Everything you need to know about international human resource management. International human resource management bears both functional and strategic resemblance to human resource management.
Functionally, it performs almost the same set of activities as human resource management – recruitment, selection, performance management, compensation, training, industrial relations, career management etc. Strategically international HRM is closely linked to the business strategy of the organization.
Pulapa Subba Rao defines international human resource management as, performing HRM and its related activities and arranging for related and necessary immigration facilities for prospective and current expatriate employees, by organizations operating in domestic and/or foreign countries.
In this article we will discuss about international human resource management. Learn about:- 1. Introduction of International Human Resource Management 2. Definition of International Human Resource Management 3. Concept 4. Need 5. Roles 6. Activities 7. Morgan’s Model 8. Recruitment Policy 9. Challenges and 10. Issues.
International Human Resource Management: Definition, Importance, Features and Functions
- Introduction to International Human Resource Management
- Definition of International Human Resource Management
- Concept of International Human Resource Management
- Need for International Human Resource Management
- Roles of International Human Resource Management
- Activities of International Human Resource Management
- Morgan’s Model of International Human Resource Management
- Recruitment Policy of International Human Resource Management
- Challenges of International Human Resource Management
- Issues of International Human Resource Management
International Human Resource Management – Introduction
International human resource management bears both functional and strategic resemblance to human resource management. Functionally it performs almost the same set of activities as human resource management – recruitment, selection, performance management, compensation, training, industrial relations, career management etc. Strategically international HRM is closely linked to the business strategy of the organization.
Hence international human resource management can be defined as the set of activities involved in hiring, managing performance, compensation, training and relations with employees hired to manage internal operations of a company, with a view to ensure the success of their international business and strategies.
International human resource management differs from domestic human resource management primarily in terms of the complexity associated with managing people across national boundaries.
International human resource management deals with at least three types of employees based on their country of origin:
1. Parent-Country Nationals (PCNs) – Employees belonging to the country where a company’s headquarters are located are called as parent-country nationals or home country nationals.
2. Host-Country Nationals (HCNs) – Employees belonging to country where the company has set up a subsidiary or a manufacturing facility are called host- country nationals.
3. Third-Country Nationals (TCNs) – Employees who work in the home or host country facility of the company but are not nationals of either are called third- country nationals.
International HRM also means dealing with issues related to different countries, expatriation, repatriation, cross-cultural issues etc.
Dowling (1999) attributed to six factors that differentiate international from domestic HRM:
1. Wide range of HR activities.
2. Need for a broader perspective.
3. More Involvement in personal life of the employee.
4. Responsiveness to changes in staffing requirements as international strategy changes.
5. Higher risk exposure.
6. More external influences.
International Human Resource Management – Definition: As Defined by Pulapa Subba Rao
International human resource management (IHRM) is the process of procuring, allocating, and effectively utilizing human resources in a multinational corporation. If the MNC is simply exporting its products, with only a few small offices in foreign locations, then the task of the international HR manager is relatively simple.
However, in global firms human resource managers must achieve two somewhat conflicting strategic objectives. First, they must integrate human resource policies and practices across a number of subsidiaries in different countries so that overall corporate objectives can be achieved.
Pulapa Subba Rao defines international human resource management as, performing HRM and its related activities and arranging for related and necessary immigration facilities for prospective and current expatriate employees, by organizations operating in domestic and/or foreign countries.
At the same time, the approach to HRM must be sufficiently flexible to allow for significant differences in the type of HR policies and practices that are most effective in different business and cultural settings.
Organizations like Procter & Gamble, IBM, Pepsi and Coca Cola have had extensive International experience and their success can only be attributed to their capability of constantly deploying the right people at the right place, facilitating knowledge and innovation dissemination and constantly identifying and developing talents on a global basis.
Thus for Ford which has a global HR perspective “The company requires understanding different cultures, what motivates people from different societies, and how they are reflected in the structure of international assignments”.
International Human Resource Management – Concept
International HRM is the process of acquiring, allocating, and utilizing human resources in a global business to achieve the stated objectives. Because of global context, international HRM is the interplay of three dimensions- HR activities, type of employees, and countries of operations.
The three dimensions of international HRM are described here briefly:
1. There are three broad activities in international HRM — procuring, allocating, and utilizing employees for international operations. These three broad activities cover all HR functions which are relevant for domestic operations and discussed in different parts of the text.
2. There are three types of employees in a multinational firm based on their place of origin — parent country nationals, host country nationals, and third country nationals. Parent country nationals (PCNs) are those whose origin is the country where the firm’s headquarters are located.
Host country nationals (HCNs) are those whose origin is the country where the firm’s operations are located. Third country nationals (TCNs) are those whose origin is a country which is neither the home country nor the host country.
3. There are three types of countries involved in international HRM activities — home country, host country, and third country. Home country is the country of origin of the firm. Host country is the country in which operations of the firm are carried on. For a single firm, there may be many host countries. Third country is a country from where resources — human and other resources — are procured. There may be many third countries.
International Human Resource Management – Need
HRM activities are performed in a particular context. It implies that either different HRM activities may be required in a global firm as compared to the domestic firm or even if the HRM activities remain the same, there may be difference in the way of performing these activities.
