Chapter NineteenChapter Nineteen

Human Resource Management

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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Learning ObjectivesLearning Objectives

Discuss creating a company “global mindset” Explain the fit of IC strategies and HR management Compare home, host, and third country nationals as IC

executives Explain the role, challenges, and opportunities of an

expatriate position Discuss the importance of the trailing spouse of an

expatriate executive Understand the difficulties of finding qualified IC

executives and the importance of language Explain compensation packages complications for

expatriate executives

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The Global MindsetThe Global Mindset

Expatriates are people who live outside their country of citizenship

Global mind-set Combines an openness to and an awareness of

diversity across markets and cultures with a propensity and ability to synthesize across this diversity

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International HRM ApproachesInternational HRM Approaches

Ethnocentric Hire and promote employees on the basis of the

parent company’s country frame of reference Polycentric

Hire and promote employees on the basis of the local context of the subsidiary frame of reference

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International HRM ApproachesInternational HRM Approaches

Regiocentric Hire and promote employees on the basis of the

specific regional context of the subsidiary frame of reference

Geocentric Hire and promote employees on the basis of ability

and experience without considering race, citizenship, or narrow frame of reference

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Recruitment, Selection Recruitment, Selection and Trainingand Training

Parent Country National (PCN) or Home Country National Broadens their experience in IB Prepares top management team managers Protect proprietary knowhow Transfer knowhow to subsidiary

Host Country National (HCN) Local expertise Local connections

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Recruitment, Selection Recruitment, Selection and Trainingand Training

Third Country National (TCN) May be less expensive than employees from the

home country May have similar culture to that of the host country May have worked for another unit of the IC and be

familiar with policies, procedures and people Common approach in developing countries May not be welcome by host country More common as more companies take a

geocentric view

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Expatriate ProfileExpatriate Profile

80% of medium and large size companies have employees abroad

65% expect the number to increase Expatriates are getting younger

54% 20 - 39 years old up from 41% More expatriates are women

21% vs. historical 15%

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Expatriates and FamilyExpatriates and Family

Nine of ten expatriate failures are family related Unhappy spouses are a major reason for early return An expatriate failure translates into a loss of a “million-

dollar corporate-training investment” in the executive Two-career families are a challenge for ICs

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Language TrainingLanguage Training

A language trap exist when the international business person speaks only the home language The English language has become lingua franca

Chinese is the new “hot” language to know

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Culture Shock PhasesCulture Shock Phases

There are five phases of culture shock Honeymoon Distress Acceptance Integration Reverse culture shock

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RepatriationRepatriation

Reverse culture shock Returning expatriate’s skills and knowledge are

valuable but may be unappreciated Positions of responsibility similar to that of

expatriate position may not be available home Family adjustment at home can be problematic

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Expatriate ServicesExpatriate Services

Health care programs exist to assist companies and expatriates with claims administration language translations currency conversions service standardization www.ExpatExpert.com www.branchor.com

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Expatriate ServicesExpatriate Services

Other expatriate services include banking services training

culture and language house hunting, utilities hook-up, grocery and

hardware shopping long-distance care for relatives schools clubs, organizations, and memberships

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CompensationCompensationSalarySalary

Paying home country nationals the same salaries as their domestic counterparts permits worldwide consistency bonuses

Increasing use of third country nationals- often treated like PCNs

Trend to pay HCNs same base

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AllowancesAllowances

Housing Allowance Permits executive to live at same standard as at

home Cost-of-Living Allowance

Based on differences in price of food, utilities, transportation, entertainment, clothing, personal services, and medical expenses as compared to home

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AllowancesAllowances

Allowances for Tax Differentials Ensures expatriates will not have less after-tax

pay at home Education Allowances

Insures children receive education equal to that at home

Moving and Orientation Allowances Used for household effects and language

instruction

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Total Compensation Cost Total Compensation Cost Expatriate in RussiaExpatriate in Russia

Compensation Component Annual Cost (US$)

Base salary $150,000 Incentive plan 15,000 Location differential (hardship premium) 5,000 Housing allowance 75,200 Cost-of-living allowance 6,200 Automobile allowance 36,500 Home leave 10,000 Educational assistance 24,000 Relocation/repatriation expenses 22,000 Total compensation before tax $343,900 Tax assistance 51,200 Total compensation expense $395,100 Other Expenses Preparation services (passports, visas, language training, etc.)

