INTERNATIONAL HRM: INTERNATIONAL HRM INTRODUCTION: INTRODUCTION International management encounters many problems above those faced by a domestic organization. Geographic distance and a lack of close, day-to-day relationships with headquarters represent a major challenge to multinationals. "It is essential, therefore, that special attention is given to the staffing practices of overseas units" Slide 3: Many challenges exist when staffing a business that functions globally. Differences in cultures provide many opportunities for establishing a diverse workforce. If the parent company is located in the U.S and separate offices are being established in other areas of the world, the HR Manager will be responsible for making sure that the goals and timeline to reach those goals are met. Slide 4: Depending on the type of business, the HR Manager will need to establish a way for the policies and philosophy of the company to be consistent in all branches, regardless of location. The easiest, but probably the most costly, solution is for the HR Manager to place home-country employees in the foreign locations in an effort to establish a program to meet the needs of the parent company. Slide 5: Geographic differences will present issues for communication, time zone differences, language difference and more. staffing: staffing “ Staffing is the process of acquiring , deploying and retaining a workforce of sufficient quantity and quality to create positive impacts on the organization's effectiveness ” Factors Affecting Staffing: Factors Affecting Staffing General staffing policy on key positions at headquarters and subsidiaries Constraints placed by host government Staff availability Pigors - 3 different sources of employees : Pigors - 3 different sources of employees First , the company can send employees from its home country, which are referred to as expatriates, expats or home country nationals. Second, it can recruit host country nationals (natives of the host country), Third , it can hire third country nationals who are natives of a country other than the home country or the host country. Challenging aspects: Challenging aspects One of the challenges is staffing the operation. Most times bringing employees from one country to another is expensive for many reasons. First , the initial cost of airfare, living expenses and transportation in the host country. The second expense incurred with bringing expatriates in to the international operation is the training involved in making sure the people going to the host country are familiar with, laws, rules, culture, and expectations in the new country. There are also expenses incurred of the expatriate is not fluent in the host countries language. Slide 10: The main challenge with hiring host-country employees is their lack of understanding about how the organization functions at home and what the goals are. There may be challenges when having a person from the host county come to train the individual, and then leaving to allow this person to run the operation with a short amount of training from the organizations superiors. Slide 11: One of the challenges in hiring a third-country national is the training and cost to relocate the individual. Though many of these hires are smart choices because of culture and language there are still costs incurred in relocation and also in training. Slide 12: When international expansion of the company is in its infancy, management is heavily relying on local staff, as it is extremely respondent to local customs and concerns. Slide 13: As the company′s international presence grows, home-country managers are frequently expatriated to stabilize operational activities (particularly in less developed countries). At later stages of internationalization, different companies use different staffing strategies; however, most employ some combination of host-country, home-country, and third-country nationals in the top management team" Staffing policies of MNCs – 4 categories: Staffing policies of MNCs – 4 categories Ethnocentric policy Polycentric policy Geocentric policy Regiocentric policy Ethnocentric policy: Ethnocentric policy The ethnocentric staffing policy refers to the strategy of a multinational company to employ managers for key positions from the parent headquarters instead of employing local staff Strategic decisions are made at headquarters Limited subsidiary autonomy Key positions in domestic and foreign operations are held by headquarters’ personnel PCNs manage subsidiaries Advantages: : Advantages: To ensure new subsidiary complies with overall corporate objectives and policies Has the required level of competence Overcomes lack of qualified managers in host nation Unified culture Helps transfer core competencies (and skills back) Disadvantages: : Disadvantages: Limits the promotion opportunities of HCNs, leading to reduced productivity and increased turnover among the HCNs Longer time for PCNs to adapt to host countries, leading to errors and poor decisions being made High cost Produces resentment in host country Can lead to cultural myopia Reasons for relying on parent country