Can you answer Question Block A (1-3); Question Block B (4) and Question (It Healthcares job-based pay dominated the existing system, while other approaches such as competency- based compensation have not been pursued, then what advantages might a competency based system have for Healthcare?)

CASE 3 WOLFGANG'S BALANCING ACT: REWARDING HEALTHCARE EXECUTIVES IN A DISPERSED YET INTEGRATED FIRM By Marion Festing and Allen D. Engle Healthcare - a successful global player in the pharmaceutical market Healthcare is one of the largest European pharmaceu- tical companies. The headquarters is situated in Hamburg, Germany, and today there are about 200 subsidiaries all over the world. In 2005, throughout the globe 30 000 people were working for Healthcare. Net sales amounted to 5.9 billion, with a net profit of750m. The company was founded more than 100 years ago. It started in a small shop in Elmshorn, a little town north of Hamburg. In the beginning, the main business was retailing with only a small part of the product range resulting from in-house production. The founder himself had a background in pharmaceutics. He was very dedicated to science and naturally interested in research and the development of new drugs. Over the years in-house-production was expanded and soon the founder distributed his products all over Germany and later on in many European countries. Overseas, the activities started in the USA with a small affiliate in New York. Over time Healthcare acquired several local pharmaceutical companies, which later became 100 per cent subsidiaries. Today, the US market is one of the core markets for Healthcare. However, the first affiliate in the USA was only the be- ginning of the firm's globalization. After this initial suc- cess, Healthcare began to enter other lucrative markets of the world - such as Japan, China, Latin America and Australia. Over time the headquarters in Germany grew dra- matically. Headquarters' activities centered on research, and the production and distribution of phar- maceutical products that were now largely developed within the fim. While in the past the product range was highly differentiated, today Healthcare concen- trates on a few business areas such as oncology or dermatology. Within these business areas the firm is now recognized globally as one of the industry's lead- ers. The firm intends to continue to build and extend this leading position in these worldwide specialized markets. Discontinuous changes in the environment - such as increasing costs for research and development and increasing pressure on prices due to cost containment by national authorities, and generic competition - have forced innovative pharmaceutical companies such as Healthcare to operate their key business processes globally. The firm has developed a multi-centered com- pany order to ensure the effective utilization of the resources and provide nimble market penetration and product ramp up. Critical capabilities include corporate- wide R&D processes, a concentration on a few produc- tion sites with worldwide supply responsibility and a fast penetration of the key markets. These capabilities will allow Healthcare to ensure the faster and more cost- effective development of innovative products, reduce production costs and thereby provide for significant sales growth and increased profitability. In the past, Healthcare's situation was character- ized by worldwide activities but mainly local business processes (e.g. development and production focusing on local/regional markets). Local issues were aggre- gated to the four significant regions in which Healthcare has organized operations. These regions are Europe, USA/Canada, Latin America and Asia Pacific. Consequently, the human resource manage- ment (HRM) processes were adapted to country - or region-specific conditions, and global integration was not a major issue. For example, executives and high potentials were recruited, selected, assessed and compensated based on different regional standards. International human resource (HR) activities concen- trated only on a few international managers that acted as coordination agents. Wolfgang Hansen: the new HR manager reviewing existing policies and practices. He has been asked to make a series of recommendations on fur- ther coordination of global pay systems at the next meeting of the Board of Directors in Frankfurt in January. Preparing the Board meeting, Wolfgang reviews a series of documents such as recent annual reports, the Leadership Competency Set, the new Global Performance Management System and firm- internal strategic documents on the development of the corporate and HRM strategies. Each document set has been placed in its own folder. These six fold- ers contain the following items: Folder one: the Healthcare Group Wolfgang Hansen has been recruited as a new HR manager at Healthcare. Wolfgang holds a Master's degree in International Management from the Univer- sity of Hamburg. During his studies he has participated in a study-abroad program spending a year in London. He has specialized in Human Resource Management and Compensation Strategies. Wolfgang's initial assignment upon graduation was in the HR depart- ment of a medium-sized German technical company. However, he missed the international dimension in this job and decided to pursue an executive MBA with a transnational orientation in order to prepare for this ideal career. His first job after having completed his transnational MBA program was at Healthcare. For one year Wolfgang has been with Healthcare, beginning as an HR manager. Three months ago he was placed in charge of global compensation poli- cies, with the newly