culture compensation

Understanding Compensation Practice Variations across Firms: The Impact of National CultureAuthor(s): Randall S. Schuler and Nikolai RogovskySource: Journal of International Business Studies, Vol. 29, No. 1 (1st Qtr., 1998), pp. 159-177Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/155593Accessed: 06/11/2010 20:45

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Understanding Compensation Practice

Variations Across Firms: The Impact of

National Culture

Randall S. Schuler* NEW YORK UNIVERSITY

Nikolai Rogovsky** CALIFORNIA STATE UNIVERSITY, HAYWARD

With operations spread worldwide, firms that find- themselves competing in a global marketplace are looking at the implications of the admonition, "When in Rome. .." This raises the question: "Do cultures of countries have an impact on the generally accepted methods of managing human resources?" The answer to this question is the focus of this article. By developing culture-specific propositions for four categories of

compensation practices based on status, performance, social benefits and programs, -and employee ownership plans, we seek to de- termine the extent to which Hof- stede's four dimensions of culture are associated with specific, compensation practices. Support is found for most of the propositions. The implications of the finding for the management of human resources by multinational firms are discussed.

INTRODUCTION

T he increased complexity of today's business environment and height-

ened international competition make it necessary for multinational firms (MNCs) to utilize all possible traditional and non- traditional sources of competitive advantage. As traditional sources, such as

financial capital, technology or location, become more accessible and, therefore, less significant for competitive advantage, firms use increasingly less traditional sources. Human assets are one of these sources (Barney, 1991).

While the management of human

* Professor of Human Resources Management at the Stern School of Business, New York University. He received his Ph.D. in organizational behavior from Michigan State University. A frequent contributor to the literature on international human resource management, he is the author or editor of several textbooks in this field. * * Associate Professor in the Department of Management and Finance, School of Business and Economics, California State University at Hayward. He received his Ph.D. degree from the Wharton School, University of Pennsylvania. He is presently working in Geneva for the International Labor Organization.

JOURNAL OF INTERNATIONAL BUSINESS STUDIES, 29, 1 (FIRST QUARTER 1998): 159-177. 159

COMPENSATION AND CULTURE

assets has typically been undertaken by the human resource (HR) departments, the function of managing human assets has also become a focus of attention of senior managers (Towers Perrin, 1992; Sparrow and Hiltrop, 1995). The function of human resources is increasingly viewed not simply as a set of practices and policies that should fit into a particular firm's overall corporate or business strategy, but also as a crucial component of this strategy. This understanding of the role of the HR function follows the resource-based theory of study- ing organizations (Barney, 1991; Jackson and Schuler, 1995). The resource-based theory looks within the firm itself (as opposed to the firm's position in relation to its environment) to suggest that firms have resources or capabilities that constitute strategic assets. These assets, in turn, can contribute to the firm's competitive advantage. Three types of resources that firms can use to create competitive advantages are: (1) physical (plant; technology; location); (2) organizational (organizational structure; systems of planning and controlling; social relations within the organization); and (3) human (employees' competencies, experience and knowledge) (Jackson and Schuler, 1995). The HR function greatly affects a firm's organizational and human resources and, therefore, can be used to gain competitive advantages (Schuler and MacMillan, 1984).

As the HR function is seen increasingly as a means of gaining competitive advantage, two questions arise: What can MNCs do to gain such an advantage? And should MNCs practice human resource management (HRM) for competitive advantage differently, or in the same way throughout their various countries in which they operate?

As suggested by Schuler and

MacMillan (1984), MNCs can gain competitive advantage through their use of any HR practice, such as training, compensation, or appraisal, so long as other firms are unable to duplicate their efforts easily or quickly. In addition to using HR practices in their own operations, MNCs can also gain competitive advantage through HR by working with their suppliers and customers. Possibilities for using HR practices for competitive advantage are described in detail else- where (e.g., Schuler and Jackson, 1996; Pfeffer, 1994), thus the focus of this article is on the second question: Should MNCs practice HRM for competitive advantage differently or in the same way throughout their global operations?

Human Resource Management Across Countries

The evidence suggests that companies in different countries differ with respect to their HR practices and policies own- ing to:

* the business structure (Schuler, Dowling and DeCieri, 1994; Pieper, 1991);

* the legislative and employment relationship context (Florkowski and Schuler, 1994);

* the patterns of HRM competence and decision-making (Sparrow, Schuler and Jackson, 1994); and

* the national culture (Hofstede, 1991, 1990; Trompenaars, 1993; Laurent, 1983, 1986; Newman and Nollen, 1996).

