International dimensions of organizational behavior.

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Chapter 9:

Staffing, Training, and Compensation

for Global Operations

Chapter Learning Goals

Understand the strategic importance to the firm of the IHRM function and its various responsibilities.

Learn about the major staffing options for global operations and the factors involved in those choices.

To appreciate the challenges involved in staffing operations in emerging market countries

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Chapter Learning Goals

Emphasize the need for managing the performance of expatriates through careful selection, training, and compensation.

Discuss the role of host country managers and the need for their training and appropriate compensation package.

Distinguish among various IHRM practices around the world.

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What Attracts the Potential Recruits in Emerging Markets?

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Brand

A global “name brand” known for its excellence

Purpose

A company that is breaking into new markets, with new models and strategy

Opportunity

A company that provides a fast-track training and career path

Culture

An organizational culture of openness and transparency

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Major Challenges in IHRM

Enhancing global business strategy

Aligning HR issues with business strategy

Designing and leading change

Building global corporate cultures

Staffing organizations with global leaders

IHRM Functions

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STRATEGY

STRUCTURE

Local laws

and practices

Cultural norms

and practices

International human resource management (IHRM) is being recognized as a major determinant of success or failure in international business. Because other factors of production (e.g., capital, technology, raw materials) increasingly can be duplicated, human resources are a key source of sustainable competitive advantage to companies. Additionally, human resources provide control over other resources.

IHRM functions include recruiting and selecting employees, providing preparation and training, setting up appropriate compensation and performance management programs, and—especially—the management of expatriates (employees assigned to a country other than their own). Without creating a system of fits between strategy, structure, and staffing, an international organization will not be optimally effective. Ideally, the desired strategy should dictate the organizational structure and staffing modes considered most effective for implementing that strategy.

Recruitment and selection

Training and development

Compensation and performance management

Management of expatriates

Staffing for Global Operations

Ethnocentric Approach

Polycentric Approach

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Used at internationalization stage of strategic expansion, with centralized structure

Parent-country nationals (PCNs)

Often used with multinational strategy

Host-country nationals (HCNs)

Managerial staffing abroad falls into one or more of four staffing approaches: ethnocentric, polycentric, regiocentric, and global.

In the ethnocentric approach, key managerial positions are filled with people from headquarters, i.e., parent-country nationals (PCNs). Advantages of this approach include PCN familiarity with company goals products, technology, policies, and procedures. Additionally, it can be a means of dealing with inadequate local managerial skills and of maintaining close control. Disadvantages include lack of opportunities and development for local managers, and poor adaptation and lack of effectiveness of expatriates in foreign countries. This approach also can perpetuate ineffective home-country processes and prevent the company from taking advantage of the worldwide pool of management skill.

The polycentric staffing approach is often used with a multinational strategy and fills key positions with host country nationals (HCNs). HCNs are local managers hired to fill key positions in their own country. This approach helps companies to “act local,” can be less expensive than using PCNs, and can help stave off problems in sensitive political situations. Often this approach is achieved by acquiring foreign firms. Disadvantages of the polycentric approach include difficulty coordinating activities and goals between the subsidiary and parent company, conflicting loyalties from local managers, and headquarters managers do not gain overseas experience.

Staffing for Global Operations

Global Staffing Approach

Regiocentric Approach

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Third country nationals (TCNs)

Transpatriates

Inpatriates: managers with global experience who are transferred to the organization’s headquarters country

Can produce a mix of PCNs, HCNs, and TCNs

In the global staffing approach, the best managers are recruited from within or outside of the company, regardless of nationality (i.e., third country nationals). Advantages of this approach include providing a greater pool of qualified and willing applicants from which to choose, which can further develop a global executive cadre. Additionally, TCNs tend to be more culturally flexible, bi or multilingual, and viewed as an acceptable compromise between headquarters and local managers. It also can be more cost-effective to transfer and pay managers from some countries than from others because their pay scale and benefits packages are lower. As some become truly global and move away from the concepts of host and home country, the term “transpatriate” is replacing the term “expatriate.” Implementing a global staffing approach is easier said than done, as there can be difficulty in finding high-quality mangers who are willing to transfer frequently around the world.

With the regiocentric approach, recruiting is done on a regional basis. This approach can produce a mix of PCNs, HCNs, and TCNs depending on the needs of the company or the product strategy.