created title of 'Personalreferent fr globale Vergtungsstrategien'. His first project is In 2012, Healthcare again had a very successful year and reached records for key financial ratios (see Table 1). Thus, the firm was well prepared for reaching new ambitious targets for 2013. The Healthcare Group's very positive business development is based on the sustained growth of their top products in all im- portant markets (see Table 2). Both the strategic reor- ientation and the improvement in operational efficiency have contributed to the growth of their business. Healthcare's aim is to create a solid base in order to further improve the company's profitability by optimiz- ing the cost structure. TABLE 1 Key data on the Healthcare Group Values expressed in m 2012 2011 Change Net sales 634 583 + 8% 3625 916 Gross profit R&D costs Operating profit Net profit Return on sales Cash Flows from operating activities Basic earnings per share () Total equity Equity ratio Personnel costs Number of employees (annual average) 3951 981 891 750 12.5% 982 3.33 736 577 11.2% 702 2.52 2725 47.59 + 9% + 7% + 21% + 23% + 1.3% + 40% + 23% + 15% +5.1% + 3% + 27% 3134 52.6% 1376 30 680 1336 29875 TABLE 2 Net sales by region of the Healthcare Group in m % of total 2012 2011 2012 2011 Europe USA/Canada 2512 2079 308 2394 1 856 275 565 326 Asia Pacific Latin America 42% 35% 5% 11% 6% 100% 44% 34% 5% 10% Other Activities 667 365 5931 6% Total 5416 100% Folder two: personnel structure of the Healthcare Group (see Table 3). Personnel costs have risen accordingly amounting to 1699 m in 2012 (see Table 4). Folder three: the leadership competence set the Healthcare Group The Healthcare Group has employed 32 185 people worldwide as of 31 December, 2012, which is an increase of more than 10 per cent compared to the previous year (28 854). The number of employees working for the headquarters of Healthcare increased by 232 and now accounts for roughly 33 per cent of the Group's worldwide personnel, while the number of employees worldwide increased by 3331 employees The corporate leadership competency set defines the critical competencies managers need to possess to master the future challenges of the Healthcare Group. TABLE 3 Employees by region of the Healthcare Group in 2012 2012 2011 9621 7956 Healthcare Headquarters Europe USA/Canada Asia Pacific Latin America Other employees Total 9853 8732 4869 2569 3706 2456 32 185 4523 1956 2944 1 854 28 854 TABLE 4 Personnel costs of the Healthcare Group in Em 2012 2011 1 365 272 1266 269 Wages and salaries Social security and support payments Pensions Total 61 62 1 699 1596 They have been developed based on an analysis of the business needs and by asking key players and HR people in nearly all locations of the company worldwide for their contributions. They are the basis for all HR practices and policies and are intended to ensure consistency across businesses and locations. They are comprised of business-related competen- cies, people-related competencies and personal competencies: Business-related competencies include: Achievement orientation. Sets and works towards achieving challenging business objectives and targets and delivers outstanding results of the Healthcare Group. Innovation and change. Identifies the need for change and generates novel ideas to create or improve processes, systems, or products. Builds commitment to change. Decision-making. Makes sound, timely and courageous decisions while balancing the risks and benefits to the Healthcare Group. environment and one's function/profession in the accomplishment of business objectives. Analytical thinking. Approaches situations by identifying the best information available and systematically assessing it for meaning and impact. Self-development. Maintains a critical awareness of one's own working style and performance. Takes steps to build strengths and addresses development needs in line with the strategic objectives of the Healthcare Group. Folder four: corporate human resource policies The corporate human resource policies, which center around these leadership competencies are outlined in Table 5. These policies have triggered changes in the structures and processes of HR as practiced across the firm's regions. Folder five: the global performance system . People-related competencies include: Team leadership. Inspires team members to maximize team output by providing clear direction, empowering them, establishing oneself as a leader and balancing team resources with assignments. Capability development Develops people and the organization to ensure that the Healthcare Group has the capabilities needed for future success. Relationship building. Establishes mutually trusting relationships with people both inside and outside of the Healthcare Group in order to foster open communication and advance the goals and business. Within the context of the new strategic orientation Healthcare has also implemented A global performance system, comprised of common standards for individual performance management, as well as a bonus system common to all executives. With this new global per- formance system Healthcare intends to strengthen the performance culture within the company and facilitate a common orientation for all managers. The individual performance management system contains two elements: Impact and influence. Influences others to gain their support for driving the Healthcare Group's strategy and goals forward and enters conflicts if necessary 1 Goal setting and appraisal. The new system ensures that every manager gets a precise orientation on expectations and priorities, clear feedback on individual achievements and contingent rewards. 