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Path-dependent Evolution of Compensation Systems in Central and Eastern Europe

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A case study of multinational corporation subsidiaries in the Czech republic, Poland and Hungary

The transformation process in Central and Eastern Europe (CEE) is related to a pervasive change of political, social and economic systems. However, organisational practices in this region still seem to be determined by the institutional baggage of pre-transformation practices. The economic organisation and transformation processes in CEE have often been referred to as “path-dependent” or, in other words, characterized by inertia of social mechanisms.


Our study addresses the lack of knowledge about specific pay-related idiosyncrasies in CEE as well as the research deficit with respect to the theoretical explanations of compensation systems in this region. To this end, we conducted an embedded case study at the headquarters (global level), regional shared-services unit (regional level) and subsidiaries (local level) in the Czech Republic, Poland and Hungary of a large North-American MNC (called ABF International in order to maintain anonymity). These subsidiaries belong to the division operating in the field of transportation equipment manufacturing.

Based on the results of our case study, we suggest that the path dependence of compensation practices in CEE is maintained at different levels. At the macro level, national governments still seem to be reluctant to abandon regulations which are path-dependent in their nature, e.g. the law on company social benefits funds in Poland, mandatory wage grade classifications in the Czech Republic or regulations on paid leave in Hungary. At the organisational level, there are still legacies with respect both to pay structures, which are regarded as a challenge by HR professionals striving to implement efficient compensation systems, and the path-dependent role of trade unions. The mere existence of such legacies, as well as the suggested impact of pre-transformation housing policies on post-state-socialist labour markets, allows us to conclude on the existence of path-dependent expectations and norms on the individual – or employee – level.

Our study showed that even a significant exogenous shock – which has the potential to literally revolutionise organisational practices, as was the case in post-state-socialist CEE countries – does not necessarily lead to complete path dissolution. Relying on our data, we also suggest the major potential exogenous and endogenous sources of path dissolution, including foreign parent companies of local subsidiaries, international management consulting companies, increasing HR professionals’ skill levels and generational turnover.



Reference:

Festing, M. and Sahakiants, I. 2013. Path-dependent Evolution of Compensation Systems in Central and Eastern Europe: A Case Study of Multinational Corporation Subsidiaries in the Czech Republic, Poland and Hungary. European Management Journal, 31(4), pp. 373–389.