In this article, a national culture explanation for cross-national compensation practice variations is provided (this explanation is in keeping with the thinking of a number of authors including Hennart, 1982; Laurent, 1986; Hofstede, 1993; and Newman and Nollen, 1996). Our research is based on the assumption that in order for MNCs to be globally

160 JOURNAL OF INTERNATIONAL BUSINESS STUDIES

RANDALL S. SCHULER & NIKOLAI ROGOVSKY

competitive, it is crucial that they recog- nize these relationships and adjust their compensation practices to the cultural specifics of a particular host country. This is based upon the studies of many researchers who have documented the importance of thinking globally and act- ing locally (Doz and Prahalad, 1986). Thus, the use of HR practices particularly compensation practices that are geared towards the cultural expectations of the host countries' employees of MNCs, may help these firms create competitive advantages. Indeed, at a minimum, MNCs need to have an understanding of possible cultural-HR practice relationships in order to avoid possible failure in their business operations. The work of Newman and Nollen (1996), in fact, strongly supports the relationship between congruency in a firm's management practices with country culture and firm performance.

The role of national culture seems to be crucial in explaining cross-national HRM differences for two reasons. National culture has a significant relationship with HRM policies and practices (Hofstede, 1993; Wilkins and Ouchi, 1983; Denison and Mishra, 1995; Schuler, Dowling and DeCieri, 1994; Schuler and Florkowski, 1996; Rogovsky, 1996; Schuler, Jackson, Slocum and Jackofsky, 1996). As demonstrated by Wright and Mischel (1987) and Earley (1994), national cultural values that rein- force human resources are more likely to yield predictable behavior and better performance. This is because congruent HR practices are consistent with existing behavioral expectations and routines that transcend the workplace. Employees are not distracted from work if HR practices are consistent with national cultural values (Newman and Nollen, 1996). Not surprisingly, there is ample evidence that

national cultures vary, and HRM practices vary depending on the national culture in question (Luthans, Welsh, and Rosenkrantz, 1993; Sparrow and Hiltrop, 1995; Newman and Nollen, 1996). Note that we refer only to national culture here. However, culture can be defined not only at the national, but also at the group, organizational, and even international levels, (e.g., "North American" culture, "European" culture etc.). All these cultures have certain effects on the choice and efficiency of HR policies and practices; therefore the distinction between national and other types of culture is important, and has been widely explored in the literature (see, Schneider, 1985; Rogovsky, 1996). Nevertheless, national culture makes a unique contri- bution to understanding HRM policies and practices (Adler, 1997; Evans, 1992).

National culture, defined as the values, beliefs, and assumptions learned in early childhood that differentiate one group of people from another (Beck and Moore, 1985; Hofstede, 1991), has been shown to be a relatively stable component of countries (Sparrow, 1995; Hofstede, 1993; Adler, 1997). National culture is the soft- ware of the mind (Hofstede, 1991), and it is deeply embedded in everyday life and fairly resistant to change (Newman and Nollen, 1996). Nevertheless, MNCs have so far paid attention mostly to such local conditions as laws and regulations (Flor- kowski and Schuler, 1994) when decid- ing how to operate in foreign locations. Local conditions tend to be obvious, explicit aspects of business operations in foreign countries. Less explicit aspects are the national culture-driven social customs and patterns of behavior that are acceptable to the general population (Jaeger, 1986). Some firms overlook these cultural differences between host and their source countries; other firms under-

VOL. 29, No. 1, FIRST QUARTER, 1998 161


stand them, but choose to ignore them. The last approach appears to be the pre- vailing one, given the astonishingly small number of strategies and policies that are used by the MNCs to adjust to national cultures, particularly in the area of compensation (Greene, 1995; Newman and Nollen, 1996). An example is given by Gleisser (1996), who documented that a domestic success story, Lincoln Electric, was not successful internationally due to its lack of understanding of cross-cultural differences in expectations as regards compensation policies and practices. The experience of Lincoln Electric is not unique (Punnett and Ricks, 1992) and can be repeated by other MNCs for a number of reasons:

* Firms do not understand the importance of developing a national culture - specific work environment, and may explain the inefficiencies in management by factors unrelated to cross-cultural mismanagement (Punnett and Ricks, 1992).

* Firms believe that the development of national culture-specific HR practices can lead to the diffusion of a company's culture, and create practical problems as regards intra-company communication and coordination (Schneider, 1986).

* Firms do not believe in saying "When in Rome, do as the Romans do," and think that local employees should forget about their culture and adjust to the culture of the parent company (Doz and Prahalad, 1986).

* Firms acknowledge the importance of cross-cultural differences and the exis- tence of national culture-specific policies and practices, but do not know how to address the relationship between facets of national culture and specific HR practices (Hendry, 1992).

* There is a lack of evidence showing that cultural sensitivity and adaptability

matter, although recent work by Newman and Novell (1996) shows that they do matter. Using several management practices, Newman and Novell (1996) found that work units with culturally consistent practices had better financial performances than work units with culturally inconsistent practices.

