Global Business 3rd Edition by Mike Peng

Exercise 9

As a Japanese expatriate in charge of US operations of Yamakawa Corporation, you scratch your head confronting a difficult decision: Cut salaries across the board or cut jobs when confronting a horrific economic downturn with major losses? Headquarters in Osaka has advised that earnings at home are bad, and that you cannot expect headquarters to bail out your operations. Too bad, US government bailouts are only good for US-owned firms and are thus irrelevant for your unit, which is 100% owned by the Japanese parent company.
As a person being brought up in a collectivistic culture, you instinctively feel compelled to suggest an across-the-board pay cut for all 1,000 employees in the United States. Personally, as the highest-paid US-based employee, you are willing to take the highest percentage of a pay cut (you are thinking of 30%). If implemented, this plan would call for other executives, who are mostly Americans, to take a 20% to 25% pay cut, mid-level managers and professionals a 15% to 20% pay cut, and all the rank-and-file employees a 10% to 15% pay cut. Indeed, in your previous experience at Yamakawa in Japan, you did this with positive results among all affected Japanese employees. This time, most executive colleagues in Japan are doing the same. However, since you are now managing US operations, headquarters in Osaka (being more globally minded and sensitive) does not want to impose any uniform solutions around the world and asks you to make the call.
As a conscientious executive, you have studied all the HRM books-in both Japanese and English-that you can get your hands on for this tough decision. While you understand that US executives routinely undertake reduction in force (RIFs), which is a euphemism for mass layoffs, you have also noticed that in the recent recession, even "bona fide" US firms, such as AMD, FedEx, HP, and New York Times, have all trimmed the base pay for all employees. If there is a time to change the norm moving toward more acrossthe- board pay cuts in an effort to preserve jobs and avoid RIFs, this time may be it, according to some US executives quoted in the media.
At the same time, you have also read that some experts note that across-the-board pay cuts are anathema to a performance culture enshrined in the United States and taught in virtually all HRM textbooks. "The last thing you want is for your A players- or people in key strategic positions delivering the most value-to leave because you have mismanaged your compensation system," said Mark Huselid, a Rutgers University professor and a leading expert on HRM, in a media interview. You have also read in a recent (September 2009) Harvard Business Review survey that, despite the worst recession, 20% of high-potential players in US firms have voluntarily jumped ship during the 2008-2009 recession, in search of greener pastures elsewhere. Naturally, you are worried that should you decide to implement the across-the-board pay cuts you have envisioned, you may end up losing a lot of American star performers and end up with a bunch of mediocre players who cannot go elsewhere-and you may be stuck with the mediocre folks for a long time, even after the economy recovers.
After spending two days reading all the materials you have gathered, you still do not have a clear picture. Instead, you have a big headache. You scratch your head again. How would you proceed?
Case Discussion Questions :
What are the benefits of across-the-board pay cuts?