There are four major contextual variables because of which HRM activities in a global firm differ from a domestic firm, hence the need for international HRM. These are cultural diversity, workforce diversity, language diversity, and economic diversity. Let us go through these variables and see how they affect HRM practices.
I. Cultural Diversity:
Culture of a country is one of the key factors which affect people-oriented processes, and HRM is a people-oriented process. Therefore, culture of a country has very significant impact on HRM practices. When we consider global perspective of HRM, we find cultural diversity along the globe, that is, cultures of two countries are not alike.
Cultural diversity exists on five dimensions- individualism versus collectivism, power orientation, uncertainty avoidance, masculinity versus femininity, and time orientation. Let us see how these dimensions affect human behaviour and, consequently, work practices.
1. Individualism versus Collectivism:
People differ in terms of individualism and collectivism. Individualism is the extent to which people place value on themselves; they define themselves by referring themselves as singular persons rather than as part of a group or organization. For them, individual tasks are more important than relationships. Collectivism is the extent to which people emphasize the good of the group or society.
They tend to base their identity on the group or organization to which they belong. Countries that value individualism are USA, Great Britain, Australia, Canada, Netherlands, and New Zealand. Countries that value collectivism are Japan, Columbia, Pakistan, Singapore, Venezuela, and Philippines.’ India may be placed near to collectivism.
2. Power Orientation:
Power orientation, also known as orientation to authority, is the extent to which less powerful people accept the unequal distribution of power; people prefer to be in a situation where the authority is clearly understood and lines of authority are never bypassed. On the other hand, in a culture with less orientation to power, authority is not as highly respected and employees are quite comfortable circumventing lines of authority to accomplish jobs.
3. Uncertainty Avoidance:
Uncertainty avoidance, also known as preference for stability, is the extent to which people feel threatened by unknown situations and prefer to be in clear and unambiguous situations. In many countries, people prefer unambiguity while in many other countries, people can tolerate ambiguity.
4. Masculinity versus Femininity:
Masculinity or femininity, also known as degree of assertiveness or materialism, is the extent to which the dominant values in a society emphasize aggressiveness and the acquisition of money and material goods, rather than concern for people and overall quality of life.
In societies having masculinity characteristics, more emphasis is placed on ego goals such as career, money, etc., while in societies having femininity characteristics, more emphasis is placed on social goals such as relationships, helping others, etc.
5. Time Orientation:
Time orientation dimension divides people into two categories- long- term orientation and short-term orientation. People having long-term orientation focus on future, prefer to work on projects having a distant payoff, and have persistence and thrift. People having short-term orientation are more oriented towards past and present and have respect for traditions and social obligations.
The basic implication of cultural diversity is that same set of HRM practices is not suitable for all cultures; consideration has to be given about matching HRM practices with cultural characteristics of the countries concerned.
II. Workforce Diversity:
Workforce diversity is increasingly becoming common for large organizations even for domestic ones. However, in a global firm, additional workforce diversity emerges because of hiring personnel from different countries.
A typical global firm may draw its employees from three types of countries — home country (PCNs), host country (HCNs), and third country (TCNs). In a global firm, workforce diversity can also be seen in the context of employee mobility from one country to another country for performing jobs.
On this basis, an employee can be put in one of the following categories:
1. Expatriate — a parent country national sent on a long-term assignment to the host country operations.
2. Inpatriate — a host country national or third country national assigned to the home country of the company where it is headquartered.
3. Repatriate — an expatriate coming back to the home country at the end of a foreign assignment.
Workforce diversity implies that various categories of employees not only bring their skills and expertise but also their attitudes, motivation to work or not to work, feelings, and other personal characteristics. Managing such employees with pre-determined HRM practices may not be effective but contingency approach has to be adopted so that HRM practices become tailor-made.
III. Language Diversity:
Language is a medium of expression but employees coming from different countries have different languages. Though English is a very common language, it does not serve the purpose adequately as it does not cover the entire world. While employees coming from different countries may be encouraged to learn the language of the host country for better dissemination of the information, it does not become feasible in many cases.
An alternative to this is to send multilingual communications. It implies that anything transmitted to employees should appear in more than one language to help the message get through. While there are no hard- and-fast rules in sending such messages, it appears safe to say that such a message should be transmitted in the languages the employees understand to ensure adequate coverage.
IV. Economic Diversity:
Economic diversity is expressed in terms of per capita income of different countries where a global company operates. Economic diversity is directly related to compensation management, that is, paying wages/salaries and other financial compensation to employees located in different countries.
One of the basic principles of paying to employees is that “there should be equity in paying to employees.” However, putting this principle in practice is difficult for a global company because its operations are located in different countries having different economic status. In such a situation, some kind of parity should be established based on the cost of living of host countries.
Diversity of various types in a global firm suggests that HRM practices have to be tailor- made to suit the local conditions.
International Human Resource Management – Various Roles Suggested by Researchers
The HR strategy and the degree of internalization determine the role or roles that HR assumes upon itself.
Various international human resource management roles suggested by various researchers are:
1. Champions of Processes:
This roles encompasses:
a. Building commitment of the senior leadership.
b. Training managers.
c. Monitoring HR processes.
2. Guardian of Culture:
a. Supervision and management of implementation of global values and systems.
b. Ensuring future leaders are sensitive and equipped to deal with global challenges.
