enthusiasm amongst all about this program.

While collecting the THINK IT OVER

survey responses, the study team observed many of the partici- 1. Should the women folk be given separate training program
pants (particularly women) had to take the help of others to fill from their male counterparts?
up their survey responses since they were unable to read or write. 2. Should the training program be imparted in local language
Individual interactions with some of these trainees revealed they and for this trainers from Uttar Pradesh be trained the local
could not follow the training content much since many of them Rajasthani language?
were not proficient in Hindi language in which this program was 3. Ideally what should be the most relevant training content
imparted. The study team now needs to give their recommenda- and training method for the gram panchayat? What should
tion to the government for future training programs. What should be ideal duration of the training program?
it recommend?

In this chapter we discuss the methods, models and theo- tools, and demonstrating for short-order cooks how to
ries of training the new employees so that they can perform prepare food orders systematically are all part of training,
their jobs most effectively. and all these activities are aimed at helping the organiza-
tion function more effectively.
Rather than focusing on specific job-related skills,
development is more generally aimed at helping managers
better understand and solve problems, make decisions,
5-1 TRAINING AND and capitalize on opportunities.1 For example, some man-
DEVELOPMENT agement development programs have a component deal-
ing with effective time management. Other management
Once new employees have been hired, HR managers
development programs may help managers better under-
must take steps to ensure that they can perform to their
stand how to motivate employ-
full potential as soon as pos- ees (for example, how to get the
sible. This generally involves employees discussed above to
training and development. exert extra effort). Thus, man-
Training and development, agers do not necessarily return
then, represent a funda- from development programs
mental investment in the with a specific new opera-
employees who work for an tional method for doing
organization, with the over- their job more effectively.
all goal of improving their Instead, they may return
ability to make contributions with new skills that may be
to the firm’s effectiveness. relevant to them in a gen-
Employee training can be eral sense at some point in
defined as a planned attempt the future. They may have a
by an organization to facili- better understanding of how
tate employee learning of job- to work more effectively, how
related knowledge, skills, and behaviors. Development, on to better motivate their employees, and how to make bet-
the other hand, usually refers to teaching managers and ter decisions. They may possess a more complete under-
professionals the skills needed for both present and future standing of how the overall organization functions and
jobs. Thus, each has a slightly different orientation, but their role within it. Development is considered a human
both have the goal of increasing an employee’s potential resource function in most organizations, but because of its
contributions. strategic nature and importance, one or more senior exec-
Training usually in- utives are usually given specific responsibility to ensure
Training is a planned volves teaching operational that management development is approached systemati-
attempt by an organization to or technical employees how cally and comprehensively.
facilitate employee learning
to do their jobs more effec-
of job-related knowledge,
tively and/or more effi- 5-1a Learning, Training,
skills, and behaviors.
Development, and Education
© mirana/Shutterstock

ciently. Teaching telephone

Development refers to operators to help customers Training, development, and education—all are targeted at
teaching managers and
professionals the skills needed more efficiently, showing some forms of learning. Learning, training, development,
for both present and future machinists the proper way and education sound synonymous to many, however, theo-
jobs. to handle certain kinds of retically there are certain differences as shown in Table 5.1.
132 Human Resource Management
TABLE 5.1 Comparison of Learning, Training,
Development and Education

Comparison factor Learning Training Development Education (Formal)

Focus On values, attitudes, On knowledge, On individual potential and On structured
innovation, and outcome skills, ability, and job future role in workplace development of individual
accomplishment performance
Clarity of objective Can be vague and difficult Can be specified clearly Stated in general terms Stated in general terms
to identify
Time scale Continuous Short term Long term Specified period
Outcomes of process Individuals learn how Skilled performance of Improved problem Externally specified
to learn and create own tasks which make up job solving, decision making, outcomes
solutions intrapersonal/interpersonal
competence
Process of evaluation Continuous evaluation Evaluation against specific Evaluation of skills and Evaluation in terms of pass/
job performance standards effectiveness fail levels
Role of professional trainer To facilitate and guide To instruct, demonstrate, Guide, instruct, coach, Acts as an expert, instruct,
and guide counsel, and mentor facilitate, and guide to
learning resources
Payback to organization Immediate and ongoing Almost immediately Medium to long-term Long term
in terms of skilled payback in terms of
performance increased potential
Adapted from Thomas N. Garavan, (1997)2

IBM helps develop its new first-line managers with analysis generally focuses on two issues: the organization’s
an extensive 9-month training program called Basic Blue, job-related needs and the capabilities of its current workforce.
which covers such topics as people management, HR poli- The organization’s needs are determined by the nature of the
cies, and leadership development. Program participants work that the organization performs—that is, what knowl-
complete 6 months of online e-learning before traveling to edge, skills, and abilities must the organization’s workforce
this Learning Center next door to headquarters in Armonk, have to perform the organization’s work most effectively?
New York, for the continuation of the program. Almost As part of this analysis, the manager must carefully
20,000 IBM managers worldwide have attended the pro- assess the company’s strategy, the resources it has available
gram since its inception in 1999. Similarly, Halliburton pro- for training, and its general philosophy regarding employee
vides six weeks of development annually for its top execu- training and development. By “philosophy,” we mean
tives under its Presidential Leadership Seminar program. the extent to which the organization views training as a
true investment in human resources or simply as a necessity
5-1b Learning and Development as a to alter or change a specific outcome or criterion measure.
Source of Competitive Advantage Workforce analysis involves a careful assessment of the
Jack Welch once mentioned, “An organization’s ability capabilities, strengths, and weaknesses characterizing the
to learn, and translate that learning into action rapidly, is organization’s current workforce. That is, it is important to
the ultimate competitive advantage.” In the face of rapid understand the extent to which the organization’s workforce
change, organizations that can rapidly learn and develop is skilled or unskilled, motivated or unmotivated, commit-
are the ones who are going to excel. Google could outweigh ted to the organization or not, and so forth. Furthermore, it
many earlier search engines because as an organization it is important that the organization decide whether it wishes
constantly upgrades itself and focuses on new learning3. to train employees for the present or more proactively train
Similar is the case with Apple which encourages employee them for what is expected in the future.
innovation through continuous learning. When organiza- Once these needs are assessed, whether through direct
tions move into different markets or product bases, new observation, or some type of survey or interview process,
capability building can take place mainly through learning the organization must determine its goals for training and
and development. HR can play a vital role in organizational development. Unless a manager knows what to expect from
learning and development by creating forum for knowledge the training it is difficult (if not impossible) to determine
sharing. how effective any training or development activity has been.
Several basic steps in the design of any training or devel- For example, consider the case of an insurance claims office.
opment program are illustrated in Figure 5.1. The process Assume that claims adjusters are processing insurance claims
should begin with a needs analysis where human resource at an average rate of 6 business days per claim. Responses and
managers responsible for training and development deter- feedback suggest that some customers are becoming unhappy
mine the organization’s true needs vis-à-vis training. This because they would like to have their claims processed more

Chapter 5: Training and Developing Employees 133

 FIG 5.1 Assessing Training and
© Cengage Learning

Development Needs
Needs Determining
analysis approach
Setting
Organization’s training and In-house programs
job-related needs development goals Outsourced
Capabilities of programs
existing workforce

quickly. Using this information and other relevant data, the job is performed under a condition that closely simulates
human resource manager—working in conjunction with the real work environment.
operating managers—might decide that an appropriate and Instructional-based programs are also quite common,
reasonable goal would be to cut the average processing time especially the lecture or discussion approach. In these situa-
from 6 to 4 days. Thus, a “4-day processing average” becomes tions, a trainer presents the material to those attending the
the goal of this particular training endeavor. program in a lecture format; although lectures continue to
The next step in the process is to decide between in- play a role in most training programs, there is evidence that
house versus outsourced training. Many larger organiza- their use has been declining, and they are being replaced
tions such as Texas Instruments and Exxon Mobil have with training outside the classroom, primarily using elec-
large training staffs and assume the responsibility for tronic technologies.
training and developing their employees, thus assuring Another instructional-based program for training and
that the content of its training and development efforts are development is computer-assisted instruction. In this situ-
precisely and specifically tailored to fit the organization’s ation, a trainee sits at a personal computer and operates
needs. Alternatively, outsourcing training activities enables software that has been developed specifically to impart cer-
a firm to draw upon expertise not available inside, in order tain material to the individual. The major advantage of this
to maximize training effectiveness. But outsourced pro- method is that it allows self-paced learning, and immediate
grams tend to be more general and even generic, and thus feedback can be given to the trainee.4
have less applicability and direct relevance to the organiza- Another method that involves basic instruction as a
tion’s needs. training device is programmed instruction. In recent years,
Finally, once the organization has decided on whether these activities have become computerized but remain
to conduct training and development in-house or through self-paced, with self-assessment. Also in recent years, all
outsourcing, it must decide upon the specific techniques to of these approaches have been affected by changes in train-
be used. For some situations, organizations might prefer ing technology. Video teleconferencing allows a trainer in
to rely upon various work-based programs. Work-based pro- a centralized location to deliver material live via satellite
grams tie the training and development activities directly hookup to multiple remote sites; the training can thus be
to performance of the tasks. The most common method delivered effectively but without the travel costs necessary in
of work-based training is on-the-job training. This approach transporting people to a common training site. Interactive
to training can help an organization achieve a return on the videos involve presenting information on a monitor from
labor cost of the employee almost immediately, assuming a central serving mechanism, DVD, CD-ROM, or Web
that the individual is capa- site. The trainee interacts with the system via a mouse
ble of performing at a mini- and keyboard. Feedback can be provided when inadequate
Work-based programs tie mal level of competency. responses or improper answers are given, and the trainee
training and development Also, direct training costs can skip material that has already been learned.
activities directly to
may be lower because the
performance of the tasks.
organization may not need 5-1c Mentoring/Coaching
Apprenticeships involve to hire dedicated trainers In both coaching and mentoring, one-on-one guidance is
a combination of on-the-
job training and classroom
or send employees to train- provided to a trainee by an expert. While we use the term
instruction. ing programs. Two other coaching and mentoring interchangeably, academicians
types of work-based train- make a fine line of distinction between the two. While
On-the-job training
involves having employees
ing are apprenticeship pro- coaching is more skill focused, mentoring is more focused
learn the job while they are grams and vestibule train- on attitude. Generally, coaching is short term, whereas men-
actually performing it. ing. Apprenticeships involve toring is long term. Mentoring usually applies to employees
Vestibule training involves
a combination of on-the- of managerial cadre; however, it can equally be applicable
a work-simulation situation job training and classroom to lower level employees. The difference between coaching
in which the job is performed instruction. Vestibule train- and traditional on the job training (OJT) is that coach/
under a condition that closely
ing involves a work-simula- mentor is like a friend whom the trainee approaches with-
simulates the real work
environment. tion situation in which the out hesitation whenever they are in need to talk about any

134 Human Resource Management

 full of letters, memos, reports, phone messages, and e-mail
messages associated with a particular manager. The trainee
must then play the role of the manager by reading and eval-
uating each of the materials, noting how he or she would
handle each one and prioritizing them. Useful feedback
can then be provided to the trainee concerning the best
© Konstantin Chagin/Shutterstock

responses as well as time management and priorities. The

leaderless group exercise, on the other hand, places a group
of trainees in a setting where they are told to make a deci-
sion or solve some type of problem. No individual, how-
ever, is assigned the role of leader or chair. It is up to the
group to decide they need a leader, then identify and select
a member who must function in that role.

5-1e Organizational Development

skill deficit. Whereas in traditional OJT, new employee or Technically, learning is a process that only occurs at the
less trained individuals are trained by trainers (e.g., expe- level of the individual, and so it may make little sense to
rienced peers, or supervisors) who remain in their role as talk about change or learning at any other level. But, in
superiors and may not come down to the level of a friend. fact, there are processes that occur at the organizational
Skills required for becoming a good coach or mentor are level that are related to learning and development. Even
the same. A mentor/coach should possess good listening though the actual changes that might take place occur at
skill. Also mentee/person to be coached should be able the level of the individual, collections of individuals can
to identify with the coach/mentor. But this identification change in such a way that it actually does make sense to
process should be done in a careful manner. The idea of talk about organizational development and learning.
mentoring/coaching is not to create dependencies of such Organizational development (OD) is a system-wide
nature where the trainee loses his/her own self-identity and effort, managed from the top of the organization, to
sense of independence. Usually, organizations prefer the increase the organization’s overall performance through
mentees to choose their mentors with whom they can iden- planned interventions. The technique relies heavily upon
tify with. Both coaching and mentoring are useful methods behavioral science technology and, although the develop-
for developing employees. Many times mentors may act as ment activities target the individual, the purpose is to ulti-
career sponsor for their mentees, where s/he gives special mately change the way the entire organization operates.
assignments or critical feedback to their mentees so that Also, OD assumes that people have a need to grow and
they can move in the higher echelon of corporate hierarchy. develop, as well as a desire to be accepted by other mem-
For succession planning, mentoring by senior personnel bers of the organization. As a result, collaboration between
becomes extremely critical. managers and employees is necessary to take advantage of
the skills and abilities of the employees and to eliminate
5-1d Management Development aspects of the organization that limit employee growth,
The training and development issues discussed thus far are development, and group acceptance. Most such programs
applicable to both standard training programs and devel- also involve an OD consultant to implement and manage
opment programs. However, some specialized issues and the program.
techniques come into play in management development. Different OD techniques are widely used. Survey feed-
This process involves more generalized training for future back involves having employees respond to questionnaires
managerial roles and positions rather than training that is about attitudes and perceptions of leadership styles, then
specific to an immediately relevant task. As a result, mana- sharing the results of the survey with everyone involved,
gerial training usually involves attending a series of train- including managers and supervisors. The purpose is to
ing programs over a period of time rather than attending a change the behavior of managers or supervisors by mak-
single program. ing them aware of how everyone perceives them. Following
Techniques may be more or less applicable to man- the feedback are usually workshops designed to help man-
agement development as opposed to more traditional agers evaluate the feedback
training. For example, the lecture method may not be very and suggest constructive
Organizational
well suited for this type of training, since it is critical that changes. development is a
that the learner be an active participant in any develop- When OD is under- systemwide effort, managed
ment program. On the other hand, techniques such as the taken to solve a specific prob- from the top of the
organization, to increase
in-basket and leaderless group may be more appropriate for lem, such as interpersonal the organization’s overall
management development. In an in-basket exercise, the conflict, techniques such performance through
participant is confronted with a hypothetical in-basket as third-party peacemaking planned interventions.

Chapter 5: Training and Developing Employees 135

might be used. Here a neutral third party, often an OD can have ultimate impact on the bottom line of the orga-
consultant from outside the organization, hears both sides nization. Hence, organization will be interested to know
in a conflict. He or she then helps the parties develop satis- after attending the training what the impact is on profit-
factory solutions or compromises so that everyone can win ability of the organization. If union representatives were
(also known as integrative bargaining). Active listening— sent for a particular program so that the industrial har-
where a person pays attention to both verbal and nonverbal mony can be upheld then after the trainees come back, the
information—is extremely valuable in these settings. organization will like to see what the impact of the training
Finally, in process consultation the OD consultant is on number of strikes that took place.
observes managers in the organization to develop an
understanding of their communication patterns, decision- 5-1g Evaluating Training
making and leadership processes, and methods of coopera- and Development
tion and conflict resolution. The consultant then provides
feedback and recommendations to the managers about There is a long tradition of evaluation for training and
how to improve these procedures. It is worth noting that, development activities—much longer than for most areas
although there is evidence that such interventions are suc- of human resource management. This is because it is eas-
cessful in improving communications, there seems to be a ier to evaluate these activities than some other practices.
real question about whether there is any improvement in The purpose of training and development is to enact fun-
organizational effectiveness as a result.55 damental change in individual performance behavior (or
At some point, when change begins to spread other outcomes), and it is relatively easy to quantify such
throughout the organization, we can actually talk about changes, making evaluation more straightforward. For
“organizational learning” taking place. This topic, as well as example, sales training should result in increased sales;
the related topic of organizational memory, will be dis- training of repair persons should result in greater customer
cussed in the next chapter. These two topics go beyond satisfaction and fewer call backs; and safety training should
the traditional boundaries of either training or devel- result in fewer accidents.
opment, and are more closely related to managing the This type of evaluation might be relatively simple, but
knowledge function in organizations, which is discussed that doesn’t mean there are no issues to consider. The most
in Chapter 8. important is to determine if there is an actual change in the
behavior being targeted. That is, we hope the trained sales-
person will sell more than he or she had sold before. This
5-1f Donald Kirpatrick’s Model of requires some type of pretraining measure to make sure that
Training Effectiveness Evaluation there has generally been change. Also, we want to be sure
According to Kirptrick model, training evaluations can that any changes we observe are really due to the training
be done at four levels—reaction, learning, behavior, and program, not just the passage of time (i.e., the employee
outcome. could just get better with more time on the job). Therefore,
it is often useful to have a “control group” of employees who
Reaction What participants felt and thought about work on the same job, but do not receive the training. In this
the training program can be captured immediately after way, it would be possible to assess the change in the perfor-
the training program gets over. Usually, a feedback form mance of the trained employees, not only relative to their
is given to participants just after the training program to performance before training, but also relative to a similar
gauge their overall satisfaction with respect to the program. group of employees who did not receive any training.
Evaluating management development programs is a
Learning To capture what participants have learned out bit more problematic because the training is really geared
of the program, participants can be tested how much they
have retained the knowledge imparted in the program. End
term exams conducted after a particular course gets over is
one such learning evaluation exercise.

Behavior Behavioral changes take time and hence much

after the training program (usually 3–6 months after the
training) this can be tested. Superiors or peers are the good
sources to recognize whether in the trainees any behavioral
© Jeff Greenberg/PhotoEdit

change has happened after

attending the training.
Organizational learning
refers to the process by which
an organization “learns” from
Result Organizations
past mistakes and adapts to send trainees to attend
its environment. training program so that it
136 Human Resource Management
at helping managers to prepare for future jobs. Therefore, playschool teacher in the existing category of “mother”) is
it may require a longer period of time and outcome mea- called the process of assimilation. The process of accom-
surement to evaluate these programs. Also, management modation requires more individual effort than the process
development programs tend to target more complex type of assimilation since accommodation requires creation of
of behaviors that are to be changed. The fact that the an altogether new category inside the mental map. This
evaluation of management development programs is more explains why at time trainers face difficulties in training
difficult is not an excuse for not conducting an evalua- middle managers who are comfortable with the old sys-
tion. Since these programs tend to be more expensive and tem of working. New training requires them to create an
involve higher levels employees, it is even more important altogether new way of dealing with things (new category
that an organization knows if the programs are effective. creation in their mental map).

5-2b Social Learning Theory

5-2 LEARNING THEORIES The main premise of Bandura’s social learning theory is that
individuals learn through observation of others’ behavior,
Knowing learning theories help trainers to understand the attitudes, and consequences of such behavior. Individuals
trainees in a better manner and impart training effectively. who are observed are called models. These models can be
Since the process of learning cannot be directly observed, parents, teachers, colleagues, television personalities or
rather experienced, hence it becomes difficult to define anybody. Bandura conceptualized that there is a continual
learning. Oxford dictionary defines learning as “The acqui- reciprocal interaction between cognition, behavior, and
sition of knowledge or skills through study, experience, environmental factors as shown in Figure 5.2.
or being taught.” There are two predominant thoughts Most of the behaviors are learned observationally
on learning: cognitive theory and behavioral theory of through the process of modeling, such as by observing others,
learning. Cognitive theorists posit that though learning individuals form ideas of how behaviors are to be performed
can be inferred through behavioral outcomes, yet learn- and at a later stage this guides individuals’ actions. For effec-
ing is not behavior per se; learning and behavior are two tive modeling, four conditions are necessary: (1) attention,
separate entities. Cognitive theorists’ primary focus area (2) retention, (3) reproduction, and (4) motivation.
is how information gets processed during the process of
learning. Behavioral theorists focus on the behaviors influ- Attention Learning process of an individual starts with
enced by learning. Three important learning theories have this stage. Amongst multitude of objects around us, we pay
been described below: (1) Jean Piaget’s Theory, (2) Albert selective attention to few, based on their distinctiveness and
Bandura’s Social Learning Theory, and (3) Learning Style relevance. In order to make a training program successful, a
Theory of David Kolb. trainer’s first job is to grab the attention of the trainees. While
delivering training content, a trainer can use voice modula-
5-2a Jaen Piaget’s Theory6 tion, use interesting presentations to get trainees’ attention.
Jean Piaget mentioned two important cognitive processes
for learning to occur: assimilation and accommodation. Retention After attention comes the stage of reten-
Assimilation is the process of integration of new experiences tion where some of the observed phenomena will get lost
in our existing mental categories. Accommodation happens and some will be retained in the memory. Bandura men-
through creation of a new category in our mental map. For tions human beings just do not respond to stimuli, rather
example, for a child, the first lady s/he meets in
his/her life is the mother who is perceived as nur-
turing and caring. Child creates a new category in
FIG 5.2 Reciprocal Interaction between Cognition,
Behavior, and Environmental Factors
the mind which is the “mother” category. Next the Personal Factors (P)
child meets the grandmother, playschool teacher
(Cognitive, affective, and
who are all ladies and if they show characteristics biological events)
or traits almost like the child’s mother there will be
no need for the child to create another category, s/
he will fit other ladies in the same category called
“mother”. But the moment the child meets with
animal world and sees, lion, tigers or elephants,
now the child is forced to create another category
called “animals” with four legs, very different from
the category created by him/her earlier called the
“mother” category. The process of creation of new
categories, such as “mother”, “animals” is called
the process of accommodation. The process of fit- Environmental
ting in similar natured objects (e.g., grandmother, Factors (E) Behavior (B)

Chapter 5: Training and Developing Employees 137

they interpret those. Individuals use visual images and 4. Active Experimentation (Doing). At this last stage
verbal codes to store external events in the memory. To of the experiential learning, learners attempt to put
ensure retention, learners need to rehearse learned mate- their training into practice.
rial through the process of symbolic rehearsal, which will To support different learning stages different teaching
involve imagination and visualization. Trainers can facilitate approaches may be adopted. For example, while for con-
the retention by asking trainees different usage of the learn- crete experience laboratory sessions work well; to ensure
ing material which will involve participants to visualize dif- abstract conceptualization, lecture will be a preferable
ferent applications of learned content and thereby retaining method of training. For reflective observation, participants
it in the mind. may be encouraged to build learning diaries/logs and for
active experimentation field work may be a supportive
Reproduction Practice of the observed behavior leads method.
to skill enhancement and eventually perfecting the behav- Experiential learning theory (ELT) developed six
ior. Behavioral reproduction has both cognitive and envi- propositions.
ronmental elements. Initially, an individual’s cognitive pro-
cess triggers a behavior, and then the behavior occurs in the 1. Learning is a process rather than an outcome.
environment and becomes a part of the environment. 2. All learning is re-learning.
3. Learning requires resolution of conflicting views, dif-
Motivation Motivation has been discussed in detail in ferences, and disagreements. Learner moves back and
a later chapter. Here it is sufficient to mention that for forth on reflection, action, feeling, and thinking.
learning to take place, individuals need to have an inner 4. Learning is just not cognition; it involves thinking,
drive. At times, the consequences of behavior determine feeling, perceiving, and behaving of the learner.
whether an individual will engage in a particular behavior 5. Learning results from synergetic interactions between
or not. Anticipatory learning happens when an individual person and environment.
learns consequences of a behavior simply by observing the 6. Learning is the process of creating knowledge rather
act being performed by others, without getting actually than mere transmission of existing fixed ideas.
engaged in the behavior.
Learning style inventory captures the degree to which
individuals display the different learning styles. The four
5-2c Kolb’s Model on Learning learning styles that emerge are shown in Figure 5.3.
Style of Individuals 7
1. Diverger. Diverger can bring many different
Psychologist David Kolb’s model of learning is one of perspectives while solving a problem and learns
the most recognized learning style theories. According to through observation rather than by actions. This
Kolb, individual’s genetic dispositions,
life experiences, and the present envi-
ronment play a vital role in their learn-
ing styles. Kolb is the proponent of
FIG 5.3 Experimental
Learning Cycle
Concrete Experience
four different learning styles, a theory (Feeling)
of experiential learning and a learning
style inventory.
Experiential learning has been
viewed by Kolb as four stage cycle as
shown in Figure 5.3.
1. Concrete Experience (Feeling). ACCOMODATOR DIVERGER
Under this first stage, learners
get involved in learning by
relying on their own feelings. Active Reflective
Experimentation Observation
2. Reflective Observation (Doing) (Watching)
(Watching). At this stage,
learners step back and reflect
what they have experienced at ASSIMILATOR
CONVERGER
the first stage.
3. Abstract Conceptualization
(Thinking). Under this stage,
learners try to make sense of
what has happened and starts
interpreting events and their Abstract Conceptualization
relationships. (Thinking)

138 Human Resource Management

Different Training Initiatives in gets global exposure in cross cultural

© moodboard/Thinkstock
India The most significant change trainee groups. Cisco has Short
in the last few years has been Term Rotation (STIR) program where
tying up training initiatives with people from different countries
strategic planning in India. Today it take up jobs on a rotational basis.
is not unusual to have learning and To address gender related issues,
development team at the strategic many organizations (e.g., IBM, HDFC,
discussion forum who would think, Standard Chartered Bank, Accenture)
plan, and discuss how changing have different training programs
strategy would translate into in place. For retention of BPO
additional training requirements for employees, companies like Infosys
certain employees. BPO are providing higher educational
The focus on e-learning has opportunities to their employees.
ensured consistent delivery of This program in a way has resulted in
training program across geographically dispersed workforce with less percentage of attrition amongst BPO employees. On the job
a considerably reduced cost8. Many companies have reduced training, coaching, mentoring, counseling, like always also take
classroom lecturing and have shifted to mobile apps, which important roles in corporate India.
can be used anywhere anytime by employees at any level. With over 12 million new entrants in the labor market,
Companies are becoming more innovative in providing training India has the world’s youngest workforce, but it is short on
programs. For example, in order to inculcate vision and values employability skill. To address this concern like China and
of the company to its young employees Aditya Birla group has Germany, a Vocational Training Act10 is going to be introduced in
come up with an interesting game based solution that can be India soon to provide a legal framework for providing quality skill
downloaded on the mobile9. During this hour long game, players building training to youths to make them employable. Corporate
are presented different scenarios which they can deal with India is also doing their share of corporate social responsibility
keeping in mind certain values, and vision, and mission of the to ensure employability of certain segments of individuals. For
company. In order to enhance customer interaction of employees example, a month after initiating voluntary retirement scheme,
at ICICI Bank, employees spend Saturday afternoons watching Nokia India at Chennai came up with Bridge program11 through
films on soft skills. Many large organizations have their dedicated which employees who had put in at least 5 years of service in the
in-house training facilities and are tying up with training vendors. company and had to face job loss are given special training on
For example, Accenture has tied up with XLRI Jamshedpur different career avenues. Training programs are imparted on MS
for providing diploma in human resource management. ICICI Office/Tally, commissioning of solar units, desktop publishing,
Bank has set up a number of academies for different functional beauty treatment courses, garment making, etc. to ensure
areas and has certification processes for different roles. Tata employability of these ex-employees.
Management and Training Centre of Tatas, Bodhi Vriksha of
Mahindra Group, Gyanodaya of AV Birla Group, etc., are a few THINK IT OVER
examples of superior training facilities provided to employees for 1. Can you think over what more innovative, creative before,
skill enhancement. during and after training solutions can be offered in the
Multinational organizations operating in India are tapping training front by corporate India so that effective transfer of
in global training system for training their top talents in India. learning takes place in the workplace?
Hindustan Unilever’s Talent Excel-Rator is an example of one 2. In order to ensure employability of youth which training
such program where high performing managers of South Asia pedagogy will you suggest to the Government of India?

type of learners enjoys interactions with people from 3. Converger. Converger learns better through
different cultural backgrounds. practical application of ideas. At times they may be
2. Assimilator. Assimilator can put different perceived as unemotional by others.
observations and thoughts together to create models 4. Accommodator. This type of learners prefers trial
and theories. They like abstract conceptualization of and error method of learning rather than thought
ideas and thoughts. and reflection while solving a problem. They like to
solve problems intuitively.

Chapter 5: Training and Developing Employees 139

Bonuses and profit sharing in 2011 exceeded $195 million, in because their pay is tied to overall performance. Trust is so high
some cases, almost tripling take-home pay. that divisions regularly compete for high performance while still
Compensation for managers is 75 percent to 90 percent maintaining cooperation.
of market average, but performance bonuses can double that Nucor has grown through more than a dozen acquisitions
amount. However, the hourly workers’ bonuses and profit sharing over the last decade, yet the culture and practices have spread
are not offered to managers, creating greater pay equality. Even to each newly acquired plant. Leaders are promoted from within,
CEO DiMicco’s pay is limited to 23 times the average hourly work- which further strengthens the culture. Nucor takes care to per-
ers’ pay compared to the typical CEO who makes 400 times the suade new workers of the advantages of its system. At one newly
pay of a low-level worker. Executives have no perks: no company acquired plant, Nucor based pay on the old system but posted
cars, extra holidays, enhanced insurance benefits, or reserved what employees would have earned under the new system. After
parking spaces. 6 months, employees realized the benefits and asked to switch to
Employment at Nucor can be lucrative, but high pay is not Nucor’s formula.
guaranteed. If a bad batch of steel is identified before leaving Workers are passionate about Nucor. One vice president
the factory, the workers get no bonus. If the bad steel gets to the describes himself as “an apostle” for Iverson’s methods and says,
customer, they give up three times that amount. Bonuses are also “Our culture is a living thing. It will not die because we will not let it
dependent on the cyclical steel market. In 2005, when sales were die, ever.” That passion has translated into profitability. Nucor has
strong, the average hourly worker made $91,000. In 2009, with steel one of the highest returns to shareholders of almost all Standard &
sales down, the average was $54,000. “In average-to-bad years, we Poor’s 500 Stock Index, at 387 percent over the past 5 years. Nucor
earn less than our peers in other companies,” says James Coblin, managers routinely credit the workers for Nucor’s high perfor-
Nucor’s human resources vice president. “That’s supposed to teach mance. General manager Ladd Hall says, “The people in the mills,
us that we don’t want to be average or bad. We want to be good.” that’s what makes it Nucor.”2
The nonunion workforce is flexible and participative. Workers
take the initiative to improve operations in their areas. In fact, THINK IT OVER
worker suggestions are the most important source of new ideas 1. Would you want to work under a compensation system like
for the firm. Management has pushed decision making down to Nucor’s?
the lowest possible level. DiMicco refers to his executive vice presi- 2. Why don’t more firms use approaches such as the one used
dents as “mini CEOs.” Workers voluntarily assume responsibility by Nucor?

