Understanding Compensation Practice Variations across Firms: The Impact of National Culture

Author(s): Randall S. Schuler and Nikolai Rogovsky

Source: Journal of International Business Studies, Vol. 29, No. 1 (1st Qtr., 1998), pp. 159-177
Published by: Palgrave Macmillan Journals
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 Understanding Compensation Practice
Variations Across Firms: The Impact of
National Culture

RandallS. Schuler*
NEW YORK UNIVERSITY

NikolaiRogovsky**
CALIFORNIA STATE UNIVERSITY, HAYWARD

With operations spread worldwide, compensation practices based on

firms that find- themselves
competing in a global marketplace
are looking at the implications of
the admonition, "Whenin 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
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, com-
pensation 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 traditionaland non-
traditional sources of competitive ad-
vantage. 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
 AND CULTURE
COMPENSATION
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 func-
tion of human resources is increasingly
viewed not simply as a set of practices
and policies that should fit into a partic-
ular firm's overall corporate or business
strategy, but also as a crucial compo-
nent of this strategy. This understand-
ing of the role of the HR function fol-
lows 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 rela-
tion 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) organi-
zational (organizational structure; sys-
tems 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 advan-
tages (Schuler and MacMillan, 1984).
As the HR function is seen increasing-
ly 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 compet-
itive advantage differently, or in the
same way throughout their various coun-
tries in which they operate?
As suggested by Schuler and
160
MacMillan (1984), MNCs can gain com-
petitive advantage through their use of
any HR practice, such as training, com-
pensation, 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 advan-
tage 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 arti-
cle 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 rela-
tionship 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 expla-
nation for cross-national compensation
practice variations is provided (this
explanation is in keeping with the think-
ing 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
JOURNAL OF INTERNATIONAL BUSINESS STUDIES

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 particular-
ly 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 relation-
ships 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 manage-
ment 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 rela-
tionship with HRM policies and prac-
tices (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 per-
formance. 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 val-
ues (Newman and Nollen, 1996). Not
surprisingly, there is ample evidence that
VOL. 29, No. 1, FIRSTQUARTER, 1998
RANDALLS. SCHULER& NIKOLAIROGOVSKY
national cultures vary, and HRM prac-
tices vary depending on the national cul-
ture 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 interna-
tional 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 cul-
ture 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 coun-
tries (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 cus-
toms 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-
161
COMPENSATION AND CULTURE
stand them, but choose to ignore them.
The last approach appears to be the pre-
vailing one, given the astonishingly small
number of strategiesand policies that are
used by the MNCs to adjust to national
cultures, particularlyin the area of com-
pensation (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 internationallydue to
its lack of understandingof cross-cultural
differences in expectations as regards
compensation policies and practices.
The experience of Lincoln Electric is not
unique (Punnettand Ricks, 1992) and can
be repeated by other MNCs for a number
of reasons:
* Firms do not understand the impor-
tance 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-culturaldifferences 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 prac-
tices (Hendry, 1992).
* There is a lack of evidence showing
that cultural sensitivity and adaptability
162
matter, although recent work by
Newman and Novell (1996) shows that
they do matter. Using several manage-
ment practices, Newman and Novell
(1996) found that work units with cultur-
ally consistent practices had better finan-
cial 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 prac-
tices, this investigation focuses more nar-
rowly on HR practices, specifically com-
pensation. As with Newman and Novell
(1996), this study uses Hofstede's dimen-
sions 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 particularinter-
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 dimen-
sions. 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-
JOURNAL OF INTERNATIONAL BUSINESS STUDIES

rial and organizational variables; and
work role and interpersonalorientation.
Hofstede (1980, 1984, 1993), however,
has presented perhaps the most compre-
hensive, 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 nation-
al values systems. These were labeled
"Power Distance" (large vs. small), "Un-
certainty Avoidance," "Individualismvs.
Collectivism," and "Masculinity vs.
Femininity."1
The first dimension of national cul-
ture, 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 consis-
tent with small Power Distance found in
the United States, for example, is
employee participation in decision mak-
ing (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).
Authoritarianmanagement 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 with-
in an organization). In societies with a
high degree of Uncertainty Avoidance,
people feel uncomfortable in unstruc-
tured or risky situations. Rules and pro-
VOL. 29, No. 1, FIRSTQUARTER,1998
RANDALLS. SCHULER& NIKOLAIROGOVSKY
cedures are more necessary for employ-
ees 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-preferthe 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 fami-
ly above those of others. In individualis-
tic 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 cul-
ture (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 Japanor the
United States, are "masculine,"i.e., have
characteristicssuch 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,
163
COMPENSATION AND CULTURE
merit pay, and managementby 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, interpersonalrelationships
and quality of work-life issues are consis-
tent with Femininity (Jaeger, 1986;
Hofstede, 1991).
National Culture and HR Policies
and Practices
Some research explaining the variance
across cultures in HR policies and prac-
tices 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 com-
panies 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 Europeancountries, 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
164
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-basedrewardswere consistent with
not only a high level of masculine cul-
ture, but that they were also associated
with a high level of financial perfor-
mance.
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 impor-
tance of matching HR practices to a
country's culture because: (1) it conveys
cultural awareness and sensitivity; (2) it
conveys expectations of, and rewardsfor,
employee behavior consistent with
ingrained patterns of acceptable behav-
ior; 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 compen-
sation practices. Using several secondary
data sets, we examine a number of
propositions regarding the relationships
between specific compensation practices
and dimensions of national culture.
PROPOSITIONSON THE RELATIONSHIP
BETWEENNATIONAL CULTUREAND
COMPENSATIONPRACTICES
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,
JOURNAL OF INTERNATIONALBUSINESS STUDIES