3. Effective Political Influencer:
a. Understanding internal labour market where a subsidiary is located.
b. Managing the internal labour market for the global managers.
4. Network Leadership:
a. Building strong internal and external networks.
b. Keeping abreast with latest trends and developments.
c. Mobilizing resources to staff project teams effectively.
a. Articulating various International HR management basics.
b. Developing basic internal HR management practices at the beginning of internalization.
6. Change Partner:
a. Continuously calibrating human resource management practices as the external environment changes.
b. To enable the MNC to be agile in terms of its HR practices to meet the challenges of the environment and cash-on the business opportunities.
a. Competency development of the people and developing a competent organization.
b. Balancing between long-term and short-term plans and goals.
c. Balancing between global integration and local responsiveness.
d. Balancing between change and status quo in an global environment
International Human Resource Management – Activities
Although the major activities of human resource management as practiced in international organizations, their scope, responsibilities, and authority may vary according to the size of the subsidiary. The policy making section may study the local situation and generate a report which will then submitted to the top management for approval. They themselves may not have the authority to formulate such policies.
Let us look at the major areas generally looked after by the human resource department:
Check their relevancy and applicability to International operations. For instance, Equal Employment Opportunity Policies relevant to the United States may not be applicable to the subsidiaries in overseas operations. Some countries allow only certain percentage of expatriates to be appointed in their subsidiaries.
Decisions regarding policies also must be made whether to fill all key positions with parent country nationals; appointment of home country nationals; appoint the best qualified irrespective of their nationality and so on.
The employment policies must be approved by the headquarters before they are being circulated to respective HR managers in various subsidiaries. Such policies also must be reviewed periodically to check for their workability and validity and proper changes must be incorporated.
Generally, a survey of American companies indicates the following steps used in finding the right people for jobs and placing them on the jobs after taking them through various steps of the selection process:
a. Preliminary Screening at campus or company locations
b. Issuing Application Forms to be completed
c. Testing—Psychological or job-related
d. Structured job interviews
e. Reference checks
f. Meeting with Department heads
g. Physical examination
i. Placement on jobs
Most of the above selection methods are transferable to the subsidiaries from the headquarters of the companies with the exception of a few items. Let us look at the items in somewhat detailed manner and see how the transferability takes place. If the subsidiary is not large, the human resource function will be placed under production head who will be in charge of the selection process and take care of most of the human resource functions and activities, with the help of one or two clerical personnel.
If the subsidiary is fairly big, then there will be a full-fledged human resource department with variety of responsibilities, each looking after one section and reporting to the subsidiary human resource manager. The manager will directly report to the Managing director of the company. At times, the manager will be a member of the executive committee and participates in policy making bodies.
Recruitment and selection policies must be established taking local regulations and rules. Human resource plans must be drawn for the local operations annually and such information must be passed on to the headquarters for compilation of a cumulative plan for the whole corporation. Checks and verifications must be made for the accuracy and relevancy for scheduled production and service operations of the subsidiary.
Such information must be updated annually or when and where changes have been made due to expansion of operations or retrenchment exercises due to economic slowdown or other human resource problems.
Since human resource policy issues are already covered, the decisions must be made as to whether recruit human resources from outside or look for them internally. If the focus is going to be from outside, then, identify the sources and established contacts with such sources. Such contacts would help public relations purposes also. Some multinational companies have a good rapport with schools and colleges in the community and make annual visits to such institutions for recruitment exercises.
Placing advertisements in the news media also serves as a good exercise not only for getting potential employees but also gets publicity to the company.
3. Selection Process:
The steps involved in the selection process must be examined to see their relevancy and applicability to the subsidiaries. For instance, the content and the information secured through application forms must be relevant and applicable to the local situation. Care must be exercised in importing such forms from parent company and using them in the subsidiary without incorporating the local content.
It may be easier to use imported application forms, but they may secure the right kind of information or the items in such forms may be understood by the applicant. Local laws must be taken into consideration rather than asking questions pertaining to laws and regulations in the country of parent organization.
The use of psychological tests is not that common in many Asian and African countries. The validity and reliability of these tests are not checked for accuracy and applicability. Although there are no laws pertaining to the use of these tests in India, they may pose language problems. The academic institutions started to use objective-centered tests for the entrance exams and as a result of these experiences, students and employees is slowly getting used to such tests.
The interviews are common features of selection program in many companies and there should not be any problem in this area of selection process. Students who apply for admissions into the educational institutions or for employment, appear for admission interviews or job interviews. They get used to preparing for these interviews and adequate training must be given to the interviewers to conduct such interviews and develop the capability to interpret the information obtained through the interview process.
In many companies using reference checks for obtaining the recommendations from the candidates previous employers or from the academic institutions has become a routine matter. The human resource specialists must learn to use such information more productively for choosing the right candidate. The ability to interpret the most valuable information is not gained to an extent in the subsidiaries of international companies.
The interviews conducted by the technical supervisors, foremen, and managers are carried out in an informal manner. Some of the international companies, particularly, the global companies use structured approaches to carry out these interviews. At times, the senior people also sit in these interviews either as observers or to quiz the candidates. Some companies with good HR practices give practical tests to test the skill level of the candidates.
Once the interviewers have firmed up their mind to the acceptability of the candidate, they may send the potential employee for a physical examination to check the general health of the candidate. In some multinational companies, the candidates may be asked to go for some specialized tests, depending on the nature of work environment and the job.