The amount of value people create for an organization The term total compensation is sometimes used to refer to
and what the organization gives them as compensation for the overall value of financial compensation plus the value of
that value are important determinants of organizational additional benefits that the organization provides.
competitiveness. If employers pay too much for the value In this chapter, we cover the basic concepts of
created by workers, then profits (and hence competitiveness) compensation and benefits. We start by examining how
will suffer. But if they pay too little or demand too much compensation strategies are developed, and then we turn
from their workers for what they are paying, they will suffer to the administration of compensation programs and how
in different ways: lower-quality workers, higher turnover, organizations evaluate their compensation programs. We
or employee fatigue and stress. Clearly, then, managing look at benefits, discussing the basic reasons for benefit
compensation and benefits are important activities for any plans and describing different types of benefit plans
organization. And just as clearly, Nucor managers have a typically found in organizations. Next we consider the often
keen understanding of the relationship between worker controversial topic of executive compensation, discussing
compensation and company performance. the basic components of executive-compensation packages
Compensation and benefits refer to the various types and why they are so controversial. We conclude with a
of outcomes employees receive for their time at work. discussion of legal issues associated with compensation and
Compensation is the set of benefits and the ways in which organizations can evaluate
rewards that organizations their compensation and benefit programs.
Compensation is the set of provide to individuals in
rewards that organizations return for their willingness
provide to individuals in
return for their willingness
to perform various jobs and 6-1 DEVELOPING A
tasks within the organiza-
to perform various jobs and
tasks within the organization. tion. Benefits are the various
COMPENSATION STRATEGY
rewards, incentives, and Compensation should never be a result of random decisions
Benefits generally refer to
various rewards, incentives, other items of value that an but instead the result of a careful and systematic strategic
and other things of value that organization provides to its process.3 Embedded in the process is an understanding of the
an organization provides to its employees beyond wages, basic purposes of compensation, an assessment of strategic
employees beyond their wages,
salaries, and other forms of salaries, and other forms options for compensation, knowledge of the determinants of
direct financial compensation. of financial compensation. compensation strategy, and the use of pay surveys.

146 Human Resource Management

 6-1a Basic Purposes of Compensation How does an employer learn about compensation
© Daisy Daisy/Shutterstock rates at other firms? In some cases, a human resource
Compensation has several fundamental purposes and objec- manager might simply ask a colleague for such informa-
tives. First, the organization must provide appropriate and tion, but there are potential charges of “price-fixing” if
equitable rewards to employees. Individuals who work for such discussions are too detailed. More commonly, much
organizations want to feel valued and be rewarded at a level of the information concerning external equity comes from
commensurate with their skills, abilities, and contributions to a pay survey, or a survey of compensation paid to employ-
the organization. In this regard, an organization must con- ees by other employers in a particular geographic
sider two different kinds of equity. In addition, compen- area, industry, or occupational group. Some
sation serves a “signaling” function. Organizations such surveys, especially for executive and
signal to employees what they feel is important managerial jobs, are conducted by profes-
(and less important) for an employee to focus sional associations such as the Society for
on by paying for certain kinds of activities Human Resource Management, and the
or behaviors (and not for others). As results are then made available to all mem-
we discuss in more detail in the next bers. Individual employees may have access
chapter, compensation can serve to this information, or they may seek their
as an incentive to employees own comparative data on the Internet.
to increase their efforts Indeed, as discussed more fully in the HR
along desired lines. We in the 21st Century feature “Negotiating
turn first to the issues Salaries on the Web,” the Internet is mak-
of fairness and equity. ing this practice increasingly common and
Internal equity in easy today.
compensation refers Other organizations also routinely con-
to comparisons made duct wage surveys. Business publications such as
by employees to other Business Week, Fortune, and Nation’s Business rou-
employees within the tinely publish compensation levels for various kinds
same organization. In of professional and executive positions. In addition,
making these comparisons, the Bureau of National Affairs and the Bureau of Labor
the employee is concerned that Statistics also are important sources of government-con-
he is equitably paid for his contribu- trolled wage and salary survey information. To obtain
tions to the organization relative to the way the exact data they need, however, many larger firms
other employees are paid in the firm. For example, a female design their own pay surveys, which allows the firm to
account manager learns that most other account managers in take advantage of the expertise available in such firms and
the firm are paid more than she is. She may look closely at the minimize their own risk and the prospects of making a
situation and determine that these other account managers significant error or mistake in the conduct of the survey.4
have similar experience and similar responsibilities, and so Figure 6.1 presents a sample section from a pay survey.
become unhappy with her compensation and ask for a raise. A survey such as this one is sent to other organizations
In this case, she may also threaten to sue for pay discrimina- in a given region. In this case, the survey would go to orga-
tion. Of course, on the other hand, when the female account nizations in various industries, but other surveys might be
manager looks more closely, she may determine that she has targeted to a specific industry. The jobs that are the focus of
fewer responsibilities and less experience, and so she con- the survey should be bench-
cludes that there is no equity problem. In any case, problems mark jobs—that is, every- Internal equity in
compensation refers to
with internal equity can result in conflict, feelings of mistrust, one understands the nature comparisons made by
low morale, and even legal action in some cases. of the job, the content is employees to other employees
External equity in compensation refers to comparisons fairly stable, and the job is within the same organization.
made by employees with similar employees at other firms per- likely to be found in a wide External equity in
forming similar jobs. For example, an accountant may experi- variety of organizations. compensation refers
ence internal equity relative to her accounting colleagues in In some surveys, specific to comparisons made
by employees to others
her work group because she knows they are all paid the same benchmark jobs are coded to employed by different
salary. But if she finds out that another major employer in the ensure that everyone reacts organizations performing
same community is paying its accountants higher salaries for to the same job. Also, some similar jobs.
comparable work, then she might be concerned about exter- surveys ask more specific Pay surveys are surveys
nal equity. Problems with external equity may result in higher questions about other areas of compensation paid
turnover (because employees will leave for better opportuni- of compensation. Data from to employees by other
employers in a particular
ties elsewhere), dissatisfied and unhappy workers, and diffi- surveys such as this are then geographic area, industry, or
culties in attracting new employees. summarized for each job. occupational group.

Chapter 6: Compensation and Benefits 147

Negotiating Salaries Back in the “old days” (probably The Internet is rapidly changing all that. Several large Web
on the Web up to the final years of the sites now provide salary information for interested parties.
twentieth century, in fact) negotiating wages and salaries was Among other information, these sites include salary survey
typically handled in a meeting between the employee and his or data, job listings with specified pay levels, and even customized
her manager. The same approach was used both for individuals compensation analyses. Armed with such detailed information,
who were being offered their first job with the company and more and more people today are negotiating better deals for
existing employees who felt they deserved a raise. In both cases, themselves with their employers.
Sometimes the Web can provide even more insights,
especially for crafty negotiators. For example, some people have
“The Internet has become been known to use Internet bulletin boards to track down other
the big level playing field individuals who have recently been offered employment with a
particular firm, find out how much they were offered, and then
for everyone [by exposing use that information as leverage in their own negotiations.
businesses that] are way In another unforeseen development, the big-time recruiting
firm of Korn/Ferry recently set up its own salary site called
below everyone else as Futurestep. But the firm faced internal negotiations when some of
far as pay is concerned.” its own employees used the site to determine that they themselves
were being underpaid! On balance, then, it seems like the Internet
—Brian Krueger, consultant5 will be playing a major role from now on in the kinds of wages and
salaries that employees expect and that companies pay.
the manager and the organization usually had the upper hand
because both prospective and current employees generally had THINK IT OVER
relatively little knowledge about prevailing wage and salary levels. 1. How do you foresee using the Internet in your initial job
They usually did not know what others in the firm were being paid, search after you finish school?
for example, or what similar companies were paying for similar jobs 2. Are there drawbacks to using the Internet to search for salary
in different parts of the region or country. information?

FIG 6.1 Example of A

Pay Survey

Organization:
Location:

Base Pay Median total Industry

No. of No. of Average
Benchmark compensation
workers workers weekly 25th 50th 75th
Jobs (base pay Mfg. Trans. Utilities Trade
(this title) (total) hours %-tile %-tile %-tile + benefits)
File
clerk
Order
clerk
Accounting
clerk
© Cengage Learning

A survey such as this one is sent to other organizations in a given region. In this case, the survey would go to organizations in various industries, but other surveys might be targeted to a specific
industry. The jobs that are the focus of the survey should be benchmark jobs, where everyone understands the nature of the job, the content is fairly stable, and the job is likely to be found in
a wide variety of organizations. In some surveys, specific benchmark jobs are coded to ensure that everyone reacts to the same job. Also, some surveys ask more specific questions about other
areas of compensation. Data from surveys such as this one are then summarized for each job.

148 Human Resource Management

 Both internal and external equity are clearly important The fundamental purpose of compensation, then, is
© Sachin Bhavsar/iStockphoto for an organization’s compensation strategy. Perceptions of to provide an adequate and appropriate reward system
external inequity can lead to the type of job search that results for employees so that they feel valued and worthwhile as
in the voluntary turnover problems. But when a female organizational members and representatives. Compensation

Under the Equal Pay Act 1962, men and women who
perform essentially the same job must be paid the same.

employee, for example, perceives internal inequity vis-à vis represents more than the number of dollars a person takes
a male employee, this can also lead to a lawsuit. In the U.S., home in her or his pay envelope. It also provides a measure
the Equal Pay Act of 1963 stipulates that men and women of the employee’s value to the organization and functions
who perform essentially the same job must be paid the same. indirectly as an indicator of his or her self-worth.8
Similarly, in India, Equal Remuneration Act, 1976, stipulates
duty of employer to ensure equal pay to men and women 6-1b Wages Versus Salaries
employees for same or similar work. If there are differences An important distinction in the field of compensation is
in the compensation paid to men and women, then such dif- the difference between wages and salaries. Wages generally
ferences may be defensible if they are based on factors such as refer to hourly compensation paid to operating employees.
performance differentials. In any case, the organization may Time is the basis for wages—that is, the organization pays
well find itself in court defending these decisions when there individuals for specific blocks of their time such as pay-
are perceptions of internal inequity. ment by the hour. Most jobs that are paid on an hourly
Compensation can also serve a motivational purpose— wage basis are lower-level or operational jobs within the
that is, individuals should perceive that their efforts and organization. For example, in the U.S., the employees are

The Fair Labor Standards Act established a minimum hourly

wage for jobs and further stipulated that wages for hourly
workers must be paid at a rate of one and a half times
the normal rate for work in excess of 40 hours per week.

contributions to the organization are recognized and also eligible for the overtime provisions of the Fair Labor
rewarded. Individuals who work hard and perform at a high Standards Act, which means they are eligible for extra pay
level should be compensated at a level higher than individu- if they work more than 40 hours a week. These employees
als who do just enough to get by and who perform at only an are typically paid every 1 or 2 weeks. Salary, on the other
average or below average rate.6 If everyone perceives this situ- hand, describes compensation on a monthly or annual
ation to be true, then employees will believe that the reward basis and compensates employees not for how much time
system is fair and just and that internal equity exists, and they spend in the organization but for their overall con-
they will be more motivated to perform at their highest level. tributions to the organization’s performance. In general,
Clearly, then, organizations must adequately and effectively salaries are paid to professional and managerial employees
manage compensation. Underpayment can cause the prob- within an organization. Plant managers, product manag-
lems discussed above, although it is also important for orga- ers, and professional managers in areas such as marketing
nizations to control costs and not overpay individuals for the and finance and accounting,
value of their contributions (which could lead to problems for example, are all likely to Wages generally refer to
be paid on an annual basis; hourly compensation paid
© kycstudio/iStockphoto

with internal equity) or provide excess or superfluous bene-

to operating employees; the
fits or rewards.7 Thus, the ideal compensation system would most of these employees are basis for wages is time.
be one that reflects an appropriate balance of organizational exempt from the overtime
constraints, costs, budgets, income, and cash flow relative to provisions of the Fair Labor Salary is income paid to an
individual on the basis of
employee needs, expectations, demands, and market forces. Standards Act. performance, not on the basis
We will discuss specific models of motivation in Chapter 13. of time.

Chapter 6: Compensation and Benefits 149

 FIG 6.2 Strategic Options for

© Cengage Learning
Compensation
Pay above-
market rate

Anticipation of Determination Pay market

setting pay level of market pay rate

Pay below-
market rate

6-1c Components of Remuneration9 know each other. If the difference between the consola-
Remuneration of an employee include wages and salary, tion prize of the loser and the winning prize of the winner
incentives, fringe befits, perquisites, and non-monetary are kept very high, then it might motivate both the players
benefits. to work hard and achieve the coveted win. Similarly, in
the organizational contexts employees may not know each
Wages and salary Employees get an annual incre- other beforehand. Their coveted win (promotion) depends
ment on wages and salaries, based on nature of the job, type both on chance and skill factors. As employees move hier-
of industry, employees’ seniority, and merit. archically up in the career ladder the salary gap between
one level to the other is kept wide open. Ultimately, there
Incentives In addition to wages and salaries, employees will be only one president in the organization whose sal-
get incentives, which are also known as payment by results. ary would be the highest and s/he will be the winner of
Incentives are of two types: individual incentives and group the tournament. One problem with keeping wide salary
incentives. Based on sales, profit, cost reduction efforts, gap between the highest level and the subsequent levels is
productivity employees are given incentives. that it might at times demotivate some of the employees so
much that they may join some competing firms where they
Fringe benefits Provident fund, gratuity, accidental can play small tournaments in which the salary spread will
benefit, health and group insurance, uniform, canteen, dis- be relatively lower.
counts on purchase of company’s products, etc.
6-1e Strategic Options
Perquisites Whereas a fringe benefit is well-defined for Compensation
and would include all employees within the organization, Most organizations establish a formal compensation
perquisites (or perk) are less well-defined and sometimes strategy that dictates how they will pay individuals.
given to employees as a special privilege. To retain execu- Several decisions are embedded within such a strategy.
tives, perquisites are offered. Paid holiday, company car, The first relates to the basis for pay. Traditionally, most
club membership, and employee stock options are exam- organizations based pay on the functions performed on
ples of perquisites. the job, but more recently they have begun to rely on
skill-based pay and pay-for-knowledge programs. In this
Non-monetary benefits Job sharing, flextime, rec- way, organizations signal to their employees the relative
ognition (e.g., employee of the month), challenging job importance of what someone does on the job versus what
assignments are example of non-monetary benefits. they bring to the job.
The second decision in developing a compensation
6-1d Tournament Theory strategy focuses on the bases for differential pay within a
of Compensation specific job. In some organizations, especially those with
Generally, workers are paid on piece rate system. But in a strong union presence, differences in actual pay rates are
order to compensate for higher level work, where skill level based on seniority: With each year of service in a particular
and chance factors play their roles, compensation can be job, wages go up by a specified amount, so the longer one
explained with the help of tournament theory of Edward works on the job, the more that person makes, regardless
P. Lazear and Sherwin Rosen10. Taking the analogy of a of the level of performance on the job. Most public school
simple tournament played between two players, the theory systems use a seniority system to pay teachers: They get a
can be explained. In a typical tournament both skill and base salary increase for each year of service they accumu-
chance factors take their roles in determining the win or late. As already noted, unions have historically preferred
loss of the match. Beforehand both the players may not pay based at least in part on seniority.

150 Human Resource Management

 Sometimes the relationship between seniority and pay them an above-market rate. Above-market pay policies
pay is expressed as something called a maturity curve, a are most likely to be used in larger companies, particularly
schedule specifying the amount of annual increase a per- those that have been performing well.
son receives. This curve is used when the annual increase In addition to attracting high-quality employees, an
varies based on the actual number of years of service the above-market strategy has other benefits. Above-market
person has accumulated. Organizations that use maturity rates tend to minimize voluntary turnover among employ-
curves might argue that a new person tends to learn more ees. By definition, above-market rates mean that an
(in part because there is more to learn) than more experi- employee who leaves a company paying such wages may
enced employees and thus may deserve a larger increase. have to take a pay cut to find employment elsewhere. Paying
Meanwhile, more senior people may already be earning above-market rates also might be beneficial by creating and
considerably higher income anyway and also have fewer fostering a culture of elitism and competitive superiority.
new tasks to learn. In any event, the assumption under a Google and Netflix both pay higher-than-average salaries
seniority-based pay system is that employees with more as a way to retain their most valued employees in industries
experience can make a more valuable contribution to the where turnover and mobility are high.
organization and should be rewarded for that contribu- The downside to above-market compensation levels,
tion. These systems also encourage employees to remain of course, is cost. The organization simply has higher
with the organization. labor costs because of its decision to pay higher salaries
In other organizations, differences in pay are based on to its employees. Once these higher labor costs become
differences in performance, regardless of time on the job. institutionalized, employees may begin to adopt a sense
These systems are generally seen as rewarding employees of entitlement, coming to believe that they deserve the
who are good performers rather than those who simply higher compensation, making it difficult for the orga-
remain longer with the organization. For such systems to nization to be able to adjust its compensation levels
succeed, however, the organization has to be certain that it downward.
has an effective system for measuring performance (as will Another strategic option is to pay below-market rates.
be discussed in Chapter 7). Most major companies base The organization that adopts this strategy is essentially
at least a portion of individual pay on performance, deciding to pay workers less than the compensation
especially for managerial and professional levels offered by other organizations competing
employees. Performance-based incentives for the same kinds of employees. Thus, it is
will be discussed in more detail later in the gambling that the lower-quality employees it is
chapter. able to attract will more than offset the labor
A third decision in developing a com- savings it achieves. Organizations most likely
© Georgios Kollidas/Shutterstock

pensation strategy deals with the organi- to pursue a below-market rate are those in
zation’s pay rates relative to going rates areas with high unemployment. If lots of people
in the market. As shown in Figure 6.2, are seeking employment and relatively few jobs
the three basic strategic options are to pay are available, then many people are probably
above-market compensation rates, market willing to work for lower wages. Thus, the
compensation rates, or below-market organization may be able to pay lower than
compensation rates.11 This decision is the market rate and still attract reasonable
important because of the costs it repre- and qualified employees. In other situations,
sents to the organization.12 employers may be able to pay below-market
A firm that chooses to pay above- rates because of various offsetting factors. For
market compensation, for example, will instance, some employers in Hawaii find that the
incur additional costs as a result. This strategic state’s beautiful setting and mild weather allow
option essentially indicates that the organization them to pay below-market salaries—some people are
pays its employees a level of compensation that willing to work for less money just to be able to live in
is higher than that paid by other employers Hawaii. Again, the benefit to this strategy is lower
competing for the same kind of employ- labor costs for the organization.
ees. Of course, it also anticipates achiev- On the other hand, the organization
ing various benefits. Some organizations will also experience several negative
believe that they attract better employ- side effects. Morale and job satisfaction
ees if they pay wages and salaries that are might not be as high as the organization
higher than those paid by other organizations; that is, they would prefer. Individuals are almost certain to recognize
view compensation as a competitive issue. They recognize that they are being rela-
that high-quality employees may select from among several tively underpaid, and this A maturity curve is a
different potential employers and that they have a better situation can result in feel- schedule specifying the
amount of annual increase a
chance of attracting the best employees if they’re willing to ings of job dissatisfaction person will receive.

Chapter 6: Compensation and Benefits 151

 A firm in a high-growth mode is constantly
striving to attract new employees and may
find itself in a position of having to
pay above-market rates to do so.

and potential resentment against the organization. In itself. As detailed in Chapter 2, a clear and carefully devel-
addition, turnover may also be higher because employees oped relationship should exist between a firm’s corporate
will be continually vigilant about finding better-paying and business strategies and its human resource strategy.13
jobs. Compounding the problem even further is the fact This connection, in turn, should also tie into the firm’s
that the higher-performing employees are among the compensation strategy. Thus, a firm in a high-growth
most likely to leave, and the lower-performing employees mode is constantly striving to attract new employees and
are among the most likely to stay. may find itself in a position of having to pay above-market
Finally, a third strategic option for compensation is to rates to do so. On the other hand, a stable firm may be
pay market rates for employees—that is, the organization more likely to pay market rates given the relatively predict-
may elect to pay salaries and wages that are comparable able and stable nature of its operations. Finally, an orga-
to those available in other organizations, no more and no nization in a retrenchment or decline mode may decide to
less. Clearly, the organization that adopts this strategy is pay below-market rates because it wants to reduce the size
taking a midrange perspective. The organization assumes of its workforce anyway.14
that it will get higher-quality human resources than a firm In addition to these general strategic considerations,
that takes a below-market strategy. At the same time, it is several other specific factors determine an organization’s
willing to forgo the ability to attract as many high-quality compensation strategy. One obvious factor is simply
employees as the organization that takes an above-market the organization’s ability to pay. An organization with
strategy. a healthy cash flow or substantial cash reserves is more
The advantages and disadvantages of this strategy are likely to be able to pay above-market wages and salaries.
also likely to reflect midrange comparisons with the other On the other hand, if the organization suffers from a
strategies. The organization will have higher turnover than cash flow crunch, has few cash reserves, and is operating
a firm paying above-market rates but lower turnover than on a tight budget, it may be necessary to adopt a below-
an organization paying below-market rates. An organiza- market wage strategy. The organization’s ability to pay
tion that adopts a market-rate strategy is likely to believe is thus an important consideration. During the economic
it can provide other intangible or more subjective benefits stagnation of recent years, many firms have found them-
to employees in return for their accepting a wage rate that selves in this predicament. In response, several major
is perhaps lower than they might be paid elsewhere. For companies reduced the pay increases they granted to
example, job security is one important subjective benefit their employees.15
that some organizations provide. In addition, the overall ability of the organization
Employees who perceive that they are being offered an to attract and retain employees is a critical factor. For
unusually high level of job security may therefore be willing example, if the organization is located in an attractive
to take a somewhat lower wage rate and accept employ- area, has several noncompensation amenities, and pro-
ment at a market rate. Universities frequently adopt this vides a comfortable, pleasant, and secure work environ-
strategy because they believe that the ambience of a uni- ment, it might be able to pay somewhat lower wages.
versity environment is such that employees do not neces- But if the organization is located in, for example, a high-
sarily expect higher salaries or higher wages. Microsoft also crime area or a relatively unattractive city or region, and
uses this approach. It offsets average wages with lucrative if it has few noncompensation amenities that it can
stock options and an exceptionally pleasant physical work provide to its employees, it may be necessary to pay
environment. higher wages simply as a way of attracting and retaining
employees.
Union influences are another important determinant of
an organization’s compensation strategy. If an organization
6-1f Determinants of competes in an environment that is heavily unionized, such
Compensation Strategy as the automobile industry, then the strength and bargaining
Several different factors contribute to the compensation capabilities of the union influence what the organization pays
strategy that a firm develops. One general set of factors its employees. On the other hand, if the organization does not
has to do with the overall strategy of the organization hire employees represented by unions or if the strength of a

152 Human Resource Management

particular union is relatively low, then the organization may A major advantage of the job-classification sys-
be able to pay somewhat lower wages and the union influence tem is that it can be constructed relatively simply and
is minimal or nonexistent. quickly. It is easy to understand and easy to communi-
cate to employees. It also provides specific standards for
compensation and can easily accommodate changes in
6-2 DETERMINING WHAT TO PAY the value of various individual jobs in the organization.
On the other hand, the job classification assumes that a
Once a compensation strategy has been chosen, it is nec- constant and inflexible relationship exists between the
essary to determine exactly what employees on a given job job factors and their value to the organization, which
should be paid. The starting point in this effort has tradi- sometimes results in jobs within a grade not fitting
tionally been job evaluation. We will briefly describe this together very well. Figure 6.3 presents an example of a
more traditional method first, but then discuss a more job-classification system.
innovative and strategic approach to determining what Job-classification systems require clear definitions
to pay. of classes and benchmark jobs for each class. The most
widely known example of a job-classification system is the
6-2a Job-Evaluation Methods General Schedule (GS) system used by the federal govern-
Job evaluationis a method for determining the relative ment. This system has eighteen grades (or classes). Most
value or worth of a job to the organization so that individ- federal employees fall into one of fifteen grades; the top
uals who perform that job can be compensated adequately three grades have been combined into a single “supergrade”
and appropriately. In other words, job evaluation is mostly that covers senior executives.
concerned with establishing internal pay Figure 6.3 describes three grades from the
equity. Several job-evaluation tech- GS system. An example of a job classified as a
niques and methods have been estab- GS-1 would be a janitor; a GS-6 job would
lished.16 Among the most commonly be a light truck driver; and an example of
used are classification, point, and a GS-10 job would be an auto mechanic.
factor-comparison systems. Within each grade are ten pay steps based
on seniority so that the range of salaries
Classification system An for a GS-6 job starts at just under $20,000
organization that uses a classifica- a year and goes up to more than $25,000
tion system attempts to group sets a year.
of jobs together into classifications,
often called grades. After classifying is Point system The most commonly
done, each set of jobs is then ranked used method of job evaluation is the point
at a level of importance to the orga- system.17 The point system is more sophis-

© Myotis/Shutterstock
nization. Importance, in turn, may be ticated than the classification system and
defined in terms of relative difficulty, is also relatively easy to use. The point
sophistication, or required skills and system requires managers to quantify, in
abilities necessary to perform that objective terms, the value of the various
job. A third step is to determine how elements of specific jobs. Using job descrip-
many categories or classifications to tions as a starting point, managers assign
use for grouping jobs. The most com- points to the degree of various compensable fac-
mon number of grades is anywhere from eight to ten, tors that are required to
although some organizations use the system with as few as perform each job—that Job evaluation is a method
four grades and some with as many as eighteen. is, any aspect of a job for for determining the relative
value or worth of a job to
The U.S. postal system is a good example of an orga- which an organization is the organization so that
nization that uses the classification system. The U.S. willing to provide compen- individuals who perform
postal system has sixteen job grades, with nine pay steps sation. For instance, man- that job can be compensated
adequately and appropriately.
within each grade. Once the grades have been determined, agers might assign points
the job evaluator must write definitions and descriptions based on the amount of The classification system
of each job class. These definitions and descriptions skill required to perform a for job evaluation attempts
to group sets of jobs together
serve as the standard around which the compensation particular job, the amount into clusters, which are often
system is built. Once the classes of jobs are defined and of physical effort needed, called grades.
described, jobs that are being evaluated can be compared the nature of the work-
The point system for job
with the definitions and descriptions and placed into the ing conditions involved, evaluation requires managers
appropriate classification. and the responsibility and to quantify, in objective
authority involved in the terms, the value of the various
elements of specific jobs.

Chapter 6: Compensation and Benefits 153

 FIG 6.3 Job-Classification
System

Grade GS–1
Grade GS–1 includes those classes of positions the duties of which are to perform, under
immediate supervision, with little or no latitude for the exercise of independent judgment:
A. the simplest routine work in office, business, or fiscal operations; or
B. elementary work of a subordinate technical character in a professional, scientific,
or technical field.

Grade GS–6
Grade GS–6 includes those classes of positions the duties of which are:
A. to perform, under general supervision, difficult and responsible work in office,
business, or fiscal administration, or comparable subordinate technical work in a
professional, scientific, or technical field, requiring in either case–
1. considerable training and supervisory or other experience;
2. broad working knowledge of a special and complex subject matter, procedure, or
practice, or of the principles of the profession, art, or science involved; and
3. to a considerable extent the exercise of independent judgment; or
B. to perform other work of equal importance, difficulty, and responsibility, and
requiring comparable qualifications.

Grade GS–10
Grade GS–10 includes those classes of positions the duties of which are:
A. to perform, under general supervision, highly difficult and responsible work along
special technical, supervisory, or adminstrative lines in office, business, or fiscal
administration, requiring–
1. somewhat extended specialized, supervisory, or administrative training and
experience which has demonstrated capacity for sound independent work;
2. thorough and fundamental knowledge of a specialized and complex subject matter,
or of the profession, art, or science involved; and
3. considerable latitude for the exercise of independent judgment; or
B. to perform other work of equal importance, difficulty, and responsibility, and
requiring comparable qualifications.

