the countries were acknowledged (Figure 6). “Everything has a history”: country-specific compensation elements are historically, evolutionary, and hence culturally determined. Three of Hofstede’s cultural dimensions stand out. Masculinity expresses explicit cultural bounded benefits as the company car, in Germany valued as a prestige object, a symbol of status, from where rank and power can be derived. The Netherlands was found to be a feminine and indulgent society, with elaborate fringe benefits in terms of social security, pension schemes, holidays, leisure time and a healthy work-life balance. Germans were said to be stuck in their work, indicating restraint (Hofstede, 2001). A remarkable finding is that power distance, acceptance of power distributions and focus on hierarchy, plays a prominent role in Germany expressed through hierarchical related compensation elements such as additional function titles and status-related rewards (procura). This finding contradicts the score on power distance by Hofstede (1999), but acknowledges reward practices found in Gunkel et al. (2009), where ‘employee of the month’ was found to be a strong motivator. Symbolic for country-specific differences in general was the introduction of the Asian Code of Conduct in Manufacturing after the merger, usually implemented to monitor host-country HR practices (Dowling et al., 2008), but it contained such fundamentally different values and practices that it was not feasible in Western Europe.

0 20 40 60 80 100

Power Distance Individualism Masculinity Uncertainty Avoidance Long-term orientation Indulgence Netherlands Germany

[Type a quote from the document or the summary of an interesting point. You can position the text box anywhere in the document. Use the Drawing Tools tab to change the formatting of the pull

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33 National culture appears to interact with the institutional environment. Besides the fact that the company car is highly valued in the German culture, it is also very cheap to supply as a company, because taxes are very low. Also, long-term employment characterizes German employees as well as the German business system: strong local labor law is typical for a CME (Soskice & Hall, 2001) and constringes compensation (Ferner, 1997; Whitley, 1992). Germans are seen as loyal and homebound, “I live here, I marry here, I die here”, and local law makes it “very difficult to get rid of employees”, which in turn also influences expectancies because a German changing jobs is assumed to underperform whereas an American is seen as being ambitious and successful. Changes in compensation such as a higher variable part are more difficult to implement because of rigid structures, conservative view of the work councils, and inflexible policies (Stone & Stone-Romero, 2008). Culture and institutions both reinforce each other (Figure 7).

The institutional perspective, shows how cultures are embedded in wider social structures, and how these give rise to dominant norms within a society. Institutions set limits and determine attractiveness of certain options: providing particular behavior to become the norm, and a particular set of corresponding values to emerge and endure (Festing et al., 2012; Grainger & Gatterjee, 2007; Edwards & Kuruvilla, 2005). The national business system entails institutional complementarities as well, such as employment regulations, importance of job security, and stability of ownership and capital provision in Germany (Hall & Soskice, 2001).

However, some say cultural differences are diminishing, especially between Germans and Dutch: people are increasingly become alike, and cultural characteristics are being leveled out, closely resembling the convergence of (economic and political) values towards a single

National culture

Institutions Expectancies CONCEPT

EXAMPLE “I expect to get at

least the same company car”

Institutions 1% additional tax on the company car

National culture Car is a symbol of status, prestige, rank

in the company

Economic interests Large automotive industry,