The study here is based upon - and extends - the excellent work of Newman and Novell (1996). Whereas their work investigated general management practices, this investigation focuses more nar- rowly on HR practices, specifically compensation. As with Newman and Novell (1996), this study uses Hofstede's dimensions of national culture.

Dimensions of National Culture A national culture is usually character-

ized by the values of the people who belong to that culture. A substantial number of studies have found that cross- cultural differences in values exist (Luthans, Welsh, and Rosenkrantz, 1993; Schneider and DeMeyer, 1991). The issues of quantitative dimensionalization of national culture are of particular inter- est, because they allow the examination of the specific ways in which cultural values are different (Schwartz, 1992;

Schwartz and Sagiv, 1995). Ronen and Shenkar (1985) reviewed eight studies that were aimed at clustering and/or ranking countries on attitudinal dimensions. These included Haire, Ghiselli, and Porter (1966); Sirota and Greenwood (1971); Ronen and Kraut (1977); Hofstede (1976); Griffeth, Hom, DeNisi, and Kirschner (1980); Hofstede (1980); Redding (1976); and Badaway (1979). These studies dimensionalize national culture by dealing with various values that can be grouped into four categories: work goal importance; need deficiency, fulfillment, and job satisfaction; manage-



rial and organizational variables; and work role and interpersonal orientation.

Hofstede (1980, 1984, 1993), however, has presented perhaps the most comprehensive, yet straightforward, means to dimensionalize national culture (Shackleton and Ali, 1990; Triandis, 1982). His familiar by now IBM studies revealed four largely independent dimensions of differences among national values systems. These were labeled "Power Distance" (large vs. small), "Un- certainty Avoidance," "Individualism vs. Collectivism," and "Masculinity vs. Femininity."1

The first dimension of national culture, Power Distance, indicates the extent to which the fact that power is distrib- uted unequally is accepted in the society by those who do and do not possess power. In a culture with small Power Distance, it is a common belief that inequality within an organization (as well as within society) should be mini- mized. A management practice consistent with small Power Distance found in the United States, for example, is employee participation in decision making (Denison and Mishra, 1995). However, in a culture with a large Power Distance, the common belief is that there should be a certain degree of inequality in the society (organization). Authoritarian management practices are likely to be more consistent in cultures with a large Power Distance (Jaeger, 1986), such as those in East Asian and Latin American countries.

Another dimension, Uncertainty Avoidance, is defined as the degree to which uncertainty and unpredictability are tolerated in a society (as well as within an organization). In societies with a high degree of Uncertainty Avoidance, people feel uncomfortable in unstruc- tured or risky situations. Rules and pro-

cedures are more necessary for employees in cultures with high uncertainty avoidance, such as those in Latin Europe. In societies low on Uncertainty Avoidance, people are more willing to take risks and can tolerate uncertainty easily. Here, rules, procedures, guide- lines, and direction are less necessary. In countries such as the United States, employees -prefer the discretion that goes with the ambiguity (Slocum and Lei, 1993).

Individualism (as opposed to Col- lectivism) is the degree to which people in a society value an individual's opin- ion, and put their individual interests and the interests of their immediate family above those of others. In individualistic societies, such as those in the United States, United Kingdom, Australia, and Canada, people take care of themselves and their immediate families before any- one else. Here, individual responsibility for results and individual level rewards are consistent. On the other hand, in col- lectivist societies, such as Taiwan (Province of China), Republic of Korea, Singapore, and Hong Kong, people dis- tinguish between "in-groups" and "out- groups." They expect their in-groups (clan, work team, organization, commu- nity, country) to look after them in exchange for absolute loyalty to the group. Here, group-based responsibility and action are consistent with the culture (Earley, 1994).

Finally, the fourth dimension, Mas- culinity (as opposed to Femininity), is the degree to which the dominant values in societies, such as those of Japan or the United States, are "masculine," i.e., have characteristics such as assertiveness, and are in favor of the acquisition of money and material goods [doing and acquiring (Kluckholn and Strodtbeck, 1961)]. Here, performance-contingent rewards,



merit pay, and management by objectives are practices consistent with the culture. However, in societies, such as those in Denmark, Norway, and Sweden, the dominant values are "feminine," i.e., they place a high value on the quality of life and caring for others [thinking and observing (Kluckholn and Strodtbeck, 1961)]. Here, interpersonal relationships and quality of work-life issues are consistent with Femininity (Jaeger, 1986; Hofstede, 1991).