nationals (PCNs): Reasons for relying on parent country nationals (PCNs) The expatriate′s technical and business expertise. Ability to transfer the headquarters′ culture to the foreign operation (infusing central beliefs throughout the organization). Political understanding of the headquarters′ organization. Effective communication between headquarters and the subsidiary. Lack of qualified host country nationals (HCNs). Greater ability of expatriates to transfer know-how from the parent to the subsidiary. Measure of control over the subsidiary. Career and promotion opportunities for PCNs. Personnel development. No need of well-developed international internal labor market. Rapid substitution of expatriates possible. Major problems with this approach : Major problems with this approach Parent country nationals continue to experience difficulties to adjust to international assignments. The adaptation of expatriates is uncertain. Complicated personnel planning procedures. The private life of expatriates is severely affected. Difficulties in constant mentoring during the stay abroad. This approach to staffing limits the promotion and career opportunities of local managers, which may lead to low moral and increased turnover. PCNs are not always sensitive to the needs and expectations of their host country subordinates. Tensions between the expatriate executives and the HCNs (caused by philosophical issues such as the clash of cultures and also by some fairly hard issues such as the often substantial income gap). Expatriates are very expensive in relation to HCNs. Legal regulations of the host country. Government restrictions. Repatriation. High failure rate. Polycentric : Polycentric Each subsidiary is a distinct national entity with some decision-making autonomy HCNs manage subsidiaries who are seldom promoted to HQ positions PCNs rarely transferred to subsidiary positions. Host-country nationals manage subsidiaries Parent company nationals hold key headquarter positions Best suited to multi-domestic businesses Advantages:: Advantages: Employment of HCNs eliminates language barriers, reduces the need for cultural awareness training programs Employment of HCNs allows a multinational company to take a lower profile in sensitive political situations Employment of HCNs is less expensive Employment of HCNs gives continuity to the management of foreign subsidiaries (lower turnover of key managers) Alleviates cultural myopia. Inexpensive to implement Helps transfer core competencies Disadvantages:: Disadvantages: Difficult to bridge the gap between HCN subsidiary managers and PCN managers at headquarters (language barriers, conflicting national loyalties, cultural differences) HCN managers have limited opportunities to gain experience outside their own country PCN managers have limited opportunities to gain international experience Resource allocation and strategic decision making will be constrained when headquarter is filled only by PCNs who have limited exposure to international assignment Geocentric : Geocentric A global approach - worldwide integration View that each part of the organization makes a unique contribution Best suited to Global and trans-national businesses Nationality is ignored in favor of ability: Best person for the job Color of passport does not matter when it comes to rewards, promotion and development. Advantages:: Advantages: Ability of the firm to develop an international executive team Overcomes the federation drawback of the polycentric approach Support cooperation and resource sharing across units Enables the firm to make best use of its human resources Equips executives to work in a number of cultures Helps build strong unifying culture and informal management network Disadvantages:: Disadvantages: Host government may use immigration controls in order to increase HCNs employment Expensive to implement due to increased training and relocation costs Large numbers of PCNs, HCNs, and TCNs need to be sent across borders Reduced independence of subsidiary management National immigration policies may limit implementation Expensive to implement due to training and relocation Compensation structure can be a problem. Regiocentric : Regiocentric Reflects a regional strategy and structure; Regional autonomy in decision making; Staff move within the designated region, rather than globally; Advantages:: Advantages: Allow interaction between executives transferred to regional headquarters from subsidiaries in the region and PCNs posted to the regional headquarters Provide some sensitivity to local conditions Help the firm to move from a purely ethnocentric or polycentric approach to a geocentric approach Disadvantages:: Disadvantages: Constrain the firm from taking a global stance Staff’s career advancement still limited to regional headquarters, and not the parent country headquarters Transfer of Staff for International Business Activities: Transfer of Staff for International Business Activities Reasons for International Assignments Types of International Assignments Expatriate and Non-expatriates – their roles Reasons For International