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 -suggestedrela-
tionships between dimensions of nation-
al culture and broaderstatements of how
firms regard and intend to manage their
human resources, more commonly
referredto 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: com-
pensation practices, based on status;
compensation practices, based on perfor-
mance; 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 com-
pensation practice.
1. Compensation Practices Based on
Status
Two practices are looked at here: sen-
iority-based pay plans, and skill-based
plans. Based on Hofstede (1980), Jack-
son and Schuler (1995) argued that in
VOL. 29, No. 1, FIRST QUARTER, 1998
RANDALLS. SCHULER& NIKOLAIROGOVSKY
societies with high Uncertainty Avoid-
ance pay practices are likely to empha-
size predictability and certainty.
Compensation practices based on senior-
ity 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
UncertaintyAvoidance.
Proposition 1.2. A skill-based com-
pensation system will be more prevalent
in countries with higher levels of
UncertaintyAvoidance.
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,pro-
fessional 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 individ-
ual-based contingent rewards and re-
wards that emphasize individual recogni-
tion. 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.
165
 AND CULTURE
COMPENSATION
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 per-
formance is tied to compensation. Thus,
we propose that:
Proposition 2.4. Pay-for-performanceis
likely to be less prevalent in countries
with higher levels of Uncertainty
Avoidance.
Proposition 2.5. A focus on individual
performancein determining the level of
pay will be less prevalentin countrieswith
higher levels of UncertaintyAvoidance.
Proposition 2.6. Individual bonus/
commission plans are likely to be less
prevalent in countries with higher levels
of UncertaintyAvoidance.
3. Social Benefits and Programs
Four practices were approachedin this
group: Flexible benefit plans, workplace
child-care programs, career-break
schemes, and maternity-leave programs.
The last three practices were again stud-
ied 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 (Kluckholnand 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 coun-
tries with higher levels of Masculinity.
Proposition 3.3. Career-breakschemes
will be less prevalent in countries with
higher levels of Masculinity.
166
Proposition 3.4. Maternity-leave pro-
grams will be less prevalent in countries
with higher levels of Masculinity.
Countries with high levels of Uncer-
tainty Avoidance emphasize predictabili-
ty 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
organizationsto deal with unpredictable
situations as they arise. Therefore:
Proposition 3.5. Flexible benefit plans
will be more prevalent in countries with
higher level of UncertaintyAvoidance.
Proposition 3.6. Workplace child-care
practices will be more prevalent in the
countries with higher levels of
UncertaintyAvoidance.
Proposition 3.7. Career-breakschemes
will be more prevalent in countries with
higher levels of UncertaintyAvoidance.
Proposition 3.8. Maternity-leave pro-
grams will be more prevalent in coun-
tries 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 op-
tions/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 organi-
zation is calculative, i.e., based upon an
evaluation of what a person contributes
and what is received in return.
JOURNAL OF INTERNATIONAL BUSINESS STUDIES

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 coun-
tries 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 oper-
ate 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
VOL. 29, No. 1, FIRST QUARTER, 1998
RANDALLS. SCHULER& NIKOLAIROGOVSKY
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 sur-
veyed 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 indi-
vidual 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.
167
 AND CULTURE
COMPENSATION

The Cranfield School of Management
and Price Waterhouse, a public account-
ing firm, launched a multi-country pro-
ject 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 pro-
ject 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 organi-
zational variables.
CulturalDimensions 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
- ~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ _ _

TABLE1
CULTURAL
HOFSTEDE'S 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).

