TRANSNATIONAL ROLES, TRANSNATIONAL REWARDS:   BEYOND EXECUTIVE COMPENSATION TO GLOBAL INTEGRATIVE PAY

Allen D. Engle, Sr.

Professor of Management 

Department of Management, Marketing and Administrative Communication

College of Business and Technology

215 Combs Classroom Building

Eastern Kentucky University

521 Lancaster Avenue

Richmond, Kentucky USA40475-3102

allen.engle@eku.edu 

ABSTRACT: This conceptual article reviews the theoretical underpinnings of traditional managerial performance models and attendant explanations of executive compensation, outlines the disconnect between existing models of executive compensation and Bartlett and Ghosal’s transnational strategy, and outlines a proposed model of global pay.   This model is based on the three roles of operational entrepreneur, managerial developer and top level leader outlined by Bartlett and Ghoshal and consists of pay emphases in the areas of experiences (inputs), activities (processes) and rewards (outputs) for all three roles. These three global integrative pay configurations are presented and discussed and the paper concludes with a series of observations and comments about the pay implications of transnational administrative roles. 

 

KEY WORDS: Executive Compensation, Transnational Human Resources, Global Integrative Pay 

 

Introduction – Justifying the Wardrobe of “Russian Dolls” 

 

            Illusions, particularly illusions that have contributed to organizational mythmaking, die hard.Perhaps no greater and more enduring myth exists in American management theory than the myth of the “generic manager”- a one size fits all manger that, once identified, can be progressively given increasingly important assignments with wider scope and resource responsibility (2: 761-762).

            According to the myth, once administrative capabilities (leadership, vision, industry or discipline skills, etc.) are identified then careers are sculpted for new stages of increasing size and scale. “The metaphor is that of the Russian doll: at each level of the hierarchy, the manager is similar but bigger [in size and scope of operational responsibility] than the manager a level below” (2: 762). These generic managers share a typical US executive compensation system made up of four components: base salary, benefits, perks, short-term incentives and long-term incentives (21: 498-502).Once inside the executive club these four components grow with advanced responsibility. 

 

Buying Wardrobes for the “Russian Dolls”

 

            This executive compensation system is explained and justified in terms of three models. First the internal hierarchical nature of organizations is used to justify vertical internal pay differentials – a so-called “internal equity argument” for proportionality of differentials (21: 496; 26: Chapter 3). Interestingly, while firms claim to have downsized, flattened, shed vertical layers and decentralized decision making between 1980 and 1999, CEO pay has gone from 42 times the average of workers to 475 times the average of workers (3). Granted, much of this increase in CEO pay is based on the explosion of short and long- term incentive components and size effects due to mergers and consolidations over the period, yet still the gap between theory and practice remains alarming. The internal equity argument helps explain base salary, benefits and perks as extreme versions of already existing hierarchically based pay systems. These pyramidal hierarchies create tournaments, in which winners at one level move up to the next level of play, and must be motivated by ever-greater prizes and payoffs. Internal tournament models only make sense to the degree that traits, skills and experiences associated with success at one level are indeed “generic” and therefore relevant at the next level in the hierarchy (12:211).

            Second, market comparison arguments are made, justifying pay packages on the ground that there is a limited (globally limited?) supply of these generic managers, and we must act decisively to corner the market on this scarce and critical talent. This “external equity,” match the market at any cost approach – facilitated by mass media contract stories, and headhunters acting as athletic or entertainment agents – has resulted in a bidding war for executive talents; much to the advantage of the larger Russian dolls (4; 17). Some evidence on the return on executive investments finds size of firm and the correlation between executive pay levels and the pay levels of members of the attendant Board of Directors (a “social comparison” explanation) do more to explain pay than external equity models can explain (22; 25).

            Finally, “agency theory” models of executive pay provide a partial explanation for the explosion in long term and short term incentives over the last ten years (4; 9; 21: 499). Executives, given significant latitude and control over the economic destiny of the firm, must be motivated (bribed?) into taking the long term interests of the shareholders into account – hence tying their personal interest to rising stock values (5; 6). When there are significant gains in all sectors of US financial markets – as in the 1990’s - executives hold on to these options, every one appears to be gaining and the transfer of wealth is more subtle and painless (9). These “generic managers,” survivors of the internal tournaments and the siren’s song of external bidding wars, are essentially assumed to be individualistic competitors – American heroes embodying American values.

             

What About Strategy?

 

            So far we have outlined the “generic manager,” clothed in increasing levels of executive pay components as the “Russian doll” becomes increasingly successful. Pay is explained in terms of the size of the firm, internal hierarchies, external market conditions, agency theory and social comparisons theory – everything except strategic intent.