National Culture and HR Policies and Practices

Some research explaining the variance across cultures in HR policies and practices using Hofstede's dimensions has already been undertaken. Schuler, Jackson, Slocum and Jackofsky (1996) suggested that the noticeable differences in HR practices that exist between U.S. and Mexican companies are rooted in the differences that exist between these two countries along Hofstede's dimensions. Sparrow and Budhwar (1995) used these dimensions to explain why certain employment practices are used by companies in India. Brown (1996) found support for hypothesized relationships between Hofstede's cultural dimensions and different performance-appraisal practices.

Related work has also been done using national culture as an explanatory vari- able for the acceptance and effectiveness of specific HRM approaches. Although not using Hofstede's dimensions, Brewster (1994) suggested that U.S.-origi- nated HR policies and practices are unac- ceptable to European countries, due part- ly to cultural differences between the United States and Europe. A number of studies have been done on the Chinese culture (Zhu and Dowling, 1994; Sparrow, 1995). These studies explain

the stability of certain HR practices and policies used by companies in China that have survived all social and political changes and revolutions by the nature of Chinese culture, specifically, neo-Con- fucianism. -Using Hofstede's dimensions, Newman and Novell (1996) found that merit-based rewards were consistent with not only a high level of masculine culture, but that they were also associated with a high level of financial performance.

All these studies provide support for the proposition that national culture is a significant explanatory factor for cross- country differences in HR practices and policies. They also support the importance of matching HR practices to a country's culture because: (1) it conveys cultural awareness and sensitivity; (2) it conveys expectations of, and rewards for, employee behavior consistent with ingrained patterns of acceptable behavior; and (3) it results in higher levels of company financial performance. These studies, however, have been limited in the number of HR policies and practices studied and/or the number of countries examined.

In this article, we extend earlier work, and focus specifically upon HR compensation practices. Using several secondary data sets, we examine a number of propositions regarding the relationships between specific compensation practices and dimensions of national culture.

PROPOSITIONS ON THE RELATIONSHIP BETWEEN NATIONAL CULTURE AND

COMPENSATION PRACTICES

We begin by examining propositions related to a number of relationships between Hofstede's cultural dimensions and compensation practices presented in the literature, and based upon theories of cross-cultural management (Hofstede,



1991; Triandis, 1982, Newman and Novell, 1996) using three data sets: the first created by the International Social Survey Programme (ISSP); the second created through the IBM-Towers Perrin project (IBM-TP); and the third created through the Price Waterhouse-Cranfield project (PW-CR).

Although the relationships between the dimensions of national culture and specific HR practices examined here are relatively unexplored, Hofstede (1980, 1984, 1993), Brewster (1994), Sparrow (1995), Jackson and Schuler (1995); and Schuler et al. (1996) have -suggested relationships between dimensions of national culture and broader statements of how firms regard and intend to manage their human resources, more commonly referred to as HR policies. A summary of these findings is provided by Jackson and Schuler (1995). Here, we move the discussion to another level of specificity by addressing the relationships between dimensions of culture and specific HR practices. Specifically, we focus on four types of compensation practices: compensation practices, based on status; compensation practices, based on performance; social benefits and programs; and employee ownership plans.

Based on the work of those cited above and on Hofstede's dimensions of culture, we develop a set of propositions that reflect only those relationships between practices and the cultural dimensions for which there is a theoretical basis. These propositions are grouped by type of compensation practice.

1. Compensation Practices Based on Status

Two practices are looked at here: seniority-based pay plans, and skill-based plans. Based on Hofstede (1980), Jack- son and Schuler (1995) argued that in

societies with high Uncertainty Avoid- ance pay practices are likely to emphasize predictability and certainty. Compensation practices based on seniority are predictable and certain to the employees. Less certain and predictable is the acquisition of skills and abilities. Therefore, we suggest that:

Proposition 1.1. A seniority-based compensation system is more likely to be found in countries with higher levels of Uncertainty Avoidance.

Proposition 1.2. A skill-based compensation system will be more prevalent in countries with higher levels of Uncertainty Avoidance.

2. Compensation Practices Based on Individual Performance

Three compensation practices are described here: pay-for-performance, individual performance, and pay using an individual bonus/commission. The last practice was studied separately for four groups of employees: managers, professional and technical staff, clerical labor, and manual staff. Hofstede (1980) and Jackson and Schuler (1995) charac- terized highly individualistic societies as likely to make widespread use of individual-based contingent rewards and rewards that emphasize individual recognition. Based on this, we propose the fol- lowing:

Proposition 2.1. Pay-for-performance compensation practices will be used more widely in countries with higher levels of Individualism.

Proposition 2.2. A focus on individual performance in determining pay levels will be more prevalent in countries with higher levels of Individualism.

Proposition 2.3. Individual bonus/ commission practices will be more prevalent in countries with higher levels of Individualism.