2,800

Settling-in services 3,600 Emergency leave 6,000 Total annual cost for expatriate $407,500

Source: U.S. Firms Extend Global Reach, Workforce Management, December 2004, p. 142

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Cost of Living and Cost of Living and Quality of Living Rankings Quality of Living Rankings Living Cost

City Country Living Quality

City Country

1 Moscow Russia 1 Zurich Switzerland 2 London United Kingdom 2 Vienna Austria 3 Seoul South Korea 2 Geneva Switzerland 4 Tokyo Japan 4 Vancouver Canada 5 Hong Kong Hong Kong 5 Auckland New Zealand 6 Copenhag en Denmark 6 Dusseldorf Germany 7 Geneva Switzerland 7 Munich Germany 8 Osaka Japan 7 Frankfurt Germany 9 Zurich Switzerland 9 Bern Switzerland 10 Oslo Norway 10 Sydney Australia 21 Sydney Australia 21 Perth Australia 22 Helsinki Finland 22 Montreal Canada 23 Stockholm Sweden 23 Nurnberg Germany 24 Douala Cameroon 24 Oslo Norway 25 Amsterdam Netherlands 25 Dublin Ireland 26 Madrid Spain 25 Calgary Canada 26 Shangha i China 27 Hamburg Germany 28 Kiev Ukraine 28 Honolulu United States 29 Athens Greece 29 San Franc isco United States 30 Almaty Kazakhstan 29 Helsinki Finland 29 Adelaide Australia

Note: Cost of living index includes cost of housing. Base City, New York City, USA = 100. Cost of Livingindex is for 2007. Quality of Living index is for 2008.Source: Mercer Human Resource Consulting, 2007 Cost-of-Living Survey,http://www.mercer.com/costofliving#top50 (July 10, 2008); Mercer Human Resource Consulting, 2008Quality of Living Survey, http://www.mercer.com/referencecontent.htm?idContent=1307990#Top50_qol (July 10, 2008).

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BonusesBonuses

Bonuses Expatriate employee compensation payments in

addition to base salary and allowances because of hardship, inconvenience, or danger

Bonuses include overseas premiums contract termination payments home leave reimbursement

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Compensation, Compensation, Exchange Rates, and InflationExchange Rates, and Inflation

For expatriate employees, compensation packages incorporate many types of payments or reimbursements and must take into consideration exchange rates and inflation

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Compensation Packages Compensation Packages Can Be ComplicatedCan Be Complicated

Allowances and percentage of base salary are usually paid in host country currency Percentage is usually 65 to 75 percent, with the

remainder banked where employee directs Firms must decide which exchange rate to use

This is more difficult in countries with exchange controls and nonconvertible currencies

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Hardship Differential Pay Premiums for Hardship Differential Pay Premiums for Selected Cities and Countries, 2008Selected Cities and Countries, 2008

City and Country Pay Premium, % Kabul, Afghanistan 35 Bahrain 10 Sao Paulo, Brazil 10 Sofia, Bulgaria 20 Guangzhou, China 25 Bogota, Columbia 5 Cairo, Egypt 15 Tbilisi, Georgia 30 Kolkata, India 25 Jakarta, Indonesia 25 Nairobi, Kenya 30 Mexico City, Mexico 15 Lagos, Nigeria 25 Karachi, Pakistan 30 St. Petersburg, Russia 20 Riyadh, Saudi Arabia 20 Johannesburg, South Africa 10 Istanbul, Turkey 10 Kiev, Ukraine 20 Caracas, Venezuela 20

Source: U.S. Department of State, ŅPost (Hardship) Differential,Ó July 6, 2006, http://aoprals.state.gov/Web920/hardship.asp (July10, 2008).

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Compensation of Third Compensation of Third Country NationalsCountry Nationals

There is a trend toward applying the same compensation plan to third country nationals as home country expatriates

Problems can arise in The calculation of the income tax differential when

an American expatriate is compared with an expatriate from another country

Home leave bonus

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Expatriate PerksExpatriate Perks

Expatriates sometimes get perks designed to boost total compensation while minimizing taxes

Perks include car(s) private pension plan retirement payment health, life, kidnapping insurance emergency evacuation services club membership company house foreign affiliate directorship home leave hidden slush funds (can be illegal)