Chapter 5: International Human Resources Management

Introduction

International Human Resources Management is a broad topic which consists of human resources activities, both at the national and international level, for employees who are both nationals and foreigners.

The Definition of International Human Resources Management

International human resources management (IHRM) refers to the planning, recruiting and selecting, training and developing, evaluating, and retaining employees for the international operations of international companies.

The dimensions of IHRM are;

• activity dimension,
• regional dimension,
• employee-group dimension.

Based on these dimensions, Dowling, Festing, and Engle (2013) discussed six factors that drive the complexity of IHRM;

1. New HR responsibilities
2. The need for an international perspective in compensation policy.
3. Greater involvement in employees’ personal lives.
4. The mix of foreigners versus locals.
5. Greater risk exposure.
6. External influences of the government and national culture.

Staffing at an International Level: Approaches

Employees can come from three sources:

1. a parent (home) country
2. a host country
3. a third country

Then, based on the above classification, employees are categorized as:

• parent-country (home-country) nationals,
• host-country nationals,
• third-country nationals.

Following the footsteps of Chakravarthy and Perlmutter (1985), four global strategies of MNEs are described next, together with the approaches they bring to staffing. These include ethnocentric, polycentric, geocentric, and regiocentric approaches.

The Ethnocentric Approach

An MNE is said to be following an ethnocentric approach when strategic decisions are made at the headquarters; and critical positions in both the domestic and foreign operations of an MNE are filled by personnel from the parent country (PCNs) with no or minimal autonomy delegated to the foreign subsidiaries. (Patel and Budhwar, 2017: 120).

The Polycentric Approach

When an MNE treats each subsidiary as a distinct national entity, it is said to be adopting a polycentric approach.

The Geocentric Approach

While the polycentric attitude strives for optimal local solutions, this might be sub-optimal for the whole organization.

The Regiocentric Approach

It is a mix between the polycentric and the geocentric approaches.

The Training and Development of Employees for International Assignments

After the employees are hired by the MNE, the skills and knowledge that they have and those that they need in order to perform their duties have to be identified. Those who lack the necessary skills or knowledge can then be directed into specific training and alternatively into development programs (Wild and Wild, 2016).

Specific training encompasses teaching and developing job-related skills.

Development programs offer more general education aiming to prepare employees for future high-level positions.

Training and Developing the Home -or Parent- Country Nationals

If the company is likely to send PCNs abroad, then before going abroad, the company will frequently encourage the PCNs to study the language and culture of the country to which they may go.

Several university-level business schools in other countries offer programs that enable students to get applied business experience, such as consulting or internship activity within different contexts.

Training and Developing the Host-Country Nationals

The same general criteria for selecting home -country employees apply to the selection of host- country nationals.

Training programs will need to be developed to enable host-country nationals to understand and perform effectively within the MNE.

HCNs Recruited in the Home Country: Many multinationals try to solve the business technique problem by hiring host-country students upon their graduation from home-country business schools.

HCNs Recruited in the Host Country: As the number of host-country citizens graduating from home-country universities is limited, multinationals must also recruit locally for their management positions.

Training and Developing the Third-Country Nationals

Hiring employees who are citizens of neither the home country nor the host country is often advantageous. TCNs may accept lower wages and benefits than will employees from the home country, and they may come from a culture similar to that of the host country.

Cultural Training

With the belief that understanding a host country’s culture will help the employee empathize with that culture and enhance his or her effectiveness in dealing with hostcountry nationals, the major part of the training and development programs will include cultural training.

Management Development

Another aspect of training and development is that the experience and skills coming through international assignments also develop specific managers. Through better cultural awareness comes the ability to see the forest rather than the trees.

Repatriation of Expatriates

A largely overlooked but critically important issue in the training and development of expatriate managers is to help them make the transition back to their home country. This training and development are called repatriation. Many employees experience what is called the reverse culture shock upon returning home.

Reverse culture shock, on the other hand, is a psychological phenomenon that can lead to feelings of fear, helplessness, irritability, and disorientation.

International Performance Management and Performance Appraisal

The performance of expatriates is likely to be related not only to the international operations of MNEs but also to the headquarters, which impacts the entire organization.

Moreover, because of being unable or unwilling, sometimes expatriates could not perform the tasks or objectives determined by the parent company.

Performance appraisal is defined as an employee’s current and/or past performance relative to the predetermined performance standards. Performance management is an extension of performance appraisal which is “a process that enables the MNE to evaluate and continuously improve individual, subsidiary unit and corporate performance, against clearly defined, pre-set goals and targets”:

Evaluation Goals:

• Provide feedback to employees, so they will know where they stand.
• Develop valid data for pay, promotion, and job assignment decisions, and provide a means of communicating these decisions.
• Identify high-potential employees and manage their talent for optimal performance and retention.
• Help management in making discharge and retention decisions and provide a means of warning employees about unsatisfactory performance.