If the individual is allergic to certain aspects of job, such as, chemicals, it is better to check that aspect in the early stages itself. This way some legal implications can be avoided. In one of the American companies, while an employee was asked to carry a heavy load, he suffered heart attack and ended up suing the company. If the company would have known the condition of the employee, this incident could have been avoided.
The human resource specialists in some international companies administer highly structured induction and orientation programs to those selected for jobs after the final interviews and checking of all records, including the reference checks. In recent years, most of the International companies seem to have well-structured selection programs.
Once the employees are placed on the jobs and their probationary period is completed, they are placed on regular jobs and their performance is observed and monitored. Proper guidance and counseling are offered to those who encounter difficulties whether in adjustments to the environment or in the learning process. Of course such things do not happen in all international companies. Generally, some employee turnover takes place during this period. But with proper built-in safeguards, such turnover can be minimized or eliminated.
International companies must be aware of and knowledgeable in laws pertaining to recruitment and selection of employees in a particular country. For instance, the Indian Government has laid down some laws pertaining to the recruitment and selection. As per these laws, reservations for Scheduled Caste, Tribes Backward Classes exist and certain percentage of jobs must be allocated for these groups.
As of now, such reservation does not apply to private sector companies. Child labor Protection Acts do apply to the Private sector companies also. The human resource department must be familiar with the Factories Act, Environmental Regulation Act (Anti- Pollution), and there are several legislative measures regarding purchase of land and constructing Factories.
The Equal Employment Opportunity Act implemented in the U.S may not apply to Indian subsidiaries. The immigration act in the U.S. has direct implication for hiring Indian employees for jobs in Indian companies in the U.S. Wherever Federal Government funding is secured, Federal Laws apply.
4. Performance Assessment:
Performance assessment is an essential part of the Human resource Management in many of the international companies. They may range from simple to complex assessment systems, such as Competency based systems. The employee’s performance is evaluated periodically with a formalized assessment system.
Whatever approaches are chosen, the following seem to be the common objectives of a performance appraisal used in international companies:
1. To help the employees improve their current job performance.
2. To stimulate their interest in self-development
3. To provide an adequate supply of well-prepared employees for promotional exercises
4. To provide a tool for comparing employee s performance with salary for sound salary administration.
5. To provide opportunity to express his feelings about job related matters.
6. To foster good personal relations.
7. To encourage high standards of performance
8. To let each employee know where he or she stands.
In recent years, quite a number of international companies have imported Management By Objectives approach to the assessment system in their subsidiaries. With proper training, the system has become routine and accepted by the employees.
Such a system includes the following steps:
1. Agreement on duties and responsibilities of the subordinate’s job between the boss and the subordinate.
2. Setting objectives in all areas of major responsibility
3. After setting the objectives, the subordinate submits them to his or her boss.
4. Reporting of progress to the boss.
5. At the end of the given period, the subordinate prepares an accomplishment report comparing performance to the set objectives.
6. The next important step is the appraisal interview where reasons for not accomplishing objectives are explored and corrective actions are suggested.
MBO is accepted as a way of life in many international companies and the human resource department gets the responsibility to make sure the system is in place and carried out effectively. According to Morrisey, the dynamism that can make MBO a potential force in organizations occurs only with the recognition that it is a human and not a mechanical process.
In many international organizations, performance assessment occupies an important place due its impact on providing feedback on the performance to the corporate headquarters or to the subsidiary heads. Due to its importance, this process is also known as Performance Improvement Management. The department heads and their subordinates are trained into conducting the appraisals and providing feedback to their subordinates.
The employee potentials are assessed for upgrading them and grooming them for higher level positions. Employee career strategies are linked to the feedback obtained from the performance appraisal outcomes. Setting up of career plans and strategies are not that common in many international companies.
This may be because of the availability of all types of employees when and where needed. Of course this attitude is changing and more and more subsidiaries are instituting career plans in their organizations. Although there are different approaches to career plans and career development, it is considered as a process of developing a personal strategy that is conceptually similar to a corporate strategy.
Through Training and Development, international companies have contributed a great deal of education to the employees of their subsidiaries. In many organizations, a separate department is set up to look after this responsibility. Training improves the ability and knowledge of operative employees and development, improves the ability and knowledge of managerial personnel.
While training prepares the individual to meet the requirements of the job by upgrading their skills, development involves improving a manager’s general knowledge to perform managerial responsibilities. Managers learn skills to make good decisions during class lectures and when get back to work, they apply such skills.
The international companies are known for imparting knowledge, skills, and techniques for new employees and skills need to upgrade for existing employees. The Japanese multinationals spend quite a bit of money, time, and effort for training employees at the shop-floor not only in Japan but also wherever their subsidiaries are located. The quality consciousness is put into every employee. Small group activities are very common in Japanese companies. The Koreans also follow the Japanese example.
Some of the commonly used training programs in the subsidiaries of international companies are:
a. Job instruction using models or prototypes
b. Apprenticeship training or understudy
c. Job rotation
d. Lectures to provide theoretical aspects of job
e. Coaching, especially low performers
Very systematically and objectively, the training needs are determined in the subsidiaries using the techniques learnt from the parent company. Through questionnaires, psychological assessments, and the feedback from performance assessment, the training needs are determined. Once the needs are determined, appropriate training and development methods are chosen and the trainees are selected. For managerial personnel, the feedback from performance assessment system comes as input for selecting the developmental methods.