Source: U.S. Office of Personnel Management

performance of the job. Job evaluation simply represents administrative job within an organization might result in
the sum of the points allocated to each of the compensable weightings of required education, 40 percent; experience
factors for each job. required, 30 percent; predictability and complexity of the
Point systems typically evaluate eight to ten com- job, 15 percent; responsibility and authority for making
pensable factors for each job. decisions, 10 percent; and working conditions and physical
The factors chosen must requirements for the job, 5 percent.
not overlap one another, Because the point system is used to evaluate jobs, most
and they must immediately organizations also develop
distinguish between substantive a point manual. The point
characteristics of the jobs, be objec- manual carefully and spe-
tive and verifiable in nature, and be cifically defines the degrees
well understood and accepted by both of points from first to fifth.
managers and employees. Not all aspects For example, education
of a particular job may be of equal impor- might be defined as fol-
tance, so managers can allocate different weights to reflect lows: (1) first degree, up to and including a high school
the relative importance diploma, 25 points; (2) second degree, high school diploma
© Sergii Figumyl/Shutterstock

of these aspects to a job. and 1 year of college education, 50 points; (3) third degree,
The point manual, used to
These weights are usually high school diploma and 2 years of college, 75 points; (4)
implement the point system determined by summing fourth degree, high school education and 3 years of college,
of job evaluation, carefully the judgments of various 100 points; and (5) fifth degree, a college degree, 125 points.
and specifically defines the
degrees of points from first
independent but informed These point manuals are then used for all subsequent job
to fifth.a evaluators. Thus, an evaluation.
154 Human Resource Management
Factor-comparison method A third method of Hay and Associates is a well-known compensa-
job evaluation is the factor-comparison method. Like the tion consulting firm that often does job evaluations
point system, the factor-comparison method allows the for large organizations. It uses a factor-comparison
job evaluator to assess jobs on a factor-by-factor basis. At system based on three factors: know-how, problem solving,
the same time, it differs from the point system because jobs and accountability.
are evaluated or compared against a standard of key points;
instead of using points, a factor-comparison scale is used 6-2b Pay for Knowledge
as a benchmark. Although an organization can choose to and Skill-Based Pay
identify any number of compensable factors, commonly The steps, decisions, and processes outlined above still apply
used systems include five job factors for comparing jobs: in many organizations, but recent proposals have suggested
responsibilities, skills, physical effort, mental effort, and a whole different approach to compensation: Employees
working conditions. Managers performing a job evaluation should be rewarded for what they know rather than what
in a factor-comparison system are typically advised to fol- they are specifically required to do on the job.
low six specific steps. Pay for knowledge involves compensating employees
(usually managerial, service, or professional employees)
1. The comparison factors to be used are selected and
for learning specific material. This approach might include
defined. The five universal factors are used as starting
paying programmers for learning a new programming lan-
points, but any given organization may need to add
guage or rewarding managers who master a new manu-
factors to this set.
facturing system. These systems can also be designed to
2. Benchmark or key jobs in the organization are identified.
pay for learning supervisory skills or for developing more
These jobs are typically representative of and common
in-depth knowledge about a topic relevant to the organi-
in the labor market for a particular firm. Usually, ten
zation. Pay-for-knowledge systems reward employees for
to twenty benchmark jobs are selected.
mastering material that allows them to be more useful to
3. The benchmark jobs are ranked on each compensation
the organization in the future and are based on mastering
factor. The ranking itself is usually based on job descrip-
new technology or mastering information that relates to
tions and job specifications determined by a job analysis.
global issues. These systems tend to be fairly expensive
4. Part of each benchmark’s job wage rate is allocated to
to start because the organization needs to develop meth-
each job factor based on the relative importance of the
ods for testing whether the employee has mastered the
job factor. Each manager participating in the job eval-
information in question, but once in place, the costs are
uation might be asked to make an independent allo-
usually not excessive. These plans also have the potential
cation first, without consulting with other managers.
to clash with more traditional incentive systems because
Then the managers would meet as a group to develop
employees might choose to perfect and apply knowledge
a consensus about the assignment of monetary values
they already have rather than learn new material.18
to the various factors.
Skill-based pay operates in much the same way as a
5. The two sets of ratings are prepared based on the
pay-for-knowledge system, but these plans are more
ranking and the assigned wages to determine the con-
likely to be associated with hourly workers. Instead of
sistency demonstrated by the evaluators.
rewarding employees who master new material, employ-
6. A job-comparison chart is developed to display the
ees are rewarded for acquiring new skills. Under such a
benchmark jobs and the monetary values that each job
plan, for example, an administrative assistant would be
received for each factor. This chart can then be used to
paid for learning how to use spreadsheets. The skills
rate other jobs in the organization as compared to the
involved can be either for the same job (or in the same job
benchmark jobs.
family) or relevant for other jobs in the organization. For
The factor-comparison system is a detailed and metic- example, in manufacturing plants, it is often useful for
ulous method for formally evaluating jobs. Thus, it pro- employees to be cross-trained so that they have the skills
vides a rigorous assessment of the true value of various to do several different jobs
jobs, which is one of its advantages. It also allows managers in the plant. This approach The factor-comparison
to recognize fully how the differences in factor rankings affords management a method for job evaluation
affect the compensation that the organization allocates to great deal of flexibility in assesses jobs, on a factor-
by-factor basis, using a
various jobs. On the other hand, the factor-comparison scheduling, and it benefits factor-comparison scale as a
method is also extremely complex, difficult to use, time employees because they can benchmark.
consuming, and expensive for an organization that chooses rotate through different
Pay for knowledge involves
to adopt it. A fair amount of subjectivity is involved, and it jobs (providing some vari- compensating employees for
is possible that people whose jobs are evaluated with this ety) and acquire skills that learning specific information.
system may feel that inequities have crept into the system may increase their market
Skill-based pay rewards
through either managerial error or politically motivated value if they choose to seek employees for acquiring new
oversight. another job. skills.

Chapter 6: Compensation and Benefits 155

 high performers are known to make more money than
6-3 WAGE AND SALARY low performers, then it logically follows that people
ADMINISTRATION throughout the organization will be motivated to work
harder under the assumption that they too will be rec-
Once wages and salaries have been determined, the ognized and rewarded for their contributions.
resulting compensation system must be admin- Many publicly funded organizations such
istered on an ongoing basis. Most organiza- as state universities and public schools
tions call this process wage and salary admin- have open pay systems whereby interested
istration or compensation administration. individuals can look at budgets or other
Much of this administration involves information to determine how much any
making adjustments to wages and salaries employee is being paid.
as the result of pay raises or changes in
job responsibilities. In addition, in orga-
nizations where jobs are arranged in a 6-3b Pay Compression
© Liv friis-larsen/Shutterstock

more hierarchical structure, programs Another problem that some organizations

should be implemented to maintain must c­ onfront occasionally during wage
progression to a higher-level job within and salary administration is pay compres-
a job class. Also certain issues related to sion. Pay compression occurs when
compensation must also be addressed individuals with substantially
as part of this administration process. different levels of experience or
Two of the most important involve performance abilities are being
pay secrecy and pay compression. paid wages or salaries that are
relatively equal. Pay compres-
sion is most likely to develop
6-3a Pay Secrecy when the market rate for start-
Pay secrecy refers to the extent to ing salaries increases at a rate
which the compensation of any indi- faster than an organization can
vidual raise pay for individuals who are
Wage and salary
in an already on the payroll. As a result, an
administration is the organization is secret or employee with experience may find him- or herself not
ongoing process of managing the extent to which it is
a wage and salary structure. making much more than an entry-level employee. In
formally made available some cases, the external market can change so rapidly
Pay secrecy refers to to other individuals. Each
the extent to which the that new employees are actually paid more than experi-
compensation of any
approach has merit.19 On enced employees; this is known as pay inversion.
individual in an organization the one hand, advocates of
is secret or the extent to which pay secrecy maintain that
information on compensation
what an individual is paid
is formally made available to
other individuals. is his or her own business 6-4 INCENTIVES AND
Pay compression occurs
and not for public knowl- PERFORMANCE-BASED
when individuals with
substantially different levels
edge. They also argue
that if pay levels are made
REWARDS
of experience, or performance Yet another approach to enhancing performance is by
abilities, or both are paid
known to everybody else,
wages or salaries that are then jealousy or resent- explicitly tying rewards, especially pay, to performance—
relatively equal. ment may result. Indeed, that is, organizations try to reinforce certain types of behav-
In pay inversion, the most businesses practice iors and outcomes by tying compensation directly to mea-
external market changes so pay secrecy, sometimes to sures of performance or productivity. Many plans allow this
rapidly that new employees to be done.
are actually paid more than
the point of formally for-
experienced employees. bidding managers from The most basic form of incentive compensation is merit
discussing their pay with pay, which generally refers to pay awarded to employees on
Merit pay is pay awarded
to employees on the basis other people. the basis of the relative value of their contributions to the
of the relative value of On the other hand, organization. Employees who make greater contributions are
their contributions to the given higher pay than those who make lesser contributions.
organization.
some organizations adopt
a more open pay system in Merit-pay plans, then, are formal compensation plans that base
Merit-pay plans are at least some meaningful portion of compensation on merit.
compensation plans that
which everyone knows what
formally base at least some everyone else makes. The The most general form of the merit-pay plan is to
meaningful portion of logic is that this promotes provide annual salary increases to individuals in the orga-
compensation on merit. nization based on their relative merit. Merit, in turn, is
equity and motivation. If
156 Human Resource Management
usually determined or defined based on the individu- 6-4a Individual Incentive Pay Plans

© Peshkova/Shutterstock
al’s performance and overall contributions to the Generally speaking, individual incentive plans
organization. We will discuss various meth- reward individual performance on a real-time
ods for evaluating employee performance in basis. Rather than increasing a person’s
Chapter 7. We noted, as well, that per- base salary at the end of the year, an indi-
formance appraisal had the most mean- vidual instead receives some level of
ing to employees if it was subsequently salary increase or financial reward in
connected with a reward such as a salary conjunction with demonstrated out-
increase. However, it is important for standing performance in close prox-
the organization to have valid and reli- imity to when that performance occurred. Individual
able measures for merit. Merit generally incentive systems are most likely to be used in
refers to performance, but for the plan to cases where performance can be objectively
have motivation and performance effects, assessed in terms of number of units of
people throughout the organization must output or similar measures rather than
clearly understand what the firm means by the on a subjective assessment of perfor-
term merit. Otherwise, the plan not only will not mance by a superior.
be effective in improving performance but also Some variations on a piece-
may cause problems with employees’ rate system are still fairly popular.
perceptions of justice. Although many of these systems
Another basic approach is based still resemble the early plans in
on systems of skill- and knowledge-based most ways, a well-known piece-rate
pay. Under these systems, instead of system at Lincoln Electric illustrates
rewarding employees for increased per- how an organization can adapt the tra-
formance they are rewarded for acquiring ditional model to achieve better results.
more skills or knowledge. But these skills or For years Lincoln’s employees were paid
this knowledge is related to what the organiza- individual incentive payments based on their per-
tion believes it will need in the future. Thus, in effect, formance. However, the amount of money shared (or the
the organization is rewarding the employee for increas- incentive pool) was based on the company’s profitability. A
ing his or her capacity to perform well in the future, while well-organized system allowed employees to make sugges-
more traditional merit-pay systems reward employees for tions for increasing productivity. Motivation was provided
achieving some level of performance, but this performance in the form of a reward equaling one-third of the profits
is defined by what the organization needs (or wants) right (another third went to the stockholders, and the last third
now. Although problems are associated with these systems was retained for improvements and seed money). Thus, the
and their administration, they offer an alternative to more pool for incentive payments was determined by profitability,
traditional merit-pay systems and provide a more strategic and an employee’s share of this pool was a function of his or
long-term focus for the organization.20 In addition, they her base pay and rated performance based on the piece-rate
allow the organization to move employees toward focusing system.
on more than just basic productivity.21 Lincoln Electric was most famous, however, because of
Incentive compensation systems are among the old- the stories (which were apparently typical) of production
est forms of performance-based rewards. For example, workers receiving a year-end bonus payment that equaled
as noted earlier, some companies used individual piece- their yearly base pay.23 In recent years, Lincoln has partially
rate incentive plans more than 100 years ago.22 Under abandoned its famous system for business reasons, but it
a piece-rate incentive plan, the organization pays an still serves as a benchmark for other companies seeking
employee a certain amount of money for every unit she innovative piece-rate pay systems.
or he produces. For example, an employee might be paid Perhaps the most common form of individual incen-
$1 for every dozen units of product that she or he com- tive is the sales commission
pleted successfully. But such simplistic systems fail to that is paid to salespeople.
account for factors such as minimum-wage levels, and Individual incentive
For example, sales repre- plans reward individual
they rely heavily on the assumptions that performance sentatives for consumer performance on a real-
is under an individual’s complete control and that the products firms and retail time basis.
individual employee does a single task continuously sales agents may be com- The base salary of an
throughout his or her work time. Thus, most organi- pensated under this type employee is a guaranteed
zations that try to use incentive compensation systems of commission system. In amount of money that the
today use more sophisticated methods, and we will now individual will be paid.
general, the person might
discuss some of these. receive a percentage of the A sales commission is an
total volume of attained incentive paid to salespeople.

Chapter 6: Compensation and Benefits 157

sales as her or his commission for a period of time. Some so valuable rather than just helping the customer transact
sales jobs are based entirely on commission, while others business efficiently. The teller may be successful at sell-
use a combination of base minimum salary with additional ing safety deposit boxes, but some customers will become
commission as an incentive. Notice that these plans put a annoyed because they just want to conduct their business
considerable amount of the salesperson’s earnings at risk. and be on their way. As a result, these customers may move
Although organizations often have drawing accounts to their accounts to another bank. Thus, the teller may maxi-
allow the salesperson to live during lean periods (the per- mize his or her earnings, but at the cost of increased cus-
son then “owes” this money to the organization), if he or tomer dissatisfaction and loss.
she does not perform well, then he or she will not be paid
much. The portion of salary based on commission is sim- 6-4b Team and Group Incentive Plans
ply not guaranteed and is paid only if the employee’s sales In addition to incentive plans designed to improve indi-
reach some target level. vidual performance, there are plans that focus on group or
Finally, organizations occasionally may use other team performance. These programs are particularly impor-
forms of incentives to motivate employees. For example, tant for managers to understand today because they focus
a nonmonetary incentive such as additional time off or a attention on higher levels of performance, and because
special perk might be a useful incentive. A company might of the widespread trends toward team- and group-based
establish a sales contest in which the sales group that methods of work and organization.26
attains the highest level of sales increase over a specified A fairly common type of group incentive system is
period of time receives an extra week of paid vacation, per- an approach called gainsharing. Gainsharing programs
haps even at an arranged place such as a tropical resort or are designed to share the cost savings from productivity
a ski lodge.24 At Chipotle restaurants, store managers who improvements with employees. The underlying assump-
groom an employee who eventually also becomes a store tion of gainsharing is that employees and the employer
manager receive a $10,000 payment. This encourages store have the same goals and thus should share in incremental
managers to recruit talented and motivated employees, economic gains,27 consistent with our discussion of agency
then work to develop them into potential managers.25 theory in Chapter 13.
As with merit systems, incentive compensation sys- In general, organizations that use gainsharing start by
tems have some shortcomings and weaknesses. One major measuring team- or group-level productivity. It is impor-
shortcoming is that they are practical only when perfor- tant that this measure is valid and reliable and that it truly
mance can be measured easily and objectively. Most mana- reflects current levels of performance by the team or group.
gerial work does not fit this pattern and, in fact, is often The team or work group itself is charged with attempting
characterized by ambiguous performance indicators that to lower costs and otherwise improve productivity through
are difficult to assess. Thus, it may be much more diffi- any measures that its members develop and that its man-
cult to provide valid and appropriate incentives for these ager approves. Resulting cost savings or productivity gains
individuals. Individual incentives are also likely to focus that the team or group is able to achieve are then quan-
attention on only a narrow range of behaviors, perhaps at tified and translated into dollar values. A predetermined
the expense of other behaviors. Take for example a bank
teller who may be able to earn
some type of incentive bonus if he
or she can sell existing customers
additional bank services, such as a
safety deposit box. The teller may
spend time explaining to the cus-
tomer why a safety deposit box is

Gainsharing is a team- and

group-based incentive system
designed to share the cost
savings from productivity
improvements with
employees.

Scanlon plans are

gainsharing plans in which
© keith morris/Alamy

teams or groups of employees

are encouraged to suggest
strategies for reducing
costs; gains are distributed
according to who suggested
the cost-reduction strategy.

158 Human Resource Management

formula is used to allocate these dol- This amount is either distributed at the end of the year

© Raywoo/Shutterstock
lar savings between the employer or put into an escrow account, and payment is
and the employees themselves. A deferred until the employee retires.
typical formula for distributing The basic rationale behind profit-
gainsharing savings is to provide sharing systems is that everyone in the
25 percent of the dollar savings organization can expect to benefit
to the employees and 75 per- when the company does well. During
cent to the company. bad economic times, however, when
One specific type of gain- the company is perhaps achieving low
sharing plan is an approach or no profits, no profit sharing is
called the Scanlon plan. This paid out. This situation sometimes
approach was developed by results in negative reactions from
Joseph Scanlon in 1927. The employees who come to feel that the
Scanlon plan has the same basic profit sharing is really part of their
strategy as gainsharing plans because annual compensation.
teams or groups of employees are Various types of stock-based
encouraged to suggest strategies for reduc- incentives are also ways to tie
ing cost. However, the distribution of these incentives to the performance
gains is usually tilted much more heavily of the firm, although these are
toward employees, with employees usually receiv- more typically used with execu-
ing between two-thirds and three-fourths of the total cost tive employees rather than hourly
savings that the plan achieves. The cost savings resulting employees. For example, in many com-
from the plan are not given just to the team or group that panies, executives may be given a certain number of stock
suggested and developed the ideas but are instead distrib- options, which enable them to purchase shares of the com-
uted to the entire organization. pany’s stock at a fixed price. Thus, under a stock-option plan
In addition to gainsharing and Scanlon plans, an executive may be given 1,000 options to purchase the
other systems are also used by some organizations. firm’s stock at $5 per share (the current trading price) for as
Some companies, for example, have begun to use true long as 1 year. If the stock price rises to $6 a share (presum-
incentives at the team or group level. As with individual ably because of something the executive did), the employee
incentives, team or group incentives tie rewards directly can exercise his or her option: buy the shares at $5, sell
to performance. And like individual incentives, team or them at $6, and make a
group incentives are paid as they are earned rather than $1,000 profit. Profit sharing is an incentive
being added to employees’ base salaries. The incentives Alternatively, some system in which, at the end
of the year, some portion of
are distributed at the team or group level, however, rather firms offer stock-purchase the company’s profits is paid
than at the individual level. In some cases, the distribution plans, which are typically into a profit-sharing pool,
may be based on the existing salary of each employee, with offered to all the employ- which is then distributed to all
employees.
incentive bonuses being given on a proportionate basis. In ees of a firm rather than
other settings, each team or group member receives the just the executives. Many A stock-option plan is an
same incentive pay. start-up firms, especially incentive plan established
to give senior managers
Some companies also use nonmonetary rewards at the in high-tech sectors, also the option to buy company
team or group level. These rewards come most commonly offer restricted stock plans, stock in the future at a
in the form of prizes and awards. For example, a company which are really used as a predetermined fixed price.
might designate the particular team in a plant or subunit of retention tool rather than A stock-purchase plan is
the company that achieves the highest level of productivity as a performance incentive. typically offered to all the
employees of a firm rather
increase, the highest level of reported customer satisfac- Under these plans, employ- than just the executives to
tion, or a similar index of performance. The reward itself ees are entitled to the stock serve more as a retention
might take the form of additional time off or a tangible only if they remain with tool. Under these plans,
employees are entitled to the
award such as a trophy or a plaque. In any event, however, the company for a specified stock only if they remain with
the reward is given to the entire team and serves as recogni- period of time. If they leave the company for a specified
tion of exemplary performance by the entire team. before that time, they have period of time. If they leave
before that time, they have no
Other kinds of team- or group-level incentives go no rights to the shares of rights to the shares of stock.
beyond the contributions of a specific work group. These stock.
Employee stock ownership
incentives are generally organizationwide. One long-stand- Employee stock owner- plans (ESOPs) are group-
ing method for this approach is profit sharing, in which some ship plans (ESOPs)repre- level reward systems in which
portion of the company’s profits is paid at the end of the sent another group-level employees are gradually
given a major stake in the
year into a shared pool that is distributed to all employees. reward system that some ownership of a corporation.

Chapter 6: Compensation and Benefits 159

companies use. Under the ESOP, employees are gradually (i.e., underwater). The management at Brocade then asked
given a major stake in the ownership of a corporation. The employees to change their employment date to make it
typical form of this plan involves the company taking out a later than it actually was—at a time when the stock’s price
loan, which is then used to buy a portion of the company’s was low—so that the employees would qualify for option
own stock in the open market. Over time, company prof- prices that were low enough for the options to still have
its are then used to pay off this loan. Employees, in turn, some value. The article reporting the scandal noted that
receive a claim on ownership of some portion of the stock similar (but less egregious) practices were carried out by
held by the company based on their seniority and perhaps many high-tech firms, but a follow-up piece indicated that
their performance. Eventually, each individual becomes an the former CEO and several others who were involved
owner of the company. were being charged with both civil and criminal securities
Although group reward systems can be effective in fraud .29
some situations, they are also subject to difficulties. For
example, not every member of a group may contribute
equally to the group’s performance. But if the group-incen-
tive system distributes rewards equally to group members, 6-5 THE NATURE OF BENEFITS
then people may feel that some factors beyond individual PROGRAMS
performance dictate the distribution of rewards. Also, for
As noted above, in addition to wages and salaries, most
incentive plans based on firm profitability, employees may
organizations provide their employees with an array of
not see how their efforts lead to increased profits (often
other indirect compensations, or benefits. Although these
referred to as a line-of-sight problem). In fact, many factors
benefits were once called fringe benefits (and a few people
that are beyond the employees’ control can affect profit-
still use this expression today), once managers began to
ability. Thus, the links among effort, performance, and
fully realize that they were spending more than one-third
outcomes, as specified by expectancy theory, are often
of wages and salaries in additional expenses on benefits
quite weak, resulting in little motivation. In addition, a lim-
they decided that the word fringe might have been under-
itation noted earlier in our discussion on profit sharing is
stating the true value of these benefits.
that employees may come to view the group-level incentive
as a normal part of their compensation and consequently
be unhappy or dissatisfied if that reward is withheld 1 year. 6-5a Purposes of Benefit Programs
Stock-based programs have special problems, since In general, benefit programs serve several purposes for the
the employees’ incentives are tied to the price of the stock. organization. First, many experts believe that organiza-
An employee, especially an executive, may therefore make tions willing to spend more money on total compensation
decisions or take actions that might result in a short- are able to attract better-qualified people and convince
term increase in the stock price, while causing long-term employees to work harder, saving the company money.
problems for firm performance. Also, stock programs The general concept underlying this approach is known as
are effective only so long as the price of the stock is ris- efficiency wage theory. Little data exists to support or refute
ing—or at least not falling. In the example given earlier, if this position, but some organizations appear to view wages
the employee has the option to buy the stock at $5.00 per and benefits as a means of attracting better applicants.
share, and price of the stock goes down to $4.00 a share,
there is no incentive value and no reason for the employee
to exercise the option. In such cases, the stock options are
said to be “below water.”
Finally, a few years ago, there was a major scandal
about the ways in which organizations can manipulate
stock options.28 A high-tech company, Brocade Systems,
Inc., granted employees stock options when they joined the
company in 1999. This was a start-up company, and the
initial offering price was $2.37, which was also the option
price for employees at that time. The stock quickly rose
(to more than $133 a share), making those options quite
valuable. But then the high-tech bubble burst in 2002, and
© Rufous/Shutterstock

the share price plummeted. Employees who joined the firm

later were also offered options, but at the selling price in
effect when they were hired. As the stock price continued
to drop, these later options became eventually worthless

160 Human Resource Management

 Most experts would also argue that money spent on protection to employees when their income is threatened
benefits affects job satisfaction and subsequent turnover. or reduced by illness, disability, death, unemployment, or
Even if employees do not work harder in response to bet- retirement. Unemployment insurance was created in the
ter benefits, they are more likely to remain with a firm that United States as part of the Social Security Act of 1935.
provides better benefits and are more satisfied with that The rationale for the act was to protect those people who
firm. In part, an employee’s reactions to specific benefits were experiencing the high levels of unemployment that
programs reflect that individual’s belief about the value of were pervasive in the United States during the 1930s.
benefits at the current company compared with the value of Unemployment insurance is intended to provide a basic
benefits at other companies. As a result, the need to remain subsistence payment to employees who are between jobs—
competitive with other firms in an industry is a major force that is, for people who have stopped working for one orga-
driving up the price of benefits. Just as when one airline in nization but who are assumed to be seeking employment
a market lowers fares and all others follow suit, once one with another organization. Employers pay premiums to
visible organization in an industry starts offering a given the unemployment insurance fund. In addition, in the
benefit, it is usually not long until its competitors offer states of Alabama, Alaska, and New Jersey, employees also
similar benefits. contribute to the fund. The premium payment is increased
In addition, various social, cultural, and political forces if more than an average or designated number of employees
may promote the introduction of new and broader benefits from the organization are drawing from the fund at any
programs. For example, increases in the number of women given time. To be covered by unemployment insurance, an
in the workforce and the rising costs of health care have each individual must have worked a minimum number of weeks,
affected benefits programs in recent times. Because of the must now be without a job, and must be willing to accept
growth in the numbers of female workers, more and more a suitable position if one is found through a state’s unem-
companies offer on-site day care, dual-parent leave for the ployment compensation commission or department.
birth of a child, and other benefits that make it easier for Furthermore, if a covered employee is out of work
people to work and have productive careers. Likewise, the through no fault of his or her own (as in the case of a lay-
health-care environment has prompted growth in benefits off), then benefits start almost immediately. If the employee
programs, including health maintenance organizations, quits or is fired for cause (e.g., for poor performance), there
managed health care, and so forth. is usually a waiting period before the individual can collect
Finally, employee expectations are a driving force in unemployment benefits. Regardless of the starting time,
determining what benefits a firm must offer. For exam- compensation is normally available for no more than 26
ple, even though an organization is not legally required weeks. But beginning in 2010, as unemployment began to
to offer any vacation time, this benefit is so desirable and rise, Congress authorized extensions of unemployment
has become so common that almost every person who benefits to as much as 99 weeks. In early 2012, however,
accepts a new job expects that he or she will be given vaca- as unemployment started to ease, there was an announce-
tion time. Indeed, most people today would be unlikely to ment that the maximum period for unemployment bene-
accept a permanent full-time job without this basic benefit. fits would go down to 73 weeks by mid-year. Payments are
A major implication of these issues, then, is the strategic generally about half of what individuals might have been
importance of employee benefits. Their costs are high, and earning on their former jobs, although an upper limit is
their effects are great. Thus, careful planning, monitor- placed on the benefit paid. As noted above, this program
ing, and communication about benefits are of paramount is funded through employer contributions, but there are
importance. considerable variations in how these laws are administered
from state to state.
6-5b Mandated Benefits
Social Security (officially
Some common benefits are mandated by law. Specifically, Social Security A sec- the Old Age Survivors
in the United States several laws have been passed that ond mandated benefit cre- and Disability Insurance
Program), another
require organizations to offer certain types of benefits to ated by the same law is Social mandated program, was
their employees or that legislate the way benefit plans are Security itself. What most originally designed to provide
administered. In Chapter 2 we discussed several of these, limited income to retired
people think of as Social individuals to supplement
including the Family and Medical Leave Act of 1993, the Security is officially the Old their personal savings, private
Pregnancy Discrimination Act of 1979, and the Employee Age Survivors and Disability pensions, part-time work, and
so forth.
Retirement Income Security Act of 1974. Another sig- Insurance Program. The ini-
nificant law, the Social Security Act of 1935, is discussed tial purpose of this program Unemployment insurance,
later. Each of these laws has resulted in mandated benefits a mandated protection plan,
was to provide some lim- is intended to provide a basic
or legally restricted the way organizations treated certain ited income to retired indi- subsistence payment to
benefits. Protection plans are benefits designed to provide viduals to supplement their employees who are between
jobs.

Chapter 6: Compensation and Benefits 161

 Among other things, the Social Security Act of 1935 provides
social welfare and social insurance coverage for
retired workers.

own personal savings, private pensions, part-time work, depend on the withholdings assessed against the employee
© Sachin Bhavsar/iStockphoto

and so forth. Unfortunately, many people have come to who is retiring. This is a potential problem for the Social
view Social Security as their primary source of retirement Security system because retirees are living longer and it
income. Problems associated with this assumption are dis- takes more current employees to fund the benefits of each
cussed later in this section. retiree.
The Social Security program is funded through
employee and employer taxes that are withheld on Workers’ Compensation Workers’ com-
a payroll basis. Currently, the maximum tax- pensation is also an important legally
able earnings amount for Social Security mandated benefit available to most
is $110,100. The tax rate is 4.2 percent employees. Workers’ compensation is
for employees and 6.2 percent for insurance that covers individuals
employers. Individ­uals are eligible who suffer a job-related illness
for partial benefits when they or accident. Employers pay
reach age 62 or full benefits when the cost of workers’ com-
they reach age 65. Effective pensation insurance. The
in 2027, however, individu- exact premium paid is a
als will not be able to retire function of each employ-
with full benefits until they er’s past experience with
reach age 67. If an employee job-related accidents
dies before reaching retire- and illnesses. About 100
ment age, then a family with million workers in the
children under age 18 receives United States are pro-
survival benefits, regardless of tected under the Workers’
the employee’s age at the time Compensation Insurance
of her or his death. In addition, Program.
an employee who becomes totally In addition to these
disabled before age 65 is also eli- major forms of mandated ben-
gible to receive insurance benefits; efits, a few others are also man-
Medicare benefits are also provided dated by most states. For instance, in
under this act. most instances organizations must give
The amount of money any individual is employees time off to vote and when they
eligible to be paid from the Social Security system have been summoned for jury duty. The orga-
is a function of the average monthly wage that individual nization might or might not choose to pay the employee
earned, weighted toward the latter years of a person’s career. for the time off, but the employee cannot be penalized or
In addition, an individual has to have worked a minimum otherwise sanctioned for taking the time.
period of time and made a minimum amount of contribu-
6-5c Nonmandated Benefits
© Krzysztof Noster/Shutterstock

tions to the system to be eli-

gible to draw full benefits. Most organizations today provide other benefits in addi-
Workers’ compensation, Actual funding for Social
another mandated
tion to those mandated by law. Businesses may elect to
protection program, is Security benefits, however, provide these benefits in order to attract more qualified
insurance that covers comes from the withhold- workers. However, even if offering the benefit is elective,
individuals who suffer
a job-related illness or ings of current employ- if a business does make the decision to offer that benefit,
accident. ees. They do not directly there are laws or regulations that must be followed.