Strategic Mode, Organizational Variables, and Staffing Orientation

Aspect of enterprise	Ethnocentric	Polycentric	Regiocentric	Global
Strategic orientation	International	Multidomestic	Regional	Transnational
Perpetuation	Expatriates used for key positions	Locals used for key positions locally	Regional people used regionally	Best people used anywhere
Evaluation and control	Home standards applied	Determined locally	Determined regionally	Globally integrated
Rewards	High at home; low in subsidiaries	Wide variation	Based on contribution to regional objectives	Based on contribution to local and worldwide objectives
Geographic identification	Nationality of owner	Nationality of host country	Regional company	Truly global company, and “glocal”

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The choice of staffing policy has a considerable influence on organizational variables in the subsidiary, such as locus of decision making authority, the methods of communication and the perpetuation of human resource management practices. Some of these influences are highlighted in this slide, which summarizes some of the information in Exhibit 9-1 in the text. It focuses on the other primary HR functions. Research indicates that an ethnocentric policy is associated with a higher incidence of IHRM problems.

Most MNCs start from their own pool of managers  polycentric or regiocentric policy:

Increasing pressure from local governments to hire locals

The greater cost of expatriate staffing

Improvement in managerial and technical competence

“all things being equal, a local national who speaks the language, understands the culture and the political system, and is often a member of the local elite should be more effective than an expatriate alien”

Managing Expatriates: Selection

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Success categories

An important responsibility of IHR managers is that of managing expatriates. Most multinationals underestimate the importance of the human resource planning function in selection, training, acculturation, and evaluation of expatriates.

Although there are many factors that contribute to expatriate success, many personal directors select expatriates only on the basis of their domestic track records and technical expertise. The need to ascertain whether potential expatriates have the necessary cross-cultural awareness and interpersonal skills is often overlooked. Studies suggest there are five categories of success for expatriates. Of course, determining whether the expatriate will be successful in those dimensions can be challenging. Research indicates that extroverted managers with high tolerance for stress are more likely to adjust to overseas assignments and perform well.

Job factors

Family situation

Language skills

Relational dimensions

Motivational state

Managing Expatriates: Selection

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Predictors of success

High tolerance for stress

Less on domestic experience, gender, int’l experience

Extraversion

Expatriates Performance Management

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Many reasons, besides poor selection, contribute to expatriate failure in US multinationals. Failure also can be attributed to poor preparation and planning for entry and reentry transitions of the manager and his or her family. The suitability and adjustment of the spouse is particularly important and often given insufficient attention. Indeed the latter is the most frequently cited reason for expatriate failure in US and European countries. This slide and the next provide a synthesis of the factors frequently mentioned by researchers and firms as the major causes of expatriate failure.

Inadequate preparation, training, orientation

Alienation or poor support from headquarters

Inability to adapt to the local culture

Selection based on headquarters criteria

Expatriates Performance Management (cont’d)

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After careful selection, plans must be made for the preparation, training, and development of expatriate managers. Though these issues are addressed separately in the following slides, it is important to note that they should be components of an integrated performance management program that is specific to expatriates.

Problems with spouse and children

Insufficient compensation and financial support

Poor programs for career support and repatriation

Expatriate Training and Development

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Unlike most US companies, foreign companies tend to provide much more training and preparation. Thus, expatriates from certain countries tend to experience much fewer incidences of failure. For example, in addition to training programs Japanese companies have very careful selection programs that eliminate potential “failures” from the start. They also make use of longer assignments to give expatriates more time to adjust initially and then function at full capacity. Once on assignment, the Japanese receive considerable support from headquarters and sometimes even from local divisions set up for that purpose.

China

Eating duck tongue and pigeon head

Brazil

Home phones don’t work

India

Pervasive poverty

Indonesia

Rent paid 2–3 years in advance

Japan

Doctors reveal little to patients

IHRM Process to Maximize Effectiveness of Expatriate Assignments

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Evaluate potential problems.

Select expatriates.

Develop contracts.

Assess development and support needs.

Evaluate effectiveness and problems.

Repatriate after successful assignment.

Integrate value-added to firm.

Debrief expatriate and family to improve IHRM.

Cross-Cultural Training

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The three areas critical to preparation are cultural training, language instruction, and familiarity with everyday matters. Training in language and practical affairs is fairly straightforward, but cross-cultural training is complex and deals with deep-rooted behaviors.

One goal of cross-cultural training is to reduce culture shock—a state of disorientation and anxiety about not knowing how to behave in an unfamiliar culture. The cause of culture shock is the trauma people experience in new cultures, where they lose the familiar signs and cues that they had used to interact in daily life and where they must learn to cope with new cues and expectations. Results of culture shock include the inability to work effectively, family stress, and hostility toward host nationals. Culture shock usually progresses through four stages:

The honeymoon phase includes positive attitudes and excitement and may last up to several weeks.

The irritation and hostility phase is the crisis stage when cultural differences result in problems at home and work. It is characterized by homesickness, and many expatriates never get past this phase.

Gradual adjustment is a phase of recovery in which the expatriate begins to understand and predict patterns of behavior, use the language, and accept his or her new life.

Biculturalism is a stage in which the expatriate and family members grow to accept and appreciate local people and practices and are able to function effectively in two cultures. Many people never get to this stage, but operate acceptably at the third stage.