            If human resource practices exist to facilitate strategic implementation, and if executive compensation is to be a legitimate human resource practice, then linkages between strategy and compensation must be evident (15; 18; 21).Given this standard, not only are executive compensation practices “fighting the last war” (old domestic US strategies in stable, certain environments with defunct hierarchical or social assumptions), but evidence suggests that traditional executive compensation practices may never have effectively contributed to winning that “last war.” 

Transnational Strategies, Transnational Roles 

            According to Christopher Bartlett and Sumatra Ghoshal, enduring global competitiveness for many firms can best be pursued by simultaneously achieving three goals. These goals are: 1) global efficiencies of scale – global standardization; 2) multinational flexibility to local conditions – local differentiation; and 3) world wide learning – the global diffusion of innovation (2: 241-242). Furthermore these goals can only be achieved by leveraging and coordinating, to an unparalleled degree, the technical and environmental capabilities (means) that exploit national differences, scale economies and scope economies (2: 247-251).

            By combining and simultaneously balancing these three goals and means in what Bartlett and Ghoshal call a “transnational strategy” the firms must radically depart from existing strategies which were based on strengths and capabilities in only one or two of these three goal areas (2: 253-255). These firms control their members’ activities primarily by means of social “clan” control as opposed to traditional bureaucratic structural control (15). Structures must still exist in the transnational firm (decentralized federation, coordinated federation and centralized hub structures are present as an “administrative heritage” and provide a partial control solution) (2: 507-512).

            Yet the primary control device in the transnational firm is not the “anatomy” of organizational structure, but a balanced constellation of “anatomy” (structure), “physiology” (informal networks of personal relationships) and notably “psychology” (a shared organizational culture)(2: 515-519). It is the “mind matrix,” the social control system, which acts as the primary control device in the transnational firm (7). International human resource (IHR) systems - acting as repositories and levers to support cultural change - may help drive this gradual transition, first changing “individual attitudes and mentalities,” then “interpersonal relationships and processes” and finally, almost incidentally, “formal structure and responsibilities” (2: 520; 24).

            Given the critical nature of individual attitudes and interpersonal relationships, Bartlett and Ghoshal go on to present three new roles for transnational managers. These roles are operating level entrepreneur, senior management developer and top level leader. We will outline each role and present the attitudes, knowledge and skills required for each role.

 

            Operating Level Entrepreneurs

 

            These locally-embedded, “aggressive entrepreneurs” are responsible for creating and pursuing new opportunities, improving ongoing productivity in these “frontline units” by “doing more with less,” while “taking responsibility for continued growth through innovation” (12:214). These individuals operate at the local-national or regional (product/functional or geographic region) level and have primary responsibility for delivering the local differentiation capabilities to the transnational firm with a secondary responsibility for the diffusion of innovation activities (2: 247-251). 

 

            Senior Level Developers

 

            As supporting coordinators, these regional or global coaches must “provide support and coordination” as well as “ bring the resources and experience of a larger company to bear on the smaller [entrepreneurial local or regional] units” (12: 214-215). These “idea champion” managers provide personal and political support to new ideas, “leverage” entrepreneurial innovations across entrepreneurial units by “linking dispersed resources and transferring best practices across units” while coordinating the “inevitable tension between the pressure for short term performance and the challenge of ambitious long term visions” (12: 216). Much of their effort and time is spent as coaches and mentors, identifying, developing and supporting front line entrepreneurial talent. This group operates at the regional or global level and have primary responsibility for providing worldwide learning and the diffusion of innovation as well as secondary responsibility for buffering and balancing global standardization and local differentiation (2: 247-249). 

 

            Top Level Leaders

 

            These culture gurus are responsible for framing a sense of direction, gaining commitment to this direction form the other two groups and the rest of the organization and providing the firm with “the vision and vitality to move beyond refining its past achievements to developing the ability to continuously renew itself” (12: 216). These charismatic leaders balance iconoclasm with trust building so as to “challenge conventional wisdom and established objectives, replacing them with higher standards” while “ embedding corporate that [support] cooperation and trust” and most importantly “create a sense of purpose and ambition that may [eventually] give rise to a set of strategic objectives but are more broadly defined’ (12: 216).

These individuals operate at the global level and have primary responsibility for delicately balancing local differentiation global standardization and the diffusion of integration, with a secondary responsibility for global standardization (12: 247-251). 

Transnational Roles, Transnational Rewards  


            The radically different roles in this new culture must be reinforced by the IHR system in general and particularly by such a powerful artifact as the reward system. We must leave behind terms like “executive compensation,” embedded as it is in bureaucratic hierarchies and pay for vertical “differentiation” and replace the term with a new term that focuses attention on horizontal coordination – “global integrative rewards”. Granted this term does not trip off the tongue, but it captures an intentional break from the past and the emphasis on valuing and rewarding coordination and integration rather than vertical differences and specialization (16). Now the extent and level of integrative activities determines the strategic value for members of the transnational firm.