162 Human Resource Management

 Private Pension Plans In addition to the pension Year’s Day, Memorial Day, Independence Day, Labor
benefits guaranteed under the Social Security Act, many Day, Thanksgiving Day, and Christmas. In addition, reli-
companies elect to establish private pension plans for their gious holidays (in addition to Christmas) are also often
employees. These prearranged plans are administered by given. Organizations have to be careful with this practice,
the organization that provides income to the employee at however, because growing diversity in the workplace is
her or his retirement. Contributions to the retirement plan accompanied by an increasingly diverse set of religions and
may come from either the employer or the employee, but in thus religious holidays, requiring clear policies about reli-
most cases they are supported by contributions from both gious holidays, which are enforced equitably.30
parties. Different retirement plans are available, including Paid vacations are also common but are likewise not
individual retirement accounts (IRAs) and employee pen- required by law. They are usually periods of 1, 2, or more
sion IRAs. In addition, a 401(k) plan allows employees to weeks when an employee can take time off from work and
save money on a tax-deferred basis by entering into salary continue to be paid. Most organizations vary the amount
deferral agreements with their employer. of paid vacation according to an individual’s seniority with
There are two basic types of pension plans: defined the organization, with newer employees receiving 1 week
benefit plans and defined contribution plans. Under of paid vacation, and the most senior employees receiving
defined benefit plans, the size of the benefit is precisely as many as 4 weeks of paid vacation a year. One part of
known and is usually based on a simple formula using the rationale for such long vacation breaks is that senior
input such as years of service and salary. This type of plan management employees need a break to escape from the
is often favored by unions and is closely monitored under stress of their jobs.31 But, as can be seen in Table 6.1, some
the Employee Retirement Income Security Act of 1974, or countries actually mandate extensive vacation benefits for
ERISA (as discussed in all employees. Moreover,
Chapter 2). Although these vacation breaks are
the employee may in addition to public holi-
The Employee Retirement
contribute to these day time. For example,
Income Security Act of
© Andy Robinson/iStockphoto

plans, the amount of Finnish workers get not

the contribution has 1974 guarantees a basic only a mandated 30 days
little or no bearing on of vacation time per year
minimum payment that but also an additional 10
the actual pension pay-
ments. Under defined employees could expect public holidays.
contribution plans, the to be paid on retirement. Another common
size of the benefit paid time-off plan is sick
depends on how much leave. This benefit is pro-
money is contributed vided when an individual
to the plan. This money can be contributed by either the is sick or otherwise physically unable to perform his or her
employer alone (noncontributory plans) or the employer job duties. Most organizations allow an individual to accu-
and the employee (contributory plans). Most new pension mulate sick time on the basis of some schedule, such as 1
plans are contributory, defined contribution plans, and sick day per month worked. Some organizations require
there are legal restrictions concerning how the money is that employees submit a doctor’s note verifying illness in
invested.

Paid Time Off Most orga-

nizations also provide their
TABLE 6.1 Minimum Annual Vacation
by Law in Different Countries
Private pension plans
are prearranged plans
administered by the
Country Minimum Vacation Time
employees with some amount (Days per Year)
organization that provides
of time off with pay. No U.S. income to employees at their
Finland 30 retirement.
laws mandate this type of ben-
France 30
efit, but most employees now Defined benefit plans
United Kingdom 28 are private pension plans in
expect it. One major type of which the size of the benefit is
paid time off is the paid holi- Russia 28 precisely known and is usually
day. Most full-time employ- Norway 25 based on a simple formula
using input such as years of
ees receive about ten paid South Africa 21 service.
holidays per year. The most Australia 20
common holidays for which Defined contribution plans
Belgium 20 are private pension plans in
workers are paid without which the size of the benefit
Source: Mercer (www.mercer.com/press-releases/holiday-entitlements-around-the-world),
having to work include New accessed on July 2, 2012..
depends on how much money
is contributed to the plan.

Chapter 6: Compensation and Benefits 163

order to be paid for the day, but others do not. Further, alternative for those who could not afford private health
some organizations extend sick day coverage when the insurance. This public option was not popular with pri-
employee needs to help with a spouse, child, or parent who vate insurers, and remains one of the most controversial
is sick. Also, some organizations require the employee to parts of health-care reform, and the whole idea fell victim
use his or her allocation of sick days within a certain period to political deals that were needed to gain passage of the
of time (such as by December 31) or lose them. Under such legislation. The bill still includes some requirement for all
a system, it would seem illogical for an employee not to employers to provide some form of health-care insurance
take all the sick days allocated during the year. Finally, for employees or be taxed in order to help pay for the unin-
another form of paid time off is personal leave. Sometimes sured, and the elimination of preexisting condition exclu-
an organization allows an employee to take a small num- sions used by insurance companies to refuse payment for
ber of days off for personal business such as funerals and health care is an important part of the bill as passed. Of
weddings. course, regardless of your views about health-care reform,
one of the more troubling remaining issues for people on
Health Insurance Coverage Perhaps the most all sides of the discussion is how to pay for the estimated
common nonmandated benefit for full-time employees in $1 trillion that will be required to truly reform health care
the United States is health insurance coverage. In most in the United States.34
cases, the employer and the employee share the cost of
health insurance, with the proportion handled by each Other Benefits Private pensions, pay for time not
varying considerably. In many cases, the insurance includes worked, and health insurance are the most common non-
special programs for prescription drugs, vision-care prod- mandated benefits, but many other benefits also are avail-
ucts, mental-health services, and dental care. In the United able. For example, disability insurance pays for employ-
States, an estimated 85 percent to 90 percent of all health- ees who cannot work because of some injury or disability.
insurance coverage is purchased by employers as group Also, in an attempt to reduce health-care costs, some com-
plans covering their employees.32 panies have introduced a different type of benefit known
During much of 2009 and early 2010, the U.S. as a wellness program. Wellness programs concentrate on
Congress debated the most sweeping health-care reform keeping employees from becoming sick rather than sim-
bill ever considered in this country. The bill that was finally ply paying expenses when they do become sick.35 In some
passed in March 2010 did not have the public option that organizations, these programs may be simple and involve
Democrats wanted so badly. The full impact—both in little more than organized jogging or walking during lunch
terms of coverage and cost—will slowly unfold over the breaks, but some organizations have full-fledged health
next few years. Why reform health care in the United clubs on site and provide counseling and programs for fit-
States? Although there is a serious concern over the rising ness and weight loss. These plans are either paid for by the
costs of health care, perhaps the biggest impetus for the company or heavily subsidized because they are attractive
proposed new legislation was the fact that many Americans to employees who appreciate the ease and low costs; at the
were simply not covered by any type of health-care insur- same time, they can reduce costs by reducing the number
ance. In fact, according to AARP, 47 million Americans of sick days, cut medical costs, and improve productivity
had no health-care insur- as the organization gains a more physically fit workforce.36
ance in 2009.33 An additional group of benefits is often
President Obama had referred to collectively as life-cycle benefits, or
argued that we needed a so- “Harvard just benefits targeted at different stages in an
employee’s life. The most common are
called public option in the completed a study child-care and elder-care benefits. Child-
insurance field—that is, he
proposed that the federal
that shows 45,000 care benefits are becoming more popular
government offer health Americans die because the changing nature of the work-
force and the fact that being considered
care that would be available every year because a family-friendly organization (which
at a lower cost. This could
help drive down costs for they don’t have must, at a minimum, have some type of
health insurance, child-care benefits) is increasingly viewed
© Ryan McVay/Photodisc/Getty Images

other plans and would also

as a competitive advantage in attracting
provide a more affordable almost 1,000 a talented workers.37 These plans might
week in America.” include scheduling child-care help, refer-
Wellness programs are rals to various types of child-care services,
special benefits programs —Senate Majority Leader or reimbursement accounts for child-care
that concentrate on keeping
employees from becoming Harry Reid (D-Nevada), expenses. Company-paid day care has
sick rather than simply paying White House health-care been found to strongly affect employee
expenses when they do summit, February 25, 2010 attitudes and job performance. 38
become sick.

164 Human Resource Management

 Elder-care benefits are also challenge is the cost of admin-
growing in popularity. These istering such plans. Because
typically take the form of every employee has a poten-
referrals for employees with tially unique set of benefits,
a disabled parent or one who someone has to keep track of
needs constant care. Long- what benefits each employee
term health-care insurance is has chosen, and these choices
also becoming a more com- can usually be changed over
mon benefit, and these plans time. Another problem is what
© Mark Richard/PhotoEdit

provide for nursing homes or is known as adverse selection.

at-home care. Some businesses offer on-site daycare centers This refers to the fact that the
A somewhat different like this one as an employee benefit. employee most likely to select
type of service is contained a benefit, such as children’s
in what are referred to as braces, is also most likely
employee assistance plans. These programs are designed to to use the benefit, which tends to drive up benefit costs.
assist employees who have chronic problems with alco- Finally, given a choice of benefits, employees are not always
hol or drugs or who have serious domestic problems. An rational in their choices. A younger employee may elect to
increase in the number of programs for mental problems contribute less to his or her retirement because retirement
and stress, as well as for bereavement, have also been part seems like a distant future event and wait until later in life
of a recent trend.39 These programs are typically voluntary, before increasing the contribution. But given the power of
and referrals are confidential. Yet the needs of the orga- compounding interest, a larger contribution early in life,
nization (especially when the personal problem is causing followed by a smaller contribution later, is actually worth
performance problems on the job) must be balanced with much more at retirement age than a smaller contribution
the needs of the individual to avoid any stigma attached to made early in life followed by a larger contribution made
having the specific problem.40 later. It is thus extremely important for employees to have
Finally, employee perquisites are sometimes provided. A full information about the available benefits, and in some
perquisite, or perk, as it is more informally known, is an extra cases it may be necessary for the organization to mandate
benefit that may or may not have any direct financial value minimum benefits levels in some areas.
but is considered an important reward by employees. A perk One of the most controversial issues for benefits pro-
might include a bigger office, a company car, membership in grams involves the question of whether to extend bene-
a country club, stock-purchase options, premium insurance fits to same-sex partners. It has become fairly typical for
coverage, and so forth. Perquisites are usually made available organizations to extend benefits to spouses of employees,
only to members of top management or to certain especially but the move to extend these benefits to life partners or
valuable professionals within the organization. spousal equivalents has been accepted much more slowly.43
Sometimes organizations provide special perquisites Obviously, objections to such a plan are based on differ-
that might be available to all employees. For example, ent points of view, but more organizations are coming to
Google provides free transportation from many remote believe that it is simply fair to extend benefits to same-sex
locations to its headquarters, and the company also pro- partners. Chevron’s corporate headquarters is located in
vides free meals for employees in its various cafeterias. San Francisco, California, and, in an attempt to be fair and
Although most benefits programs are designed for to remain competitive for employees in the local market,
all the employees in an organization, cafeteria-style benefits the company decided to extend all health and insurance
plans allow the employee to choose the benefits that he or benefits to same-sex partners. Although this move was
she really wants. Under these plans, the organization typi- applauded in San Francisco, employees at headquarters for
cally establishes a budget indicating how much it is will- the firm’s production company located in Houston, Texas,
ing to spend per employee on benefits.41 The employee is were less enthusiastic. The company made it clear, how-
then presented with a list of possible benefits and the cost ever, that the provision of these ben-
of each; they are free to choose the benefits in any com- efits is company policy and that
bination they wish. Such an approach should maximize it believed that gay and lesbian
the effectiveness of the benefits program for achieving the partners deserved equal treat-
organizational goals discussed at the begin- ment on the job—and employees
ning of the chapter, and some evidence
© L Barnwell/Shutterstock

suggests that cafeteria-style benefits

programs can lead to increased satis-
faction and reduced turnover.42 Cafeteria-style benefits
plans allow employees to
Nonetheless, these programs choose those benefits they
are not without problems. One really want.

Chapter 6: Compensation and Benefits 165

who could not live with this policy were invited to seek employees are entitled to carry forward their untaken
employment elsewhere. leave to the next year or en-cash the value of the leave.
b. Food Vouchers Many Indian companies earlier used to
6-5d Employee Benefit Programs in India provide lunch to the employees through canteen facil-
Almost all Indian companies provide statutory retirement ity. Currently employees are provided food coupons.
benefits, leave benefits, and health benefits. Some of the These coupons are non-taxable up to certain limit.
benefits offered by Indian organizations are noted below44: c. Flexi time Generally employees are expected to work
in stipulated 8 hours shift per day, however, in order
1. Retirement Benefits to retain talent companies are providing flexi hours to
a. Employees’ Provident Fund Indian employees are employees. Under this scheme employees will be pres-
entitled to Employees’ Provident Fund wherein the ent in the office during certain core periods, the rest of
prescribed contribution of the plan requires both the day is considered flexible, wherein employees may
employer and employee to contribute 12% of basic sal- choose at what time they would like to work.
ary. This scheme also allows employees to contribute d. Transportation benefits Some Indian companies pro-
an additional 12% of basic salary if they want. Out of vide car lease policy, cab/shuttle service for employees
the employers’ contributed 12% of basic salary, 8.33% to facilitate easy transportation of employees.
goes to pension part of the provident fund, named as
Employee Pension Scheme, and the remaining 3.67%
is deposited under Pension Fund account. Interest 6-6 CONTEMPORARY ISSUES IN
is credited at a rate announced by the government.
Employees’ Provident Scheme allow for superannua- COMPENSATION AND BENEFITS
tion pension, retiring pension, and permanent disable- Three contemporary issues in compensation and benefits
ment pension for employees. Pensionable salary will include executive compensation, growing legal issues, and
be average monthly pay drawn during the contribution how best to evaluate compensation and benefits programs.
period in the span of 12 months preceding the date of
exit from the membership of employees’ provident 6-6a Executive Compensation
fund. An employee in case of permanent or total dis- Quite simply stated, many human resource management
ablement during employment is entitled to get pension practices and techniques do not work well with top execu-
per month subject to a prescribed minimum. tives. Selection and appraisal of these executives cannot be
b. Private Plans Other than the scheme of Employees’ accomplished using the methods used for other employees.
Provident Fund Organization (EPFO) some organi- But the area of human resource management that is most
zations provide private provident fund, superannua- important for executives deals with their compensation.
tion plans, and pension plans. Therefore, we will concentrate primarily on the issue of
c. Gratuity Employees who has rendered 5 years of ser- executive compensation, discussing techniques and meth-
vice in an organization are entitled for a gratuity ben- ods as well as some of the issues that arise in this area.
efit. Gratuity is paid for 15 days of every completed Most senior executives receive their compensation in
year of employment after 5 years of service. At the two forms: base salary and some form of incentive pay.
time when employees leave their organization they are The traditional method of incentive pay for executives is
provided their gratuity amount, which is subject to in the form of bonuses, which can exceed their base pay
certain tax exemptions. by some multiple. Bonuses are typically a function of the
performance of the organization and are less dependent on
2. Health Benefits Different health coverage benefits the perceived performance of the executive. Near the end
are offered to employees by Indian companies, ranging of a fiscal year, some portion of a corporation’s profits are
from reimbursement of pharmacy bills to group health diverted into a bonus pool, and the share received by each
insurance coverage. Many organizations fund hospitaliza- executive is determined partially by perceived performance
tion cover of employees via insurance policy. Health cov- but mostly in advance as part of the executive’s employ-
erage may include spouse and children and in some cases ment contract.
employees’ parents. For example, in 2009, Goldman Sachs set aside
$16.7 billion for compensation, most of which was paid out
3. Wellness Programs Many employers also arrange in year-end bonuses. As a result, the average salary of a
for facilities like gym, yoga, or meditation classes which are Goldman employee was reported to be $595,000 in 2009.
partially or fully funded by the employer. This figure may be shockingly high for some readers, but the
fact that Goldman also reported record profits for the year
4. Other Benefits suggests that executives may well have earned their huge
a. Paid time off/leave encashment programs Paid time paychecks.45 All of these announcements took place, how-
off/leave encashment program is one of the most com- ever, against the backdrop of the highest unemployment
mon programs in India. Subject to certain restrictions, rate (10 percent) in living memory in the United States.
166 Human Resource Management
 One catalyst for the quick demise of the ABC system was 4 years leading up to his termination. He was graded a B– the first
when AARP, an advocacy group for Americans 50 years of age year the system was in place and downgraded to a C the next
and older committed itself to provide legal resources to those year. In fact, the first lawsuit ended with the court agreeing with
suing Goodyear company. The lawsuit named eight plaintiffs Goodyear that the company’s practice was not discriminatory, but
aged 55 to 59, whose annual salaries ranged from $48,700 to the tire maker still decided to retreat from the ABC system and
$71,700. The lawsuit claimed that hundreds of workers in more revert to its old methods.1
than ten states could join if the case was granted class-action
status. THINK IT OVER
Jim Skykora, 55, the youngest and best-paid plaintiff, said in an 1. Would you like to work under an ABC system?
interview that he had been designing tires for various Goodyear 2. How would you feel about using the ABC for a group of your
customers and had had all eleven of his projects approved in the own subordinates?

Virtually all businesses must focus some degree of atten-

tion on performance management. Indeed, the effec- 7-1 WHY ORGANIZATIONS
tive management of performance may be the difference CONDUCT PERFORMANCE
between success and failure. Many firms, such as Boeing,
find it necessary to occasionally adjust how they approach APPRAISALS
performance management. Performance-appraisal systems Most people involved in performance appraisals tend to
are designed to provide organizations with the information be dissatisfied with them. This is true for both the person
to manage performance improvement. To develop employ- being rated and the person doing the rating. We will dis-
ees to their full potential, however, organizations also must cuss some of the major reasons for this dissatisfaction in
help employees manage their careers. Career manage- this chapter. But the fact that performance appraisals are
ment and career development enable employees to grow so widely used in spite of this dissatisfaction is a strong
both personally and professionally. Further, performance indicator that managers believe that the performance
appraisals help provide employees with information on appraisals are important and that they have a meaning-
how they can best manage their own careers. This chapter ful role to play in organizations. In fact, managers con-
is about performance-appraisal systems and their implica- duct performance appraisals for several different reasons.
tions for how individuals manage their careers. We also Organizations also hope to achieve several goals with per-
cover careers from other perspectives. formance appraisals.2
Performance appraisal is the specific and formal evalua-
tion of an employee to determine the degree to which the
employee is performing his or her job effectively. Some 7-1a The Importance of Performance
organizations use the term performance appraisal for this pro-
Appraisal
cess, and others prefer to use different terms such as perfor-
mance evaluation, performance review, annual review, employee Although most managers are dissatisfied with the appraisal
appraisal, or employee evaluation. The outcome of this evalu- process, most would also agree that performance appraisal
ation is some type of score or rating on a scale. These evalu- is an important part of human resource management. The
ations are typically conducted once or twice a year. A related results of performance appraisals serve many important
topic, performance management, refers to the more general functions in organizations, and this is why they are still
set of activities carried out by the organization to change prevalent despite their problems.
(improve) employee performance. Although performance 1. For example, appraisal results provide a benchmark
management typically relies for assessing the extent to which recruiting and selec-
heavily on performance tion processes are adequate; that is, appraisal results
A performance appraisal appraisals, performance help managers assess the extent to which they are
is the specific and formal management is a broader indeed recruiting and selecting the most appropriate
evaluation of an employee
to determine the degree
and more encompassing employees. When this information is used in con-
to which the employee is process and is the ulti- junction with performance-management techniques,
performing his or her job mate goal of performance- it can lead to real improvements in the performance
effectively.
appraisal activities. We will of individual employees and, ultimately, the entire
Performance management discuss the concepts of per- organization.
is the general set of formance management in 2. Performance appraisals are also important for legal
activities carried out by the this chapter. reasons. Organizations must be able to demonstrate
organization to change
(improve) employee that their promotions, transfers, terminations, and
performance.

178 Human Resource Management

 reward allocations are based on merit (or the lack
thereof), as opposed to discriminatory factors such as 7-2 THE PERFORMANCE-
gender or race. Performance appraisal, therefore, is the APPRAISAL PROCESS
mechanism by which the organization can provide this
documentation. Several tasks are necessary for the performance-appraisal pro-
3. Appraisals play a role as part of the larger performance- cess to be successful. Some should be done by the organiza-
management process. The goal of performance man- tion, some by raters (the individuals who will be conducting
agement is to improve employee performance. Part of the performance appraisal), and in many organizations by
this process is letting employees know how well they are the ratee (the individual whose performance is evaluated). In
currently doing so they can correct their deficiencies, addition, follow-up and discussion should accompany the pro-
capitalize on their strengths, and improve their over- cess. Although some of this follow-up and discussion may be
all contributions to their jobs.3 Performance appraisal more accurately considered performance management rather
should provide this information to employees. than performance appraisal per se, it is still an integral part
4. Finally, performance-appraisal information should of how organizations manage the entire process. Figure 7.1
be the basis of incentive pay systems and other illustrates the actual performance-management system of one
performance-management interventions designed to major corporation. Although some
improve motivation and performance. firms might make minor modifi-
cations to reflect their philoso-
phies more closely, these
7-1b Goals of Performance Appraisal general steps are almost
The preceding discussion makes the goals of appraisals always followed. The
almost self-evident. A basic goal of any appraisal system performance-
is to provide a valid and reliable measure of employee per- appraisal part
formance along all relevant dimensions. In other words, of this over-
the appraisal results should reflect the true picture all process
of who is and is not performing well, and they is high-
should indicate the areas of specific strengths lighted
and weakness for each person being rated. and will be
Although it is extremely difficult to assess
the framework
the extent to which an appraisal sys-
for much of the dis-
tem accomplishes these goals, it is
cussion that follows. In
probably just as important that
employees perceive appraisals later sections of this chap-
to be fair and accurate.4 ter, we will address and discuss
Although docu- the remaining parts of the process.
mentation, as dis-
cussed, is another 7-2a The Role of the
important goal of Organization
the appraisal pro- The organization, primarily through the work
cess, the ultimate goal of its human resource (HR) function, develops the
for any organization using general performance-appraisal process for its manag-
performance appraisals is to ers and employees to use. One of the first considerations
improve performance on the job. relates to how the information gained from performance
Accomplishing this goal requires
appraisals is to be used. For example, will it be used for devel-
that employees receive useful and accu-
opmental feedback only? Or will decisions about merit pay or
rate feedback about their job performance,
other outcomes be based on these ratings as well? It is obvi-
as well as guidance on how to improve. The goal
also relies on the organization’s ability to make decisions ously important that everyone understand exactly what the
about things such as raises and promotions on the basis of ratings are to be used for and exactly how they will be used.
performance on the job. When these two requirements are The organization also generally determines the timing of the
met, managers can generally assume that, when employees performance appraisals. Most organizations conduct formal
get feedback about areas that need improvement, they will appraisals only once a year, although some organizations con-
© John T Takai/Shutterstock

be motivated to make these improvements if they recognize duct appraisals twice a year or even more frequently for new
that improving their performance will improve their chances employees. However frequent the appraisals, the organization
for a promotion, pay increase, or other important outcome and its HR managers must decide when they will be con-
or benefit. At the same time, employees should also gain a ducted. The most common alternatives are for appraisals to be
clear understanding of where they stand relative to the orga- done on the anniversary date of each individual employee’s hir-
nization’s expectations of them vis-à-vis their performance. ing (which spreads out the need to do appraisals throughout

Chapter 7: Performance Appraisal and Career Management 179

can also lead to an emphasis on processes underly- If individuals are rated and rewarded based on

© VectorLart/Shutterstock
ing effective performance. In the example above, one their individual performance, they have less reason
might assume that following up sales leads is part of to cooperate with other team members to accomplish
the process of being an effective salesperson. Providing the team’s goals. In some cases, there may be no basis
feedback about behaviors and processes can be instruc- or reason for cooperation. For example, one of the
tive and useful because it can help employees to under- authors recently learned that his university’s bowl-
stand how to improve their performance. ing team was competing a major tournament. But
The final commonly encountered option is to rate each team bowls at their own alley, and each teams’
performance based on outcomes. For example, rather score is simply the average of the scores of each
than evaluating whether the salesperson has a good individual team members. Therefore, there is no
attitude or follows up on leads, an organization could opportunity to cooperate and each team member
simply tally actual sales. Focusing on outcomes has the helps the team by maximizing his or her own per-
advantage of emphasizing the most objective measures formance. In such settings, either the team captain
of performance available. Also, these systems are usually (or leader) or fellow team members can provide team
tied to specific goals, which have added benefit (discussed member evaluations.
below). Feedback can be relatively straightforward and In other team settings, though, it is critical that team
easy to interpret (i.e., you did or did not meet your sales members work together toward a common goal. In these
goal), although feedback is even more useful if it includes cases, it is critical that performance be measured and
information on how to improve future performance. Goals rewarded only at the team level. One person’s performance
can be stated in terms of absolute amounts or in terms of should not be considered except as part of the whole.
improvement (e.g., increase sales by 10 percent over last Some employees are uncomfortable with this kind of sys-
year). It is important to set the right goals (goals that help tem and believe they should be recognized for their indi-
the organization achieve its objectives), and it is important vidual efforts. Also, in such settings, it is possible for one
to monitor the means by which employees meet their goals employee to relax and let the other team members carry
(i.e., to make sure they act ethically and legally). Appraisal the workload. This free-rider problem is a real challenge to
systems built around outcome measures are a reasonable work teams. Nonetheless, if the team functions as a team
alternative for organizations to consider.22 rather than as a set of individuals, it is essential that the
team’s performance is appraised and rewarded.23
7-2f Who Should Be Rated?
A final issue to consider is exactly who should be rated in
the appraisal process. Specifically, this issue is connected 7-3 METHODS FOR
with the use of work teams. With work teams, the orga-
nization must decide whether to evaluate individual per-
APPRAISING PERFORMANCE
formance or team performance, and this issue can become Different performance-appraisal methods and techniques
quite complicated. are used in organizations. By their very nature, most
appraisals are subjective—that is, we must rely on a rat-
er’s judgment of an employee’s performance. As a result,
performance appraisals are also prone to problems of bias
(some of which were discussed earlier) and rating errors
(which are discussed later in this chapter). Raters tend to
be uncomfortable passing judgment on employees, and
employees generally do not care to be judged in this way.
The question then becomes, why don’t managers sim-
ply use objective measures of performance in evaluating
employee performance?
The simplest
answer is that, for
most jobs, and for
all managerial jobs,
straightforward objec-
tive measures of per-
© Andresr/Shutterstock

fomance do not exist.

Moreover, even when
such measures do
exist, they are usu-
ally contaminated

184 Human Resource Management

 Counting Seconds, One of the most important jobs in 5. Each checkout operator’s score is averaged across an entire shift.
Measuring Scans retailing is the person who takes 6. The minimum performance expectation at Meijer is 95 percent
the customer’s money, in part because paying for their items is of the standard. If an operator falls below this standard too many
about the last thing customers do before leaving. An efficient and times, the person is either demoted to a lower-paying job or fired.
pleasant experience can leave a customer walking out of the store
with a smile, and a slow or unpleasant experience can leave a bad Interviews with Meijer cashiers suggest mixed results. On the
taste in the customer’s mouth. There is also a lot of variation in how one hand, they all agree that the new system causes them to
checkout operators work. Some are fast and efficient, and others are work faster. On the other hand, they feel more stress. Moreover,
plodding and never seem to get in several suggested that they avoid
a hurry. conversations with their customers
Meijer, a family-owned because that can detract from their
discounting chain, operates 185 work and slow them down.
huge megastores in Michigan, Feedback from customers is also
Illinois, Indiana, Kentucky, and Ohio. mixed. Some think the new system
The company has recently installed is great. One woman, for instance,
a new performance-measurement said “A lot of the [cashiers] like to
system for its checkout operators stop and chat, and I don’t really
that might potentially revolutionize have the time for it.” But another
those jobs. Essentially, the system suggested that “elderly people . . .
works like this: feel so rushed at checkout that they
don’t want to come here.”
1. Meijer has established minimum
But the Meijer system, developed
baseline performance metrics for the job based on the number
by Accenture, may be the wave of the future. Gap, Office Depot,
of units a person should reasonably be able to scan and bag in a
Limited Brands, and Toys “R” Us are all testing it. On the other hand,
specified amount of time.
other retailers such as Kroger and Abercrombie & Fitch have said
© Blend Images/Getty Images

2. When a checkout operator scans a customer’s first item, a timer

“Thanks, but no thanks” because they are afraid the new system will
in the scanning system is activated.
detract from customer service. 24
3. This timer runs until a customer’s last item is scanned.
4. The operator’s “score” is adjusted for the kinds of items being THINK IT OVER
purchased (large, bulky items, for instance, take longer to scan 1. How would you feel about working under the Meijer system?
than do small tightly packed ones) and how the customer is paying 2. What other kinds of jobs might be amenable to this sort of
(checks usually take longer than cash or credit, for instance). performance-measurement technology?

by factors such as locations of sales territories. In many 7-3a Ranking Methods

other cases where objective measures exist, they are Versus Rating Methods
meaningful only at the level of the team (or an assembly
line) and not at the level of the individual. Of course, Probably the simplest method of performance appraisal
objective data that does reflect conditions under the is the simple ranking method, which involves having the
control of the individual employee are sometimes avail- manager simply rank-order, from top to bottom or from
able. These data could be sales figures for outside sales best to worst, each member of a particular work group or
employees. In other cases, a rater could measure out- department. The individual
comes such as reductions in complaints. These examples ranked first is presumed to The simple ranking
are best suited for outcome-based appraisal methods. be the top performer, the method involves having the
But as shown in HR in the 21st Century, even objec- individual ranked second is manager rank-order each
member of a particular work
tive outcome-based methods may not always tell the presumed to be the second- group or department from
full story. In many other cases, however, organizations best performer, and so on. top to bottom or from best
have no choice but to rely on judgments and ratings. The ranking is generally to worst.
Therefore a great deal of effort has been spent in try- global or based on overall In the paired-comparison
ing to make these subjective evaluations as meaningful performance. A variation on method of performance
and as useful as possible. Some of the methods that have the ranking method is the appraisal, each individual
employee is compared
been proposed are based on relative rankings, while oth- paired-comparison method with every other individual
ers rely more on absolute ratings. of performance appraisal, employee, two at a time.