The developmental methods cannot be simply taken from the headquarters and planted into the subsidiaries. Such efforts may not yield good results. What constitutes the success criteria in the local context must be examined systematically and then the relevant programs must be planned. The subsidiaries must analyze their own situations and try to isolate executive characteristics necessary to make their executives successful in those situations.
Once these factors are assessed, the developmental programs can be designed and program sessions can be planned. At times, managers are sent to the headquarters of the parent organization for gaining insights and education. The Japanese companies are very aggressive in this aspect. Executives get expose to things as practiced in the corporate headquarters, especially the world’s best run companies either in Japan, America or Europe. Visiting such places gives the managers firsthand knowledge and exposure. They are also indoctrinated into the philosophies and culture of the parent company.
Subsidiaries in many developing countries have set up institutes for providing vocational training. Some of them were funded by the agencies under the United Nations. The apprentice programs are still common in these countries. These are well-structured programs which provide classroom training as well as job training to the people who are coming out of vocational institutions which provide basic education.
Some of the commonly used developmental programs for executive level in subsidiaries are:
a. Interviewing Skills
b. Negotiation Skills
c. Motivational methods
d. Leadership styles
e. Grievance handling skills
f. Middle management development programs
g. Executive development programs
h. MBA level courses on a part-time basis.
i. Use of local educational institutions
Multinationals use most of the above developmental programs. Moulton and Fickel stress that all development whether it takes place on or off the job is self-development individual has the ultimate responsibility for continuing growth as a person and as a professional manager on a defined career path.
Newer types of developmental methods and techniques are generally imported from the corporate headquarters and in some cases they are adapted to the local conditions. The local facilitators and trainers are used to deliver the message. The program content is also adapted to the local environment and situational conditions. At times, the trainers and consultants are brought in to deliver the programs with the assistance of subsidiary trainers.
Compensation is a complex subject when it comes to International area of management. Conditions, systems, and legal aspects vary from country to country. If two or more countries are involved in determining salaries and benefits to their employees in world-wide locations, the complexity is further increased.
The parent organization may have to work out several policies, procedures, and methods acceptable to the employees in various subsidiaries. This particular area of business also involves governmental rules and regulations, economic conditions, pressures from the unions and things alike. The currency exchange rate will further complicate the issue. When people are moved from one country to another, the internationally accepted standards and norms have to be followed.
The expatriate managers may have to be compensated at a much higher level than the local managers. Their housing, travel, maintaining cars, special clothing allowances, maintenance expenses have to be added to their salaries. Their compensation package will take varying income tax rates in different countries. The tax reporting system to their respective governments is also too complex.
The same types of problems are experienced by the expatriates working for Subsidiaries of Indian companies. Bharat Forge, Tata’s, Birla’s, Ranbaxy, Infosys Technologies, and Oberoi are some examples. They have to work out compensation packages to employees in different countries as per the local conditions and regulations caused by economic, political, and regulatory backgrounds.
In the compensation practices of multinational companies, variations occur. Different countries have different systems and policies to determine the salaries and reporting systems. The impact of national cultures on compensation determination was studied by Schuler and Rogovsky Development of culture specific compensation practices based on status, performance, social benefits, and employee ownership plans were examined by the authors.
They tried to correlate these four factors with Hofstede’s four dimensions of culture and found to be associated with comparative practices.
Generally, there are two common approaches to the determination of compensation in International companies. These are balance sheet approach and the Going rate approach. In this approach, the amount paid for income tax, expenses met for house rents and related expenses, goods and services payments, and discretionary expenses.
The differences between home country and the country of residence are figured out and if there is a difference, that difference will be compensated. Going rate approach refers to the market rate. In this approach, the salary structure of the host country is connected to the base salary. Some supplements are given consideration.
The National Employers’ Federations or some consulting companies put out annual surveys which are used for determining salaries. Due to some complexities in figuring out the base salary, this approach is not favored. Only problem is figuring out the taxes and living expenses. The services of accounting firms and consulting companies are utilized in handing the compensation matters.
Besides salaries, the benefits offered by the company vary depending on the nationality of the company. While some are generous, others take a stringent approach. Some countries are generous in offering maternity benefits for their female employees. The mothers can get nearly ten month’s salary for their pregnancy related expenses and given a few months of paid leave. Some countries go to the extent of granting four weeks of paternity leave.
Singapore has developed a very interesting system for compensating employees. This system is known as Flexible wage system. In recent years the single most important task facing international and local companies is handing wages and salaries according to changing environmental conditions. When the panic button is pressed, the human resource people look for short-term solutions which sometimes may get them into trouble.
There is a great deal of rigidity to traditional compensation systems based on collective bargaining agreements. Generally these agreements are for two or three years. The increments are predetermined at the time of collective negotiations and the employers are bound to go by the agreements irrespective of the prevailing economic conditions. Traditional wage systems also favor seniority rather than individual performance. Granting across the board increases without any consideration for individual performance leads to inequity.