Assignments: Reasons For International Assignments Position filling Skills gap, launch of new endeavor, technology transfer Management development Training and development purposes, assisting in developing common corporate values Organizational development Need for control, transfer of knowledge, competence, procedures and practices Types of International Assignments: Types of International Assignments Short term: up to 3 months Troubleshooting Project supervision A stopgap until a permanent arrangement is found Extended: up to 1 year May involve similar activities as short-term assignments Long term: varies from 1 to 5 years The traditional expatriate assignment Non-standard Assignments: Non-standard Assignments Commuter assignments Rotational assignments Contractual assignments Virtual assignments Some of these arrangements assist in overcoming the high cost of international assignments but are not always effective substitutes for the traditional expatriate assignment . Roles of an Expatriate: Roles of an Expatriate Agent of direct control Agent of socialization Network builder Boundary spanner Language node Transfer of competence and knowledge Roles of Non-expatriates: Roles of Non-expatriates People who travel internationally yet are not considered expatriates as they do not relocate to another country Road warriors, globetrotters, frequent fliers Much of international business involves visits to foreign locations, e.g. Sales staff attending trade fairs Periodic visits to foreign operations Non-expatriates enjoy positives as:: Non-expatriates enjoy positives as: A Glamorous life Excitement and thrills of conducting business deals in foreign locations Life style (top hotels, duty-free shopping, business class travel) General exotic nature experience a High level of stress: experience a High level of stress Home and family issues - Frequent absences Work arrangements Domestic side of position still has to be attended to Travel logistics waiting in airports, etc. Health concerns Poor diet, lack of sleep, etc. expatriate problem: expatriate problem Expatriate: citizens of one country working in another Expatriate failure: premature return of the expatriate manager to his/her home country Cost of failure is high: estimate = 3X the expatriate’s annual salary plus the cost of relocation (impacted by currency exchange rates and assignment location) Inpatriates : expatriates who are citizens of a foreign country working in the home country of their multinational employer Reasons for expatriate failure: Reasons for expatriate failure US multinationals Inability of spouse to adjust Manager’s inability to adjust Other family problems Manager’s personal or emotional immaturity Inability to cope with larger overseas responsibilities European multinationals Inability of spouse to adjust Slide 40: Japanese Firms Inability to cope with larger overseas responsibilities Difficulties with the new environment Personal or emotional problems Lack of technical competence Inability of spouse to adjust. Slide 42: Strategists - representing interests of the MNE’s headquarters Daily Managers - run operations, to build local capabilities and gain international management experience Ambassadors - representing headquarter’s interests in the subsidiaries and representing the interests of the subsidiaries when interacting with headquarters Trainers - for their replacements Expatriate Failure and Selection: Expatriate Failure and Selection (1) premature (earlier than expected) return (2) unmet business objectives (3) unfulfilled career development objectives Using the relatively easy-to-observe measure of premature return, studies in the 1980s reported that 76% of US MNEs have more than 10% expatriates failures, and 41% and 24% of European and Japanese MNEs, respectively, have a comparable number of failure cases Expatriate selection: Expatriate selection Reduce expatriate failure rates by improving selection procedures An executive’s domestic performance does not (necessarily) equate his/her overseas performance potential Employees need to be selected not solely on technical expertise but also on cross-cultural fluency Four attributes that predict success: Four attributes that predict success Self-Orientation Possessing high self-esteem, self-confidence and mental well-being Others-Orientation Ability to develop relationships with host-country nationals Willingness to communicate Perceptual Ability The ability to understand why people of other countries behave the way they do Being nonjudgmental and being flexible in management style Cultural Toughness Relationship between country of assignment and the expatriate’s adjustment to it Components of expatriate pay : Components of expatriate pay Base Salary Same range as a similar position in the home country Foreign service premium Extra pay for work outside country of origin Allowances Hardship, housing, cost-of-living and education allowances Taxation Firm pays expatriate’s income tax in the host country Benefits Level of medical and pension benefits identical overseas Slide 48: Compensation Benefits Employment and Taxation Laws Organization’s