Subculture shock occurs when a manager is transferred to another part of the country where there are cultural differences—essentially from what he or she perceives to be a “majority” culture to a “minority” one. The shock comes from feeling like an “immigrant” in one’s own country and being unprepared for such differences.

Culture Shock

A state of disorientation and anxiety about not knowing how to behave in an unfamiliar culture

Subculture Shock

When a manager is transferred to another part of the country, where there are cultural differences

The goal of training is to ease the adjustment to the new environment

The “shock” comes from feeling like an “immigrant” in one’s own country

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Culture Shock

Honeymoon

Irritation and hostility

Gradual adjustment

Biculturalism

Training Techniques

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Area studies are documentary programs about the country’s geography, economics, sociopolitical history, etc. Cultural assimilators expose trainees to the kinds of situation they are likely to encounter that are critical to successful interactions. Language training, sensitivity training, and field experiences are also training options. The latter provides exposure to people from other cultures within the trainee’s own country. Host-family surrogate is a kind of field experience in which the MNC pays for and places an expatriate family with a host family as part of an immersion and familiarization program.

Tung recommends giving trainees increasing levels of personal involvement as they progress through each method. The most effective intercultural training occurs when trainees become aware of the differences between their own cultures and the ones they are planning to enter. The impact of host-country training (like host-family surrogate) can be far greater than that of training conducted strictly in the home country.

Area studies

Culture assimilators

Language training

Sensitivity training

Field experiences

Host-family surrogate

Factors that Influence the Integration of Expatriates with Local Staff

Facilitates Integration

Hinders Integration

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Forming close working relationships

Learning local language

Transferring technical/ business knowledge

Cultural adaptability

Respect

Not using team concept

Not learning local language

HQ mentality

Spouse/family adjustment problems

Being autocratic

Limited time in assignment

Exhibit 9-7 lists behaviors that can help or hinder expatriate integration with local staff. The information was collected from actual expatriate managers and can provide the basis for expatriate training. It also can help HCNs to anticipate and work with expatriates to meet joint strategic objectives. This first four helping behaviors presented in Exhibit 9-7 are shown in this slide. The first four hindrances are shown in the next slide.

Compensating Expatriates

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DuPont’s Global Transfer Center of Expertise creates perceptions of equity and goodwill.

Companies are looking for ways to cut the costs of expatriate assignments.

The need to reconcile parent- and host-country practices adds complexity.

The balance sheet approach

Tax equalization

Components of the compensation package:

salary,

taxes,

allowance,

benefits

Compensation is a crucial link between strategy and its successful implementation: There must be fit between compensation and the goals for which the firm wants managers to aim. The premature return of expatriates or the unwillingness of managers to take overseas assignments can often be traced to their knowledge that the assignment is financially detrimental. DuPont is an example of a company that centralizes its programs for about 400 international locations in its Global Transfer Center of Expertise. Because of this centralization, expatriates know they are getting the same package.

The Wall Street Journal estimates that sending a $100,000-a-year manger to London can cost the organization $300,000 per year. Send the same manager to Stockholm or Tokyo and the cost may rise to $1 million. For this reason, many companies are looking for ways to cut the costs of expatriate assignments, such as by making assignments longer (to cut down on relocation costs) or shorter (so that the family does not need to accompany the expatriate).

Particularly challenging when it comes to designing expatriate compensation packages is the need to reconcile parent- and host-country practices. Though there may be little world-wide variation in typical executive base salaries, wide variation in net spendable income is often present. US executives may receive more in cash and stock, but must pay for many things European companies provide (e.g., cars, entertainment allowances). Also, purchasing power is affected by the relative cost of income in different locations.

In designing compensation packages, it is necessary to make sure expatriates can maintain a standard of living that is equivalent to their colleagues at home and to compensate them for any additional costs incurred. The balance sheet approach is used to equalize the standard of living between the host and home country and to add some compensation for inconvenience or qualitative loss. Some companies, however, are now striving to create a standard of living that is comparable to host-country managers. Even so, the MNC is obliged to make up additional costs that the expatriate would incur for taxes, housing, and goods and services. With tax equalization, the company pays any taxes due on any type of additional compensation that the expatriate receives for the assignment. The expatriate pays in taxes only what she or he would pay at home. Tax planning can lessen the tax burden for the company. For example, a company can save on taxes by renting an apartment for the employee rather than providing a cash housing allowance. All components of the compensation package must be considered in light of home- and host-country legalities and practices. In designing each of these components, it is most important to be strategically competitive by making the package attractive to those kinds of managers the company wishes to relocate.

Managing PNC compensation is a complex challenge for companies with overseas operations. All components of the compensation package must be considered in the light of both home and host-country legalities and practices.