A flexible wage system is one that gives discretionary power to the employer in determining compensation. Such power is essential when deteriorating and unfavorable economic conditions prevail. Without such power or flexibility, the employer may not be able to adjust to changing business conditions.
The power to manipulate wages and salaries does not mean that the employer can do anything at the will. In fact, such power places a greater degree of responsibility on the employer. This responsibility includes coming out with an equitable compensation system for a given economic situation.
The flexible wage system has certain principles in common. The basic wage and salary component of the system reflects the worth of the job. Usually, a job evaluation exercise is used to assess the relative worth of jobs in a company. Thus inequities in the existing compensation system must be removed, if the flexible wage system is going to be successful. The company’s performance and productivity measures are considered in setting aside funds for the distribution of wages and salaries to increase, payments. Individual s performance is assessed through performance appraisal as a criterion for distributing payments to individual employees.
An important and critical element in the flexible wage system is the assessment of the individual’s performance. Along with this is the need to convince the individual that the assessment is fair and objective. Without an effective appraisal system, a flexible wage system will not be a flexible wage system.
The flexible wage system and its accompanying appraisal system should not be used as a tool to justify one’s actions. Rather, it should be used to demonstrate fairness. Now days, new models are being developed for more fair distribution of wages and salaries across the globe, taking Globalization into consideration. It is worth keeping an eye on the models and strategies for Wage and Salary Administration.
International Human Resource Management – Morgan’s Model of International Human Resource Management
Morgan (1986) had developed a unique model to depict how IHRM works.He asserted that IHRM basically is comprised of three components, namely-
1. The wide spectrum of HR activities particularly with reference to the added responsibilities of the international HR managers in terms of managing cultural diversity and developing international executives.
2. The National/Country specific people and cultural categories involved in IHR activities and lastly
3. Types of international employees deployed in various international organizations.
1. HR Activities:
The HR activities on an International perspective can be broadly depicted as those of procurement, allocation and utilization of human resources in the organization. These activities include international human resource planning, staffing (recruitment, selection, induction and placement), performance management, training and development, compensation and reward management and managing international employee relations and industrial relations.
These HR activities with respect to an international scenario have a broad spectrum mainly in terms of the complexity created by country differences, level of control, cultural differences and so many factors influencing the international business environment.
2. Country Categories Involved in IHRM:
The model further depicts that in an international perspective three types of country categories may be involved, namely-
a. The host country where the subsidiary could be located or be operating.
b. The home country where the MNC/International firm could be headquartered.
c. The “third-country” from where employees, capital and other resources like technology or logistics could be availed or procured by the organization.
3. Employee Categories Involved in IHRM:
Depending on the above country categories, the employees in an international perspective could be broadly classified as under:
a. Host Country Nationals (HCNs) representing the employees hired from the host country.
b. Parent Country Nationals (PCNs) representing the employees expatriated to the foreign subsidiary from the home country of the MNC.
c. Third Country Nationals (TCNs) representing the employees deployed from third/other countries other than that of the home country of the MNC.
International Human Resource Management – Recruitment Policy
Companies operating outside their home countries, essentially, follow three ways of hiring executives:
It is a cultural attitude marked by the tendency to regard one’s own culture as superior to others. Sending home country executives abroad – thinking that they will be able to deliver the goods – may be an appropriate strategy in the initial stages of expanding company operations worldwide as these officials know what to do immediately. At Royal Dutch Shell, for instance virtually all financial controllers around the world are Dutch nationals.
Often the other reasons advanced for ethnocentric staffing policies include- lack of qualified host country managerial talent, a desire to have a unified corporate culture, tight control and the keenness to transfer the parent company’s core competencies (say, a specialised design skill) to a foreign subsidiary more expeditiously.
However, a policy of ethnocentrism is too narrow in its focus and may evoke strong negative reactions from local executives whose upward mobility is blocked.
There is also no guarantee that the expats will win over the hearts of local employees and offer positive contributions. In fact, failures of US expats range from 10% to 15%. European and Japanese expat failures are equally alarming, the costs of each such failure running to several thousands of dollars.
Too often expats are selected on the strength of their domestic track record. They are posted abroad without requisite cross-cultural training. The family factors stand completely discounted in the selection process. The rate of failures could be drastically reduced if these issues are properly addressed.
In the polycentric corporation, there is a conscious belief that only host country managers can ever really understand the culture and behaviour of the host country market; therefore, the foreign subsidiary should be managed by local people. The home-office headquarters, of course, is staffed by parent-country nationals.
Hiring nationals has many advantages. It eliminates language barriers, expensive training periods, cross-cultural adjustment problems of managers and their families.It also permits the firms to attract talented locals by offering an attractive compensation package. Many western MNCs have found that the key to success on foreign soil is to employ local people.
Analog Devices Inc. has achieved global success in a highly technical field by picking up local managers, training them extensively and then empowering them to hire and manage more local talent. Likewise, global sales of Bausch & Lomb improved dramatically after putting the local managerial talent to good use.
Geocentrism assumes that management candidates must be searched on a global basis, without favouring anyone. The best manager for any specific position anywhere on the globe may be found in any of the countries in which the firm operates. Such a staffing policy seeks the best people for important jobs throughout the organisation, regardless of nationality. It helps to build a stronger and more consistent culture and set of values among the entire global management team.