Compensation Policy Competitors Standard of Living Political and Social Environment Allowances Economic Conditions Slide 49: E xpatriate costs may pose a multiple-fold expense in relation to employees who are not sent as expatriates to foreign destinations, and are usually significantly higher than the compensation accorded to HCNs and TCNs a Chinese manager with 15 years experience costs less than USD 70,000 per annum, while a US expatriate manager with corresponding expertise would cost his or her organization USD 300,000 per year Key Components of International Compensation Programme for Expatriates: Base Salary The base salary is usually the main component in international compensation, and is the main benchmark used for other elements in an expatriate compensation package, such as bonuses and benefits The base salary is either paid in the expatriate’s home or parent country currency, or in the currency of the expatriate’s host country Key Components of International Compensation Programme for Expatriates Slide 51: Hardship Premium For expatriate’s (usually PCNs, TCNs) who will encounter “hardships” caused by the transfer to a foreign location, determining the appropriate level of payment can be difficult Factors determining the hardship premium, usually expressed in terms of an expatriate’s base pay, are typically: Assignment Actual hardship Tax consequences Length of assignment Slide 52: Allowances: There are many types of allowances in an international compensation package: Cost of Living Allowance – Payment made to the expatriate with a view to compensating for differences in expenditure between the home or parent country and the host country. Factors such as inflation differentials and the price level need to be considered. Often, the cost of living allowance is difficult to determine Slide 53: Housing Allowance – Payment made to the expatriate with a view to ensuring that he or she can maintain their home-country living standard in the host country. Alternatively, an organization may provide housing facilities on a mandatory or optional basis. Also, support services may be provided to the expatriate, for example, by helping sell or rent the expatriate’s house in the home country Slide 54: Home Leave Allowance – Payment made to the expatriate with a view to facilitating their visit back to the home country, once or twice a year. Home leave enables the expatriate to renew business, family and social ties, and thus avoid adjustment problems subsequent to repatriation Relocation Allowance – Payment made with a view to enable the relocation of the expatriate to the assignment location. Includes moving, shipping, storage costs, subsidies for purchase of appliances and (possibly) an automobile Slide 55: Education Allowance – Payment made with a view to supporting the education of the expatriate’s children, i.e. tuition, language class, school enrollment fees, books and supplies, transportation to educational establishment, room and boarding, school uniforms etc. Problems regarding the level of education required and adequacy of schools in the host country, and transportation to other localities may pose significant problems for organizations Slide 56: Miscellaneous Allowances – Depending on the level of seniority of the expatriate, payments to him or her for club memberships, sport associations, maintenance of household staff etc. may be rendered In addition, the organization may render financial assistance to the spouse for her or his loss of income as a result of the transfer of the expatriate Slide 57: Benefits – Support rendered to an expatriate in addition to the allowances provided. There are several types of benefits, more prominent examples being: Social Security Benefits (home country or host country?) Paid Vacations for expatriate and family Rest and Rehabilitation leave (especially for expatriates based in “hardship” assignment locations) Emergency Cases (severe illness, death) approaches: approaches There are two basic approaches used to determine an international compensation package: The Going Rate Approach The Balance Sheet Approach The Going-Rate Approach: The Going-Rate Approach Based on local market rates Relies on survey comparisons Local nationals (HCNs) Expatriates of same nationality Expatriates of all nationalities Compensation based on the selected survey comparison Base pay and benefits may be supplemented by additional payments for low-pay countries Example: Should a Pakistani bank operating in London use local British salaries, the salaries other Pakistani competitor banks in London or the average salary offered by all foreign banks operating in London as the reference point for the base salary offered ADVANTAGES: ADVANTAGES Equality with local nationals Simplicity Identification with host country Equity amongst different nationalities DISADVANTAGES: DISADVANTAGES Variation between assignments for the same employee Rivalry between expatriates of same nationality in getting assignments to some countries Potential reentry problems in the home country Balance Sheet Approach: Based on the premise that employees on