168 BUSINESSSTUDIES
JOURNALOF INTERNATIONAL

and Uncertainty Avoidance, described in
detail in Newman and Novell (1996).
These indices for the economies exam-
ined here are provided in Table 1.
The choice of compensation practices
selected from the data sets was informed
by these cultural dimensions and is con-
sistent 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 ben-
efits; and focus on individual perfor-
mance; 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 common-
ly 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 sta-
tistic 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.
VOL. 29, No. 1, FIRSTQUARTER,1998
RANDALLS. SCHULER& NIKOLAIROGOVSKY
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 compen-
sation 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 compensa-
tion practices to the Individualism
dimension were supported (although a
relationship involving individual
bonus/commission plans was found, as
predicted, only for clerical staff and man-
ual 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 indi-
vidual bonus/commission-pay practice.
For social benefits and programs, four
out of the eight propositions were sup-
ported fully, and four more were sup-
ported for only some groups of employ-
ees. 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, work-
place child-care programs, career-break
schemes, and maternity-leave programs.
169
 AND CULTURE
COMPENSATION

TABLE2
BETWEENCOMPENSATION
CORRELATION PRACrICESAND
CULTURALDIMENSIONS:KENDALL'STAU
(Z-statisticin parenthesis)

Power Indivi- Uncertainty

Distance Masculinity dualism Avoidance

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

PERFORMANCE:
2. BASEDON INDIVIDUAL
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. SOCIALBENEFITSAND PROGRAMS
Flexible benefits -.439***
(IBM - TP) (-1.92)
Workplacechild-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-breakscheme for:
(PW-CR)
- managers .500*** .411**
(2.29) (1.71)
- professional & .315* .336

170 JOURNAL OF INTERNATIONAL BUSINESS STUDIES

 RANDALLS. SCHULER& NIKOLAIROGOVSKY

TABLE2 (CONTrINUE)
CORRELATION
BETWEENCOMPENSATION PRACTICESAND
CULTURALDIMENSIONS:KENDALL'STAU
(Z-statisticin 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)
Maternityleave for:
(PW-CR)
- managers .478***
(2.29)
- professional & .338*
technical staff (1.56)
- clerical staff .321*
(1.56)
manual labor .295*
(1.56)
4. OWNERSHIPPLANS
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
I

The results for Uncertainty Avoidance
do not suggest strong support for our
propositions. Workplace child-care pro-
grams 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.
VOL. 29, No. 1, FIRSTQUARTER,1998
The results for employee ownership
plans showed a rather strong support for
all hypotheses, three (except for man-
agers, in the case of the relationship with
Power Distance). In other words, em-
ployee-ownership plans are more likely
to be found in countries with higher
Individualism, lower Uncertainty Avoid-
ance, and lower levels of Power Dis-
tance.
171
COMPENSATION
AND CULTURE
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 rela-
tionships between these cultural dimen-
sions 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 proposi-
tions were developed to examine the rela-
tionships between the cultural dimen-
sions of a society and specific HR com-
pensation 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 sys-
tems, 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
172
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 high-
er levels of Individualism, and lower lev-
els of Uncertainty Avoidance and Power
Distance. In addition to cultural con-
straints on the use of options and owner-
ship 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 num-
ber and choice of countries studied do
not guarantee the generalization of our
findings for the rest of the world.
Furthermore, although the Kendall cor-
relation technique is rather robust, it does
not allow us to control for other impor-
tant macro-level social, legal, economic,
political, and historical variables that
might moderate the relationships exam-
ined here (Schuler and Florkowski,
1996). As a consequence, the results here
may understate the real impact of nation-
al culture on specific HR practices.
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 compa-
nies 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 com-
pensation (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 differ-
ent cultural dimensions and those bun-
dles of HR practices. It may be that cer-
tain 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
arguedthat MNCsthat 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 for-
eign affiliates are always more concerned
with cross-cultural training of their per-
sonnel. In the literature, early research
on these inter-relationshipsappearsto be
promising (Kochan and Osterman, 1994;
MacDuffie, 1995; Huselid, 1995).
Further research in the suggested direc-
VOL. 29, No. 1, FIRSTQUARTER,1998
RANDALLS. SCHULER& NIKOLAIROGOVSKY
tion would help to cluster HR practices
into bundles. Each bundle would in-
clude, for example, specific compensa-
tion 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 relation-
ships between them and the dimensions
of national culture, and even the effec-
tiveness of these bundles under different
cultures (Huselid, 1995).
In this article we examined the rela-
tionship between dimensions of national
culture and specific HR (compensation)
practices, but did not control for a num-
ber of important factors that might
explain certain amount of variance in the
use of particularpractices due to the data
limitations. These factors include indus-
try, ownership, company size, employee
occupation etc. Furtherresearch 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
furtherresearch,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 performancecontributionsin remuner-
173
 AND CULTURE
COMPENSATION
ation schemes, and then allow their for-
eign affiliates to establish more specific
HR practices, for example, individual
remuneration based on performance,
rather than team remunerationbased on
performance.Impacting these considera-
tions, 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 culturalmalleability
may be instrumentalin allowing MNCsto
gain a competitive advantage through
their HRMactivities.
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 quan-
titative study involving national values
(Newman and Novell, 1996).
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