Chapter 7: Performance Appraisal and Career Management 185

which involves comparing each individual employee with An advantage of this system is that it results in a
every other individual employee, one at a time. This tech- normal distribution of performance ratings, which many
nique is simply an alternative way to generate rankings, people see as inherently fair. Also, from the organization’s
however. perspective, if employees are to receive merit pay increases,
Although ranking techniques are simple and easy a forced distribution ensures control over how much money
to implement, there are some serious shortcomings. It is spent on merit pay. On the other hand, the distribution
is true that organizations that are seeking to make rela- that is being imposed may have no relationship to the true
tively simple decisions such as which person to promote distribution of performance in the work group. It is pos-
can obtain clear and useful information about the “most sible, for example, that all the employees are performing at
promotable,” but even in such cases where an organiza- acceptable levels, but the forced-distribution methods, as
tion must then turn to the “second-most promotable,” well as the other ranking methods, force the rater to make
ranking methods provide no information about the dif- distinctions that might not really be meaningful. As a result,
ference between the persons ranked first and second. The most organizations rely instead on some type of absolute
absence of such information is even more problematic for judgments and employ a system of performance ratings
the employee who might be told that she or he is the “sec- rather than rankings.
ond best” but is not given any information about how to
become the best. 7-3b Specific Rating Methods
A related technique for performance appraisal is One of the most popular and widely used performance-
forced distribution, a method that has been in practice appraisal methods is the graphic rating scale. A graphic rating
for many years.25 The forced-distribution method involves scale simply consists of a statement or question about some
grouping employees into predefined frequencies of perfor- aspect of an individual’s job performance. Following that
mance ratings. Those frequencies are determined by the statement or question is a series of answers; the rater must
organization in advance and are imposed on the rater. For select the one that fits best. For example, one common set
example, an organization could decide, similar to the tradi- of responses to a graphic rating scale is strongly agree, agree,
tional approach at General Electric, that approximately 20 neither agree nor disagree, disagree, and strongly disagree.
percent of the employees are not performing to standard, These descriptors or possible responses are usually arrayed
while 60 percent are meeting expectations and standards, along a bar, line, or similar visual representation, and this
and only 20 percent are truly outstanding. The manager representation is marked with numbers or letters that cor-
can classify his or her employees into any one of these three respond to each of the descriptors.
groups, but the percentages assigned to each group must be Figure 7.4 illustrates a graphic rating scale. A wide array
as specified. of performance dimensions can be efficiently tapped with var-
For example, in Figure 7.3 employees are put into the ious rating scales on the same form. Each of the descriptors
bell curve of a normal distribution and designated as top on the rating form is accompanied by a number or a letter for
performers (10%), middle performers (80%), and low per- responses. Most graphic rating scales have ranges of 1 to 5 or 1
formers (10%). Exactly what percentage should fall under to 7, although occasionally a scale may use only 1 to 3 or perhaps
top, middle, or low brackets are decided by organization even 1 to 9. The rater assigns a score for each dimension rated
based on their policy. Infosys [global technology services and then can sum these to form a measure of overall perfor-
company, headquartered in Bangalore, India] high-poten- mance, or the form might simply add an overall performance
tial pool consists of less than 3% of the total workforce, scale. The specific dimensions measured by graphic rating
whereas at Unilever 15% employees from each management scales should be based on job analysis, but this approach is
level get designated as high-potential category. A typical not typically taken. Instead, to have a single instrument that
bell-curve has been depicted below. can be used with all or most employees in an organization,

FIG 7.3 Forced Distribution

Method

The forced-distribution
method involves grouping
employees into predefined
frequencies of performance
ratings.

A graphic rating scale 10% 20% 40% 20% 10%

consists of a statement
or question about some
aspect of an individual’s job Poor Below Average Good Excellent
performance. Average

186 Human Resource Management

 FIG 7.4 E xamples of Graphic

© Cengage Learning
Rating Scales
Please rate the target subordinate on the following characteristics:
ATTITUDE

1 2 3 4 5
Poor Below Average Above Outstanding
average average

WORKING WITH OTHERS

1 2 3 4 5 6 7
Poor Average Outstanding

MEETING DEADLINES
Needs improvement
Meets expectations
Exceeds Expectations

QUALITY OF WORK

Poor Outstanding

graphic rating scales typically measure performance relative to another. The sample of behaviors developed from one
traits or behaviors such as initiative or problem-solving capa- employee may not be comparable to the sample of behav-
bilities or even attitudes. In addition, a number of problems iors acquired for another.
have been associated with the use of graphic rating scales, but Another method for appraising performance involves
these will be discussed later when we consider various types of the use of a behaviorally anchored rating scale (BARS) . 28
rating errors. BARS appraisal systems (also known sometimes as
A somewhat different type of rating instrument involves behavioral expectation scales) represent a combination of
the use of the critical incident method. A critical incident is the graphic rating scale and the critical incident method.
simply an example or instance of especially good or poor They specify performance dimensions based on behav-
performance on the part of the employee.26 Organizations ioral anchors associated with different levels of perfor-
that rely on this method often require raters to recall such mance. Figure 7.5 presents an example of a BARS devel-
instances on the job and then describe what the employee oped by one of the authors to measure one dimension
did (or did not do) that led to success or failure. Thus, this of teacher performance: interpersonal skills. As shown
technique provides rich information for feedback to the in the figure, the performance dimension has different
employee and defines performance in fairly clear behavioral behavioral examples that specify different levels of per-
terms. In other cases, managers are asked to keep a log or formance along the scale.
diary in which they record examples or critical incidents Developing a BARS is a complicated and often expen-
that they believe reflect good and bad performance on the sive process. Generally, these scales are developed by
part of individual employees.27 the same managers who eventually use them to evaluate
For example, a critical incident illustrating good employees. First, the managers must develop a pool of criti-
performance by a bank teller might read as follows: On cal incidents that represent various effective and ineffective
Tuesday, March 5, you were observed helping another behaviors on the job. These incidents are then classified
teller deal with a difficult transaction. You were also into performance dimen-
observed going out of your way to help an elderly cus- sions, and the dimensions
tomer who couldn’t understand how to complete a deposit that the managers believe The critical incident
slip. An advantage of the critical incident method is that represent a particular level method relies on instances
of especially good or poor
it allows managers to provide individual employees with of performance are used performance on the part of
precise examples of behaviors that are believed to be both as behavioral examples, or the employee.
effective and less effective performance. On the other anchors, to guide the raters
A behaviorally anchored
hand, the critical incident method requires considerable when the scales are used. rating scale (BARS) is
time and effort on the part of managers because they must At each step, an incident is an appraisal system that
maintain a log or diary of these incidents. In addition, the discarded unless the major- represents a combination of
the graphic rating scale and
method may make it difficult to compare one person with ity of managers can agree on the critical incident method.

Chapter 7: Performance Appraisal and Career Management 187

 FIG 7.5 Behaviorally Anchored
Rating Scales
PERFORMANCE DIMENSION 1.
Interpersonal skills: Instructor’s ability to establish rapport with students
in and out of the classroom.

7
Instructor encourages students to ask questions.

6
Instructor comes down to the level of the students.
Instructor maintains an informal relationship with the students.
5

4
Instructor doesn’t draw out students who don’t ask questions.

3
© Cengage Learning

2
Instructor “puts down” students who ask questions.
Instructor lowers students’ self-esteem.
1

where it belongs or what level of performance the incident second difference between a BOS and a BARS is that a
illustrates.29 The manager who then uses the scale has to BOS allows managers to rate the frequency with which the
evaluate an employee’s performance on each dimension individual employee has exhibited each behavior during the
and determine where on the dimension the employee’s per- rating period. The manager then averages these ratings to
formance fits best. The behavioral anchors serve as guides calculate an overall performance rating for the individual.
and benchmarks in helping to make this determination. Although the BOS approach is an improvement over the
A BARS system has the significant advantage of limitations of the BARS approach, it takes even more time
dramatically increasing reliability by providing specific and can be even more expensive to develop.
behavioral examples to reflect effective and less effective Earlier in the chapter, we noted that it might be rea-
behaviors. Because the managers themselves develop the sonable to evaluate an employee based on outcomes. In
scales, they tend to be more committed to using them fact, another popular method of appraising performance
effectively, and the process of developing the scales helps that does focus on outcomes is a goal-based or management-
raters develop clearer ideas about what constitutes good by-objectives (MBO) system.31 Management by objectives is
performance on the job. The process of developing a the most popular term used for this approach, although
truly effective BARS is extremely expensive and time many companies develop their own label to describe the
consuming, and so these scales are rarely used in their pure system used in their organization. In an MBO system, a
form. Instead, some modified BARS procedures are often subordinate meets with his or her manager, and together
adopted in an attempt to reap some of the benefits without they set goals for the subordinate for a coming period of
incurring the costs. time, often one year. These goals are usually quantifiable,
A behavioral observation
A related measure of objective, and almost always written down. During the
scale (BOS) is developed performance is the behavioral year, the manager and the subordinate meet periodically to
from critical incidents like a observation scale (BOS). 30 Like review the subordinate’s performance relative to attaining
BARS but uses substantially
more critical incidents to
a BARS, a BOS is devel- the goals. At the end of the year, a more formal meeting is
define specifically all the oped from critical incidents. scheduled. During that meeting, the actual degree of goal
measures necessary for Rather than using only a attainment is assessed. The degree of goal attainment then
effective performance.
sample of behaviors that becomes the individual’s performance appraisal. If an indi-
A goal-based or reflect effective or ineffective vidual has attained all the goals that she or he set for her- or
management-by- behavior, a BOS uses sub- himself, then employee performance is deemed to be very
objectives (MBO) system is
based largely on the extent
stantially more of the behav- good. On the other hand, if not all goals were accomplished
to which individuals meet iors to define specifically all and the individual is directly responsible for that perfor-
their personal performance the measures necessary for mance deficiency, then her or his performance is judged to
objectives.
effective performance. A be less than adequate or acceptable.
188 Human Resource Management
 of privacy. 32 Although only a limited number of stud-

© Darren Whitt/Shutterstock
ies have investigated the effectiveness of this method, it
seems as though the approach can be effective without
triggering negative reactions on the part of employees—
at least under certain circumstances.33 While we need to
know a great deal more about the effects of computer
monitoring on individuals, the fact remains that this
approach is being used with growing frequency in the
workplace, and it is likely to become even more popular
in the future.34

7-3c Which System Is Best?

Despite the time and effort that have gone into devel-
oping and improving performance-appraisal systems, it
is difficult to find much advantage for any one system
over the others.35 We shall discuss issues of rating errors
later in the chapter, and much research has focused on
the susceptibility of different types of rating instruments
to different types of errors. But this research has been
inconclusive, and it is somewhat misguided. As noted
at the beginning of this chapter, the ultimate reason for
conducting performance appraisal is to improve perfor-
mance. Therefore, it is difficult to suggest which system is
best because it is difficult to predict how a set of employ-
Goal-based systems are often seen as the best alter- ees will react to a given system. The HR manager must
native available for rating performance, but care must be take what is known about each type of system and decide
taken when these systems are used. Specifically, the kinds how well the system fits into the culture and operations
of behaviors specified in the goal-setting process are exactly of the organization.
what the employee will tend to focus on, so it is critical that
the organization really wants to encourage these particular 7-3d Balanced Scorecard
behaviors. For example, a customer service representative (BSC) Framework
may have goals stated in terms of how many customers are
served in a day. But, in order to maximize the number of In 1992 Robert S. Kaplan and David P. Norton36 popu-
customers served, the representative may need to be curt larized the concept of balanced scorecard. Balanced score-
or even rude to some customers who are taking “too much” card tries to look at organizational performance holistically
time. This may result in lower levels of customer satisfac- from four important perspectives—financial, customer,
tion which, in the long run, could be devastating. The only internal business processes, and learning and growth. Each
real solution to this type of dilemma is to emphasize the organization keeping in mind its vision and strategy should
need to be careful in setting goals to make sure that such a ideally monitor and report how they have progressed in
situation never arises. these four areas. The idea behind balanced scorecard is
One relatively new innovation in performance- that in order to succeed organization cannot just only think
appraisal methods is the use of computer monitoring. in one dimension (e.g., financial parameters), rather they
Employees can now be monitored electronically to see should think about growth and development in the other
how they spend their time and how productive they three areas also. The framework of the balanced scorecard
are. These systems are now used widely with customer- is shown in Figure 7.6.
service representatives and reservations clerks. In fact, Different departments have to sit together (on a yearly
you may have heard a telephone recording (after you basis) to determine objective, measure, target, and initia-
pressed the right numbers to get the service you wanted) tives to be taken.
stating, “This call may be monitored for quality pur- Objective A statement of what exactly the organization
poses.” This recording is an indication that electronic is striving to achieve (e.g., Improvement of safety measures
monitoring is taking place. For example, it is possible in the shop floor/Enhancement of quality standards at
to track how many calls an employee receives, how long shop floor)
each call takes, and (with minimal input) the outcome of
those calls. It is also possible to track when an employee Measure How strategic objective will be measured (e.g.,
is not at his or her phone station, which has caused Number of accidents in the shop floor/Number of product
some people to raise serious questions about invasions rejection)

Chapter 7: Performance Appraisal and Career Management 189

FIG 7.6 Balanced
Scorecard
Financial Impact

To succeed Obj. Measure Targets Initiative

financially,
how should
we appear
to our
shareholders?

Customer Internal Business Process

To achieve Obj. Measure Targets Initiative To satisfy our Obj. Measure Targets Initiative
our vision, shareholders
how and
should we Vision & customers,
appear to Strategy what business
our processes
customers? must we
excel at?

Learning & Growth

To achieve Obj. Measure Targets Initiative

our vision,
how will we
sustain our
ability to
change and
improve?

Target Expected performance level (e.g., 5% improve- (KRA)/key performance indicators (KPIs) can be derived
ment in productivity) from balanced scorecard.

Initiative What all programs or projects are required to

support the strategic objective? 7-4 OTHER ISSUES IN
Example of financial measures will include return on PERFORMANCE APPRAISAL
investment (ROI), return on capital employed (ROCE), We noted earlier that all the participants in the appraisal
profitability, revenue growth, etc. Customer satisfaction process tend to be dissatisfied with the process. Several
index (CSI), market share, customer retention, etc., are the issues that arise when we try to appraise performance con-
examples of customer measurement indicators. Similarly, tribute to this dissatisfaction, and we will discuss some of
under learning and growth, organizations can have indica- these problems below, as well as one additional issue that
tors such as employee satisfaction index (ESI), employee deals more with exactly what should be appraised.
retention, employee productivity, etc. Processes would
vary from organization to organization. Cycle time for a 7-4a Rating Errors
specific function, number of breakdowns, etc. are examples Several rating errors have been identified that can affect
of process related indicators. Individual’s key result areas performance appraisals. Although it is not always clear that

190 Human Resource Management

these are really “errors,” they are nonetheless important to really errors, the presence of these response tenden-
consider as part of our discussion of performance appraisal. cies can make it difficult to differentiate between dif-
One such error is known as contrast error; it occurs when ferent employees or to accurately identify the strengths
we compare people against one another instead of against and weaknesses of a given employee. Furthermore,
an objective standard. For example, suppose a particular employees (ratees) might be less likely to perceive a set
employee is a good performer but not an outstanding one. of lenient ratings as accurately reflecting their perfor-
If that individual happens to work in a group of people in mance and so may not be willing to work to improve
which everyone else is a relatively weak performer, then the their performance.
“average” individual may appear to be a better performer As a result, organizations often do work to reduce rat-
than he or she really is. Likewise, if the same person works ing error. One method for error reduction is to train man-
in a group of exceptionally strong performers, the person agers to overcome these weaknesses, even when that means
may be seen as a poorer performer than might otherwise nothing more than pointing out to managers their ten-
be the case. dency to commit distributional errors or contrast errors.
One of the major criticisms that had been leveled Rater accuracy training is usually more involved than that,
against graphic rating scales is that they were especially however. Specifically, an approach known as “frame of ref-
prone to a series of distributional errors. A distributional erence training” attempts to emphasize for managers the
error occurs when the rater tends to use only one part of fact that performance is multidimensional in nature and
the rating scale. to train those managers with the actual content of vari-
1.  Sometimes the distributional error may be severity, ous performance dimensions.39 As noted earlier, however,
which occurs when the manager gives low ratings to all regardless of training or ability, there are cases where a rater
employees by holding them to an unreasonably high simply chooses to be inaccurate. It is critical, therefore, that
standard. organizations do whatever they can to reward raters for
2. The opposite error is leniency, which occurs when a doing a good job in performance appraisal by reinforcing
manager assigns relatively high or lenient ratings to all the fact that these appraisals are important. Perhaps the
employees.37 most important and useful thing an organization can do
3. A central tendency distributional error occurs when the to improve the quality of performance appraisals is simply
manager tends to rate all employees as average, using to demonstrate to raters how and why it in their own best
only the middle part of a rating scale. interests to do the best job they can in appraising employee
performance.40
A different type of error that may occur is what is known
as either halos or horns. A halo error occurs when one posi- 7-4b Contextual Performance
tive performance characteristic causes the manager to rate all Formal performance-appraisal systems assess performance
other aspects of performance positively. For example, sup- on aspects of one’s job.
pose a given employee always comes to work early and is Recently, however, inter-
always full of energy and enthusiasm at the beginning of the est has focused on what
workday. The manager may so appreciate this behavior has been termed contextual Contrast error occurs when
that he or she gives the employee a high performance rat- performance, which brings a
we compare people against
ing on all other aspects of performance, even when those one another instead of
different dimension to the against an objective standard.
other aspects may be only average or merely adequate.38 question of what should A distributional error
The opposite of a halo error is a horns error. In this be appraised.41 Contextual occurs when the rater tends
instance, the manager tends to downgrade other aspects performance refers to tasks to use only one part of the
of an employee’s performance because of a single perfor- an employee does on the
rating scale.
mance dimension. For example, the manager may feel that job that are not required as A halo error occurs when
a given employee does not dress appropriately and views one positive performance
part of the job but that nev- characteristic causes the
that characteristic negatively. As a result, the manager may ertheless benefit the orga- manager to rate all other
also give the individual low performance ratings on other nization in some way (we aspects of performance
performance dimensions when higher ratings are justified. positively.
introduced this topic in the
Except for contrast errors, however, it is not always previous chapter). These
A horns error occurs when
clear that these other “errors” are really errors. Using the manager downgrades
behaviors might include other aspects of an
the term error implies that there is a correct rating and willingly staying late at employee’s performance
that the observed rating in some cases is incorrect. But work to meet deadlines,
because of a single
when we discuss leniency error as indicating that ratings performance dimension.
helping co-workers get
are “too high,” we imply that we know how high the rat- Contextual performance
their work done, and per- refers to tasks an employee
ings really should be—but we don’t. Therefore, what we forming any other task that does on the job that are
observe might be leniency or it might simply mean that benefits the general good not required as part of the
the employee is really good. Whether or not these are of the organization. These
job but that still benefit the
organization in some way.

Chapter 7: Performance Appraisal and Career Management 191

behaviors are also often referred to as orga- production, fewer
nizational citizenship behaviors.42 Because returns in sales,
these behaviors are never stated improved perfor-
as formal requirements of mance apprais-
the job, the employee is never als, or lower levels
formally told that he or she of absenteeism or
is expected to do these tasks. turnover. In the long
They might be told informally, run, however, these out-
however, that such behaviors comes are not critical to the organization unless
are valued by the organization they translate into some improvement in overall firm
in general or the manager in performance. If performance-appraisal and performance-
particular. In any event, they do benefit the organization, management systems are doing what they were designed
and raters do consider them when conducting employee to do, the organization as a whole should perform better.
evaluations.43
How important are contextual performance behaviors
in determining the overall ratings an employee receives? A
recent study indicates that, although they are important, 7-5 PERFORMANCE
they are not as important as task behaviors (or even as MANAGEMENT AND FEEDBACK
important as counterproductive behaviors), but they do
There are also a series of programs and interventions that

© gualtiero boffi/Shutterstock
matter.44 The next question is, how important are these
behaviors for organizational effectiveness? Clearly, the orga- are referred to as performance-management techniques that
nization benefits if someone engages in these behaviors, so are somewhat more specific than the programs we have
they represent part of an employee’s overall contribution to discussed thus far. We discuss two of these—behavior
the organization. On the other hand, they are not required modification and goal setting—and we will also discuss
of anyone. As a result, some, especially union members, some issues associated with feedback, which is a key
argue that it is inherently unfair to evaluate someone on component of many of these performance-management
something that is not part of his or her job. Perhaps that interventions.
assertion is true, but it seems that, consciously or not, raters
do take these behaviors into account in making appraisal
7-5a Performance-Management
decisions. Techniques
The basic notion underlying this theory is that all behav-
ior is a function of its consequences—whether actual or
7-4c Evaluating the Performance- anticipated—and so we can shape behavior by arranging for
Appraisal Process the “right” set of consequences. We also noted that positive
At the beginning of this chapter, we noted the strategic reinforcement was designed to reward desirable behaviors
importance of the performance-appraisal system. Clearly, that we wanted to see repeated, whereas punishment and
the organization must monitor the extent to which it is extinction were techniques to discourage behaviors that
conducting its performance appraisals effectively, ade- were less desirable. Behavior modification, as discussed in
quately, and appropriately. As with selection, performance the preceding chapter, is the systematic and simultaneous
appraisal must be free from bias and discrimination. application of positive reinforcement and either punish-
Beyond these stipulations, however, the performance- ment or extinction (or both). The basic notion is that it
appraisal system must also help the organization identify is not enough to eliminate undesirable behaviors unless
its strongest performers so that they can be appropriately we can also provide the person with a new set of desirable
rewarded and efforts can be made to retain them. It should behaviors.
also identify low performers so that their performance For example, perhaps an organization is concerned
deficiencies can be remedied through training or other that employees are spending too much time browsing
measures. Periodic audits of the performance-appraisal the Internet or checking out friends’ Facebook pages.
system by trained professionals can be an effective method Productivity is suffering because employees are talk-
for assessing the effectiveness and appropriateness of the ing and socializing rather than working. The company
performance-appraisal process used by the organization. could begin by taking out the coffee machine (removing
Because performance appraisal feeds into the an incentive for congregating) and perhaps even install a
performance-management process, and because the ulti- loud piece of equipment in the space to make it uncom-
mate goal of this process is to improve performance on fortable for employees to remain there for long. At the
the job, managers should be able to see real improvements same time, the firm could provide free coffee, delivered to
in organizational performance if the process is working. workstations on a cart, but only to people actually work-
This improvement may take the form of fewer errors in ing. The idea here would be to discourage congregating

192 Human Resource Management

 and socializing and to encourage people to remain at their service reps are not what anyone thinks of when they think
workstations. of “excellent” customer service. Thus, in the long run,
One key to any successful behavior-modification plan perceptions of customer service would likely decline even
is to make sure that the employee can see strong links though the individual representative is meeting his goals
between his or her behavior and the consequences that on a daily basis.
can follow. The other, more critical component, however, Many other examples of goal setting reflect this same
is to make absolutely sure that desir- type of problem. Think about the telephone repair person
able behaviors are never punished and whose goal is to fix fifty phones a day (think about what
that undesirable behaviors are never happens if there are only forty-five broken phones), or the
rewarded. Too often, supervisors teacher whose goal is to have the highest percentage of stu-
reward the wrong behaviors and punish dents passing an exam (and therefore has no incentive to
the behaviors they should be reward- fail even the weakest student).
ing. One of the authors of this text The key here is that any goal chosen as part of
recently had to put together a a performance-management system must
faculty committee for a task that be aligned with
no one really wanted carried the higher-level,
out. When he suggested a strategic goals of
certain faculty mem- the organization.
ber, he was told that Ideally, one can
it was unwise to assign think about these
that faculty member to goals as “cascading
any committees because down” so that at
the person did not usually show up for meetings. Instead, each level in the organization the performance goals that
it was suggested, he should assign a different faculty mem- are set will influence the goals at the next lower level. In
ber who always showed up for meetings. This apparently terms of goal accomplishment, we can think about the
had been a long-standing practice and yet no one could goals cascading upward so that goals met at one level
understand why it was so difficult to get the first faculty help the next level to meet its goals and so on up to the
member to perform any service activities. The author, of strategic level.
course, assigned the first faculty member to the committee Performance feedback plays an important role in both
© David Guildeer/Shutterstock

and actually released the second faculty member from one behavior modification and goal setting, and it is also seen
or two committee assignments. as useful tool in its own right for performance manage-
We also discussed goal theory in the previous chapter ment. But many managers do a poor job in this area, in part
and indicated that this theory was very useful for manag- because they do not understand how to provide feedback
ing performance as well as simply motivating it. Recall that properly and in part because they do not enjoy it. Almost
goal theory suggests that employees will exert the great- by definition, performance appraisal in many organizations
est effort when they have specific, difficult goals to work tends to focus on negatives; as a result, managers may have
toward. Thus, from a performance-management perspec- a tendency to avoid giving feedback because they know an
tive, managers should provide employees with difficult, employee who hears negative feedback may be angry, hurt,
specific goals, and then reward them when those goals are discouraged, or argumentative. But clearly, if employees are
achieved. The earlier discussion also included consider- not told about their shortcomings, they have no reason to
ation of some issues in choosing the “right” goal, but, for try to improve and have no guidance concerning how to
the current discussion, it is extremely important that all improve. Therefore, it is critical that a rater provide feed-
parties can agree on what is the “right” goal. back, so he or she must understand how it might be done
Quite often, when employees (and managers) are better.
asked to think about goals, they tend to focus on things One method of improving performance feedback is to
that can be readily counted. That is not necessarily bad, provide feedback on a regular basis via feedback interviews.
because such goals are often concrete and specific, but they Instead of providing feedback annually, in tandem with the
can simply be wrong. For example, a customer service rep- annual performance-appraisal interview, it might be more
resentative for an airline might be told by his supervisor appropriate for managers to provide feedback on an ongo-
that he should set a goal of helping fifty customers a day, ing basis. Feedback might be provided on a daily or weekly
which is concrete, specific, and presumably difficult. But, basis, depending on the nature of the job, and it should
if in order to help so many customers, the service rep cuts focus on various characteristics of performance, includ-
off customers in the midst of their complaints, or simply ing both effective and ineffective performance.45 In fact, if
sends them to someone else who really cannot solve the managers remember that the goal of performance manage-
customers’ problems, this will have long-term implications. ment is changing employee behavior, then they should also
Customers will be dissatisfied—rude or abrupt customer recognize that they clearly are more likely to effect change

Chapter 7: Performance Appraisal and Career Management 193

 should be balanced against praise and
recognition of the positive aspects of the
employee’s performance.
Also, throughout the interview and
the performance-management process, it
is essential that the manager take a devel-
opmental and problem-solving orienta-
tion to the process. In other words, it is
important not to focus on the individual
as a person by saying things such as “You
are a bad employee.” Instead, the focus
should be on providing developmental
feedback targeted at behavior, not on
the individual him- or herself. A simple