Development Goals:

• Help managers improve their performance and develop future potential.
• Develop a commitment to the company through a discussion of career opportunities and career planning with the manager.
• Motivate employees via recognition of their efforts.
• Diagnose individual and organizational problems.
• Identify individual training and development needs.

Criteria used for International Performance Appraisal

The criteria for performance appraisal are identified by Gregersen, Hite, and Black (1996) as, objective criteria, subjective criteria, and contextual criteria.

Objective criteria: (Also defined as hard criteria) are about the quantifiable factors which can be directly measured based on tangible outcomes, such as market share, total revenues, and return on investment.

Subjective criteria: (Also defined as soft criteria), include judgments, and consider factors that are difficult to quantify which are based on traits or relationships; examples for these criteria include factors such as the expatriate’s interpersonal skills and leadership style, teamwork and customer orientation.

Contextual criteria: Include factors that result from the situation in which performance occurs, and identification and consideration of these criteria are critical for accurate performance appraisal.

Challenges for International Performance Management

As can be expected at first sight, there exist significant differences between domestic and international performance management. These differences affect the performance of employees who undertake international assignments.

The most significant factors that arise as challenges for international performance management are discussed below in three parts as individual, organizational and contextual factors.

Individual Factors: One of the critical challenges for international performance management is about the question that by whom the appraisal should be performed.

Organizational Factors: One of the most significant problematic issues about international performance management is lack of objective (invalid) or reliable performance criteria, which leads to non-comparable results between headquarters and subsidiaries.

Likewise, the relation and conflicts between headquarters and subsidiaries also influence the performance system.

Contextual Factors: The host-country for MNEs poses significant challenges for international performance management. Culture is one of the most critical factors that cause performance appraisals to be different among countries.

International Compensation

Employee compensation is defined as all forms of pay going to employees that arise from their employment. Compensation has two main components: direct financial payments and indirect financial payments.

Direct financial payments: wages, salaries, incentives, commissions, and bonuses.

Indirect financial payments: financial benefits like employer-paid insurance.

There are many factors including individual (i.e. nationality, family situation regarding spouse and children), job related (i.e., career development), organizational (i.e., compensation differences between compensations of PCNs, TCNs, and HCNs, compensation differences of repatriation, pay gaps between expatriates and local employees) and contextual (i.e. laws and regulations regarding compensation and benefits, different tax systems, inflation rates and exchange rates, different standards of living, political instability, international terrorism), which should be taken into consideration for international compensation policy.

Components of the International Compensation Package

Base salary is the primary component of a package of allowances, many of which are directly related to base salary, and allowances are the basis for in- service benefits and pension contributions.

International compensation compromises various allowances. MNEs pay such incentives in order to encourage the employee to accept an international assignment.

MNEs also pay various allowances to motivate their employees to take on an international assignment. There are many types of allowances. One of the most common ones is the cost-of-living allowance.

The other types of allowances include housing allowance home- leave allowance, education allowances, relocation allowances and spouse assistance.

Moreover, expatriate benefits include health-care, pension plans/social security, life insurance, child allowances, and profit-sharing/stock-options plans (Dowling, Festing and Engle, 2013: 220).

Approaches to International Compensation Management

For ethnocentric companies, compensation is related to how much home-country expatriates should be paid; and for polycentric companies, the pay can and should be kept country-specific.

In general, MNEs use different approaches for compensating their employees. Two main approaches of international compensation are the Going Rate Approach (also referred to as the Market Rate Approach) and the Balance Sheet Approach (sometimes known as the BuildUp Approach) (Dowling, Festing and Engle, 2013: 221).

According to Fenwick (2004: 314), the basis of expatriate compensation is maintaining relativities with parent country national colleagues and preserving parity of purchasing power; in other words, ensuring that the expatriate maintains the same standard of living that he/she enjoyed at home.

International Industrial Relations

Industrial relations is a broad concept encompassing many relations regarding the workplace.

Kaufman (2008) classifies industrial relations under two distinct paradigms; the Original Paradigm and the Modern Paradigm. The Original Paradigm focuses on employment relations, and the Modern Paradigm focuses on unions and labor management relations.

According to Dunlop (1958: 16), a national industrial relations system consists of four basic components;

1. Actors or parties (employees, employers, government)
2. Rules (both substantive and procedural resulting from mutual cooperation and oppositions between actors)
3. An ideology (which binds separate actors one another)
4. The environmental context

According to (Dowling, Festing and Engle, 2013: 244- 246) the involvement of MNE headquarters in industrial relations is influenced by several factors which are listed below:

• the degree of inter-subsidiary production integration,
• the nationality of the ownership of the subsidiary,
• the international human resource management approach (i.e., ethnocentric, geocentric),
• the MNE’s prior experience in industrial relations,
• subsidiary characteristics (i.e., subsidiaries formed through acquisition, key strategic important subsidiary, poor subsidiary performance),
• characteristics of the home product market (i.e., large or small home market),
• management attitudes towards unions.