However, as Laurent (1986) and Sch- neider and DeMeyer (1991) suggested, in low Uncertainty Avoidance countries there is a greater level of comfort with risk and uncertainty. This is consistent with practices in which individual performance is tied to compensation. Thus, we propose that:

Proposition 2.4. Pay-for-performance is likely to be less prevalent in countries with higher levels of Uncertainty Avoidance.

Proposition 2.5. A focus on individual performance in determining the level of pay will be less prevalent in countries with higher levels of Uncertainty Avoidance.

Proposition 2.6. Individual bonus/ commission plans are likely to be less prevalent in countries with higher levels of Uncertainty Avoidance.

3. Social Benefits and Programs Four practices were approached in this

group: Flexible benefit plans, workplace child-care programs, career-break schemes, and maternity-leave programs. The last three practices were again studied for the four groups of employees mentioned earlier.

In societies with high Femininity, quality of life and caring for other people are reflected in compensation practices that take into consideration employees' personal and social needs, and their lives outside work (Kluckholn and Strodtbeck, 1961; Jackson and Schuler, 1995). Therefore, it might be suggested that:

Proposition 3.1. Flexible benefit plans will be less prevalent in countries with higher levels of Masculinity.

Proposition 3.2. Workplace child-care practices will be less prevalent in countries with higher levels of Masculinity.

Proposition 3.3. Career-break schemes will be less prevalent in countries with higher levels of Masculinity.

Proposition 3.4. Maternity-leave programs will be less prevalent in countries with higher levels of Masculinity.

Countries with high levels of Uncer- tainty Avoidance emphasize predictability and security in career planning, as well as in workday scheduling. In these countries, firms are also expected to offer more flexibility in benefit programs. This flexibility enables individuals and organizations to deal with unpredictable situations as they arise. Therefore:

Proposition 3.5. Flexible benefit plans will be more prevalent in countries with higher level of Uncertainty Avoidance.

Proposition 3.6. Workplace child-care practices will be more prevalent in the countries with higher levels of Uncertainty Avoidance.

Proposition 3.7. Career-break schemes will be more prevalent in countries with higher levels of Uncertainty Avoidance.

Proposition 3.8. Maternity-leave programs will be more prevalent in countries with higher levels of Uncertainty Avoidance.

4. Employee Ownership Plans Based on Hofstede (1980), Denison and

Mishra (1995) and Jackson and Schuler (1995) argued that practices of employee participation, such as employee share options/stock ownership plans, are more likely to be prevalent in low Power Distance countries than in high Power Distance countries. Therefore:

Proposition 4.1. Employee share options/stock ownership plans will be less prevalent in countries with higher levels of Power Distance.

However, Hofstede (1980) suggested that in highly Individualistic societies employees' involvement with an organization is calculative, i.e., based upon an evaluation of what a person contributes and what is received in return.



Therefore, we can propose that: Proposition 4.2. Employee share

options/stock ownership plans will be more prevalent in countries with higher levels of Individualism.

Also, one might suggest that in countries with a lower level of Uncertainty Avoidance, employees and organizations are willing to share risks. Therefore:

Proposition 4.3. Employee share options/stock ownership plans will be more prevalent in countries with lower levels of Uncertainty Avoidance.

METHOD

Data Sets IBM-Towers Perrin (IBM-TP). One of

the available data sets used in this article was created as a result of a worldwide study of HR policies and practices con- ducted by IBM and Towers Perrin (Towers Perrin, 1992). The survey items were developed using existing academic and practitioner research and literature. A major topic addressed in one of the sections of the questionnaire was "human resource concepts and practices for gaining competitive advantage." In that section, respondents were asked to indicate the degree of importance they attached to each item in their firms' attempts to gain competitive advantages through HR policies and practices. The respondents indicated their evaluations for the year 1991 (current year) and the year 2000. In this article, we analyze the data for 1991. Because these firms operate in highly competitive environments, demands of efficiency and effectiveness, rather than national culture, should be primary in shaping their HR practices. Thus, the impact of national culture could be more modest in this sample than in a broader sample of firms for which the demands of efficiency and

effectiveness may be lesser. Therefore, the tests of the propositions formulated earlier may be regarded as very conserva- tive. The countries covered by this study include France, Germany, Italy, the United States, the United Kingdom, Australia, Japan, Mexico, Brazil, Argentina, Canada, and Spain.

ISSP. Another data set was put togeth- er within the framework of the International Social Survey Programme. The ISSP is a voluntary grouping of study teams in more than a dozen nations, each of which runs a short annual self-completion survey of a prob- ability-based, nation-wide sample of adults containing agreed a priori set of questions. The topics change from year to year by agreement. The questions are developed by subgroups, and are then discussed at an annual meeting attended by representatives of each national team.