2 Leadership feedback. In order to ensure a systematic development of each manager the system envisages a differentiated feedback on leadership behavior (based on the corporate leadership competencies), identification of development needs and a real consensus built for targeted development activities. Personal competencies include: Business understanding. Demonstrates an understanding of the implications of the Healthcare Group's strategies, industry dynamics, market trends, the competitive TABLE 5 HR policies of the Healthcare Group HR area Recruitment of key talents Management development Transfer/mobility Executive compensation Policy direction Good recruitment practices Strategic workforce planning Corporate management development system base on corporate leadership competency set Enhanced cross-functional mobility Well-balanced cross-regional mobility Attractive and competitive compensation Aligned bonus system Move to a defined contribution systems Clear structures, efficient processes Corporate announcements on managerial and structural changes Balanced goal setting Measuring performance Clear feedback Linkage to variable pay Pension system Organizational development Performance management mainly on his or her local/regional compensation levels. Corporate standards define the market standards (based on target benchmark firms and target quartile positions). Pay level is largely defined according to local standards, while taking into consideration Healthcare's industry-specific positioning targets. The bonus of managers at Healthcare is based on three components: Individual component. Based on results of six to ten individual objectives in the respective area of responsibility. The weight of this component is 50 per cent. The individual performance management is based on consistent goal categories, a rating scale, a template and a performance management cycle which is stand- ardized at all sites, and coordinated to critical corpo- rate processes. To ensure equal application, all managers belonging to the target group are trained on the system, its philosophy, procedures and goals. Closely linked to the individual performance system is the compensation policy of the firm and the newly developed bonus system. The compensation policy is characterized by a balance of corporate standards and local applications for cash-related compensation. Fringe benefits are organized solely on a local or re- gional level. The most centralized compensation element is long-term incentives. Following traditional industry practice, Healthcare grants share options to its manag- ers. The size of the options is largely dependent on the level of management the position holds in the hierarchy. For every level a possible range of options is defined. With respect to base pay and short-term incentives the situation is different. Global standards define an ori- entation for the level of total cash (fixed pay plus vari- able pay) to local/regional market standards. This means that the total cash a manager receives depends "My unit' component for regions, countries, global business units or regional business units. Reflects the performance of the organizational unit a manager is responsible for or working in. The weight of this component is 25 per cent. The goal achievement is measured by deviation between contribution margin and net sales goals and the actual numbers. Note that for Headquarter functions (e.g. controlling or HR), which have no profit and loss account the 'my unit' component is replaced by an additional individual component, which accounts for 25 per cent as well. FIGURE 1 Recent developments in the internationalization strategy of Healthcare "Broader Context' component. This reflects the joint responsibility for performance of a higher organizational level, i.e. the corporate level. The weight of this component is 25 per cent. The evaluation of goal achievement on corporate level is based on the degree of corporate goal achievement. Corporate goals are decided by the Board each year, the leading parameter is corporate contribution margin. b transnational Coordination of company processes national Both the 'broader context' and the 'my unit' compo- nents are leveraged. As a consequence, a goal achievement of, e.g. 120 per cent will lead to 200 per cent pay out for this component. On the other hand a goal achievement of less than 100 per cent will decrease the pay out for the respective component significantly. In this manner unit and broad context components have potential variance in payoffs and/or shortfall that are disproportionate to their simple weights. For every component a pay- out is calculated, the sum of the three components is the total bonus a manager receives Geographically Geographically concentrated dispersed Configuration a Healthcare's past situation b Healthcare's current situation C Healthcare's future situation Folder six: an overview of the corporate and HRM strategy performance orientation and to support global coordi- nation, which is essential for globally integrated busi- ness processes. Elements indicating a stronger global integration include the above-mentioned common set of leadership competencies. This concept has been developed by the headquarters' HR department in cooperation with local HR representatives and manag- ers from different regions and business units. Bumps on the road to international coordination at Healthcare Group As stated above, the competitive situation in the phar- maceutical industry has required Healthcare execu- tives to redesign cross-border activities. While the company has always been active in a high number of foreign markets, business processes