Solving the Pay Structure Puzzle of International Growth

By Craig Rowley, craig.rowley@haygroup.com

International expansion has become the go-to growth opportunity for U.S. retailers. The domestic market is over-stored and under-shopped, and therefore, retailers are looking to grow top line sales outside of the United States. But going international means more than just dropping stores into new locations. International growth requires an entirely different management approach. New markets come with radically different business environments, alternative consumer needs and unfamiliar shopping patterns. Furthermore, employee values, laws and approaches to compensation vary greatly from country to country. For retailers to achieve international success, they must take local laws, customs and cultures into account and prepare to adapt accordingly.

Address varied labor laws
Labor laws and practices in other countries vary significantly from those in the United States.
European countries are likely to have regulations and established practices that guide compensation, control the involvement of works councils and determine how rewards are delivered. In the United Kingdom, for example, “comparable worth” laws require equal pay for jobs of equal worth, while in Germany, federal guidelines require businesses to cooperate with works councils to determine pay.

Developing countries, on the other hand, are less likely to offer direction on setting compensation, but often have statutory requirements for benefits and perquisites.  They are also likely to have significant variation in how reward is designed and delivered by employee level, and many require businesses to pay employees an additional month’s worth of compensation in December.

Before setting up shop in a foreign country, retailers should have a handle on that nation’s labor laws and work to adapt their current policies to ensure compliance.

Account for diverse employment practices
Just as cultural norms vary in every country, so do work practices. Many countries outside of the U.S. limit the use of part-time employees due to culture, business practice, or legal restraints. In addition, employees in many countries insist on a greater work/life balance than employees in the United States. Working on holidays can pose problems, and employees expect to use all of their vacation time within a calendar year -- often taking multiple weeks off in a row, an uncommon practice in the United States. Paid time off, including maternity and paternity leave, is both a cultural and statutory expectation in much of the world. Even Canada has laws in place that guarantee generous maternity leave and pay, requiring companies to hold a new mother’s job for up to five years.

To retain talent, successful international retailers may need to alter their holiday and work/life balance plans to meet the employee needs of the specific country.

Determine appropriate compensation and benefits levels
When entering a new country, retailers must first determine the level of compensation they are willing to provide their international employees. Foreign companies tend to have significantly more diversity in how pay packages are structured compared to the United States. Employers must think about compensation in terms of total remuneration, as opposed to simply financial rewards.

Total remuneration includes base, bonus, the value of benefits and potentially long-term incentives (LTI). A total remunerations viewpoint is needed because non-statutory benefits in other countries can vary significantly from industry to industry and from company to company. Benefits in the United States tend to be the same across industries and organizational levels, often driven by regulations and taxation. But in other countries, the benefits provided can vary significantly by level. For example, it is common to find company cars provided to all managers and above. It is also common for retailers to provide food coupons to all employees, a practice particularly prevalent in developing countries. Understanding the total mix of compensation is critical in setting your pay rates.

Design tailored compensation and variable pay plans
Once you have determined the appropriate level of compensation, you must consider how to use compensation to motivate performance. Most countries place a higher value on job predictability, security and fairness, and employees expect more guaranteed (or fixed) pay that includes base salary, guaranteed bonuses, cars, etc.  As a result, variable compensation is less prevalent and incentive targets fall at lower percentages of base salaries overseas than in the United States.

A number of countries also have a cultural bias around directly measuring individual performance. They structure incentive plans more around company or team results with little emphasis on individual performance. For example, some Asian countries struggle with paying an individual a low bonus for failing to meet goals because it can cause shame.

Introducing LTI in other countries can be problematic as well. Employees in many countries have not had experience with the stock market and do not value these plans.  When U.S. retailers introduce LTI internationally, employees often view this as an add-on and expect highly competitive cash compensation and benefits without regard to the size of the LTI grant they receive.

Companies should consider market prevalence and employee understanding/value when determining how to structure the pay package.

Prepare for a premium on talent
Recruiting experienced talent in new markets is challenging.  Retailers often find a limited number of companies to recruit from. For example, while the United States has over 150 retailers with revenues over $500 million, there are approximately 40 in Canada and even fewer in developing countries. There is also a value of “career for life” in one company, which means retailers may have to pay above market rates to persuade skilled talent to take the risk of joining a new and unknown employer. The premium required will likely be in the form of base salary or guaranteed bonuses, particularly in those countries that don’t value variable compensation to begin with. While some companies can afford to pay a premium for top talent, most will need significant training resources to be able to hire affordable employees to meet business needs.

The opportunities in international growth can be as plentiful as the challenges. It’s crucial retailers resolve their company’s compensation and people issues early on in the strategy and due diligence process. Best in class organizations create philosophies and approaches that guide how they will manage compensation from country to country, then tailor the actual design and delivery of compensation to meet the unique circumstances, regulations and culture of each country where there are operations.

Craig Rowley is a VP and global practice leader of the Retail Practice at Hay Group, a global management consulting firm. He can be reached at craig.rowley@haygroup.com.