At the first conference of the ISSP in 1984, it was decided that the topic "Work Orientation" would be one of the main modules that should be examined. This panel was fielded in 1989. It surveyed over 1,000 people across seven occupational groups in each of the eleven participating economies (except Hungary). (The economies, participating in the study, were Germany, the United Kingdom, the United States, Austria, Hungary, Netherlands, Italy, Ireland, Northern Ireland, Norway, and Israel). The data allowed us to look at the individual level self-reported HR practices existing in each respondent's workplace. These practices, except for those in Hungary and Northern Ireland, are used in the analysis and presented here (International Social Survey Programs, 1989).

Price Waterhouse-Cranfield (PW-CR). The third data set was the one used in the Price Waterhouse-Cranfield project.



The Cranfield School of Management and Price Waterhouse, a public account- ing firm, launched a multi-country project in 1989, and mailed a questionnaire to HR specialists in firms employing 200 or more people located in five countries in Western Europe: Germany, Spain, France, Sweden, and the United Kingdom. The HR experts were asked questions about specific HR practices used by their firms. In order to obtain information over time, the survey was repeated annually as often as possible twice - in the subsequent two years. The number of countries involved in this project increased each year. In this article, we used the latest findings available, namely those for 1991-1992, when 12 countries participated in the project. The sample size for those years was

33,100, with 5,507 returns and 4,684 usable responses (Brewster and Hegewisch, 1994).

The three data sets mentioned are the most comprehensive in the contempo- rary field of international HRM. All three of these sets are nation-wide, and were aimed at representing the whole population of any given country. Unfortunately, these data sets do not allow for control of industry and organizational variables.

Cultural Dimensions and Compensation Practices

The cultural dimensions used here were measured by the country indices reported by Hofstede and Bond (1988) for Power Distance, Individualism- Collectivism, Masculinity-Femininity

- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ _ _

TABLE 1 HOFSTEDE'S CULTURAL DIMENSIONS

Country Power Distance Masculinity Indivi- Uncertainty dualism Avoidance

Argentina 49 56 46 86 Australia 36 61 90 51 Austria 11 55 79 70 Belgium 65 75 54 94 Brazil 69 49 38 76 Denmark 18 16 74 23 Germany 35 66 67 65 Finland 68 43 71 86 France 68 43 71 86 Greece 60 35 57 112 Ireland 28 68 70 35 Israel 13 54 47 81 Italy 50 70 76 75 Japan 54 95 46 92 Korea (Rep. of) 60 39 18 85 Mexico 81 69 30 82 Netherlands 38 14 80 53 Norway 31 8 69 50 Portugal 63 31 27 104 Spain 57 42 51 86 Sweden 31 5 71 29 Turkey 66 45 37 85 United Kingdom 35 66 89 35 United States 40 62 91 46

Source: Hofstede and Bond (1988).



and Uncertainty Avoidance, described in detail in Newman and Novell (1996). These indices for the economies examined here are provided in Table 1.

The choice of compensation practices selected from the data sets was informed by these cultural dimensions and is consistent with the literature (Schneider and DeMeyer, 1991; Dorfman and Howell, 1988; Puffer, 1993; Schuler, et al., 1996; and Newman and Novell, 1996).

Compensation Practices Compensation practices were taken

from the above-mentioned data sets, as follows: from the ISSP data set, seniority- based pay system, pay-for-performance, and skill-based pay system; from the IBM-Towers Perrin data set, flexible benefits; and focus on individual performance; from the Price Waterhouse- Cranfield data set, employee share options/stock ownership, individual bonus/commission, workplace child- care, career-break scheme (time off to attend to family responsibilities), and maternity leave.

Analysis To test the propositions stated above,

the Kendall Tau coefficient was used. The use of this coefficient, rather than other measures of association, such as Spearman's Rho, can be supported for at least two reasons (Champion, 1970):

* While Spearman's Rho has commonly been included as an ordinal-level mea- sure of association, the computation of subtracting ranks from one another actu- ally assumes interval-level data. This contradiction has led some researchers to question the appropriateness of this statistic for ordinal-level data;

* A primary advantage of Kendall's Tau is that it is appropriate when a large number of ties is present within ranks.

This advantage is important given that there was a large number of ties within a number of the variables used in this article.

RESULTS

The overall results of the analyses are presented in Table 2. For compensation practices based on status, statistically significant support was found for both propositions. The propensity to use both seniority-based and skill-based compensation systems was found to be positive- ly correlated with Uncertainty Avoid- ance.

For compensation practices based on individual performance, three out of the six propositions were supported fully, and one more proposition was supported for only some groups of employees. All propositions that related these compensation practices to the Individualism dimension were supported (although a relationship involving individual bonus/commission plans was found, as predicted, only for clerical staff and manual labor). The results for Uncertainty Avoidance were less supportive. Only one out of three variables, the individual performance practice, was found to be related to Uncertainty Avoidance. No relationship was found between Un- certainty Avoidance and the use of the pay-for-performance practice on the individual bonus/commission-pay practice.