overseas assignments should have the same spending power as they would in their home country. The home country is the standard for all payments. The objective is to: Ensure cost effective mobility of people to global assignments Ensure that expatriates neither gain nor lose financially Minimize adjustments required of expatriates Balance Sheet Approach Slide 63: The balance sheet approach is widely used by international organizations to determine the compensation package for expatriates: Basic objective is the maintenance of home-country living standard, plus financial inducement Home-country pay and benefits are the foundations of this approach Adjustments to home package to balance additional expenditure in the host country Financial incentives (expatriate / hardship premium) added to make the package attractive Slide 64: The balance sheet approach to international compensation is a system designed to equalize the purchasing power of employees at comparable position levels living abroad and in the home country, and to provide incentives offset qualitative differences between assignment locations Outlays Considered in the B S A: Outlays Considered in the B S A BSA considers 4 types of outlays which are incurred by expatriates: Goods and services – Outlays incurred in the home country for food, personal care, clothing, household furnishings, recreation, transportation & medical care Housing – All major costs associated with housing in the host country Slide 66: Income Taxes – Parent country & host country income tax expenditures Reserve – Contributions to savings, payments for benefits, pension contributions, investments, education expenses, social security taxes, etc. Where costs of host country > costs of home country organization pays the expatriate to make up the difference Balance Sheet Approach: Balance Sheet Approach Allowances, paid by company Reserve $1,000 Goods and Services $2,000 Housing $2,000 Taxes $2,000 Home Country Salary $7,000 Reserve Goods and Services $700 Housing $1,000 Taxes $1,500 Relocation Bonus Equivalent Salary and Allowances, Host Country $10,200 ADVANTAGES: ADVANTAGES Equality between assignments & between expatriates of the same nationality Facilitates expatriate reentry Easy to communicate To employees DISADVANTAGES: DISADVANTAGES Can result in considerable disparities between expatriates of different nationalities & between expatriates & local nationals Can be quite complex to administer (e.g. changing economic conditions, taxation) Other Approaches: Other Approaches Negotiation Localization Lump Sum Cafeteria Plan Regional Systems Slide 73: Global compensation managers increasingly deal with two areas of focus. They must manage highly complex and turbulent local details, while Concurrently building and maintaining a unified, strategic pattern of compensation policies, practices and values. Expatriate Expectations: Expatriate Expectations Financial protection in terms of benefits, social security and living costs in the foreign location. Opportunities for financial advancement through income and/or savings. Issues such as housing, education of children and recreation to be addressed in the policy. Career advancement and repatriation. Key Components of International Compensation: Key Components of International Compensation The area of international compensation is complex, primarily because multinationals must cater to three categories of employees: PCNs, TCNs and HCNs Key Components: Base salary Foreign services inducement Hardship premium Allowances Benefits Expatriate Compensation Worksheet: Expatriate Compensation Worksheet Example of an Expatriate Compensation: Example of an Expatriate Compensation An expatriate working in a U.S. branch may receive: Base pay: $1,400/ mon Housing: up to $1,400/ mon (Optional) Itemized reimbursement: $500/ mon Discretionary expense (e.g., gifts & gratuity to clients and partners): $1000/special holidays Benefits: Social security/Medicare (Optional) Health care: $200/ mon paid by employer Unemployment coverage Workers comp REPATRIATION: REPATRIATION process of facilitating career anxiety experienced by repatriates (returning expatriates) psychological contract - informal understanding of expected delivery of benefits in the future for current services repatriates also experience a loss of status , spouse and children may also find it difficult to adjust back home mentor - helps alleviate the “out-of-sight, out-of-mind” feeling by ensuring that the expatriate is not forgotten at headquarters and by helping secure a challenging position for the expatriate upon return EXPATRIATION vs. INPATRIATION: EXPATRIATION vs. INPATRIATION Addressing the expatriation problem, one solution is inpatriation – relocating employees of a foreign subsidiary to the MNE’s headquarters for the purposes of filling skill shortages at headquarters and developing a global mindset for such inpatriates. Most inpatriates are expected to eventually return to their home country to replace expatriates. Unfortunately, many are ineffective. Inpatriates, just like expatriates, have their fair share of problems and headaches.