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The Balance Sheet Approach to Expatriate Compensation Package

Hypothetical examples

Other Considerations in Expatriate Compensation

Localization (or going-rate) approach: The compensation package that pays the expatriate the going rate for similar positions in the host country, plus other allowances and benefits negotiated.

A recent KPMG survey notes the need for MNCs to review mobility policies to focus on harmonization of the treatment of globally mobile employees.

To be strategically competitive, the compensation package must be comparatively attractive to the kinds of managers (PCN, HCN, or TCN) the company wishes to hire or relocate.

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If going rate is similar in host country, not much problem. But if it’s lower, there can be resentment or reluctance to accept the assignment to begin with.

The complexity of harmonizing compensation packages worldwide: legal and cultural restrictions.

Training HCNs

Facilitates indigenization

Links successful corporate culture and local culture

Facilitates e-business adoption

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The continuous training and development of HCNs and TCNs for management positions is also important in the long-term success of multinational corporations. The ongoing development of HCNs will facilitate the transition to an indigenization policy. It also is a way of bridging the gap between a firm’s successful corporate culture and practices and local culture and practices. Additionally, managerial training in information and communication technologies is critical for firms in new economy and emerging markets, and it can provide leverage for rapid economic growth.

Compensating HCNs

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How do firms determine appropriate compensation for HCNs, given local norms, and the competitive needs of the firm? Research by Mercer indicates that most firms have a global pay structure in place that includes policies on position pay relative to the market, short- and long-term incentives, and methodologies for job grading.

When designing HCN pay, there are many variables to consider. These variables include the local market and local pay scales, government involvement in benefits, the role of unions, and the cost of living. For example, Hungarians, Poles, and Czechs spend about 35-40% of their disposable incomes on food and utilities. Russians may spend as much as 75%. Thus, Eastern European managers must have cash for about 65-80% of their base pay, whereas US managers only have about 40% in cash. MNCs also can be competitive by providing goods and services that are either not available or very expensive in Eastern Europe. In Japan, compensation is becoming more Westernized to become more competitive. For instance, they are beginning to base pay on performance, rather than seniority, and are making people responsible for their own retirement fund decisions. Alternatively, Chinese workers often resist pay for performance, leading many Western companies to use salary increases. Companies also set up housing schemes, such as investing in apartments, as a way to compete for good managers.

Eastern Europeans require more cash than Americans.

Compensation in Japan is becoming more Westernized.

In Latin America an employees pay and title are associated with type of car.

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Conclusion

Global HR management = vital component of global strategy

Strategies = ethnocentric, polycentric, regio-centric, and global

Many causes of ex-pat failure: inadequate preparation, inability to adapt, lack of HQ support for repatriation, etc.

Cultural training, language instruction, familiarity with everyday matters  training is needed

Compensation must be carefully designed

Integrating Training with Global Orientation

Export Stage

Multidomestic Stage

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Training need: low to moderate

Content: interpersonal skills, culture, customer values, business behavior

HCNs: train to understand parent-country products and policies

Training need: moderate to high

Content: interpersonal skills, culture, technology transfer, business practices and laws

HCNs: familiarize with production and service procedures

Training programs, like staffing approaches, should be designed with the company’s strategy in mind. The relative level or stage of globalization the firm has reached should be considered. This and the next three slides suggest levels of rigor and types of training content for four globalization stages.

Integrating Training with Global Orientation

Multinational Stage

Global Stage

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Training need: high moderate to high

Content: interpersonal skills, two-way technology transfer, corporate value transfer, strategy, stress management, culture, business practices

HCNs: training in technical areas, products and services, corporate culture

Training need: high

Content: global corporate operations, corporate culture transfer, customers, global competitors, strategy

HCNs: training in proficiency in production and efficiency systems, corporate culture, business systems, global conduct policies

Comparative Management in Focus: Compensation

“Best Practices”	Regional Clusters	Country Specific
Incentives not too large, pay based on individual performance, reduce seniority pay	Asian and Latin countries use more seniority pay, group/team pay, and pay for future goals	United States uses less incentives than expected, China and Taiwan use more

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Research by Mary Ann Von Glinow examined how and in what environments various organizations conducted their IHRM functions. Her findings are highlighted in the Comparative Management in Focus. This and the following slides illustrate some of her findings for each IHRM function. The first column shows those practices that tend to be universal within the cultures studied. The second column shows countries or regions where those practices are similar. The third column shows where those practices were specific to certain countries.

Comparative Management in Focus: Selection

“Best Practices”	Regional Clusters	Country Specific
“Getting along with others” and “Fit with corporate values”	Anglo cluster focuses on technical skill, work experience; Korea, Japan, and Taiwan deemphasize work experience	Japan looks at a person’s potential; Korea relies on employment tests; Taiwan relies on interviews

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