For social benefits and programs, four out of the eight propositions were supported fully, and four more were supported for only some groups of employees. The most convincing results were found for the propositions involving the Masculinity dimension. As predicted, high Masculinity seems to be associated with less use of flexible benefits, workplace child-care programs, career-break schemes, and maternity-leave programs.



TABLE 2 CORRELATION BETWEEN COMPENSATION PRACrICES AND

CULTURAL DIMENSIONS: KENDALL'S TAU (Z-statistic in parenthesis)

Power Indivi- Uncertainty Distance Masculinity dualism Avoidance

1. BASED ON STATUS: Seniority-based .571*** (ISSP) (2.29) Skill-based .500** (ISSP) (1.71)

2. BASED ON INDIVIDUAL PERFORMANCE: Pay-for-performance .555*** (ISSP) (2.29) Focus on individual performance .712*** -.660*** (IBM-TP) (2.81) (-2.61) Individual bonus/ commission for: (PW-CR) - managers -.186

(.75) - professional and .351*

technical staff (1.56) - clerical staff .411 *

(1.71) - manual staff .419**

(1.71)

3. SOCIAL BENEFITS AND PROGRAMS Flexible benefits -.439***

(IBM - TP) (-1.92)

Workplace child-care for: (PW-CR) - managers -.691 * * * .444*

(-2.29) (1.56) - professional and -.691 * * * .444* technical staff (-2.29) (1.56)

- clerical staff -.691*** .519** (-2.29) (1.71)

- manual labor -.666*** .491** (-2.29) (1.71)

Career-break scheme for: (PW-CR) - managers .500*** .411**

(2.29) (1.71)

- professional & .315* .336



TABLE 2 (CONTrINUE) CORRELATION BETWEEN COMPENSATION PRACTICES AND

CULTURAL DIMENSIONS: KENDALL'S TAU (Z-statistic in parenthesis)

Power Indivi- Uncertainty Distance Masculinity dualism Avoidance

technical staff (1.56) (1.56) - clerical staff .352* .374

(1.56) (1.56)

- manual labor .330* .426**

(1.56) (1.71) Maternity leave for: (PW-CR) - managers .478***

(2.29)

- professional & .338*

technical staff (1.56) - clerical staff .321*

(1.56)

manual labor .295*

(1.56)

4. OWNERSHIP PLANS Employee share options/stock ownership for: (PW-CR) - managers -.373* .574*** .486***

(-1.04) (2.29) (-2.29)

- professional and -.561*** .426** .561***

technical staff (-2.29) (1.71) (-2.29) - clerical staff -.572*** .396** -.495***

(-2.29) (1.71) (-2.29)

- manual labor -.544*** .443** .525***

(-2.29) (1.71) (-2.29)

* p<.10 ** p<.05

p<.025

The results for Uncertainty Avoidance do not suggest strong support for our propositions. Workplace child-care programs and career-break schemes seem to relate to Uncertainty Avoidance, but only for some groups of employees. Neither flexible benefits schemes, nor maternity-leave programs were found to be significantly associated with Uncer- tainty Avoidance.

I

The results for employee ownership plans showed a rather strong support for all hypotheses, three (except for managers, in the case of the relationship with Power Distance). In other words, employee-ownership plans are more likely to be found in countries with higher Individualism, lower Uncertainty Avoid- ance, and lower levels of Power Dis- tance.



CONCLUSIONS

In this article we explored a number of relationships between the cultural dimensions suggested by Hofstede (Power Distance, Uncertainty Avoidance, Individualism-Collectivism, and Masculinity-Femininity) and specific compensation practices. Previous research had suggested a number of relationships between these cultural dimensions and generally defined HR approaches used by firms, usually referred to as general HR policies. Here, we added another level of specificity by analyzing the relationships between Hofstede's dimensions and specific HR practices. These relationships were examined quantitatively across twenty four countries and three large data sets. A number of theoretically based propositions were developed to examine the relationships between the cultural dimensions of a society and specific HR compensation practices of firms. The results suggest that national culture provides as important explanation for the variance in the utilization of different compensation practices in different countries.