© TetraImages/Alamy
distinction between saying things like
“You are a poor performer” versus “Your
performance is not acceptable” can help
keep the focus on behavior and not on
the individual.
with more frequent feedback, and this approach is consis- The performance-appraisal inter-
tent with both behavior modification and goal setting. view should conclude with a future-oriented discussion
Another useful method for improving performance of what will happen next. This discussion often includes
feedback is to have the individual appraise his or her own topics such as setting goals for correcting performance
performance in advance of an appraisal interview. This deficiencies and discussing the possibility of pay raises,
method involves having employees think about their own promotion prospects, and similar kinds of awards. Of
performance over the rating period, which helps sensitize course, if performance is judged to be deficient, the feed-
them to areas where they have done good and ineffec- back interview may focus on topics such as the establish-
tive jobs. This method also lends efficiency to the process ment of a probationary period (after which employment
because the manager and the subordinate may be able may be terminated), the development of a training strategy
to focus most of their time and effort in a performance- for improving performance, and so forth. Regardless of the
appraisal interview on those areas of performance assess- level of current performance, this interview setting should
ment where they disagree. That is, if the manager and the provide a time when the rater and the employee discuss
subordinate both agree that certain elements of the subor- future performance goals for the employee. If the organiza-
dinate’s performance are very good and that certain other tion uses a goal-based appraisal system, this discussion may
elements need improvement, it may be possible to spend be automatic. Even if a different type of appraisal model is
little time discussing those elements and to focus more used, it is helpful for the employee to have clear and specific
energy on the performance areas that are in disagreement. goals for improving future performance. These goals, along
It is also important during a performance feedback with continued and regular feedback, should constitute the
interview to encourage participation and two-way com- critical part of any performance-management program.
munication. Some managers are prone to lecture a sub- Even with these recommendations, however, feed-
ordinate on the outcome of the performance-appraisal back is not always as effective as
interview. The basic nature of the meeting, then, involves we would like to believe. Many
the manager telling the subordinate how he or she has been of today’s recommendations
evaluated and then concluding the interview. As a result, and practices are based on
the subordinate may feel threatened and that she or he had the assumption that, if done
no voice in the process. Participation and two-way dia- properly, they will provide
logue, however, allow the individual to express her or his employees with feedback
own feelings and opinions about job performance and to about their job performance.
provide other kinds of feedback as appropriate.46 Several years ago, however, a
© Ratjachai Namman/Shutterstock

It is also important for the manager to try to balance study reviewed the research on the
positive and negative feedback. As already noted, many effectiveness of feedback interventions,
managers tend to focus on the negative. In reality, however, beginning with early studies from the
employees are likely to have many positive characteristics nineteenth century.47 This study found
related to performance as well. Thus, even though the man- that, although feedback was effective in
ager must clearly address the negative performance char- almost two-thirds of the cases, it was
acteristics noted in the appraisal, these negative attributes not effective in the rest. In fact, in a

194 Human Resource Management

 large number of cases, provid- The productivity measurement and evaluation system
ing feedback to employees (ProMES) incorporates ideas from goal setting to feedback,
actually lowered subsequent and it includes incentives for improvement.48 More impor-
performance. This result tant, it includes a method for tying performance at the
was independent of the individual and group levels to organizational productivity.
nature of the feedback (i.e., Specifically, team members work with outside experts to
whether it was positive or literally map the relationship between a given outcome and
negative), which suggests that productivity. For example, assume that a group is focusing
any feedback can, under certain on reducing turnover. In most cases, reducing turnover will
conditions, have a negative effect lower costs and boost productivity. In most cases, too, the
on subsequent performance. incremental value of reducing turnover will be greatest when
The study found that feedback turnover is high; similarly, when turnover is low, further
was more likely to have a negative effect reductions will likely have a smaller impact. This pattern of
when the employee was new to a job, diminishing returns is shown in the sample ProMES curve
the job was extremely complex, ways in Figure 7.7.
to improve performance were not discussed, or goals for the In this hypothetical example, the curve shows that the
future were not considered. The study also reported that group has a current annual turnover rate of 20 percent and
feedback must focus the employee’s attention on the task that there is a known baseline level of units currently being
at hand. When feedback is provided so that the employee produced (it does not matter what this baseline is, only
can take it personally, the feedback is much more likely to that it is known). The team has also calculated that if turn-
interfere with rather than enhance subsequent performance. over can be reduced from 20 percent to 15 percent, then
Thus, the recommendations above will help ensure that feed- the number of units produced will increase by 20 percent.
back has the desired effect. An additional reduction in turnover from 15 percent to
10 percent will achieve another 10-percent increase in
7-5b ProMES units produced (a 30-percent increase in total). However,
Some of the techniques and interventions we have another 5-percent turnover reduction from 10 percent to
described are best suited for enhancing individual perfor- 5 percent increases the number of units produced by only
mance (which hopefully will result in ultimate improve- an additional 3 percent (33 percent total). Further reduc-
ments in firm performance), and others could be used tions in turnover from 5 percent to 3 percent and 1 percent
with groups as well. Furthermore, we have been discussing yields a unit increase of only 1 percent each.
these techniques relative to how they can improve some Now, understand that reducing turnover is likely to
type of performance, but it is also possible to establish sys- have costs associated with it such as paying higher wages,
tems that can reduce turnover or absenteeism. These out- paying bonuses for longevity, and so forth. The initial
comes might also well be related to firm performance, but costs of reducing turnover from 20 percent to 15 percent
it is critical that such a link be established. In fact, if any will almost certainly be outweighed by the increased unit
performance-enhancement technique is doing what it was production of 20 percent. The additional costs for reduc-
designed to do, the organization as a whole should perform ing turnover from 15 percent to 10 percent for an addi-
better. One such technique allows for the consideration of tional 10-percent increase in production may or may not
a wide range of outcomes and is concerned directly with be a cost-effective decision. But almost certainly the cost
team or organizational performance. for reducing turnover from, say, 5 percent to 1 percent for

FIG 7.7  Sample ProMES

A
Curve
+40%
The productivity
measurement and
+30% evaluation system
Units produced

(ProMES) is a program
developed to improve group-
© Cengage Learning

+20% or firm-level productivity.

This approach incorporates
ideas from goal setting, with
+10% incentives for improvement,
and is based on a model
of motivation similar to
Baseline expectancy theory.
20% 15% 10% 5% 3% 1%
Turnover rate

Chapter 7: Performance Appraisal and Career Management 195

only a 2-percent increase in unit production will end up the firm level. As a result, a performance management or
costing more money than is gained. Of course, the point enhancement intervention designed to make the server
along the diminishing returns curve where costs begin to more efficient or more pleasant might have no effect on
outweigh benefits must be calculated for each individual firm performance. There is no simple answer to the ques-
work setting. tion of how to translate individual-level performance to
The other important part of the ProMES process organizational-level performance, but the key seems to
involves the various “connections” among the compo- be adopting a systems approach: The firm can focus on
nents. The procedure is based on a model of motivation49 individual-level performance but in a systematic way that
that is similar to the expectancy model discussed in the recognizes the interrelationships among individuals and
previous chapter. Thus, these connections are concerned the need to coordinate across individuals.51
with the relationship between effort and performance It is critical that these performance-enhancement inter-
and between performance and attaining outcomes, as ventions ultimately improve firm-level performance. This is
well as the link between obtaining outcomes and satisfy- the level that determines the long-term survival of the firm,
ing needs. The model and the technique are also based generates profits for potential profit sharing, and determines
on the assumption that individuals and group have a the company’s stock price. As you read through the rest of
pool of resources (and effort) that they can assign to dif- this chapter, keep this in mind: Regardless of the level of per-
ferent activities, and the technique is designed to help formance targeted by a specific intervention, these interven-
them understand which activities they should focus on to tions are effective only as long as they also improve organi-
increase firm productivity. The system has been widely zational performance. With this as background, we can now
adopted (especially in Europe)50 and has been quite suc- review several techniques that have been shown to improve
cessful, and it is one of the few performance-enhance- performance at some level within the organization.
ment techniques that focuses on performance above the
level of the individual. 7-6a Training and Development
Training and development activities within an organiza-
tion are a very basic form of performance-enhancement
7-6 ENHANCING PERFORMANCE intervention. These topics were discussed in their own
right in Chapter 5, and the relevant terms were defined
AT DIFFERENT LEVELS there, but it is worth briefly revisiting the topic in the con-
Performance in any organization exists at multiple levels. text of performance enhancement. As we noted in that
The most basic level of performance is that of the indi- earlier chapter, the training process begins with some type
vidual employee, and this is the level that most people find of needs assessment. The outcome of this assessment pro-
easiest to conceptualize. In fact, we discussed primarily vides information about gaps between present and desired
measures and models of individual-level performance; that levels of performance and therefore provides a roadmap of
is, most appraisal techniques are concerned with determin- what needs to change in order to improve performance.
ing how many products a person assembles or how many For example, suppose an online retailer has a group of
units individual contributors sell. We can usually aggregate shipping clerks who are currently taking an average of 2 days
this up to the group or department level by simply combin- to ship a new order. To remain competitive, though, the
ing sales or productivity data for individuals, but when we company has decided it must reduce its shipping time to an
move up to the organizational level, things become more average of 1 day. A needs assessment would be conducted to
complicated. Of course, we can still talk about how many determine what is needed in the way of additional training
products are produced by the firm, or what a company’s (and perhaps other things as well) in order to get the clerks
total sales are for a quarter, but this is often not very mean- to meet this new goal. Perhaps a subsequent training pro-
ingful data. gram might deal with efficiency, or it could involve training
For example, a server in a restaurant may serve many shipping clerks to use new technology. Assuming that the
tables and generate great business for the restaurant, and shipping clerks are capable of working more efficiently and
be very pleasant and earn a lot of tips, but the average bill using new technology, this should improve shipping times,
at the tables she or he serves may not be very high. As a move the company towards its new goal, and improve its
result, that server is doing well but not generating much competitive position.
profit for the restaurant. In It is possible to adapt training models to individuals,
fact, it makes little sense to or groups and teams. It is even possible to adapt training
Firm-level performance
is an indication of a firm’s talk about profitability at methods to ensure that all team members share mental
chances of long-term the level of the individual models of how the team should perform, which is essential
survival. Performance at this because profits depend for effective teamwork. Training and development activi-
level generates profits for
potential profit sharing and largely upon costs, which ties are a very flexible, and often easy, way to begin the per-
determines the company’s can only be computed at formance improvement process.
stock price.

196 Human Resource Management

 7-7b A Typology of Career Systems
7-7 THE NATURE OF CAREERS Sonnenfield and Peiperi53 have proposed a typology of
Most people have a general idea of the meaning of career. career systems. On the vertical axis, there is supply flow
For instance, they generally agree that careers have some- dimension and on the horizontal axis, there is assignment
thing to do with the work a person does in an organiza- flow. Supply flow dimension captures the openness of the
tion, but they also recognize that a career is a broader career system toward external labor market. For the entry
and more general concept than a single job or task in an level position, almost all organizations will have to depend
organization. on external labor market. In the model the primary focus of
supply flow is not so much at the entry level, rather on what
happens at the mid-level or senior level. These two levels
7-7a The Meaning of Career will determine the openness of the career system toward
We define a career as the set of experiences and activities in external labor market. On the horizontal axis, assignment
which a person engages related to his or her job and live- flow captures the criteria through which assignments and
lihood over the course of a working life. This definition, promotion decisions are taken. Essentially, assignment
then, suggests that a career includes the various specific flow measures whether organization values individual con-
jobs that a person performs, the kinds of responsibilities tribution or group contribution while recognizing or pro-
and activities that make up those jobs, movements and moting employees.
transitions between jobs, and an individual’s overall assess- Based on these two axis, four career models have been
ment of and feelings of satisfaction with these various com- identified. The authors have given details of what will
ponents of her or his career. happen to the career system of the employees in terms of
Most people have historically thought of the various employees’ entry, development, and exit from the organi-
components making up a person’s career as having some zation. Adapted version of the Sonnenfield and Peiperi’s
degree of interrelation. This perspective stems from the model has been depicted in Figure 7.8.
fact that, in the past at least, people generally wanted to
work for a single organization and spent most of their Academy Academy type of organizations nurtures per-
work life within that single organization. Presumably, if sonal growth and development. Generally, these organi-
they performed effectively and were successful at their zations do very well in their core competency domain.
work, they advanced up the organizational hierarchy. Even Employees have highly specialized firm-specific knowledge.
when people changed jobs, they tended to work for other The organizations recognize skills and might ensure fast
organizations in the same industry. For example, Steve track promotions for key contributors. For management
Jobs founded Apple in 1976. He left the company in 1985 and technical professionals, two separate career growth
and started another computer business, NeXT. He also path might be created by these types of organizations.
bought a computer-animation business from George Lucas Organizations operating in pharmaceuticals, automobiles,
and turned it into Pixar. Jobs eventually rejoined Apple in and consumer products are typical examples of academy
1997 and led the company until his death in 2011. type organizations.
In recent times, however, conceptualizations of careers
have become considerably more general. Because of orga- Club Club is such type of organization where it is buff-
nizational downsizing efforts and innovations in strategies ered from the rest of the world (e.g., military, government,
such as outsourcing and shared services, considerably more etc.). Schooling, previous employment, prestige, and status
change has occurred in the work patterns of individuals determine employees’ worth in these organizations. Many
than in the past.52 For instance, people are likely to leave times club type organizations will be involved in greater
an organization in one industry and go to work for an good for the society and requires utmost commitment
organization in a totally different industry, and they may from the employees.
also spend time between jobs and organizations consult-
ing or working in otherwise independent contractor-type Baseball team Like a typical baseball team, each indi-
positions. vidual’s contribution will determine market success of the
More and more frequently, people are taking breaks organization. Employees’ individual contribution matters
from their work. These breaks include sabbaticals, discre- most and star performers gain celebrity status in these orga-
tionary periods of unemployment, and similar activities that nizations. Organizations
may make a positive contribution to a person’s overall work operating in advertising
life but do not involve formal employment by an organiza- agencies, semiconductor A career is the set of
tion. People who return to school to enhance their educa- industries are typical exam- experiences and activities that
ples of baseball team type. people engage in related to
tion now more than ever before are likely to consider that their job and livelihood over
period of their lives as part of their career. the course of their working
life.

Chapter 7: Performance Appraisal and Career Management 197

 FIG 7.8  Models of Career
System

FORTRESS - Retrenchment BASEBALL TEAM - Recruitment

Entry
Entry
– Primary human resource practice
– Passive recruitment
– Emphasis on credentials, expertise
– Employees are drawn to
industry by their own – Recruit at all career stages
External interests/backgrounds Development
– Selective turnaround – On-the-job
Development – Little formal training
– Effort to retain core talent – Little succession planning
Exit Exit
– Layoffs frequent – Hugh turnover
– Respects seniority
SUPPLY
FLOW
CLUB - Retention ACADEMY - Development

Entry Entry

– Early career – Strictly early career

– Emphasis on reliability – Ability to grow

Development Development
Internal – As generalists – Primary human resources practice

– Slow paths – Training for specific jobs

– Emphasis on commitment – Tracking and sponsorship of

high potential employees
Exit
– Elaborate career paths/ladders
– Low turnover
Exit
– retirement
– Low turnover
– Dismissal for poor performance

Group Contribution ASSIGNMENT Individual Contribution

FLOW

Fortress Fortress are organizations which are not 7-7c Traditional Career Stages
doing good business and almost at the verge of taking One traditional view, shown in Figure 7.9, suggests that
turnover strategies. Why do employees still join in these a typical individual progresses through four career stages:
organizations? One of the reasons for getting attracted
toward this struggling organization is that this type of 1. The first stage is called exploration. During this period
organization gives tremendous learning opportunity to in people’s lives, they try to identify the kind of work
try out experimentations. If somehow the organization they are interested in doing. This period of a typi-
survives, then those professionally attached themselves cal person’s career starts in the mid- to late teens and
for its revival can create a niche image for them. Other lasts through the mid- to late twenties. It generally
obvious reason for joining such organization would be encompasses the time when he tries to assess his own
lack of alternatives. Some employees still will like to interests, values, preferences, and career opportuni-
retain their memberships in fortress type organizations ties and to relate them to what he thinks represents a
because they fail to recognize that the organization is feasible career option. His coursework in school and
sinking and have hope his first jobs play an important role in the exploration
of its revival. In order to stage of career development. For example, it is not
Exploration is the sustain themselves, fortress uncommon for someone who anticipates majoring in
first traditional career a certain field of study to change his major once he
stage and involves
type organizations take
identifying interests and massive restructuring and begins taking courses in that area. Sometimes people
opportunities. retrenchment moves. take their first jobs in particular fields only to discover
they are not what they expected and so begin to look

198 Human Resource Management

 FIG 7.9 Exploration
The Traditional Model of
Career Stages
Establishment Maintenance Decline
High

Growth?

Performance
Advancement

Decline
Stagnation?
Trial

Low 0 10 20 30 40 50 60 70
Age
Source: Adapted from Careers in Organizations, by Douglas T. Hall. Copyright © 1976 by Scott, Foresman, and Co. Reprinted by
permission of Douglas T. Hall and Lyman Porter.

for alternative options. Of course, sometimes people 4. Finally, the fourth stage of a typical career is the
are perfectly happy with the outcome of the explo- disengagement stage. During this period, the indi-
ration stage. They find that the coursework of their vidual gradually begins to pull away from her work
field is indeed of interest to them and their first job in the organization, her priorities change, and work
assignments are exciting, challenging, and just what may become less important to her. Consequently,
they expected them to be. she begins thinking more and more about leaving the
2. The second stage of a typical career is called the estab- organization and finding other sources for fulfilling
lishment stage. During this period, an individual begins her personal needs and goals. Some employees may
to create a meaningful and relevant role for herself and evolve toward part-time work status, some retire from
the organization. She may, for example, become a the organization, and some simply cut back on their
valuable member of a work team, achieve success and activities and responsibilities.
recognition by her superior, and be acknowledged by
the organization as someone whom the company val-
ues and wants to retain. There is considerable range 7-7d New Views of Career Stages
in terms of age and time in this stage, but it gener- Of course, in the contemporary era of downsizing and
ally encompasses an individual’s late twenties through layoffs, sometimes people go through these four stages of
mid- to late thirties. career development in a relatively short period of time.
3. The maintenance stage is the next stage in a typical People may find themselves disengaging from the organiza-
career. During this period, the individual begins to tion at a relatively young age, and they may also anticipate
reach a level in the organization that optimizes his tal- beginning the entire process again by seeking new oppor-
ents or capabilities. Not everyone can become a chief tunities, new challenges, and new interests.55 Many experts
executive officer, however, and only a small percent- agree that even though the
age of the total workforce in any organization attains traditional model of careers
the rank of top executive. For many employees, then, summarized above still has The establishment stage
this stage marks a midcareer plateau. Many successful conceptual value, new per- of the traditional career
model involves creating a
managers, especially in larger companies, may never spectives on careers are better meaningful and relevant role
progress beyond the rank of middle manager and so reflections of today’s realities. in the organization.
end their careers on this plateau, but they nevertheless Some experts, for instance,
The maintenance stage
enjoy careers considered to be highly productive and argue that we should think involves optimizing talents or
worthwhile. Individuals in the maintenance stage of about career ages (how long capabilities.
their career must often devote extra effort to learn- someone has been on a job)
The fourth traditional career
ing new job skills and remaining current in their pro- rather than career stages stage, disengagement,
fessional skills and abilities. They are also frequently or even chronological age.56 involves the individual
called on to fill mentoring roles in which they help Furthermore, they suggest gradually beginning to
pull away from work in
newcomers to the organization get their feet on the that we must directly incor- the organization. Priorities
ground and launch their own careers.54 porate the premise of multiple change, and work may
become less important.

Chapter 7: Performance Appraisal and Career Management 199

 career when these issues become more salient and the
individual must deal with the potential trade-off
between working hard to build and advance a
career and establishing lasting relationships
with others, including building a strong fam-
ily life. Also, at this stage, decisions are more
frequent regarding whether or not the per-
son should remain with a given firm or move
to a different organization. The decision as
to how best to advance one’s career in terms
of moving is, of course, also tied to the grow-
ing importance of balancing work and family.
By the time a person reaches some sort of
midcareer point, there are often questions
about the worth of continuing to work on
one’s career, and new questions about self-
identity emerge (sometimes leading to a so-
called midlife crisis).58
© James Steidl/Shutterstock

7-7e Issues Facing Older Workers

and the Decision to Retire
As workers continue to age, they have new career issues
to deal with, and some of them relate to potential age
discrimination. In the U.S., persons age forty and older are
protected by the Age Discrimination in Employment Act,
careers into any modern view of careers. At the beginning but the fact remains that many people assume that abilities
of each new career, though, the employee begins a pro- and job performance decline with age. In fact, the evidence
cess of exploration, trial, and establishment, followed by regarding such declines is rather mixed and generally weak.
another period of exploration. This second level of explo- For example, although there is evidence of declines in abili-
ration in turn is likely to take the person away from the ties such as motor coordination and dexterity, these effects
current career and into a new one where the process begins can be explained by differences in education and job type,
again. and there is no evidence of age-related declines in intel-
This perspective also suggests that employees face dif- ligence, verbal ability, or numerical ability.59 Perhaps more
ferent types of challenges at each step.57 At the beginning critically, there is almost no relationship between age and
of one’s career there are issues about making the transition job performance—in fact, some studies have found a curvi-
from a student to an employee. This involves questions linear relationship between age and performance with per-
about one’s self-identity, and these questions also influence formance highest when workers are youngest and older.60
decisions about exactly what career someone plans to enter. In any event, eventually older workers must con-
Individuals may choose to enter certain careers because they front the decision to retire. In truth, however, the deci-
are considered “hot,” or because of general economic trends. sion to retire is not as simple as it once was. Today, there
They also choose careers because they are more consistent is really a whole continuum of choices available to a
with their own interests, education, and values.
© Sachin Bhavsar/iStockphoto
person contemplating retirement. The person can actu-
Once a career has been chosen and the person ally retire, take a pension, and begin some other non-
begins to build on that career, the issues that emerge work activities (the traditional view of retirement), but
often deal with trying to establish the proper balance this is becoming less common. More commonly, indi-
between work and family life. It is at this point in one’s viduals retire and then take on full-time work at other

The Age Discrimination in Employment Act (or ADEA) prohibits

discrimination against employees age forty and older.

200 Human Resource Management

 FIG 7.1O  Individual and Organizational
Perspectives on Career Planning
Organization
Work to achieve good
Stronger and more
person-organization

© Cengage Learning
effective workforce
fit through selection

Effective career
planning

Understand and monitor

More successful and
career opportunities,
healthier career
successes, and failures
Individual

organizations, or they retire and take on part-time work is a critical factor in this process. But the individual her- or
or work as consultants either at their former employers himself must also play a role in this process.63 This section
or elsewhere. Over time, they may reduce the amount of examines the organizational and individual perspectives on
time they spend at work until they gradually move into careers shown in Figure 7.10.
full retirement, but retirement has become much more
of a process than an event.61
Nonetheless, many factors are related to the decision 7-8a Organizational and Individual
to retire (or begin the retirement process). For example, Perspectives on Careers
individuals are more likely to retire when they have the Organizations are generally responsible for determining
financial resources needed to maintain their preretire- the jobs that people will perform for the organization, the
ment lifestyles, and they are more likely to retire when pattern of interrelationships between jobs in an organiza-
their health makes continuing to work excessively bur- tion, the kinds of people who will be hired for those jobs,
densome. Individuals are also more likely to retire when the development of those individuals to prepare them for
their spouses have retired. In addition, several factors more meaningful jobs, and the decisions regarding the
are related to adjustment after retirement. Of course, as movement of people from one job to another. Clearly, it
noted above, many people tend to continue with some is in the organization’s best interest to take an active role
type of “bridge work,” and these people generally adjust in career management for people in the firm, and for this
well to retirement. Also, individuals who have struc- reason career management is often part of the larger per-
tured leisure activities and those who do volunteer work formance-management process.64
tend to adjust better to retirement. But one of the most The organization can take steps from the outset to
important factors related to adjustment is one’s health. facilitate career management. For example, in Chapter 4
Individuals who avoid serious health problems adjust bet- we discussed the idea of selecting individuals not because
ter, partly because they can engage in the kinds of activi- of their match with the requirements of a specific job but
ties outlined above. It is important to realize that these because of their fit with the organization. Despite any
and any other issues relating to the decision to retire are other problems associated with this selection strategy, it
likely to become much more important for HR managers seems helpful for career management because the organi-
as the workforce ages and as lives and productive work zation presumably hires individuals who fit different jobs.
careers expand. In fact, even when organizations select individuals for a
specific job, it is still possible to do so with subsequent
career moves in mind. In other words, if an entry-level
7-8 HUMAN RESOURCE position is not particularly demanding, then it is possible
MANAGEMENT AND CAREER for an organization to hire people whose skills and abili-
ties match a higher-level job that they might be expected
MANAGEMENT to move into later. This practice can be defended as long
Most successful organizations and managers today as the employee will likely move up to the higher-level job
recognize that careers do not simply happen; they must eventually.
be planned and managed. Most of the companies with If an organization does indeed help its employees
a reputation to be great places to work—like General plan and manage their careers more effectively, it can
Electric, Disney, and Southwest Airlines—have formal expect to find itself with a larger pool of talented individu-
career-planning systems for their managers.62 Part of the als who are generally more satisfied and motivated. On
responsibility for this career planning resides with the the other hand, if the organization does a poor job with
organization, and the feedback from the appraisal process managing the careers of people in the organization, then
Chapter 7: Performance Appraisal and Career Management 201
 FIG 7.11 S teps in Career

© Cengage Learning
Planning

Communication
Organizational specifi-
Individual cation of career paths Career
assessment and opportunities counseling
Performance
management

it will find that the quality of its talent pool might vary 1. In the individual assessment phase, individuals need to
in inefficient ways; that is, it might have an abundance or analyze carefully what they perceive to be their own
surplus of highly talented and qualified employees in some abilities, competencies, skills, and goals. Many orga-
areas and at some levels of the firm but have a shortage nizations provide employees with forms or question-
of talented and capable people at other levels or areas of naires to help them develop this information.
the organization. In addition, the workforce of such an 2. At the same time, the HR manager should be develop-
organization might be more dissatisfied and unmoti- ing a potential career path an employee may take up
vated because people are not given appropriate promotion the corporate ladder.65 Shell’s
opportunities or are not placed in appropriate positions. career-path model, for example, is available to manag-
When the organization needs to transfer people or lay ers on the firm’s corporate intranet.
people off, it may be unsure about who can handle the new 3. Communication is also an important part of this pro-
assignments. cess. For example, the organization may know the paths
Individuals obviously have an important stake in their that are most likely to be followed from one position
own careers. They experience most directly the benefits to another and be able to gauge the probability or like-
and rewards of successful careers and incur the costs and lihood that a specific individual will follow this path
frustrations of unsuccessful careers. A person’s perceived or a prescribed path for a promotion to another posi-
and experienced career success or failure is also likely to tion. But if this information is not communicated to
have a major effect on his or her self-esteem and similar the individual employee, then it is of little or no value
indications of self-worth. to anyone. At the same time, the organization must
People who understand and carefully monitor their also integrate its performance-management system
careers are likely to understand the reasons behind their with its career-management system. A person should
successes and failures. These individuals will know why not expect to progress automatically from one job to
they have or have not been promoted and will have accu- another along a certain path but instead recognize that
rate assessments of future promotion prospects and pos- this movement will be determined in part by his or her
sibilities. In addition, people who accept responsibility for performance effectiveness.
managing their careers will also be better prepared to deal 4. The final step in effective career planning is career coun-
with unanticipated career setbacks such as job losses and seling. As the term suggests, career counseling involves
demotions. Unfortunately, many people are surprisingly interaction between an individual employee or man-
uninformed and uninvolved in their own careers. ager in the organization and either a line manager or
a human resource manager. This counseling session
7-8b The Importance of Career typically involves frank and open dialogue with the
Planning goal of making sure that the individual’s assessment
Career planning is clearly important to both organizations and the organization’s assessment of the individual’s
and employees. Furthermore, effective career planning role and prospects in the organization are congruent.
requires careful coordination We discuss career-counseling programs in more detail
between individual employees in the next section.
The individual assessment and the organization itself.
phase of career planning Usually, HR managers rep- Even though career planning is important to both
requires that individuals organizations and individuals, and effective career planning
analyze carefully what they resent the organization in
perceive to be their own the career-planning process. benefits both, everyone should also recognize that career
abilities, competencies, skills, General Electric and Shell planning has limitations and potential pitfalls. For exam-
and goals. ple, no amount of sophisticated forecasting can predict
Oil are known to be especially
Career counseling involves effective with their managers’ with absolute certainty the level of talent, expertise, moti-
interaction between an career planning and develop- vation, or interest a given individual will have in the future.
individual employee or People experience changes in interests, for example, and
manager in the organization ment. In general, most career-
and either a line manager or planning systems involve the they may redefine their priorities. Even though the orga-
a human resource manager. steps shown in Figure 7.11. nization and the individual may expect that the individual

202 Human Resource Management

 different from what they expected. For example, a senior
“If an institution Amoco manager based in Houston, Texas, had been on a
career path that did not include the possibility of an inter-

© Ryan McVay/Photodisc/Getty Images

wants to be national assignment. Shortly after the integration of the
firms, however, this manager was offered a promotion to a
adaptive, it has new job in London.
to let go of some
control and trust 7-9 CAREER INTEREST
that people will INVENTORY
work on the There are numerous career interest inventories to capture
right things in potential or existing employees’ career interests and per-
sonality types. We will discuss here three such inventories:
the right way.” EK Strong’s Interest Inventory, Schein’s Career Anchor,
and Campbell’s Interest and Skill Survey.
—Robert B. Shapiro,
CEO of chemical company Monsanto, 7-9a EK Strong’s Interest Inventory66
Harvard Business Review
( Jan.–Feb., 1997) Strong’s Interest Inventory is a self-assessment tool that
helps high school and college students as well as adults
to discover their interests. It has 291 items which ask the
respondents about their preferences with respect to occu-
will be capable of performing a certain job in the future, it pations, subject areas, activities, leisure activities, and
may turn out that both parties are wrong. characteristics. Since Holland Personality test has been
The organization’s future human resource needs can integrated with this self-assessment, hence this test also
also change. For example, it may become more or less suc- categorizes individuals under six personality types: realis-
cessful than originally envisioned, or it may decide on new tic, investigative, artistic, social, enterprising, and conven-
strategies to pursue. Or new managers may come in and tional. It takes approximately 40 minutes to complete the
want work done differently than in the past. And new questionnaire. Based on respondents’ answers, a report is
opportunities may present themselves to both the indi- generated. It helps students to choose a particular field of
vidual and the organization. For instance, an organization study, helps individuals in career exploration and develop-
may have a certain current member of its workforce who ment. It can also help organizations to ensure employee
has been tapped to assume an important position in a cou- engagement by assigning them jobs based on their inter-
ple of years. But a substantially stronger individual for that ests. The Strong Interest Inventory is a registered trade-
same position may unexpectedly emerge. In this case, the mark of CPP, Inc. of Mountain View, California.
organization may have to alter its original strategy, even at
the risk of alienating the individual originally tapped for 7-9b Schein’s Career Anchor
the job.
Similarly, individuals sometimes find new opportuni- Career Anchors Self-Assessment helps participants to
ties at unexpected times. Both an individual and the orga- identify their major career orientation so that they can
nization, for instance, may expect that individual to take make better career choices. Career anchor is the dominant
a certain job in the future. But another organization may self-concept which a person will not let go even under diffi-
appear on the scene to lure the individual away, perhaps at cult times. Eight career anchors identified by Edgar Schein
a substantially higher salary. In this instance, the individual are described below.
is likely to be happy with this turn of events because he or
she will have a new position and a higher salary. The orga- Technical Functional Competence Individuals
nization, on the other hand, may face disruption and may under this category are good in engineering, teaching, and
have to alter its existing plans. other related fields.
Unanticipated mergers and acquisitions can also result
in changes in career opportunities. For example, when General Managerial Competence Individuals
Amoco was acquired by British Petroleum a few years ago, belonging to this category are more generalists than spe-
the new organization found itself with a surplus of qualified cialists and like to move around different domains.
managers and had to offer early retirement incentives to
some of them. Others were presented with unanticipated Autonomy/Independence Individuals of this type
opportunities for new assignments that were substantially require high degree of autonomy and flexibility in the job.