were traditionally locally oriented in the past. Wolfgang recalls a typology of international firms developed by Christopher Bartlett and the late Sumantra Ghoshal. Thinking in student terms, realigning or rebalancing Healthcare's pay sys- tem means increasing global integration. In an abstract sense, Healthcare is attempting to develop a transna- tional strategy now by globally integrating certain activ- ities while leaving room for local responsiveness. Figure 1 shows the developments in Healthcare's cross-border strategy. This tendency is reflected in the HR strategy. While recruitment, selection, performance management and compensation policies for executives were designed according to local standards in the past, these proc- esses are replaced by new solutions. These solutions focus on furthering global consistency of HR systems in order to respond to strategic changes on the corpo- rate level. The overall goal is to strengthen an aligned Some of his colleagues in the HR department have told Wolfgang about problems with a standardized compensation model, which was supposed to be implemented two years ago. Healthcare's aim was to have the same compensation system in each country. They wanted to have the highest possible degree of standardization in order to make transnational proc- esses easier and more efficient. They planned to split the salary in two parts: 65 per cent fixed income and 35 per cent variable income depending on individual performance. The plan was to introduce this system not only for managers but for all employees. Shortly after announcing the new plans, several of Healthcare's regional HR managers and employees vocally opposed the new system. In France, managers even called for a strike. In Germany, the situation was difficult as well because the worker's council (Betriebs- rat) did not agree to the new system and many nego- tiations followed. Many employees were frightened by the new 'risky' system as they had become depend- ent on a high percentage of fixed (guaranteed) income. They panicked at the thought of losing nearly half of their income and were afraid that they would never reach the 100 per cent they gained before. As a consequence the implementation of this sys- tem was never realized. In designing the new compen- sation system, Healthcare's management board had only considered economic issues, while disregarding existing, yet unspoken cultural frames of reference and perceptions. Wolfgang knew he had to be careful to avoid oversimplification and an overstandardization, and develop a more country-specific system which could be adjusted to local characteristics. From his international background Wolfgang knew how important it is to include his HR counterparts from the different countries and regions in the process of further developing the HR policies and systems. This would allow him to more accurately understand the cultural and legal particularities at hand as well as ensure him a higher level of political support in Health- care's regions and countries. For example, as a first step, Wolfgang has been in close contact with the HR representatives in the most important strategic markets, which currently are the USA and Japan. Here, he has negotiated exceptions for the standardized currency base of performance- based pay elements. He has learned that the local cur- rency is most important because local managers are not used to considering a foreign currency and would not accept this as a major element of the compensa tion system. Another issue for discussion was the percentage dedicated to fixed and variable pay. Wolfgang had problems understanding the Japanese opposition to the new global performance management system. During Healthcare's yearly HR conference he felt that Mr. Okubayashi, the Japanese head of HR at Health- care, was not happy with the global performance system but did not really engage in discussions about how to improve or adapt the system. Thus, one evening Wolfgang invited him for dinner in a nice sushi bar in Dsseldorf where Healthcare's yearly HR conference took place. Over innumerable cups of saki Okubayashi patiently outlined traditional compensation systems in Japan. Upon sobering up the next day Wolfgang slowly realized that given culture and firm traditions it would be very difficult to introduce a high level of variable pay based on individual performance in Japan. He attributed this to a higher level of risk aversion characterizing the Japanese culture as com- pared to many other cultures. From his studies he knew about the Hofstede's dimensions describing cul- tural differences. As he recalled one of them was uncertainty avoidance. This points out the extent to which people are risk averse or are prepared to take risks. He thought that risk-taking managers were probably ready to accept large incentive payments while risk-averse managers were not prepared to accept a high income variability, which may be involved in performance-based pay. The latter may be the case in Japan. When Wolfgang talked to the American head of HR at Healthcare, Thomas Miller, in a very late after- noon video conference, he received a different mes- sage. Miller loudly and repeatedly asserted that, from an American perspective, the global performance management system suggested by the headquarters was 'wimpy' and would not reward the outstanding achievements of "franchise player' star managers. Compared to the big US pharmaceutical companies percentage of variable pay for top managers, Thomas declared the monetary incentive system of Healthcare ridiculous' and demanded a higher proportion of vari- able pay. Wolfgang had to turn the video link sound