Academic journal article Management International Review

Compensation Design as a Tool for Implementing Foreign Subsidiary Strategy

Academic journal article Management International Review

Compensation Design as a Tool for Implementing Foreign Subsidiary Strategy

Article excerpt

In their efforts to identify organizational structures and processes that facilitate the effective implementation of a multinational corporation's (MNC's) international strategy, international management researchers have examined a variety of macro-level organizational design issues (Egelhoff 1982, 1988, Stopford/Wells 1972). However, it has become apparent that the effective implementation of international strategies requires attention to more than just the structural aspects of organizational design. Researchers have demonstrated the need to focus on subsidiary managers and their role in the implementation of coordinated international strategies (Bartlett/Ghoshal 1989, Hedlund 1986, Hedlund/Rolander 1990). Beginning with Perlmutter's (1969) seminal work, authors have stressed the importance of the international manager's orientation toward doing business internationally. It is generally accepted that one goal of MNC management is to develop in its worldwide managers an orientation or mind-set that is consistent with the international strategy of the firm. (Bartlett/Ghoshal 1989, Kobrin 1994, Murtha/Lenway/Bagozzi 1998). For example, it has been argued that a global strategy necessitates a geocentric managerial orientation (Kobrin 1994). However, little empirical work has been done to examine the role of human resources practices in the development and maintenance of the subsidiary manager's attitude toward the firm and its competitive environment. Several authors have stressed the importance of international human resources management in the implementation of global strategies (Edstrom/Galbraith 1977, Kobrin 1994, Kogut 1985, Rosenzweig/Nohria 1994), however, few authors have empirically examined the role of international human resources management in the effective implementation of international strategies.

One must turn to the strategic management literature to find studies that have demonstrated the importance of various micro-level organizational design issues in the implementation of firm strategy, many of which involve the management of the firm's human resources. In particular, it is becoming increasingly recognized that the compensation and reward system is a key factor in the implementation of an organization's strategy and the accomplishment of its strategic objectives (Galbraith/Kazanjian 1986, Schuler/MacMillan 1984). However, more work must be done to tie compensation and reward systems to the organization's operating objectives and strategies (Balkin/Gomez-Mejia 1987, 1990), for it is recognized that the reward system can be pivotal in terms of the motivation, attraction and retention of human resources (Lawler 1981).

Several studies have examined the relationship between compensation systems and firm strategy in the strategic management literature. A basic assumption underlying much of the research linking managerial reward systems and firm strategy is that compensation, particularly in the form of incentives, can be used to encourage the top management behaviors needed to effectively implement the organization's strategy (Finkelstein/Hambrick 1989). "It is well understood that the basic, underlying objective of an incentive program is to directly influence the actions and behavior of those managers covered under that program" (Galbraith/Merrill 1991, p. 353). The notion that, through their decision-making, managers can influence the direction and performance of the firm, has led researchers to examine the link between firm strategy and the reward systems used. Several authors have empirically examined the relationship between firm diversification and reward systems (Balkin/Gomez-Mejia 1990, Gomez-Mejia 1992, Kerr 1985), while others have specifically looked at the determinants and outcomes of CEO compensation (Finkelstein/Hambrick 1989, Zajac 1990).

Increasingly, researchers are advocating a strategic approach to examining compensation systems which calls for a fit between compensation and both corporate and business unit strategy (Balkin/Gomez-Mejia 1987, 1990). …

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