Compensation disparity between locals and expatriates in China: a multilevel analysis of the influence of norms.
| Verfasser | Leung, Kwok |
| Posten | RESEARCH ARTICLE |
Abstract In developing countries, there is a large gap in the compensations of locals and expatriates, which is related to negative attitudes of locals. A multilevel study was conducted in China on the influence of low compensation parity in MNC operations. Findings show that the negative effects of low compensation parity on outcome variables, namely, evaluation of and knowledge sharing with expatriates, as well as job satisfaction and intention to quit, were fully mediated by distributive justice based on a comparison with expatriates. Personal pro-disparity norm regarding low compensation parity played a buffering role and was related to a weaker relationship between compensation parity and comparative distributive justice. Organizational pro-disparity norm showed a similar cross-level buffering effect. Trust climate was related to a weaker relationship between compensation parity and comparative distributive justice, and fully mediated the moderating effect of organizational pro-disparity norm. The findings have important theoretical and managerial implications for mitigating the negative influence of low compensation parity in multinational firms, and point to some important topics for future research on the social integration of locals and expatriates.
Keywords Locals * Expatriates * Compensation disparity * Distributive justice * Norms * China
1 Introduction
Multinational corporations (MNCs) operate in many developing countries, and expatriates are often deployed in these operations. Expatriates are typically remunerated according to the compensation level of their home countries, whereas local employees are paid according to the local labor market, resulting in a large gap in compensation between these two groups. In these MNC operations, locals do compare with expatriates and report low distributive justice, (1) i.e., low perceived fairness of the compensation received as compared to the compensation of expatriates (e.g., C. C. Chen et al. 2002), which is related to negative outcomes, such as low job satisfaction (e.g., Leung et al. 1996). Indeed, this compensation gap is often a source of perceived injustice and frustration for local employees (Toh and DeNisi 2003).
To maintain cost competitiveness, it is difficult for MNCs to narrow the compensation gap significantly, and it is important to identify non-financial factors to mitigate its negative effects (C. C. Chen et al. 2002; Toh and DeNisi 2003). Managerial guidelines can then be developed to maintain the morale of local employees and promote their working relationship with expatriates. From a theoretical perspective, this line of research can unravel the dynamics underlying the negative reactions to the compensation gap between well-defined national groups, and shed light on the social integration processes within MNCs in developing countries.
The research reported in this paper attempts to develop and test a multi-level model with a focus on the mitigation of the negative influence of low compensation parity, i.e., a large compensation gap, between locals and expatriates in China. This research has two major objectives. First, we develop a theoretical model for the relationships between compensation parity, perceived justice, and locals' reactions to compensation parity. Previous studies have examined the relationship of compensation parity between locals and expatriates with perceived distributive justice (e.g., C. C. Chen et al. 2002), and of distributive justice with the reactions of local employees (e.g., Leung et al. 1996). Consistent with equity theory (Adams 1965), we develop and evaluate a mediation model in which perceived distributive justice mediates the effects of compensation parity on the reactions of locals.
The second objective is to extend previous research on mitigating the negative effects associated with low compensation parity by developing a multi-level model based on the notion of norm, defined as beliefs about the proper and appropriate behaviors and practices for a given situation (Cialdini and Trost 1998). As described in a subsequent section, prior research has examined several moderators that can buffer the negative reactions of locals to low compensation parity, but norm is distinct from the moderators examined before. It is well-known that salient norms function to guide behaviors, and theories of norms (e.g., Cialdini and Trost 1998; Staw et al. 1980) suggest that they exert both main and moderating effects. Norms exist at two levels: The personal level as well as the group level (e.g., Ehrhart and Naumann 2004). Most prior research on norms focuses on one level, either personal or group norm, and is primarily concerned with their main effects (e.g., Albarracin et al. 2001; Goldstein and Cialdini 2011; Cialdini and Trost 1998). A novel feature of our research is to adopt a multi-level conceptualization of norms and explore their buffering effects at the personal as well as group levels on the negative effects of low compensation parity in MNCs. In sum, this study provides a novel perspective on mitigating the negative influence of low compensation parity and helps promote the development of multi-level models in international management research.
