Riordan Manufacturing is an industry leader in plastic molding with three plants in the United States and one in China. Riordan is now considering an expansion into Japan. Robert Lord is a Director of Plant Operations for Riordan Manufacturing, he is also the expatriate who will be sent to oversee the production plant in Japan.
Through the experience of expatriate Robert Lord, this paper will assess the role of social contract on international compensation systems, evaluate the equity in compensation within the same country, evaluate the effect of trade unions and employee involvement in compensation systems for cross border organizations, compare, and contrast pay systems across countries. Role of the Social Contract in Japan Social contract refers to an agreement between the governed and the government defining and limiting the rights and duties of both parties.
The social contract in Japan dictates government involvement business practices, operations, and expectations for employees. The social contract in Japan main objective is to provide protective measures to ensure consistency throughout its society. It addresses the amount of services the government has to provide in return for their right to reduce citizen's incomes. Social contracts differ from country to country, it depends on what the citizens expect or want from their government and what the government expects and want from the citizens.
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Countries craft their social contract over the course of their histories; in fact it is a part of their history. "A social contract grown over time and inclusive of a country's leading interest as well as societal norms and values, is difficult to change, either incrementally or radically" (Olson, 1982). Change in social contract can occur however it must be accompanied with a change in fundamental values and agreement within the contract itself.
Japanese citizen embrace their social contract because it provides security, stability, and certainty, however their social contract has perhaps prevented them from a successful transition into an industrial society. The 20th century expatriation was dominated by professionals sent by their employers to either establish or work at foreign subsidiaries. Globalizations has created a global market for a global workforce or skilled professionals and leveled the income of the skilled professionals relative to the cost of living.
The cost of intercontinental travel has become significantly low; thereby preventing employers from finding the skills in a local market requires them to turn to recruitment on a global scale. Although most American corporations can rely on local talent, expatriates bring more company knowledge than locals so they have to be compensated for their in-depth knowledge and skills. According to Milkovich and Newman, understanding international compensation systems and the role of social contract begin with a sound recognition of variations; the differences and similarities within the system.
Internationally, people are compensated depending on the differences and similarities in the following four categories: economic, institutional, organizational, and employee. In addition, to those categories, compensation is also based on the systems each country has in place because of their history and what works for their people and their culture. American corporations should "think global, act local conditions and social contracts. Social contracts play a major role in determining compensation for locals and expatriates entering the society.
Equity in Compensation between Expatriate and Nationals within the same country Understanding equity in compensation between expatriates and nationals within the same country begins with a focusing on three groups; home country nations (HCN), parent country nationals (PCN), and third country nationals (TCN). As organizations expand operations and they move more activities and functions to the global market place, domestic sources of labor become exhausted, so firms have to look to local home country nationals or third country nationals to sources of labor to provide much needed local knowledge.
Incentives and adjustments are more finely tuned for PCN's and HCN's usually have more locally driven salaries and benefits, TCN's are usually paid by way of a citizenship salary system that is based on their native country residence or citizenship, in essence little adjustments are made to HCN's. Equity in compensation revolves around careful negotiations "give too many premiums and incentives and you create an international stampede and unrest in the domestic pay system.
Give too few incentives and you cannot influence people to risk foreign assignments" (Engle, 2007). As an organization decides to go global or expand internationally, the number of expatriates grows. Compensating these expatriates is the key to expanding globally. "Multinational companies have always faced challenges with respect to compensation" (Watson, 2005). Compensation practices may involve three basic forms; "negotiated" compensation packages, the "balance sheet" approach, and the "going rate" approach.
Negotiated compensation package involves advantages of flexibility especially when there are few employees working abroad. Like wise when more expatriates are called for or required, compensation practices change to the "balance sheet" approach in which base salary, benefits, bonuses, etc. , are adjusted by incentives such as housing and relocation costs to create a compensation package that reflects systems at the home location. "The goal of this package is to keep the expatriate economically whole while providing incentives for career risk taking abroad" (Briscoe, 1995).
Through the balance sheet approach and the negotiation package an organization can motivate expatriates to accepting assignments abroad. The "going-rate" approach involves variation of pay because of assignments in multiple locations. This approach is evident when an employee is transferred from an economically advanced location to a developing country. Compensation plays a significant role in international strategies. There are various approaches that can be utilized to ensure compensation is sufficient for both home nationals and expatriates.
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