The Role of Culture in Compensation

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University of Agder

Master of Science in Business Administration: International Management and Strategy Term Paper- ORG 409 International Management

The influence of Culture on Reward and Compensation Management practices across subsidiaries of a Multinational Company

By

Kwame Ohene Djan
(Student Nr: 166289)

6th November, 2012

Contents

ABSTRACT3
1.0 INTRODUCTION4
2.0 REVIEW OF RELEVANT PRIOR LITERATURE5
Table 1 Summary of Research Findings11
3.0 A CONCEPTUAL MODEL………………………………………………………………. 12
4. 0 CONCLUSION AND RESEARCH QUESTION13
REFERENCES14

ABSTRACT

The positive effects of being able to identify and effectively manage the motivational needs of employees of a company cannot be overemphasized. However this is not an easy task as employees, as human as they are, have complex behavioral responses to different types of motivational schemes. This complexity increases in the case of multinational firms in their quest to identify and manage the motivational needs of employees who are host-country nationals as this requires cultural sensitivity among other factors. Unfortunately, most global firms tend to overlook this important cultural aspect of international human resource management because of the perceived high rate of convergence. This perception puts most expatriate managers at a risk of applying global compensation management practices to employees who are host-country nationals. The purpose of this paper was to explore the effects of cultural values of host country on the reward and compensation management practices of a subsidiary of a multinational company from a theoretical perspective. This was done through a critical review of papers that employed various cultural characteristics and their influence on employees reward preferences. The study revealed that cultural values still play a critical role in employees’ rewards preferences despite the increased rate of convergence. However owing to the complexity and dynamism of human behavior and the influences of the external business environment, Human Resource (HR) managers operating in foreign-owned subsidiaries cannot fully rely on cultural stereotypes in making decisions regarding reward and compensation of host-country nationals.

KEY WORDS: Culture, International Human Resource Management, reward and compensation.

1.0 INTRODUCTION

According to Lowe, Milliman, De Cieri and Dowling (2002 pp 46), three factors make effective human resource management critical in the quest for global competitiveness. First, “increased emphasis on multinational trade and the growth of foreign subsidiaries has heightened the need for managers in foreign countries”. Second, “expansion of the international work force brings increased capabilities and often lower costs to multinationals”. Third, “the traditional factors of production (capital, technology, raw materials, and information) are increasingly fungible, with employee quality the only sustainable source of competitive advantage to developed country multinationals”. This makes the search for an appropriate compensation package for Host Country Nationals very relevant in this era of increased globalization.

Cross-border business leads to interactions with not only different political and socio economic paradigms but also cultures (Porter, 1990, in Chiang, 2005). According to (Bond 1999 pp 3–4 in Chiang, 2005) ‘culture’ is one of the most important factors influencing global operations and as he indicated, “simply exporting Western cultural norms is not possible today without conflict”.

“In the face of globalization, organizations strive to find the balance between global and local in designing and implementing Human Resource Management (HRM) practices” (Aycan, 2005 pp 1,083).While multinational corporations feel the pressure to ensure the standardization of HRM practices, on one hand, and localization, on the other, organizations with a multicultural workforce try to...
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