‘Team members here are always interacting, networking and building bonds with each other, as they move from assignment to assignment, around the globe and participate in global development activities’. Colgate-Palmolive is an example of a company that hires the best person for the job regardless of nationality. It has been operating globally for more than 55 years, and its products are household names in more than 175 countries.
Fully 60 per cent of the company’s expatriates are from countries other than the Unites States and two of its last four CEOs were not US nationals. Moreover, all the top executives speak at least two languages and important meetings routinely take place all over the globe.
International Human Resource Management – Challenges
According to P. V. Morgan, International HRM is the result of an interplay among the three dimensions — human resource activities, types of employees and countries of operation. The complexities of operating in various countries and employing different national categories of workers is an important variable that differentiates domestic and international HRM, rather than any major differences between HRM activities performed.
Broadly stated, IHRM is “the process of procuring, allocating and effectively utilising human resources in a multinational corporation “. When compared to domestic human resources management, the scope of IHRM is very wide.
For example, while compensating people in India, the American MNC must keep in mind the expectations of locals, the competitor’s compensation structure, taxation problems of repatriates, TCN’s aspirations and a host of other issues that have a bearing on the psyche of employees possessing different skills and having different cultural backgrounds (both within and outside the country).
IHRM, thus, requires a much broader perspective, encompasses a greater scope of activities and is subject to much greater challenges than is domestic HRM.
International HRM can be a challenging exercise because of fairly obvious reasons:
I. Integration Issues:
It is difficult to push the right button at the right time, especially when managers operate from headquarters separated by distance. Controlling operations of subsidiary companies in different parts of the globe through remote control can be really taxing — especially in coordinating effort and put the same on track in sync with the established policies of a company.
II. Heterogeneous Functions:
International HRM can be very challenging when one takes a look at what international HR managers are supposed to handle in terms of variety and complexity — including issues relating to international hiring, placement, culture-specific training, compensation relating problems, administrative services to expatriates, carrying out appraisals from time to time, offering growth opportunities to the talented ones, putting out fires with labour, resolving conflicts and maintaining health labour-management relations, etc.
The employees sent abroad on an assignment need to be taken care of in a special way. Their families too need to be taken care of including medical, educational, insurance, transportation benefits, etc. HR issues relating to the above are going to be impacted by a variety of factors which demand a closer examination.
International Human Resource Management – Issues
Some of the more basic issues involved in pertinent areas of global human resource management are explained below:
There are basically three ways to meet the requirements of manpower in foreign ventures. First, a foreign company may send persons of its home country to manage its affairs in the host country. Second, it can hire people of the host countries to meet its human resource requirements there. Third, it can also utilise the services of third country nationals. International HRM is now accepted as the key source of competitive advantage for international business.
In all cases, there have emerged certain norms regarding basic characteristics in international staffing. These are as follows – (i) cultural adaptability, (ii) strong communication skills, (iii) technical competence, (iv) professional expertise, (v) global experience, (vi) inter-personal skills, (vii) family flexibility and (viii) country or region specific considerations. Most of the multinational companies vie with each other to recruit candidates for technical and managerial positions from highly reputed technical and management institutes offering them lucrative compensation packages and try to retain the services of the most talented ones.
Some of the advantages of staffing from the home country nationals are as follows – (i) greater control over activities of the organisation, (ii) acquisition of experience in local markets; (iii) greater efficiency in implementing business strategy and (iv) adequate understanding of culture of the host country. The disadvantages include the following – (i) difficulty in adoption to the foreign environment, (ii) problems of family adjustability and (iii) friction resulting from language barriers.
The major advantages of staffing from amongst the host country nationals are as follows – (i) elimination or reduction of language barriers; (ii) better understanding of host country’s laws and regulations; (iii) reduction of hiring cost and (iv) reduced compensation package. The disadvantages include- (i) poor understanding of business objectives of host-country organisation and (ii) possibility of biases and favouritism in appointments.
The advantages of third country nationals in staffing are as follows – (i) better equipped with the use of international perspectives and (ii) possibility of low cost of hiring. Disadvantages are as follows – (i) poor understanding of political situations and national hostilities and (ii) resistance from the government and local people and functionaries in the organisation.
In India, major requirements of various categories of manpower needed by foreign companies are met by the people of the country itself. India has a bountiful of software engineers and analysts, technical and managerial personnel with adequate expertise and specialisation, skilled and unskilled workers. Most of the foreign MNCs operating in India utilise the services of the local people to manage their businesses in the country.
The use of information technology, Internet and the services of specialised and professional organisations have considerably made the task of hiring easy and convenient. Only in the case of top positions, the foreign companies generally prefer to fill them by personnel of their home countries.
Foreign companies having their business in India also have the advantage of not facing the rigours of laws related to management of human resources such as the Civil Rights Act of the USA, compulsions of co-determination of Germany and a few European countries and compulsory collective bargaining as in existence in the USA and a few European countries. Besides, they do not have to face the problems of visa restrictions, rigid immigration laws and regulation of supplies.
There are, however, legal constraints on dismissing, discharging, retrenching or otherwise separating specified categories of employees under the Industrial Disputes Act, 1947. Besides, most of these countries do not have to face problems of language and skill and expertise of personnel needed for manning positions at various levels. These companies also have the advantage of outsourcing of specific operations, the facilities of which are in abundance in the country.