2 Literature Review and Development of Hypotheses
2.1 Compensation Parity between Locals and Expatriates and Justice Perception
Equity theory (Adams 1965; Carrell and Dittrich 1978), a major theory in organizational behavior, posits that people evaluate the fairness of their rewards based on a comparison with others in similar situations. Briefly put, distributive justice is perceived if the ratios of inputs and outcomes are similar across individuals in similar situations. Equity theory also posits negative reactions to low perceived distributive justice, from negative attitudinal reactions to reduction of effort. Drawing on this theory, Lawler (1981) proposes a pay satisfaction model, in which the perceived pay of referent others is able to influence one's pay satisfaction. Applying equity theory in the MNC context in developing countries, local employees would evaluate the fairness of their compensations with regard to their input to the job, such as effort and qualifications. If they choose expatriates as the referent group for social comparison, they will perceive low distributive justice, because expatriates typically make a few times more than locals in developing countries (e.g., Choi and Chen 2007). Because of the common practice of pay secrecy, locals usually do not have precise information about the magnitude of the compensation gap. However, distributive justice judgments are theoretically based on perceptions and, as a result, our research is concerned with the subjective appraisal of compensation parity.
Based on equity theory, we predict that the lower the perceived compensation parity between locals and expatriates, the lower the perceived distributive justice of locals. Consistent with equity theory, C.C. Chen et al. (2002) found that compensation parity between locals and expatriates was positively related to locals' perceived fairness of their compensations, termed comparative distributive justice by Leung et al. (1996) because this justice perception is based on a comparison with expatriates. In line with equity theory, several studies have shown that perceived comparative distributive justice is related to positive reactions from locals, such as job satisfaction (e.g., Choi and Chen 2007; Leung et al. 2001). These findings as a whole suggest that comparative distributive justice should mediate the effects of compensation parity between locals and expatriates on locals' reactions.
To index the reactions of local employees toward comparative distributive justice, we examined two major types of reactions. The first type involves reactions toward expatriates, which are particularly important for our research context. Probing the dynamics that shape these reactions provides theoretical insight about intercultural relations in MNCs, which are critical to their success. Two such reactions toward expatriates are included. Evaluation of expatriates, referring to the evaluation of the managerial competence of expatriates, reflects positive attitudes toward expatriates as managers, which is key to positive intercultural relationship. Knowledge sharing with expatriates, referring to the sharing of knowledge and expertise with expatriates by locals, is critical for the collaboration of locals and expatriates and the effective learning and performance for both groups. In line with this argument, Hocking et al. (2007) found that experiential learning of expatriates was related to access to the knowledge of locals. Reiche et al. (2009) argue that knowledge transfer between expatriates and locals contributes to the intellectual capital of MNCs, which is obviously critical to their success.
The second type of reaction is oriented toward the firm and includes job satisfaction and intention to quit, which are major outcome variables in justice research (Colquitt et al. 2001). Job satisfaction is important in its own right and is a reliable and important predictor of various job outcomes (Harrison et al. 2006). Intention to quit is the best predictor of employee turnover behavior (Griffeth et al. 2000), and the retention of high-performing local employees is a major challenge confronting MNC operations in China (e.g., Walsh and Zhu 2007).
Following equity theory, we predict that comparative distributive justice should be related to both types of reactions from locals. The two outcome variables concerning the firm are conceptually distinct from the two outcome variables concerning expatriates, thus allowing us to test the convergence of the results.
Hypothesis 1: Perceived compensation parity between locals and expatriates will be positively related to evaluation of and knowledge sharing with expatriates as well as job satisfaction and negatively related...
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