IHRM Developed by MNCs - Term Paper Example

Human Resource Management Contents Introduction 3 International Reward and Compensation 4 Challenges of International Reward and Compensation 7 Convergence and Divergence of HRM 7 Hofstede’s Cultural Dimension 8 Conclusion 9 Reference List 10 Introduction With the advent of industrialisation and globalisation, countries around the globe have started developing their international networks. The incredible growth of international trade over the past few decades has been the primary cause and consequence of globalisation. Globalisation has resulted in the arrival of Foreign Direct Investment (FDI) in different countries (Benn, Teo and Martin, 2015). This entails establishment of foreign business bodies in host nations. These foreign subsidiaries need to recruit employees of the host nations when operating abroad. This implies that in a particular MNC firm, there are employees belonging to the host nation, parent nation of the firm and a third country (Lai, 2015). In a multinational corporation, a Third Country National (TCN) is an employee, whose nationality is different from that of the firm and also of the nation in which it is operating. For example, an Australian manager working in a Japan-based subsidiary of an American company, then the Australian manager is referred to as a Third Country National. On the other hand, a Parent Country National (PCN) is an employee whose nationality matches with that of the organisation but is dissimilar from the host nation in which they are functioning. For example, if an American manager is working for a Japan-based subsidiary of an American organisation, then the American manager is called a Parent country national. They are also referred to as the Expatriate. The Host Country Nationals (HCNs) are those employees whose nationality is the same as that of the country in which the foreign subsidiary is operating (Hahn, Lee and Lee, 2015). According to Harmon (2015), this implies that a multinational firm is an amalgamation of different cultures and work ethics. A diverse culture in the organisation means that there are advantages and disadvantages both associated with managing the employees from different backgrounds. It is evident from the status of large MNCs that integration of employees from culturally diverse backgrounds makes their companies much stronger. They claim that cultural diversity leads to increased creativity and productivity of the employees, new attitudes and new language skills also get introduced in the workplace which enhances global understanding. The diversity also helps in developing new solutions and processes to solve difficult problems. However, the drawbacks are discrimination occurring in the workplace. It is difficult for the management to manage cultural differences. In many cases, foreign employees are not welcomed by the existing employees thus resulting in disturbance of the corporate work culture (Tricker, 2015). International Reward and Compensation Aladwan, DNetto and Bhanugopan (2015) observe that to manage the cross cultural differences, the Human Resource management are responsible. They try to implement various strategies to handle the diversity issues in the workplace and one of the strategies is the introduction of international reward and compensation. Building any reward system needs attention regarding the motive of the reward. The purpose of a reward is to appreciate the contribution and efforts of the employees. Appreciation in the form of reward boosts the level of motivation in the workers. However, reward is a very complex strategy since the employers have to incorporate policies, strategies and practices for rewarding workers in accordance with their skill, performance, competence and strategies. One of the key components for enhancing the effectiveness of international operations is adopting compensation strategy of expatriates. Basically, reward is given to the PCN, HCN, TCN employees with the aim of retaining and motivating them so that they can work harder to achieve competitive advantage for the companies (Stone and Deadrick, 2015). There are three main categories of reward namely, reward type, reward systems and reward criteria. The nature of the remuneration is broadly distributed into extrinsic and intrinsic; financial and non-financial (Xavier, 2014). Determination of workers reward results (that is pay increment) can be either non-performance or performance oriented. So, reward system basically deals with the mechanisms and methods of establishing employee reward outcome. Performance oriented reward system provide incentives to the employees on the basis of their performance. Non-performance reward systems provide incentives on the basis of various other criteria like seniority, skills and competencies. Organisations determine and distribute rewards on the basis of reward criteria, that is, whether it is an individual or group-based reward. To identify the areas where specific differences in reward preference exist, examination of rewards is necessary (Snell, Morris and Bohlander, 2015). Objectives behind the construction of international reward and compensation policies are broadly discussed here. The MNEs seek to retain qualified employees and transfer international workers in the most cost efficient method. It also aims at easy administrating policies for employees from different backgrounds and at maintaining a balance between country specific elements and uniform basic regulations. The MNCs undertake these steps to gain comparative advantage over other companies (Ashkanasy and Daus, 2002.) In today’s era of globalisation, organisations adopt the policy of market expansion to enhance global talent and develop human capital of the companies. Since expatriates leave their home country and stay at foreign nation, they often have to spend more on their living expenses. Keeping this in mind, the companies often offer them higher remuneration than the domestic employees to compensate them for living and working abroad. However, Milne (2007) noticed that 77% of expatriates are dissatisfied with their reward system. From the perspective of expatriates, it is observed that they are