The Indian companies having their businesses abroad do not have to face many problems in recruitment and selection of suitable candidates for their enterprises as a sufficient number of qualified and competent people with managerial and technical skills and specialisation are available in the country for foreign assignments.
They can conveniently be sent to countries having English as the major language. Many of the Indian students acquire efficiency in different foreign languages, which do not only enhance their career prospects, but also contribute to the success of the enterprises in the host countries.
Only in a few cases, both the Indian and foreign companies avail of the services of third-country nationals.
Training and Development is an important area which calls for special attention in international human resource management. Although a sufficient number of qualified people with requisite academic background is available in India, they need suitable training to develop skills and capabilities commensurate with requirements of jobs assigned to them.
Different foreign and Indian companies have their own specific areas of operations, and their needs for equipping employees with essential capabilities vary. In the situation of fierce competition among firms, it becomes imperative for them to keep their employees at the level of maximum efficiency.
It is the task of training and development programmes to ensure that employees at all levels of organisational hierarchy are effectively trained and developed keeping organisation’s objective at the forefront. Some more notable areas of T&D programmes in international businesses comprise the following – (i) language efficiency, (ii) understanding of the social and political environment of the host countries; (iii) awareness of the cultural and social environment; (iv) adaptability to changing situations; (v) efficiency in the use of the computers, Internet and other electronic devices and (vi) the needs of employees’ career development.
As the extent and dimension of competition, technology job requirements, market conditions and government policies change, so also it is necessary to arrange for suitable training programmes on a continuing basis. Some of the methods used for training of managers and executives in international perspective comprise job rotation training, simulation, conferences, case study and Internet-based training.
Many reputed companies have started laying increasing emphasis on professional development in order to enable employees to achieve their carrier-related goals. T&D programmes must also cover proper understanding of legal framework of the host countries including labour and social security laws and those related to compensation and personnel matters.
In international human resource management, compensation issues are of vital importance. Companies engaged in foreign businesses must offer lucrative compensation packages to all categories of employees in order to attract and retain talented and competent personnel.
It must also be emphasised that labour cost has increasingly become an important component of the total cost of business operations. Although the use of improved technology in various areas of business activities has tended to replace manpower by electronic and other devices, the total expenditure on wages and salaries has continued to rise.
While formulating compensation policies and determining compensation packages, it is necessary to give due consideration to the standard of living, prevailing rates of remuneration, statutory regulation of wages and fringes benefits, cost of medical care and income tax laws of the host countries. People of various countries prefer to work in gulf countries as their emoluments are income-tax free.
Labour laws of many countries also lay down minimum standards related to paid holidays, vacation time pay, maximum daily and weekly hours, minimum rates of wages statutorily fixed, liability of the employers in regard to social security benefits and payment of gratuity and bonus. As there are wide variations in practices in different countries of the world, international human resource management must take into account the implications of these variations.
Other pertinent aspects that deserve particular attention in international compensation management, especially in regard to higher positions, include the following – remuneration paid by competing firms; consistency with international standards; need for career development of employees; simplicity in administration; and stability in the retention of talents with a view to maintain the services of talented and indispensable executives. Many MNCs have started offering stock ownership and equity-based compensation, long-term incentives, profit-sharing and team-based remuneration to them.
Regular performance appraisal of various categories of functionaries in foreign business is also important in international human resource management. It is rather very difficult for the home- country management to evaluate performance of employees working abroad. The task of performance appraisal of such employees may be entrusted to competent appraisers of the host country.
However, the home-country management may formulate guidelines and lay down the standards for key jobs. Certain guidelines for appraisal may be related to objectives of assignment, emphasis on quantifiable measurement for the assignment, converting qualitative behaviour into quantifiable measurements, evaluating employees’ performance on these measurements and making calculations of return on investment (ROI).
It is always desirable to provide feedback which can be helpful in making appraisal objective and transparent. Foreign companies sometimes have to face the problem of biases and prejudices by host-country appraisers, impact of unforeseen situations and also group-pressures. Many foreign companies have started increasing adoption of 360° appraisal. Email has generally been helpful in making both the appraiser and appraisee aware of the relevant issues in performance appraisal.
A specific area deserving attention in international human resource management is the standards set by international and regional organisations in regard to the use of human resources. A particular mention may be made of the role of the ILO, European Union, (EU), South Asian Association for Regional Cooperation (SAARC), Association of South East Cooperation (APEC) and BRICS (Brazil, Russia, India, China and South Africa).
The ILO creates international standards of labour in the forms of Convention and Recommendation. Conventions are obligation-creating instruments. The member states ratifying a Convention are under the obligation to give effect to its provisions by enacting labour law or under collective agreement or in other ways. The MNCs operating in foreign countries must abide by the provisions of ratified Conventions as embodied in labour law, collective agreement or other instruments.
Similarly, the European Union also creates norms in various areas related to the use of human resources in the member countries. Some of these norms are related to industrial relations, workers’ participation in management and rights and obligations of employers and unions. Some of the norms adopted by organisations in the Asian countries also have direct or indirect relevance to the use of human resources.
The areas of activities in domestic and international human resource management are not dissimilar, but the international HRM requires revamping and modifying them taking into account the dissimilarities in the cultural, political, economic and legal environment of the countries in which they operate.