Chapter 7: Performance Appraisal and Career Management 203

Academy of Film and Television (IAFT), not only to staff Bigfoot Bigfoot also buys four to six English-language movies
Studios but to train what executive director Keith Sensing calls annually—“genre films,” says Bigfoot CEO Kacy Andrews, “horror
“the next generation of global filmmakers.” IAFT, says Sensing, and action that will sell well internationally and play well theatri-
looks for creative people who “have a desire for adventure” and cally, too.” In order to bolster its ability to get its films into theaters
“an education that will set them apart from people who have a (most of the company’s features have gone straight to DVD or been
strictly Hollywood background.” sold to cable TV), Bigfoot has also become the largest shareholder
IAFT enrollment is currently 60 percent international and in Carmike Cinemas, the fourth-largest theater chain in the United
40 percent Filipino, but “all of our students,” says Sensing, States. It also purchased the historic Majestic Crest theater in Los
“have the opportunity to participate in real projects going on Angeles. The acquisition, says Andrews, goes hand in hand with
at Bigfoot Studios. . . . Many IAFT graduates,” he adds, “have Bigfoot’s overall strategy “We wanted a great theater to showcase
gone on to write, produce, and direct their own films” and our films—not only ones we produce but ones we plan to acquire.
often follow in Bigfoot’s steps by finding distribution for their Everyone knows the Crest,” she adds. “It gives us a lot of prestige.”2
independent features on the international festival circuit. Three
recent graduates landed jobs on Gleissner’s most recent proj-
ect, a Philippines-set thriller revolving around a female diver. THINK IT OVER
Gleissner not only co-wrote and directed Deep Gold but drew 1. What are some of the key HR challenges faced by managers
on his experience as an underwater photographer to shoot at Bigfoot?
key scenes in Bigfoot’s specially designed 170,000-gallon 2. In what ways are the jobs of a domestic versus an interna-
Underwater Studio. tional HM manager similar and different?

International business is an ever-growing component of

the global economy. During much of 2011 and 2012, this 11-1 THE GROWTH OF
was made obvious to everyone as problems in Europe, INTERNATIONAL BUSINESS
ranging from a possible debt default by Greece to shaky
credit in Italy to general problems with the euro, affected International business is not a new phenomenon. Indeed,
markets all over the world, and especially in the United its origins can be traced back literally thousands of years
States. Almost every large firm located anywhere in the to merchants plying their wares along ancient trade routes
world remains on the alert for new business opportunities linking southern Europe, northern Africa, the Middle
anywhere else in the world. Such opportunities include East, and Asia. Silks, spices, grains, jade, ivory, and textiles
new markets where products and services can be sold, were among the most popular goods forming the basis for
new locations where products and services can be created early trade. Even in more recent times, Columbus’s voyages
for lower costs, and areas where new information, financ- to the so-called New World were motivated by the eco-
ing, and other resources may be obtained. To manage nomic goal of discovering new trade routes to the Far East.
international expansion effectively, firms need skilled and Wars have been fought over issues arising from interna-
experienced managers and employees who understand tional commerce, and the British empire was built around
both specific individual foreign markets (such as Japan the financial and business interests of the British nobility.
or Germany) and general international issues (including In more recent years, however, several specific trends have
areas such as exchange rate fluctuations, political risk, emerged in international business that provide a meaning-
and the cost of labor). One of the fastest-growing and ful context for the study of human resource management.
most important concerns for human resource managers The forces that shaped today’s competitive interna-
in many companies today is preparing other managers tional business environment began to emerge in the years
for international assignments. In reality, however, this is
only one part of international human resource manage-
ment (HRM).
This chapter will explore international human Columbus’s voyages
resource management in detail. We begin with a general to the so-called New
overview of the growth of international business and
then discuss global issues in international HRM. Next World were motivated
we examine the HR function in international business. by the economic
Domestic issues in international HRM are identified
and described, and then we describe the management goal of discovering
of international transfers and assignments. Finally, new trade routes
we summarize the basic issues in international labor
relations. to the Far East.
308 Human Resource Management
 following World War II. As a result of that global con- By the late 1970s, businesses from other countries
flict, Japan and most of Europe were devastated. Roads emerged as major players in the world economy, and by the
and highways were destroyed, and factories were bombed. 1980s many of them had established dominant positions in
The United States was the only major industrial power their industries. At the same time, many U.S. firms had
that emerged from World War II with its infrastructure grown complacent, their products and services were not
relatively intact. Places not devastated by the war, such as of high quality, and their manufacturing and production
South and Central America and Africa, were not major methods were outdated and outmoded.
players in the global economy even before the war, and Eventually, U.S. firms decided that they had little
Canada had yet to become a major global economic power. choice but to start over as well, so many of them practically
Businesses in war-torn countries had little choice but rebuilt themselves in the late 1980s and early 1990s. They
to rebuild from scratch. They were in the unfortunate shut down or renovated old factories, developed new man-
position of having to rethink every facet of their business, ufacturing techniques, and began to renew their empha-
including technology, productions, operations, finance, sis on quality. By the mid-1990s, global competitiveness
and marketing. Ultimately, however, this position worked seemed to have become the norm rather than the excep-
to their advantage. During the 1950s, the United States was tion. The United States, Japan, and Germany remained
by far the dominant economic power in the world. Its busi- the three leading industrial powers in the world. However,
nesses controlled most major marketplaces and most major other western European countries such as France, England,
industries. At the same time, however, Japan, Germany, the Netherlands, Spain, and Belgium were also becoming
and other countries were rebuilding their own infrastruc- increasingly important. In Asia, Taiwan, Singapore, and
tures and developing new industrial clout. Malaysia were also emerging as global economic powers.
During the 1960s, this newly formed Japanese and Of course, China and India are clearly emerging as global
German industrial clout began to exert itself in the world powers. Few events illustrate this fact better than the
marketplace. Such German firms as Siemens, Daimler-Benz, acquisition by Lenovo (a Beijing-based personal computer
and Bayer and Japanese companies such as Toyota, NEC, company) of IBM’s personal computing division a few
and Mitsubishi began to take on new industrial strength and years ago and the growth of call-center operations in India.
slowly but surely began to challenge the dominance of U.S. Substantial developments in Europe (which we will
firms in markets ranging from automobiles to electronics. discuss below) have strengthened the position of coun-
Firms from other parts of Europe had also fully recov- tries there. In North America, Canada and Mexico also
ered and were asserting themselves in areas ranging from began to show promise of achieving economic preemi-
petroleum and energy (e.g., Shell and British Petroleum) nence in the global marketplaces, and many countries in
to food (e.g., Nestlé and Cadbury) and luxury goods (e.g., South America have also begun to globalize their opera-
LVMH and Gucci). tions. Figure 11.1 illustrates the regions of the world that

FIG 11.1 Global Business

Centers
North America Pacific Asia Europe

North London
America
Toronto
Paris
Europe
Rome
New York Beijing
Los Angeles
Asia Tokyo
New Delhi
Miami
Kolkata
Mexico City Hong Kong
Africa

Kuala
Lumpur

South
America
© Cengage Learning

Australia

Chapter 11: The Global Environment 309

 large number of so-called sub-

© ildoggesto/Shutterstock
prime housing mortgages that
were packaged, securitized, and
sold around the world wreaked
havoc, first on the U.S. economy
and then on economies all over
the world. Later, in 2011–12, we
witnessed another clear example
as the European Union struggled
to deal with impending defaults
in Greece, Italy, and Spain, crip-
pling international money mar-
kets and economies worldwide.
Today, no global organiza-
tion can ignore elections in Iraq,
the developments in the Gaza
Strip, or the valuation of the
Chinese renminbi. All of these
events, once seen as far removed
from the concerns of American
businesses, now strongly and
immediately affect how firms
in this country and other coun-
tries around the world do busi-
ness. Finally, as we discuss later,
the growth of regional economic
alliances has also had substan-
tial effects on the global business
community.
are especially significant in today’s global economy. It
is also worth noting that, of the 100 largest firms in the
world in 2011 (based on sales), 62 of them are headquar-
tered outside the United States, and there are 15 different
countries that have a business on the list. In each case, 11-2 GLOBAL ISSUES IN
international business operations are a vital part of the INTERNATIONAL HUMAN
firm’s success.
Several other developments in the world also have
RESOURCE MANAGEMENT
affected the new global economy. First, many developed Various global issues in international HRM must be
countries such as the United States, Japan, and the addressed by any international firm. Three types of
countries of Western Europe have experienced slow- employees involved in international organizations include
ing rates of growth in their populations. This trend Parent Country Nationals (PCNs), Host Country
has implications for the demand for certain types of Nationals (HCNs), Third Country Nationals (TCNs).
consumer goods as well as for the availability of indi- For example, Unilever headquartered at London (UK)
viduals to work producing those goods. On the other employs Indians for its Indian operation (HCNs), sends
hand, countries such as Mexico, India, Indonesia, and UK citizens to US on assignment (PCNs), and may send
China (despite its one-child-per-couple policy) continue some Japanese employees to Indian operations (TCNs).
to experience rapid population growth. This growth is As shown in Fig 11.2, employees who are citizens of coun-
fueling a demand for international goods and also makes try Z (where headquarter is located) will be referred as
these locations attractive sites for new businesses or PCNs; citizens of country X working in country X will be
joint ventures. Furthermore, the collapse of the Japanese referred as HCNs (similarly, citizens of country Y working
markets in the late 1990s, the downturns in U.S. mar- for country Y will be HCNs). For subsidiary X, employees
kets in 2009, and the various crises in the “eurozone” in who are citizens of country Y will be referred as TCNs
2011–12, made it clear exactly how interdependent global (since they are neither from the parent organization, nor
economies really are. from the host country).
The financial crisis in the United States beginning As shown in Figure 11.3, one issue is the development
in 2008 is a perfect illustration of this interdependence. of an international HRM strategy.3 Another is developing
An overpriced U.S. stock market combined with a an understanding of the cultural environment of human

310 Human Resource Management

 FIG 11.2  
PCNs, HCNs,
and TCNs

Parent Country

Head Quarter:
Country Z

PCNs HCNs

Subsidiary in Subsidiary in
Country X Country Y
TCNs

resource management. A third is developing an under- serving the home market will be prime example of domes-
standing of the political and legal environment of interna- tic organization. Whenever domestic organizations face
tional business. any market saturation, they may get into different markets
or enter into new product base. These companies may not
11-2a Stages of Development of like to do environmental scanning to enter into interna-
Transnational organizations tional business. As a result of myopic view, at times these
Bartlett and Ghoshal (1989)4 have conceptualized five companies may ruin their existing businesses believing that
stages through which organizations go through before they they are unconquerable in their home turf.
emerge as a transnational organization.
Stage 2 – International organization Stage 2
Stage 1 – Domestic organization Stage 1 orga- organizations are the ones who start participating in world
nizations are those who serve their domestic market base. trade either through exporting or through establishing their
They do not participate in the world trade. Their market offices. Even though these organizations are at the second
or product development is restricted to their domestic stage, still managers in these organizations may have the
home base. Companies at this stage have ethnocentric ori- same ethnocentric orientation, like that of the earlier stage.
entation, which means managers working in these orga- The product or service offerings these organizations make
nizations may start believing that home country ways of have domestic market as the reference point. The stage two
dealing with things is the best way. Any organization only is a natural progression from stage one when companies

FIG 11.3   Global Issues in International

© Cengage Learning

Human Resource Management

Developing an international
human resource
management strategy

International
human resource
management

Developing an understanding of Developing an understanding of The ethnocentric staffing

the cultural environment of the political and legal environment model primarily uses parent-
human resource management of human resource management country nationals to staff
higher-level foreign positions.

Chapter 11: The Global Environment 311

 FIG 11.4  
Structures of International, Multinational,
Global, and Transnational Organization
Formal
management
planning and
control system
allow tight head
quarter subsidiary
linkage

Loose, simple controls Formal system controls

(mainly financial) (some centralization and standardization)

Structure B. MNC Structure Structure A. International Structure

(Decentralized Federation) (Coordinated Federation)

Large flows of
information,
components,
products, resources,
and people among
interdependent units

Tight central control of decisions, Complex coordination

resources, and information (strategic decision making shared)

Structure C. Global Structure Structure D. Transnational Structure

(Centralized Hub) (Integrated Network)
Source: Ghoshal & Bartlett (1989)

are looking forward to market expansion and have started At times multinational organizations put consider-
learning how to carry out business in foreign land. able threats to domestic competitive scenario. As a result
of which domestic organizations start lobbying against
Stage 3 – Multinational organization At this entry of foreign companies in the domestic home base. For
stage, organizations become more committed toward example, both Coke and Pepsi faced considerable threats
international business. They will start establishing subsid- while they first tried to enter into India. Multinational
iaries. In order to grow their businesses further, the subsid- organizations as a strategy in general have to showcase that
iaries are given ample power and flexibility. Multinational they are “almost Indian organizations” if they are to be fully
organizations develop multi-domestic strategy, differ- functional in India. Substantial recruitment of host coun-
ent strategies for different national market that it serves. try nationals and showcasing to the foreign government
Managers working in multinational corporation (MNCs) that they are helping in the growth and development pro-
will have polycentric orientation, which essentially means cess of the home country become imperative for multina-
they will appreciate that in order to succeed in different tional organizations. Moreover, recruiting foreign country
markets worldwide the business mantra is to adapt. Many nationals becomes important to understand and appreciate
MNCs at this stage adapt their products or service offer- the home country culture and better serve the market.
ings as per the tastes and preferences of the national mar-
ket. For example, since hamburgers do not completely Stage 4 – Global organization At this stage,
suit the tastes and preferences of Indian customers, hence organizations start fully participating in the world trade
McDonald had to introduce McAloo Tikkis so that it can through two major routes—either they market worldwide
capture the Indian taste buds. or fully procure raw materials worldwide for gaining sub-
stantial economies of scale. But they do not at this stage

312 Human Resource Management

go for both global marketing and global sourcing strategies responsibilities are unique for each unique subsidiary and
together. Example of global organizations fully exploiting a loose simple financial control of headquarter over its sub-
marketing opportunity would be Harley Davidson motor- sidiaries prevails. Each country is being treated in a unique
bikes5. Harley Davidson primarily used to manufacture way based on the customers’ need and preference and prev-
their bikes in the United States, but sells it throughout alent country norms.
the world. Retail leader GAP is an example of a company
that sources its product from various countries across the Structure C Global organizations have a structure called
globe to serve primarily the US retail outlets. Managerial centralized hub, which reflects dependent and tightly con-
orientations of the country heads become geocentric where trolled subsidiaries (unlike the multi-national organiza-
they understand the similarities and differences of differ- tions), major decisions are centralized.
ent countries. Hence, in the true sense, the entire world
becomes a “global village.” Wherever there is economy Structure D Transnational organizations have an inte-
through sourcing or marketing, these organizations start grated network-like structure which helps these organiza-
tapping those markets. tions to achieve efficiency, innovation and market respon-
siveness. There is high amount of dependencies amongst
Stage 5 – Transnational organization the subsidiaries. Detailed comparisons of domestic, mul-
Transnational organizations are the ones which match tinational, and transnational organizations are shown in
global resources with global markets at a profit. The key Table 11.1.
functions of transnational organizations are dispersed,
specialized, and interdependent. For example, there is 11-2c International Human Resource
nothing called Japanese R&D or Indian R&D. The R&D Management Strategy
function is dispersed to more than one country, interde- The overall strategy of a business has to be logical and
pendent and specialized. This holds for every other func- well conceived. The effective management of a firm’s
tion, e.g., marketing, manufacturing, etc. Wherever there international human resources also must be approached
are economies of scale, manufacturing or assembling can with a cohesive and coherent strategy. As a starting
take place. Customer served by these organizations can point, most international businesses today begin by
reside anywhere around the globe. Integrated knowledge developing a systematic strategy for choosing among
acquired through various countries served in the previous home-country nationals, parent-country nationals, and
four stages help transnational organizations to come up third-country nationals for various positions in their
with an integrated product or service knowledge. Hence, organization.6
there is no need to make country specific adaptation of Some firms adopt what is called an ethnocentric staffing
product or service offerings at this stage. Lessons learned model. Firms that use this model primarily use parent-country
at the previous four stages help transnational organiza- nationals to staff higher-level foreign positions. This strat-
tions to come up with standard global product portfolio. egy is based on the assumption that home-office perspec-
Truly transnational organizations are rare. In the study by tives and issues should take precedence over local perspec-
Bartlett and Ghoshal (1989) NEC, Procter and Gamble, tives and issues and that parent-country nationals will be
Ericsson, Philips, Matsushita, and Unilever were close fit more effective in representing the views of the home office in
toward transnational organizations. the foreign operation.7 The corporate HR function in orga-
nizations that adopt this mentality is primarily concerned
11-2b Structural Implications with selecting and training managers for foreign assignments,
Structural implications of the above model have been developing appropriate compensation packages for those
depicted diagrammatically in Figure 11.4. In a particular managers, and handling adjustment issues when the manager
model, the central box represents headquarter, whereas the is reassigned back home. Local HR officials handle staffing
other boxes represent different subsidiaries. The lines rep- and related human resource issues for local employees hired
resent different flows (of knowledge, technology, process, to fill lower-level positions in the firm. Sony Corporation’s
etc.). operations in the United States follow this model. Sony
Corporation of America, a wholly owned subsidiary of Sony
Structure A International organizations have a struc- Corporation, handles local
ture called coordinated federation. Headquarter in this HR issues, but top execu-
structure has high amount of control over product or pro- tives at the firm’s operations The ethnocentric staffing
cess development of subsidiaries. The primary task for model primarily uses parent-
around the United States are country nationals to staff
international organizations is to ensure knowledge transfer Japanese managers from the higher-level foreign positions.
from headquarter to overseas market. firm’s Japanese home office.
The polycentric staffing
Other international busi- model calls for the dominant
Structure B Multinational organizations have the char- nesses adopt what is called use of host-country nationals
acteristics of a decentralized federation since assets and a polycentric staffing model throughout the organization.

Chapter 11: The Global Environment 313

TABLE 11.1  Comparison of Domestic, International, Multinational, Global, and
Transnational Organization
Strategy Domestic International Multinational Global Transnational
Model Domestic International Multi-domestic Global Global

View of the world Coordinated Decentralized Centralized hub Integrated network

Federation Federation

View of the world Home country Extension markets National markets Global markets or Global markets and
resources resources

Orientation Ethnocentric Ethnocentric Polycentric Mixed Global

Key Assets Located in home Core centralized, Decentralized and self All in home country Dispersed,
country others dispersed sufficient except marketing/ interdependent and
sourcing specialized

Role of country Units Single country Adapting and Exploiting local Marketing or sourcing Contributions to
leveraging opportunities company worldwide
competencies

Knowledge Home country Created at center and Retained within Marketing developed All functions
transferred operating units jointly and shared developed jointly and
shared

Source: Keegan (1995)8

that calls for a much heavier use of host-country nationals to be adopted and used by fully internationalized

© H.Kan/Shutterstock
(HCNs) from top to bottom throughout the organization. firms such as Nestlé and Unilever.9 In many ways,
Thus, polycentric staffing is used with the assumption the corporate HR function in geocentric compa-
that such individuals (that is, host-country nationals) are nies is the most complicated of all. Every aspect
better equipped to deal with local market conditions. of the HRM process—planning, recruiting, selec-
Organizations using this approach usually have a fully tion, compensation, and training—must be undertaken
functioning HR department in each foreign from an international perspective. Each foreign subsidiary
subsidiary that is responsible for or operation still needs its own self-contained HR unit to
managing all local HR handle ongoing employment issues.
issues for lower-
and upper-level
employees
11-2d Understanding the
alike. The cor- Cultural Environment
porate human The cultural environment of international business also
resource func- poses a variety of more applied challenges and opportu-
tion in such compa- nies focuses primarily on coordinating nities for human re­source managers. A country’s culture
relevant activities with their counterparts in each foreign oper- can be defined as the set of values, symbols, beliefs, and
ation. U.S. energy companies operating in Asia often adopt languages that guide the behavior of people within that
this model, especially because these operations are often joint culture. A culture does not necessarily coincide precisely
ventures between the U.S. company and one or more local with national boundaries, but these two different con-
companies. structs are sometimes similar in terms of geographic area
Still other firms adopt and domain. All managers in an international business
The geocentric staffing what is called a geocentric need to be aware of cultural nuances (by definition, HR
model puts parent-country, staffing model. The geocentric managers are concerned with people), but they must be
host-country, and third-
country nationals all in the staffing model puts parent- especially cognizant of the role and importance of cul-
same category, with the firm country nationals, host-coun- tural differences and similarities in workers from differ-
attempting to always hire the try nationals, and third-coun- ent cultures.
best person available for a
position. try nationals in the same cate- Cultural beliefs and values are often unspoken and
gory. The firm then attempts may even be taken for granted by those who live in a
Culture refers to the set to hire the best person avail- particular country. When cultures are similar, relatively
of values that helps an
organization’s members able for a position, regard- few problems or difficulties may be encountered. Human
understand what it stands less of where that individual resource managers can extrapolate from their own experi-
for, how it does things, and comes from. The geocentric ences to understand their function in the other culture.
what it considers important.
staffing model is most likely Thus, U.S. managers often have relatively little difficulty
314 Human Resource Management
doing business in England. Managers in both countries Another cultural factor that is most directly related to
speak the same language, and a common framework HRM practices is the roles that exist in different cultures.
exists for understanding both commercial and personal The United States has seen considerable change over the

© Ioannis Pantzi/Shutterstock
relationships. last few decades regarding the role of women in our society.
More significant issues can arise, Women have made considerable strides in pursuing and
however, when considerable differences achieving career opportunities previously closed
exist between the home culture of a man- to them. In some parts of the world, how-
ager and the culture of the country ever, the situation is quite different.
in which business is to be conducted. In Japan, for example, women may
Thus, there is a higher still find it fairly dif-
likelihood of culturally ficult to launch a suc-
related problems and cessful career. Similar
difficulties between situations exist in some
managers from, say, European countries, as
Canada and India. well as in almost all the
Differences in lan- countries in the Middle
guage, customs, and East. Some role differ-
business and personal ences are related to sta-
norms increase the tus and hierarchy. In
potential for misun- the United States, for
derstandings, miscom- example, relatively little
munication, and simi- psychological distance
lar problems. In these exists between manag-
instances, HR manag- ers and subordinates,
ers must be careful to resulting in a certain
avoid overgeneralizing degree of familiarity
from their own experi- and informality. But in
ences or perspectives. many Asian countries,
Cultural differences can also directly affect business this psychological distance is much greater, resulting in
practices in international situations. For example, the more formalized roles and less informal communication
religion of Islam teaches that people should not make a across levels in the organization.
living by exploiting the problems of others and that mak- Perhaps the most systematic study of national values
ing interest payments is immoral. As a result, no out- was undertaken by Dutch scholar Geert Hofstede, who
placement consulting firms exist in Saudi Arabia and the studied cultural differences among managers in fifty-three
Sudan (because outplacement involves charging a fee to countries.10 He defined five dimensions of culture:
help terminated workers cope with their misfortunes).
As a result of these and myriad other cultural differences, 1. power distance (or status and authority differences
then, managers may encounter unexpected complexities between a superior and a subordinate),
when doing business in countries where these sorts of 2. individualism versus collectivism (or the extent to
cultural differences exist. which persons define themselves as individuals rather
Language is another important cultural dimension than as members of groups),
that affects international HRM practices. Most obvi- 3. masculinity versus femininity (assertive, competitive,
ously, differences in specific languages such as English, success-driven values versus quality of life, relation-
Japanese, Chinese, and Spanish dramatically complicate ship-oriented values in society),
the issues involved in dealing with international business. 4. uncertainty avoidance (or preferences for structured
Unfortunately, U.S. managers who are fluent in different rather than unstructured situations), and
languages still tend to be relatively rare. When a U.S. orga- 5. time orientation (or emphasizing long-term values
nization does find such an employee, that individual usu- such as thrift and persistence versus short-term values
ally becomes a valuable asset. On the other hand, it is fairly such as fulfilling social obligations).
common for Asian managers to learn English in school,
and most European managers are multilingual. It is inter- Hofstede’s work has been influential in the field of interna-
esting to note that several years ago, many U.S. colleges tional management and provides useful general guidelines
and universities (and especially business schools) began for what to expect when dealing with managers or employ-
dropping foreign-language requirements. As it turns out, ees from different countries.
those decisions may result in some competitive disadvan- Hofstede’s work has some limitations as well. The
tage for managers educated in the United States. initial sample, although quite large (100,000), was drawn

Chapter 11: The Global Environment 315

from a single organization (IBM). Thus, it is difficult to

© 1000words/Shutteerstock
tell if some of the effects found in the study resulted from
country cultures or from one or more elements of the cor-
porate culture that all respondents shared. Even though the
sample was large, it is still difficult to make generalizations
across the entire populations of countries. For example, the
United States was described as being the highest on indi-
vidualism, in the middle on masculinity versus femininity
and on time orientation, and quite low on power distance
and uncertainty avoidance. But is this description true of
all Americans? Surely not. It is not even clear that they
describe the “typical” American (whoever that might be).
Even within countries, for instance, regional and ethnic dif-
ferences account for large differences in values. Thus, one
must be careful not to overgeneralize from these results.
Nonetheless, Hofstede’s work provides some interesting
and useful ideas about differences across cultures that are
relevant to HR managers. Locating manufacturing facilities in
Yet another significant cultural factor has to do countries with low labor costs can
with children. In the United States, child labor is closely
regulated, and children traditionally attend school until help a business lower its overall costs
they become young adults. In other countries, however, and therefore increase profits. But
this practice may be quite different. In Bangladesh, it
is quite common for children to be a major source of this practice can also lead to worker
income for their families. Many children do not attend exploitation.
school at all and begin seeking jobs at very young ages. A
business operating in such an environment thus faces a
significant dilemma. On the one hand, local cultural fac-
tors suggest that it is acceptable to hire young children
11-2e Understanding the Political
to work for low wages because other businesses do the and Legal Environment
same. On the other hand, this practice would be illegal It is also important for HR managers in international
or unethical by the standards that exist in most indus- businesses to understand the political and legal envi-
trialized countries. ronment of the countries in which they do business.
The HR manager dealing with international issues Figure 11.5 illustrates four fundamental aspects of the
thus faces two fundamental cultural challenges. The first political and legal environment of international business
challenge is simply understanding and appreciating differ- that are of primary concern for HR managers: govern-
ences that exist in different cultures. The value of work, ment stability, potential incentives for international
attitudes, orientation toward work, and common work- trade, controls on international trade, and the influ-
related attitudes and practices vary significantly from ence of economic communities on international trade.
culture to culture, and the HR manager needs to develop In addition, laws that affect the management of human
an understanding of these differences if she or he is to resources are basic issues, but we will say more about
function effectively.11 those issues later.12
The second challenge is more ethical in nature. On Government stability can be thought of as either the
the one hand, many businesses relocate manufacturing ability of a given government to stay in power against
facilities to other countries to capitalize on lower labor opposing factions or as the permanence of government
costs. Indeed, it is quite possible for a business from a policies toward business. In general, companies prefer to
country such as Japan or the United States to set up a do business in countries that are stable in both respects
factory in Bangladesh, Pakistan, or other regions of the because managers have a higher probability of understand-
world and have minimal labor costs there. The ethi- ing how those governments affect their business. In recent
cal issue, however, is the extent to which this situation years, several governments in the Middle East have been
becomes exploitation. Many people, for instance, would facing mounting pressure from Islamic radicals to establish
agree that it is reasonable for a company to take advan- governments more in line with fundamentalist interpreta-
tage of low prevailing wages and benefit costs to achieve tions of the Koran; it is not clear, for example, how stable
low-cost production. But if a company goes too far and or effective the Iraqi government will be over time or how
truly begins to exploit foreign workers, then problems much longer the Israelis and Palestinians will continue to
may arise. struggle. These events have made the Middle East a less