            Given these three transnational roles, what approach to globally integrative rewards can we develop to facilitate these roles and forward the transnational strategy? Before we present such an approach, let us discuss two dimensions central to such a model. By outlining these dimensions we can outline a framework of a transnationally relevant model of pay. 

 

            Time – the Horizontal Dimension

 

            The timing of employee work contributions and attendant organizational inducements has long been an issue of interest to students of compensation (13). Technically, timing distinguishes between rewards and incentives (18) and as presented earlier timing is critical in distinguishing between base salary (in the present) and the short term and long term incentive components of a traditional pay package. Obviously, time can be analyzed in the past tense, the present tense and the future tense.

            In his presentation of group incentive plans, McAdams (20) distinguishes between “leading” measures (similar to our past tense) – such as customer satisfaction, sales and market share; “operational measures” (similar to our present tense) – productivity, internal quality, cost reduction, attendance, safety, output cycle time, and projects in work; and “lag (Financial)” measures (similar to our future tense) – such as profitability, earnings or revenues, returns (on equity, assets, etc.), and publicly traded stock price (161-177). These three time frames are associated with distinct yet complementary sets of performance measures.

            In the past tense, an individual’s past work experiences, activities, performance and achievements are the basis for rewards. This category of rewards acts as an input to the present work role and based on personal characteristics, not based on the job or performance (19). Applied for example to the entrepreneurial role we would include previous successes in the role of entrepreneur or previous in depth experience in the products or cultures of the present entrepreneurial assignment. To provide a more traditional frame of reference, you may want to view this category as analogous to the base salary component of executive pay systems or as the “Fixed Base” component of World at Work’s “Total Reward “ model (27)

            In the present, an individual’s ability to handle the activities of their present job is the basis for rewards. This category of rewards are based on processes critical to the present work role and are based on the job (role) characteristics and not the person nor performance (19).

            Applied, for example, to the senior management developer role, we would include the indicators and measures of successfully building teams, reconciling differences, balancing short term priorities and long term goals. Evidences of active coaching and mentoring of entrepreneurs in the firm would be another example of present tense, activity based job processes. Again, in terms of a frame of reference, you may want to consider this category as analogous to the merit component of executive compensation, largely determined based upon successful activities in work processes. In terms of the “Total Rewards” model, consider the “Fixed-Differential” component (27).

            In the future tense, an individual’s ability to transition processes into performance results is the basis for this category of rewards. This category of rewards is based on outputs from the relevant organizational unit and is based upon direct performance, not the person or the job (19).

            Applied, for example, to the operating level entrepreneur role, here we would include direct unit performance in terms of sales, revenues, market growth, etc. As a final point of reference, consider this component analogous to short term incentive or long term incentives or what is presented in the “Total Rewards” model as “Variable – Profit and performance sharing, incentives, bonus and equity” (27). 

 

            Scope of Role and Level of Activity – the Vertical Dimension

 

            With this dimension we return to the idea that transnational firms must balance local, regional and global concerns. As stated earlier, operating level entrepreneurs operate primarily at the local-national level with some regional interests, senior management developers operate primarily at the regional level while balancing local and global interest, and top level leaders operate at the global level while balancing forces of change and continuity. This provides us with three vertical foci: local, regional and global. 

 

A Globally Integrative Model of Pay 

 

            By combining the two dimensions above, we present a prescriptive model applied to link the input-process and output pay dimensions for all three transnational roles. Pay for each of these three role configurations will be discussed in turn. Figure one represents a proposed pay configuration for the entrepreneurial role. 

INSERT FIGURE ONE APPROXIMATELY HERE

            Triangles represent the relative emphasis placed on pay for the various time and level coordinates. No triangles mean no pay will be provided for that aspect of work. One triangle (e.g. point “a” in Figure 1) represents a low emphasis in pay - perhaps keyed to comparison of local labor market “floors” (11) - for the achievement of those activities. There is very little pay given for this area since entrepreneurs should be paid for results. Let them apply their own idiosyncratic processes to achieve those results. Two triangles (e.g. point “c” in Figure 1) represent a medium emphasis in pay (notice that at this regional vertical level the comparison is to the average of regional labor markets) for achieving not only local results, but for coordinating entrepreneurial activities that, when diffused across other units in the region, produce results across and within the region. Three triangles (for example points “b” and “d” in Figure 1) represent a high level of emphasis. For this role we value presence of both past experiences related to entrepreneurship and an in-depth regional knowledge associated with local responsiveness (point “d”) as well as the ability to produce results from the local unit (point “b”). This high level may be related to comparisons of local product market “ceilings’ (11). Note components emphasized in this pay configuration reinforce and reflect key role requirements. Figure 2 represents a proposed pay configuration for the developer role. 