More specifically, the findings repre- sented here offer several suggestions to MNCs. First, they suggest that MNCs operating in countries with high levels of Uncertainty Avoidance may be advised to offer more certainty in compensation systems, for example, seniority-based or skill- based compensation. Second, as MNCs strive for greater productivity through the use of individual incentive compensation, a country's culture should be taken into account. More specifically, the results of the pay-for-performance study suggest that individual incentive compensation practices have a better fit in countries with higher levels of Individualism. Third, MNCs should consider country culture in the use of social benefits and

social programs. The results suggest that in countries with higher levels of Masculinity there is less use of flexible benefits, workplace child-care programs, career-break schemes, and maternity- leave programs. There is, however, no need to consider the levels of Uncertainty Avoidance in offering social benefits and social programs. Fourth, as North American MNCs expand abroad, they need to consider country culture in their use of share options and stock-ownership plans. The results suggest that share options and stock-ownership plans may be more congruent in countries with higher levels of Individualism, and lower levels of Uncertainty Avoidance and Power Distance. In addition to cultural con- straints on the use of options and ownership plans, however, there are also legal prohibitions on the use of these forms of compensation in many countries.

While the results are encouraging, we view the findings as an important first step; substantial additional analysis is called for because of the limitations of this study. Due to data availability con- straints, we were able to test only a small number of compensation practices in a limited number of countries. It would not be surprising, however, to see varia- tion by culture in other HR practices (Newman and Nollen, 1996). The number and choice of countries studied do not guarantee the generalization of our findings for the rest of the world.

Furthermore, although the Kendall correlation technique is rather robust, it does not allow us to control for other important macro-level social, legal, economic, political, and historical variables that might moderate the relationships examined here (Schuler and Florkowski, 1996). As a consequence, the results here may understate the real impact of national culture on specific HR practices.

172 JOURNAL OF INTERNATIONAL BUSiNESS STUDIES


Another factor that may also have tem- pered support for our propositions is the general nature of the research. Because we utilized existing data sets, the companies surveyed were both national and multinational in origin. It was impossi- ble to separate these in the analysis. It would be expected that national firms would have HR practices that are more closely aligned with the dimensions of their national culture than would MNCs. To the extent that this is supported, the findings presented here would underesti- mate the real relationships between HR practices in firms and the dimensions of national culture. To the extent that MNCs practice "being local," however, the real relationships may not be under- estimated.

In this article, we looked only at a number of specific HR compensation practices for staffing, appraisal, and compensation (MacDuffie, 1995) rather than a bundle of them. There is a need to build models and research programs internationally that would try to bundle several different HR practices, and then examine the relationship between different cultural dimensions and those bundles of HR practices. It may be that certain HR practices are closely related to other HR practices, and that these inter- relationships are constant across cultures and companies. For example, it could be argued that MNCs that put heavy empha- sis on hiring locally are always more concerned with professional training of their employees, while MNCs that trans- fer parent company nationals to the foreign affiliates are always more concerned with cross-cultural training of their per- sonnel. In the literature, early research on these inter-relationships appears to be promising (Kochan and Osterman, 1994; MacDuffie, 1995; Huselid, 1995). Further research in the suggested direc-

tion would help to cluster HR practices into bundles. Each bundle would include, for example, specific compensation practices fitted with specific training practices, performance appraisal mecha- nisms, and other HR practices. The research may show that such a "fit," viewed as the internal coherence among various components of HR activities, may lead to higher levels of efficiency for those companies that pursue that "fit" (Arthur, 1992; Ichniowski et al., 1993). Once these "bundles" are created, we would be able to examine the relationships between them and the dimensions of national culture, and even the effectiveness of these bundles under different cultures (Huselid, 1995).

In this article we examined the relationship between dimensions of national culture and specific HR (compensation) practices, but did not control for a number of important factors that might explain certain amount of variance in the use of particular practices due to the data limitations. These factors include industry, ownership, company size, employee occupation etc. Further research is need- ed to show how substantial the effect of national culture is if we control for these factors. Rogovsky (1996) showed that national culture is much more important in explaining the variance in employees work orientations and HR approaches than occupation.

Given these caveats and suggestions for further research, the results are suggestive of the importance of national culture for how firms manage their human resources. For MNCs this would suggest consideration of the admonition, "When in Rome..." For MNCs that strive to operate as one firm, these results might suggest that they develop broad-based general HR policies, such as recognition of performance contributions in remuner-



ation schemes, and then allow their foreign affiliates to establish more specific HR practices, for example, individual remuneration based on performance, rather than team remuneration based on performance. Impacting these considerations, of course, is the degree to which culture changes and the relative impact of culture in relation to other factors, such as national laws, economic conditions, and social customs (Schuler and Florkowski, 1996). Being sensitive and alert to the degree of cultural malleability may be instrumental in allowing MNCs to gain a competitive advantage through their HRM activities.

NOTES 1 Because Hofstede's scores were

obtained from a specific company, some scholars have questioned their validity as a representation of national culture. However, Hofstede's scores are still the best known and the most recognizable dimensions used in undertaking a quantitative study involving national values (Newman and Novell, 1996).

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