willing to accept foreign assignments only when they are offered heavy compensations. Other aspects considered by them include health services, children education and housing. Tax is another factor that influences expatriates decision of undertaking foreign projects. If the parent company does not assist the PCN and TCN, then they will have to pay various tax imposed by the government of the host nation. If expatriation takes place to a harsh nation, then this will require the parent company to increase the salary package (Drucker, 2007). The key components of reward and compensation policies are allowance, base salary, inducement or hardship premium and other benefits. Base salary is defined as the main component of a package of allowances that serves as a yardstick for other compensation components. Allowances are the compensations introduced for the expatriates so that they get the chance of remaining close to the home standards. Benefits include pension plans, social security, vacations, special leave and medical coverage. Hardship premium is introduced with the intention of making the expatriate accept the foreign assignment. It is also provided as compensation for hardships faced by the expatriate for his transfer. Rewarding expatriates depends on the time length of the issue of assignment. There are three criteria like short assignment is up to 1 year and without any family, long term assignment is more than 1 year and permanent assignment which means family may also settle down with the expatriate (Armstrong, 2002). It has been noted that when a planned international assignment takes more time to get accomplished, the more rules and local environment of the parent company establish the reward packages for the expatriates. According to Heneman, Ledford Jr and Gresham (2002), there are short term and long term remuneration packages. Short term packages are given to those employees who have to dislocate to a short distance from their home. This will need little variation in their reward package. Long term packages are given to those expatriates who dislocate to a large distance. As a result, desirable packages are offered to them that includes inducements. Bebchuk (2009) advocated different approaches related to staffing can be identified in three groups, namely Ethnocentric, Polycentric and Geocentric. In Ethnocentric approach, PCNs are given key roles in subsidiaries which is mainly dependent on the decisions of the headquarters of the parent company. Expatriates mainly receive enhanced reward and compensation packages that include expenses for accommodation in foreign nation, travelling expenses for him and his family and improved rates of pay. It is recommended to the HR management to carefully manage the salary gap between local employees and expatriates as it can become the source of tension in the workplace. The difference in pay can also demotivate the nationals of the host country. However, there are limited promotion opportunities for the HCNs. In the Polycentric approach, the HCNs tend to occupy main position in subsidiary. The result of this approach is the transfer of HCNs to headquarters of the parent company. Hiring HCNs gives the advantage to the MNCs by removing the language barrier which helps the companies to build their networks. HCNs are also believed to be less expensive. There are reward gaps between PCNs and HCNs. This approach also recognises inadequate international career prospects for HCNs. Geocentric approach concentrates on recruiting the best personnel for the key positions in the parent company irrespective of their nationality. This results in worldwide integration of workforce. The drawback of this approach includes the biasness of the government of the host nations towards employment of local employees due to labour issues. The government may also raise the issue of salary and reward gap between PCNs, TCNs and HCNs (Yahya and Goh, 2002). Approaches of reward and compensation are mainly of three types such as ‘balance sheet’ or home-based approach, ‘going rate’ or host-based approach and local and international benefits package. Home based approach is also called home-net system (Carraher, Sullivan and Crocitto, 2008). It is mainly used for those PNCs who are sent to foreign subsidiaries for 3 years. This is adopted for the international employees as a compensation package that balances the cost difference between assignment in the home nation of the employee or the firm. This is considered as an essential method to keep salaries of the expatriates in line with their home nation’s colleagues but not with the host nation’s employees. The main motive of adopting this approach is to maintain internal equity with his co-workers in the home country (Riusala and Suutari, 2000). Host based approach on the other hand, means that the assignee adopts the payroll structure of the host nation and also receives incentives on the basis of the practices and regulations of the host nation. This approach is considered as the cost efficient alternative. However, there are inadequate assignment related allowances. Benefits and base pay may be enhanced by extra payments for low-pay countries. This approach supports those assignments in which the employees may have to settle down in the host nation permanently. This is useful in attracting TCNs to a location where higher salaries are paid. Global market approach is more inclusive of the other two approaches. The main advantages are provided regardless of the country in which the assignee is assigned (Hahn, Lee and Lee, 2015). Challenges of International Reward and Compensation Along with the advantages, reward and compensation system often create disturbances in the organisation. Though reward system is believed to motivate employees, but improper formulation can decrease the level of motivation among the employees. The main challenges that the companies can face is managing the salary gap that are associated with different approaches (Bebchuk, 2009). Compensation policies can also lead to conflict if HCN compare their pay packages to the expatriates and conclude that they are being ill treated. Also, if reward gap is high then it can also reflect