Related resources This article is based on a presentation delivered by Darrell Cira and Corinne Carlson of Mercer, along with two Mercer clients, at the 2007 WorldatWork Total Rewards Conference & Exhibition. Download full presentation here     Main Human Capital Perspective page      Darrell Cira   +1 215 982 4205           Corinne Carlson   +1 312 902 7554          David Conroy   +44 20 7178 5577

Global companies seeking the right balance between global and local compensation design and administration must make trade-offs between consistency and flexibility. Consistent global programs offer multinationals many benefits, including the ability to leverage internal resources and buying power, improve financial management, and create a consistent culture and employer brand.

Yet there are several sound reasons to favor local flexibility over global consistency. First, local compensation practices can vary widely, with big differences in areas such as bonus payouts and pay mix opportunities, both region to region and country to country. Second, laws and regulations also differ across countries and are constantly changing. For example, while in some countries, benefits are provided by the state, in others their provision is left to the determination of employers or the market. Last, the programs employees value actually differ significantly from country to country. In Mercer’s What’s Working™ studies (conducted in 22 countries around the world), for example, we found that the value employees in France place on base pay as a part of total compensation is quite different from the way employees in Portugal or Japan view it.

Given this tension, how are global companies balancing the global and the local? In late 2006 and early 2007, Mercer surveyed 170 US and European multinationals with an average of 20,000 employees and average revenues of $1 billion to $5 billion to find out. This study was a follow-up to Mercer’s 2005 benchmark study on this topic.

Formal global compensation strategies are becoming commonplace

Despite the benefits of local flexibility in compensation programs, Mercer research reveals that organizations are moving toward greater centralization of compensation strategy, design and administration. Among survey respondents, 60 percent of companies report that they have developed a global compensation strategy and another quarter say they are considering developing one in the next two years. Only a small minority allow the regions or locals to define their own strategies. This represents an increase in the percentage of companies developing global compensation strategies since Mercer’s 2005 study.

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Why is movement toward the global?

The three leading reasons respondents gave for moving toward global compensation design were improving compensation processes, reinforcing common organizational values and facilitating talent mobility. Many companies said that they had first defined broad global principles to guide the regions and locals, but found that too much variation existed in the way strategy and design were executed in the field.

US multinationals also reported that managing costs was a motivating factor, although European companies were less likely to see this as an objective of globalizing compensation design and administration.

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Does globalization of compensation programs follow global compensation strategy?

Companies with global compensation strategies do not necessarily need to have global compensation designs or administer their programs on a centralized basis. Yet the research shows that organizations with a global compensation strategy are much more likely to adopt global compensation programs and attempt to centralize the administration of those programs. In fact, the globalization of compensation seems to follow a continuum, whereby strategy is centralized to the greatest degree, followed by design and then finally by administration.

While 60 percent of the sample have a global compensation strategy, 45 percent have a fundamentally global compensation design. Even for companies with a global compensation design, however, some of the infrastructure pieces – such as market pricing standards – continue to be handled almost exclusively at the regional level, while others – such as salary increase practices and the process for assigning jobs to grades – are split between the global and the regional levels.

Finally, about a third of respondents have centralized the administration of compensation programs. For those who administer programs regionally or locally, Human Resources serves this function, not Compensation. Most of these multinationals do not have expertise in the field to help with administration.

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Global strategies and programs are more likely for executives and managers

The extent to which compensation strategies and programs are centralized depends also on the employee level. More than four in five companies surveyed have a global compensation strategy for the top 1 percent of executives. In contrast, about half of the sample report developing a global compensation strategy for managers and less than a third do so for professionals and sales employees.

Of the 39 percent of respondents who undertake compensation design at the local level and the 34 percent with local administration, most still do global design and administration for their executives and managers. So the interesting break between centralized and local design and administration occurs at the professional and sales employee level.

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How will the balance shift in the future?

While most companies in the study plan to maintain the status quo, those intending to shift the balance between the global and the local plan to further centralize design and administration, starting with currently localized design elements, such as assigning jobs to rates or bands. Based on this research and our work with multinational firms, we conclude that while local flexibility in compensation design and administration offers benefits, a vast majority of multinationals are seeing greater strategic value in globalizing their compensation practices.

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