down twice by the end of the web-enabled telecon- ference meeting. Was this a sign of a higher level of risk taking as a result of the underlying culture in the USA? Step-by-step Wolfgang learned how important it is to ensure acceptance in the important strategic mar- kets and to consider local labor market regulations. He came to realize that country-specific determinants such as cultural values or the legal environment of the firm must be considered if problems with cultural ac- ceptance or legal conflicts are to be minimized. This newly acquired awareness made his mandate even more complicated. He had some general ideas about the contextual situation in some countries, yet he was unaware of the conditions in other countries. Imple- menting a new system always runs the risk of losing political support and insulting the perspectives of the local HR administrators and the business unit heads. Thinking about the positive effects of the interna- tional HR conference as well as his individual discus- sions with Okubayashi and Miller, Wolfgang took the opportunity of visiting some of Healthcare's subsidia- ries and taking out the HR managers for lunch. He dili- gently tried to identify their relative positions as to the strengths and weaknesses of the current compensa- tion system and collected ideas for his presentation to the board. mountains and preparing the final draft of his presenta- tion for the management board meeting at the begin- ning of January. The six file folders lay spread out across the large blonde ash table and even across the oak floor as thick, heavy snowflakes silently fall outside. He is thinking about reorganizing Healthcare's compensation system. His task is to find the right mixture of standardi- zation and flexibility. On the one hand, he has to imple- ment a new compensation system in order to reduce costs. On the other hand he has to take into account the traditional local HR practices. As he considers all he has learned at Healthcare over the last few months, he asks himself a series of questions. A visual learner, Wolfgang writes out a chart on a writing tablet that cap- tures his sense of integration and local responsiveness at Healthcare. We present his sketch as Figure 2. Conclusion: a not so happy Christmas It is Christmas Eve. Wolfgang is sitting in a newly built ski hotel in Garmisch-Partenkirchen, overlooking the snowy FIGURE 2 Balancing global integration and local responsiveness in Healthcare's compensation strategy Healthcare's transnational Strategy Global Integration Responsiveness Healthcare's Pay Strategy Global consistency, according to MNE's strategic requirements Localization, according to cultural and institutional environment Pay mix Pay level Global consistent policy for Local adaptation for . Compensation elements including variable pay elements (reflecting a rather risk-taking orientation) and fixed pay (reflecting a rather risk-averse orientation) Short-term incentives Individual (reflecting individual performance) and My Unit Component (reflecting group performance) Standardized long-term incentives (reflecting corporate performance) Variable pay through ranges within the bonus potential Broader Context Component (reflecting group or division performance), in case of regional level US and Japanese currency bases for calculation of short-term incentives Fringe benefits . . Question block A: standardization acquire and maintain those management competencies that have been defined in the vs local responsiveness of competency set (in folder three)? compensation systems 2 Would a purely competency-based pay system be somehow more flexible? Wolfgang reconsiders the degree of global standardi- 3 But then again, what about the standardization zation and local responsiveness of the current global Healthcare has just achieved through standardizing compensation system. the job descriptions across units ? 1 Should he move some of the existing pay elements 4 How would he take these three competency across the T account in Figure 2, shifting them from categories and use them to develop a series of globally standardized to locally customized? measurable, behavioral indicators to be used to 2 Should he add or delete some existing practices assess an executive's contributions to Healthcare? from the T account? In what sense should these new behavioral 3 Should he change the weights or emphases indicators be customized to local (regional) (percentages) of existing elements of the pay contexts? How can Wolfgang go about this process to ensure a balance of organizational system? standardization and local relevance? Question block B: job-based vs Frustrated with the complexities he is facing, Wolfgang competency-based compensation is planning a telephone conference with regional com- pensation administrators and other executives in order It Healthcare's job-based pay dominated the existing to expand his analysis with this group and to build po- system, while other approaches such as competency- ltical support for a new policy Does he have the time based compensation have not been pursued, then to deal with all the inevitable differing perspectives that will emerge, and can they together create a systematic what advantages might a competency based system set of recommendations before his report is due to the have for Healthcare? Healthcare board? As a member of Wolfgang's tele- 1 How can the firm communicate to the phone conference please comment on the question geographically dispersed executives the need to blocks A and B. NOTE AND REFERENCE 1. The authors would like to thank Frank Kullak, Judith Eidems, Susanne Royer, Andrea Ngel and Sinnet Lorenzen for support