INSERT FIGURE TWO APPROXIMATELY HERE

            Notice first the three-triangle emphasis for past experiences (an in-depth understanding of people and their motivations across numerous cultures), present activities (coaches must engage in processes that diffuse innovation throughout the region or globe) and future results (again regional synergism and the diffusion of innovation as a critical and measurable outcome).

Interestingly enough, an empirical investigation of high tech firms (many with global activities) showed a strong relationship between innovation and CEO short term compensation as well as some relationship between innovation and CEO long term compensation (1). An additional two-triangle emphasis on entrepreneurial results (in the bottom right area) is based on the developmental aspect of these developer roles. Successful coaches have high performing athletes.

            Experiences related to understanding local conditions faced by both local entrepreneurs and global leaders (the two sets of two triangles located at the top and bottom left “global and local-experiences” section of the figure) is also critical if the developer is to reconcile differences while maintaining a balance between short term priorities and long term interests (12:216). For these regionally-based coaches, these three triangle “highs” are scaled compared to regional and not local product market “ceilings.” Finally, Figure 3 represents a proposed pay configuration for the leader role. 

INSERT FIGURE THREE APPROXIMATELY HERE

First note how critical (three triangle) experiences, processes and results are on the global (top) level of the model.

Experiences are required to provide a “grounded understanding of the company, its businesses and operations,” while extensive process competence provides the ability to “create an exciting, demanding environment . . . [the]. . . ability to inspire confidence and belief. . . [and] . . . the ability to combine conceptual insight with motivational challenges” and results are seen in terms of “setting stretch opportunity horizons and performance standards” and seeing those standards are met (12: 222).

Next, secondary criteria (represented by two triangles) include understanding the process of balancing local differentiation, global standardization and the criticality of the diffusion of innovation. Additional minimal role expectations (represented by one triangle) are required for an understanding of regional and local experiences (to provide a local/regional context for global integration decisions) and to better understand the intricacies of local and regional performance outcomes. For global leaders and cultural gurus the primary focus of pay comparison is at the level of global product market “ceilings” (11). 

 

Final Considerations 

 

            A series of closing comments are in order. First, the dimension of time provides a dynamic and not static variable of analysis. The past slides into the present, the present rolls into the future and future promised incentives come to fruition only in the present. The reduced cycle time experienced by the transnational firm means that the overseerers (compensation committees on Boards of Directors) of globally integrated pay systems must be able to provide a much more timely and regular, hands on and real time review and control process.

            The role of these global integrators (as administrative agents) vis a vis the role of those in a position of fiduciary oversight for the owners of these global firms is uncertain and understudied at this time. All we can say is that activism by those responsible for fiduciary oversight is required at a whole new level of timeliness, complexity and detail (21: 498).

Second, obviously the accurate assessment of integrative activities are, by the very definition of the integrative task, problematic (14; 16). Issues related to transfer pricing, assessing experiences, processes activities and result contributions, and role based contributions to mutual adjustment integration processes require a complete and shared understanding of the relationships between culture guru, coach and entrepreneur. It is our contention that a pursuit of these issues is absolutely essential for members of the transnational firm if IHR practices are to reinforce transnational values, roles and cultural assumptions (23). Intense integration is at the heart of the transnational solution – integration across products, functions and regions (2). This integration must be mapped, recognized and celebrated if the strategy is to be successfully implemented.

            A final caveat – the transnational firm will ultimately stand or fall based on the firm’s cultural capability in combining “anatomy,” “physiology” and “psychology” and not on the intricacies of IHR processes (2: 515-519). In Etzioni’s terms, the successful transnational is first and foremost a “moral-normative” control system with only secondary and supportive “calculative-renumerative” characteristics (8:12-16).The ironic danger is that by supporting too overwhelmingly the transnational strategy we will replace the individual role incumbent’s intrinsic motivation for task mastery with a less flexible and complete extrinsic motivation for task mastery (10).

            The timing of pay changes, always an issue for compensation strategies in support of corporate strategic change, should be one of introducing globally integrative pay only after major cultural changes are complete. In this way globally integrative pay simply echoes the messages of social control, reflecting and reinforcing normative cultural values and role expectations (15; 21). 

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Figure 1

Integrative Pay Configuration - Entrepreneurial Role

ExperiencesActivities  Results

Figure 2

Integrative Pay Configuration – Developer Role

Figure 3

Integrative Pay Configuration – Leader Role