discrimination. This may also lead to the decreased moral of the staff. The problem of reward may become a very serious issue if not properly handled since higher remuneration is often provided to the TCN or PCN which create disputes among the employees. Sometimes, fairness is not maintained while introducing reward system in the workplace. Companies often forget to renew the pay structure which can also disappoint workers (Baruch, Steele and Quantrill, 2002). Convergence and Divergence of HRM The convergence and divergence is considered as an emerging issue in international organisations. The dilemma is to what extent the human resources should “converge” globally to become the same in every location or “diverge” in order to become differentiated according to the local needs. The management takes local conditions into account to shape their key decisions. Convergence is believed to be increasing because of the reasons like power of markets, quality and productivity pressures, importance of production cost and growth of like-minded international management. For example, American HRM holds shareholder perspective and stakeholder perspective is adopted by the European HRM. The divergence can also be viewed in the economic system of USA and Europe. American HRM is performance oriented and European HRM tries to protect interests of the society. The economy in EU is characterised by the presence of regulated market economy and USA market is liberal market economy. However, American HRM and European HRM are now converging. It has been observed that EU HRM has started applying American HRM practices. Firm performance objective in HR management has also been implemented by EU HRM. Also, the European market is now transiting towards deregulated economy. This example has shown that on one hand, MNCs are leading to the convergence phenomena in international HRM and on the other, national institutions and their policies are leading to divergence in IHRM. MNCs compel local subsidiaries to implement their HRM practices. However, by using law obligations, national institutions diverges HRM (Xavier, 2014). Hofstede’s Cultural Dimension It has been observed that cultural differences make an impact in compensation decisions of the management. Hofstede’s cultural dimension theory is a model for cross-cultural communication. It proposed that cultural values can be analysed on the basis of four dimensions namely, individualism-collectiveness, power distance, uncertainty avoidance and masculinity-femininity. Power distance is defined as the degree to which the less powerful employees of the companies accept and expect that power is unequally distributed. This basically describes inequality from the point of view of the employees. Uncertainty Avoidance deals with the tolerance of the society towards ambiguity and uncertainty. In this process the society handles unknown situations, stress of change, unexpected events, etc. Individualism Vs collectiveness measures the extent into which employees are integrated into groups. Masculinity Vs Femininity examines allocation of emotional roles between genders. It identifies the level of importance that a culture gives on masculine values like power, assertiveness, etc. along with feminine values like valuing human relationships (Minkov and Hofstede, 2011). Hofstede emphasised that there are cultural variations as shown by his model that exist between countries and that considerably affect HRM practices and perceptions. HRM should notice that power distance arises when workers are distinguished from their seniors with respect to promotions, salaries, rewards, etc. so they should aim at decentralisation where power is equally distributed ((Minkov and Hofstede, 2011). The HRM should also try to build collectiveness in the workplace as it aims at giving stress to the group-based achievement. Since, HRM finds it difficult to manage the implementation of any change in a workplace that is marked by the presence of high uncertainty avoidance. In weak uncertainty avoidance, employees do not work hard and there is lack of enthusiasm among the employees. Uncertainty avoidance culture gives more emphasises on performance based pay. It has been observed that in collectivist society, it is difficult for employees who were selected externally to enter the strong social networks in the company and handle the resistance from the existing co-workers. All these factors influence the company’s decision of rewarding employees. Conclusion An MNC has mainly three types of worker groups and hence, their backgrounds vary widely. This necessitates International Human Resource Management (IHRM) to coordinate procedures and policies in order to shape international reward and compensation system. These policies should aim at efficiently balancing the requirements and desires of PCNs, HCNs and TCNs. The failure in identifying differences in managing human resources in global scenario often results in a major divergence in global operations (Drucker, 2007). Effective management of an international workforce can be an important factor in the success and failure of an MNC. A successful compensation structure aims at motivating expatriates on one hand and meeting the objectives of the company on the other. Thus, it is essential that the HRM focuses on optimal reward formulation that decreases the gap and eliminates workplace discrimination. Proper communication system needs to be maintained so that disputes can be overcome. MNCs should develop an efficient IHRM who can successfully handle such situations. Pay system must be aligned with the local customs and laws while fitting into international policies. HRM should also adopt a proper balance between masculinity and femininity factor of Hofstede’s model. They must pay similarly to everyone who does the same kind of work regardless of the home nation compensation environment. Reference List Aladwan, K., DNetto, B. and Bhanugopan, R., 2015. The Effects of Human Resource Management Practices on Employees’ Organisational Commitment. International Journal of Organizational Analysis, 23(3), pp. 472-492. Armstrong, M., 2002. Employee Reward. 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