316 Human Resource Management

 FIG 11.5

© Cengage Learning
 Political and Legal Issues
of International Business
Government
Trade incentives
stability

Political and
legal issues

Economic
Trade controls
communities

attractive region for doing business. On the other hand, the controls that some countries place on international trade.
easing of tensions between the Chinese and the government Several different controls exist. One is a tariff, essentially a
on Taiwan has made that entire region more attractive. tax collected on goods shipped across national boundaries.
A major HR issue relating to the topic of government Tariffs may be levied by the exporting country, countries
stability is the extent to which expatriate managers, or any through which goods pass, or the importing country. The
other representatives of a U.S. firm, may be put at risk as most common form of trade control, however, is the quota,
a result of political instability. For years, extremist groups a limit on the number or value of goods that can be traded.
have targeted U.S. executives for terrorist activities. But The quota amount is typically designed to ensure that
since September 11, 2001, these fears have grown consider- domestic competitors will be able to maintain a predeter-
ably. Estimates are sketchy but some experts suggest that mined market share. Honda Motors in Japan, for example,
at least a few hundred people are kidnapped each year and is allowed to export exactly 425,000 automobiles each year
are most often released in exchange for a ransom. In the to the United States. Sometimes, however, companies can
post–September 11 world, many U.S.-based managers are circumvent quotas. Honda has built assembly factories in
more uncomfortable about traveling to parts of the world the United States for this purpose because the automo-
where they fear they may be threatened. Heightened biles they produce within the United States do not count
security measures on planes and in airports have made against the 425,000-unit quota.
these dangers salient to anyone traveling abroad. For the international HR manager, an important set
In addition, some firms continue to face situations in of international controls involves the control of human
which their managers are closely watched or even harassed resources. Some countries require that a foreign business
by local government officials on the grounds that they setting up shop within its borders hire a minimum per-
are alleged illegal informants or spies for the U.S. gov- centage of local employees to work there. For example, a
ernment. Still another risk is the extent to which a busi- country might require that 80 percent of the production
ness itself might become nationalized, or seized by a for- employees and 50 percent of the managers of a foreign-
eign government, which claims the company’s facilities. owned business be local citizens. A less common but still
Nationalization has occasionally occurred in the Middle salient factor is the control of international travel. Some
East and in certain countries in South America. countries, for instance, limit the number of trips that for-
Another aspect of the political and legal environment eign managers can make in and out of their country in a
involves the incentives for international trade that are some- given period of time. HR in the 21st Century discusses a
times offered to attract foreign business. Occasionally, munic- variation on this issue related to language barriers.
ipal governments offer foreign companies tax breaks and other
incentives to build facilities in their area. Over the last few
years, for example, BMW, Mercedes, and Toyota have built
new assembly factories in the United States. In each instance, Some countries
various state and local governments started what essentially
became bidding wars to see who could attract the manufac- require that a foreign
turing facilities. Examples of incentives include reduced inter- business setting
est rates on loans, construction subsidies and tax incentives,
and the relaxation of various controls on international trade. up shop within
Some countries have also offered guaranteed labor contracts its borders hire a
with local unions as a form of incentive designed to reduce
the uncertainties that an entering foreign business faces in minimum percentage
negotiating its own initial labor contract. of local employees
A third dimension of the political and legal envi-
ronment of international business consists of those very to work there.
Chapter 11: The Global Environment 317
 “The folks were difficult to Ideally, of course, offshoring should benefit the contractor
as well as the contracting firm. Take for example the case
understand. We were afraid of Wisconsin‑based PCMC, which designs and makes paper

that we would lose sales, packaging. PCMC had a problem with its engineering function:
Although it had a large base of potential customers, it often
and we couldn’t risk that.” lost them because its engineering group was too small to
create new designs fast enough to keep pace with customer
—1-800-FLOWERS spokesperson
needs. Nor could the company afford to expand its engineering
department. To solve the problem, PCMC entered into an
offshoring contract with an Indian company that agreed to
Offshoring for From computer programmers in the provide a 160‑member staff to support PCMC’s engineering
Fun and Profit Philippines and molecular biologists in function. The result? Not only 160 new jobs in India but more
Russia to customer‑service agents in India, the practice of offshoring orders and more jobs in Wisconsin as well.
(or outsourcing to a foreign country) is bringing workers from around Obviously, offshoring arrangements don’t always work out.
the world into the workforces of U.S. corporations in a broad range When 1‑800‑FLOWERS tried to expand its customer‑service
of industries. When U.S. firms “offshore,” they hire foreign firms and operation by outsourcing customer calls to India, the results
foreign personnel to perform their business functions. In so doing, were disastrous. Why? When customers call, florists have to do
they not only increase the diversity of their workforces but alter the more than merely process orders: They’re often called upon to
processes by which they conduct offer interior‑design tips and
organizational business. relationship counseling and
“In theory,” says business even to console the grieving.
journalist Pete Engardio, offshoring Indian workers could neither fully
is making it “possible to buy, off understand the psychology of U.S.
the shelf, practically any function flower buyers nor communicate
you need to run a company.” In the nuances necessary to serve
part, that’s why the offshoring their needs. 1‑800‑FLOWERS
processes at some firms are almost terminated the experiment after
dizzying in their complexity. At a few weeks. “The folks were
Penske Truck Leasing, for instance, difficult to understand,” admitted
drivers submit their paper logs one company executive. “We were
for data entry to a facility in
© Laura Cavanaugh/UPI/Landov

afraid that we would lose sales,

Mexico, which forwards them to and we couldn’t risk that.”13
Hyderabad, India, where they’re
analyzed and the results reported to Penske management back in THINK IT OVER
the United States. How does a company’s data‑processing function 1. When and under what conditions is offshoring most likely to
come to consist of such far‑flung operations? As with most other succeed?
decisions, companies choose operational partners according to the 2. As a consumer, when does it matter to you if a service is
value‑creation capabilities that they bring to the overall process. offshored?

A final aspect of the political and legal environment have also recently joined, including Cyprus, Malta, and
is the growing importance of the influence of economic many former Soviet-bloc countries (Bulgaria, the Czech
communities. Economic communities consist of sets of Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
countries that agree to reduce or eliminate trade barriers Romania, Slovakia, and Slovenia). These countries have
among their member nations. One of the most commonly been relatively successful in working toward a unified
cited economic communities is the European Union market with no barriers, but, beginning in 2011, they also
(EU). The original EU members were Belgium, France, learned that they shared a certain amount of risk as several
Luxembourg, Germany, Italy, and the Netherlands. potential defaults threatened the stability of the Euro and
Denmark, Ireland, the United Kingdom, Greece, financial stability of each member country.
Portugal, and Spain joined later. Austria, Finland, and This European Union became much more formida-
Sweden have also been admitted, and several nations ble with the introduction of the euro, a common currency

318 Human Resource Management

designed to eliminate exchange-rate fluctuations and make

© Andy Robinson/iStockphoto
cross-national transactions easier. Twelve early members The North American Free
of the EU (all except Denmark, Sweden, and the United
Kingdom) officially converted their domestic currencies Trade Agreement (NAFTA)
to the euro on January 1, 2002. These twelve countries reduced trade barriers
now make up what is called the eurozone. From a human
resource management perspective, the advent of the euro between Canada, the United
brings up two issues: (1) Individuals and employers in the States, and Mexico. NAFTA
eurozone can more readily compare their compensation
packages to those of their peers in other countries because
also includes separate
they are all paid in the same currency, and (2) it is easier labor agreements among
for firms in the eurozone to transfer managers to other the three countries.
countries.
Nonetheless, there are threats to the union. The
admission to the EU of several economically weaker
countries, such as Romania and Hungary, put a great deal
of strain on the EU’s ability to subsidize its members. 11-3 THE HUMAN RESOURCE
Furthermore, when Greece threatened to default in 2011, FUNCTION IN INTERNATIONAL
massive transfers of funds from Germany and France were
required to stabilize its economy (at least for the time).
BUSINESS
When Italy also looked as though it was nearing default All basic international functions—marketing, operations,
in late 2011, it became clear that the EU simply did not finance, and human resources—play a vital role in interna-
have the money to bail out such a large economy. In early tional business. The HR function, for example, must deal
2012, Italy introduced new austerity measures and a new with several general, fundamental management challenges
government. These actions stabilized the EU temporar- in international business.14 These challenges are illustrated
ily, but the possibility of an Italian default, coupled with in Figure 11.6. In addition, specific HRM implications exist
a possible Spanish default, remains a real threat in the for the different forms of international business activity
coming years. that firms can pursue.
Another less-comprehensive economic community
was created by the North American Free Trade 11-3a General Human Resource
Agreement (NAFTA). NAFTA attempts to reduce
the trade barriers that exist among Canada, the United
Issues in International Business
States, and Mexico, making it easier for companies to One general set of challenges relates to differences that may
do business in each of the three countries. Extending exist in culture, levels of economic development, and legal
NAFTA to other countries in Latin America, especially systems that typify the countries where the firm operates.
Chile, has been discussed, but for now at least it remains These differences may force an international organization
a three-country union. No plans for a single currency to customize its hiring, firing, training, and compensation
have been seriously discussed, and human resource programs on a country-by-country basis. A particularly
management practices and laws remain independent. But difficult set of issues arises when conflict exists between
NAFTA also includes separate labor agreements, which the laws or cultures of the home country and those of the
have the potential to affect HRM practices dramatically. host country.
The Commission on Labor Cooperation, for example, The first issue of conflict is discrimination. For
was established to hear cases dealing with these labor example, it is illegal in the United States to discriminate
agreements in areas such as child labor, occupational in an employment relationship on the basis of gender. In
safety and health, and union–management relations. Saudi Arabia, on the other hand, such discrimination is
Some of these standards are more stringent than those not only allowed but also expected. Women are highly
imposed by U.S.-based legislation. Although it is not restricted in their career opportunities, and a firm doing
clear how much enforcement power the Commission business in that country has to balance its own affirma-
on Labor Cooperation will have, it is possible that HR tive action efforts with the legal and cultural restrictions
managers will have to deal with an even more complex imposed by that country. And overt discrimination is still
set of regulations in the future. It is interesting to note actively practiced in many other countries as well.15 As we
that these standards would apply not only to U.S. noted, the Civil Rights Act of 1991 allows employees of
companies doing business in Mexico or Canada but U.S. firms working abroad to sue their employers if they
also to U.S. companies doing business solely in this violate the Civil Rights Act. But exception to this privilege
country. exists when a country has a law that specifically contradicts
the Civil Rights Act. For example, a woman could not sue

Chapter 11: The Global Environment 319

 FIG 11.6
© Cengage Learning

 Fundamental Management Challenges

in International Business

Avoiding Training and

discrimination in development of
employment employees

General HR
issues in
international
business

Choosing an Working conditions,

appropriate source compensation, and
of employees the cost of living

a U.S. company operating in Saudi Arabia for sex discrimi- large pool of well-educated (often at Western universities),
nation because some discrimination against women is actu- highly motivated locals who are qualified for and interested
ally prescribed by law in that country. On the other hand, in management positions now exists in these same coun-
Japan has no laws institutionalizing such discrimination, tries. Some U.S.-based organizations are taking advan-
so a woman could bring suit against a U.S. firm operating tage of these relatively new labor pools by hiring local
there if it were guilty of discriminatory practices. employees and then transferring them to the United
The second fundamental HR challenge in international States for training before returning them to their home
business (a topic introduced earlier) is the determination of country, where they can play a key role in managing the
the most appropriate source of employees: the host country, global enterprise. U.S.-based universities are increas-
the home country, or a third country. The ideal combina- ingly opening branches for graduate study in places such
tion of employees differs according to the location of a firm’s as Singapore and China, as are European universities,
operations, the nature of its operations, and myriad other especially INSEAD.
factors. A company is more likely to hire local Third, international businesses must also

© Corbis Super RF/Alamy

employees, for example, for lower-level deal with complex training and development chal-
jobs with minimal skill requirements lenges. At one level, for example, HR
and for which there is a reasonable managers need to provide cross-
local supply of labor. Again, it is also cultural training for corporate execu-
necessary to consider local laws or tives who are c­hosen for overseas
customs that may limit or constrain assignments. In addition, train-
hiring practices. For instance, immigra- ing ­ programs for production
tion laws may limit the number of work workers in host countries must
visas that a firm can grant to foreigners, be ­tailored to represent the educa-
and employment regulations may mandate tion offered by local school systems.
the hiring of local citizens as a requirement Dramatic differences in the skill and
for doing business in a particular educational levels within a labor force
country. make it necessary for international business
But this situation is chang- to pay close attention to the training and devel-
ing to some extent. Twenty- opment needs of all its employees in foreign mar-
five years ago, companies kets.16 But again, the establishment of institutions of
doing business in places such higher education from the United States, the United
as Singapore would have relied Kingdom, France, and Australia has changed the face
on the local labor market for of local training and education in many countries, espe-
hourly employees only. Over cially in Asia.
the years, however, Singapore The fourth important international HRM question
and other countries have made relates to working conditions, compensation, and the cost
significant investments in their of living. It costs more for people to live and work in some
human capital. As a result, a countries than in others. A general stance adopted by most

320 Human Resource Management

international businesses is that an employee should not as employees in the operations, sales, or finance depart-
suffer a loss of compensation or a decrease in his or her ments. Thus, when a domestic firm begins to export to
standard of living by virtue of accepting an international a foreign market, the human resource function may be
assignment. Thus, HR managers must determine how to extended to include another set of employees, but it does
compensate executives who accept overseas assignments not change in any other meaningful way.
and who face higher costs of living, a reduction in their Another popular form of international business
quality of life, or unhappiness or stress because of sepa- strategy is called licensing. Under this agreement, a com-
ration from family or friends. This stance, however, can pany grants its permission to another company in a for-
create some additional complications that we will address eign country to manufacture or market its products in
later when dealing with issues for expatriate managers. the foreign country’s local market. For example, a cloth-
ing manufacturer might allow a manufacturer in another
country to use its design, logo, and materials to manu-
11-3b Specific Human Resource facture clothing under the original firm’s name. Under
Issues in International Business such an agreement, the licensing firm typically pays a
royalty or licensing fee to the original firm based on the
Organizations can adopt a wide variety of strategies for com- number of units it actually sells. Microsoft licenses soft-
peting in the international environment. Each strategy poses ware firms in other countries to produce and distribute
its own unique set of challenges for HR managers. One com- software products such as Office and Windows in their
mon strategy is exporting, which is the process of making a local markets.
product in the firm’s domestic marketplace and then selling The major advantage of this strategy is that it allows
it in another country. Exporting can involve both goods and the firm to enter a foreign market with relatively little risk
services. U.S. agricultural cooperatives export grain to Russia and to gain some market exposure and develop name rec-
while major consulting firms sell their services to companies ognition that will make it easier for it to enter the mar-
in Europe and Asia. Other businesses ship gas turbines to ket more aggressively in the future. On the other hand,
Saudi Arabia, locomotives to Indonesia, blue jeans to Great its profits are limited to those it receives from the royalty
Britain, computers to Japan, disposable diapers to Italy, payment. Likewise, the firm must also be vigilant to ensure
and steel to Brazil; others sell airline service, information- that its quality standards are upheld.
technology support, and various other service products. If a firm is involved in international business activities
Such an approach to international business has many exclusively via licensing, the HR function is approached
advantages. First, it is usually the easiest way to enter a new in the same way as in a pure exporting enterprise. In other
market. In addition, it typically requires only a small out- words, no meaningful differences in the HR function
lay of capital. Because the products are usually sold “as is,” likely exist, but HR managers need to extend their exist-
there is no need to adapt them to local conditions. Finally, ing services and responsibilities to employees associated
relatively little risk is involved. On the other hand, products with the licensing activities. The HR function itself does
exported to other countries are often subject to taxes, tar- not really change in any meaningful way.
iffs, and high transportation expenses. In addition, because A third international strategy for doing business is
the products are seldom adapted to local conditions, they direct foreign investment. A direct investment occurs when
may not actually address the needs of consumers in local a firm headquartered in one
markets, and consequently the products may not achieve country builds or purchases
their full revenue potential. The shipment of some prod- operating facilities or sub- Exporting is the process
ucts across national boundaries is also restricted by vari- sidiaries in a foreign coun- of making a product in the
ous government regulations. For example, it is not easy for try; that is, the firm actu- firm’s domestic marketplace
and then selling it in another
ranchers from the United Kingdom to export beef into the ally owns physical assets in country. Exporting can involve
United States because of complex regulations designed to the other country. Boeing, both goods and services.
protect U.S. domestic beef producers. for example, constructed a
Licensing involves one
If the firm functions solely as an exporter, the human composite materials factory company granting its
resource function faces no meaningful differences in in China. This business permission to another
responsibilities from those in a domestic business. An activity represents a direct company in a foreign country
to manufacture or market its
exporting company usually has an export manager, and investment on the part of products in its local market.
that manager likely has a staff to assist in the various parts Boeing. Other examples of
of the exporting process. Human resource managers usu- direct investment include Direct foreign
investment occurs when a
ally play a role in hiring people for these jobs and oversee the Disney Corporation’s firm headquartered in one
other aspects of their employment, such as compensa- construction of a new theme country builds or purchases
tion and performance appraisal. But other than perhaps park near Hong Kong, a operating facilities or
subsidiaries in a foreign
some exporting-specific skills required for workers in Mercedes Benz plant in country.
this department, these employees are treated the same Alabama, and Procter &

Chapter 11: The Global Environment 321

 the company itself keeps all the profits its investment earns
© AP Photo/Disney, David Roark

in that country. On the other hand, considerably more risk

is attached to this strategy. Just as the investing firm can
keep all its profits, so too must it absorb any and all losses
and related financial setbacks. In addition, of course, the
costs of direct investment are also quite high and borne
solely by the investing firm.
At this level of international business activity,
the HR function changes substantially from that of a
domestic firm or business using a pure exporting or
licensing strategy. This difference stems from the fact
that in a direct investment, employees of the firm are
working in foreign locations. Depending on the nation-
alities reflected in the foreign workforce (i.e., whether
the firm uses a polycentric, geocentric, or ethnocentric
approach to hiring), the corporate HR function will
need to extend and expand its scope and operations to
provide the appropriate contributions to firm perfor-
mance as determined by the philosophy used for staffing
the foreign operations.
A fourth form of international strategy is a joint venture
or strategic alliance. In this case, two or more firms cooperate
in the ownership or management of an operation, often on an
Disney’s new theme park equity basis. Joint venture is the traditional term used for such
in Hong Kong is a major an arrangement and describes a situation in which actual
equity ownership exists. A strategic alliance might not involve
direct foreign investment. ownership but still involves cooperation between firms. Both
arrangements are rapidly growing in importance in the inter-
national business environment. They represent a way for two
or more firms to achieve synergy from working together, they
Gamble’s construction of a major new distribution center reduce risk, and they provide mutual benefit to both part-
in Brazil. ners. The airline industry has seen several strategic alliances.
As already noted, there are actually two differ- One of the largest is known as the Star Alliance. This group
ent forms of direct investment. First, the firm can sim- includes United Airlines, Lufthansa, Swiss Air, Air New
ply acquire an existing business in the foreign country. Zealand, South African Airlines, Singapore Airlines, and Air
This has been the primary strategy used by Walmart China, among other airlines from all over the world. This
as it entered the market in the United Kingdom—it alliance makes it easier for travelers to place reservations,
bought existing retail chains and then converted them to purchase tickets, and make connections between any two or
Walmarts. This approach provides nearly instant access more partners in the alliance. This flexibility also makes the
to new markets, but it may require protracted negotia- group itself more competitive relative to other airlines.
tions over the acquisition; afterward, the firm also faces Human resource managers in a firm that uses this
the challenge of how to integrate the new acquisition into strategy face an even more complex set of issues and chal-
its other operations. Alternatively, the firm can create or lenges. If the new operation is a separate legal entity that
build a new wholly owned subsidiary, factory, or other functions as a semiautonomous enterprise, the corporate
unit. This takes much more time, carries much greater human resource staff of each strategic partner needs to
risk, and is much more expensive, yet it also represents determine how to link and coordinate with their counter-
the path to the greatest potential profits. parts in both the new venture (seen as a separate entity)
In either case, direct investment has the advantage that and their partner. If the new venture is operated within
it provides the firm its own company-owned facilities in the the context of one of the existing partner’s organization
foreign country, and allows it to become truly integrated in structures, the HR function becomes more complicated
a particular foreign market. still because of the disparate relationships among the HR
Considerably more profit staff for the new venture and its counterparts in both the
In a joint venture (strategic potential can be realized in partner within which it operates and the other partner
alliance), two or more firms direct investment because (this latter relationship is somewhat more distant).
cooperate in the ownership or
management of an operation
on an equity basis.

322 Human Resource Management

 © Ryan McVay/Photodisc/Getty Images
11-4 DOMESTIC ISSUES IN
INTERNATIONAL HUMAN “Globalization has
RESOURCE MANAGEMENT changed us into
Regardless of their level of internationalization, all firms a company that
dealing in foreign markets must confront three sets
of domestic issues in the management of their human
searches the world,
resources. These domestic issues, shown in Figure 11.7, not just to sell or
are local recruiting and selection, local training, and local
compensation. to source, but to
find intellectual
11-4a Local Recruiting and
Selection Issues capital—the
Nonmanagerial employees, such as blue-collar production world’s best
workers and white-collar clerical and office workers, are
usually HCNs in international business. Basic and funda- talents and
mental economic reasons explain this pattern. Simply put,
host-country nationals are usually cheaper to employ than
greatest ideas.”
parent-country or third-country nationals. Host-country
nationals are also frequently used because local laws usually
—Jack Welch,
American businessman and author,
promote the hiring of locals.17 Immigration laws, for exam-
former chairman and CEO of
ple, may restrict jobs to citizens and legal residents of a
General Electric, 1981–2001
country. Thus, an international business must develop and
implement a plan for recruiting and selecting its employees
in a host-country market. This plan must include assess-
ments of the firm’s HR needs, primary sources of labor
in that country, labor force skills and talents, and training
11-4b Local Training Issues
requirements. In addition, the plan should also account for Human resource managers must also understand the train-
special circumstances that exist in the local markets. When ing and development needs of the host country’s workforce
firms hire parent-country nationals for foreign assign- to help host-country nationals perform their jobs most effec-
ments, they must obviously adhere to their home-country tively. These needs of a local workforce depend on several
hiring regulations. But when hiring HCNs, they must also factors. One, of course, is the location of the foreign market.
be aware of the regulations, laws, and norms that govern In highly industrialized markets such as England and Japan,
employment relationships within the host country. Thus, organizations can usually find a cadre of capable employees
even though the reliance on parent-country nationals may who may need only a small amount of firm-specific training.
be less expensive, it adds complexity to the employment But in a relatively underdeveloped area, training and devel-
relationship.18 opment needs will be much more extensive.

FIG 11.7  Domestic Issues in International

Human Resource Management

Local recruiting and

selection issues

Domestic issues in
international
human resource
management
© Cengage Learning

Local training issues Local compensation issues

Chapter 11: The Global Environment 323

 For example, when Hilton first began opening hotels
in Eastern Europe, it found that restaurant waiters, desk
clerks, and other customer-service employees lacked the
basic skills necessary to provide high-quality service to
guests. Because Eastern European employees were accus-
tomed to working in a planned economy in which they
did not have to worry about customer satisfaction, they
had difficulty recognizing why it was important to shift
their focus. As a result, Hilton had to invest consider-

© Danilo Ascione/Shutterstock
ably more than originally planned in training employees
to provide customer service. Training is also important
if international business wants to take full advantage of
locating production abroad. Many firms move production
facilities to areas with low labor costs such as Malaysia
and Mexico but then find that the productivity of the
labor force is relatively low. Thus, they have to invest
additional training and development dollars to bring the
workforce up to the performance standards they expect.

© Zelenskaya/Shutterstock
11-4c Local Compensation Issues
Compensation must also be addressed at a local level for inter-
national businesses. Some countries, such as the United States,
focus compensation on assessing an individual’s performance
and then compensating that individual accordingly. In other
countries, however, such as Japan, the emphasis is based more
on group work and less on individual performance. Dramatic
differences in lifestyles, standards of living, and regulation also
11-5 MANAGING
cause a wide variation in the way in which firms compensate INTERNATIONAL TRANSFERS
their employees in different foreign locations. AND ASSIGNMENTS
Of course, dramatic differences in benefit packages are
offered to workers in different countries as well. In coun- Another extremely important part of international human
tries with socialized medicine such as the United Kingdom, resource management is the effective management of expa-
firms do not have to worry as much about paying all or part triate employees.20 Expatriates are employees who are sent
of employee health-insurance premiums (although they pay by a firm to work in another country; they may be either
higher taxes to help support the government program). In parent-country or third-country nationals. Particularly
Italy, most workers expect to have several hours off in the important areas here include selecting, training, and com-
afternoon. Also, Italy and Britain legally mandate 4 weeks of pensating expatriates. It is also important to understand
vacation a year, while France and Denmark mandate 5 weeks. how the management of expatriates is related to a firm’s
In contrast, U.S. firms are not legally required to provide any international strategy.21
vacation leave.19
It is also important for international HR managers to 11-5a Expatriates and Corporate
look at the total picture of compensation rather than on some International Strategy
simple index such as the hourly wage. For example, as already
To a large extent, how a firm deals with expatriates should
noted, some firms choose to move production to Mexico to
depend on the strategy the firm is pursuing in terms of its
take advantage of lower labor costs. Although labor costs
international operations. We can best understand this rela-
in Mexico are cheaper than they are in the United States
tionship if we think about how expatriates help multina-
(when compared on an hourly basis), Mexican law requires
tional corporations (MNCs)s compete by playing a role in
employers to pay maternity leave to their employees, pro-
the knowledge-transfer process. This process involves the
vide a Christmas bonus equal to 15 days’ pay, and provide
acquisition of knowledge as well as the diffusion of knowl-
at least 3 months of severance pay for workers who are ter-
edge throughout the organization; indeed, some people
minated. Lower labor costs
have argued that MNCs exist primarily because they can
thus may be at least partially
Expatriates are employees transfer and exploit knowledge more efficiently and effec-
lost because of these and
who are sent by a firm to tively than by using external market mechanisms.22
work in another country; they other higher costs for other
The expatriate manager is the key player in this
may be either parent-country benefits.
or third-country nationals. knowledge-transfer and diffusion process; unfortunately,

324 Human Resource Management

this manager may not have a real incentive to share the information acquired by the managers and can later diffuse
information he or she has acquired. If the expatriate man- that information throughout the firm. From this perspec-
ager does not share all the information acquired, then he or tive, the success of an expatriate assignment depends on the
she will have a monopoly on that information, which can volume and quality of the information acquired by the expa-
be to the manager’s advantage (referred to as “opportunis- triate and shared with the organization and its members.25
tic behavior”). Furthermore, the organization cannot pos-
sibly know all the information the expatriate manager has 11-5b Selecting Expatriates
acquired. This then poses the classic agency problem23 in Recruiting and selecting employees for an international
which the incentives of the parties are not aligned and there business requires that the HR manager address two sets of
is an asymmetry in terms of who knows what. Furthermore, questions.26 The first set of questions involves the defini-
this problem can become more or less severe, depending on tion of skills and abilities necessary to perform the work
which international strategy the organization uses. that the organization needs to have done. The second set
Table 11.2 shows the situation relative to potential relates to defining the skills and abilities that are needed to
agency problems for each of four international strategies work in a foreign location.
proposed by Bartlett and Goshal.24 Firms carrying out a The first step, then, is to define the actual skills necessary
global strategy rely heavily on direction from the home office, to do the job. Different types of assignments typically require
with one global strategy applied to all operations. Expatriate different types of skills for success. Traditionally, expatriate
managers are not capable of making important decisions managers were sent abroad to provide some technical exper-
and so have less opportunity to behave opportunistically, tise that was not available in the local economy. In such cases,
and there is a low level of information asymmetry (lowest it is extremely important that the manager selected has the
risk of agency problems). Firms employing an international requisite technical skills and communication skills needed
strategy also rely heavily on headquarters expertise, although to work with less technically adept workers. Because these
this expertise is adapted to local needs. The threat of oppor- assignments are often for a limited time, however, it may be
tunistic behavior and information asymmetry are also low less critical that the manager possess extensive cultural skills.
here, but not as low as with the global strategy (low risk of But multinational enterprises (MNEs) more and more often
agency problem). The threat of opportunistic behavior and send managers overseas, not to help the overseas operation,
information asymmetry are higher when a firm adopts a but to help the manager. In other words, they see expatri-
transnational strategy (higher risk of agency problem). Here ate assignments as a critical developmental opportunity that
the expatriate manager is expected to acquire, leverage, and is essential for career progress.27 Clearly, success in these
transfer specialized knowledge. The only limit to the expa- assignments is based less on technical skills, and cultural skills
triate’s opportunistic behavior is the need to get locals to go would be far more critical because the expatriate manager is
along with the behavior. Finally, firms using a multidomestic supposed to learn from his or her experience and carry this
strategy face the greatest threats for opportunistic behavior information back to the home country. Some of the more
and greatest information asymmetry (highest risk of agency common skills and abilities assumed to be necessary in this
problem) because all decision making is decentralized. regard include adaptability, language ability, overall physical
For the MNC to manage the expatriate’s information and emotional health, relatively high levels of independence
acquisition successfully in cases where there is a transna- and self-reliance, and appropriate levels of experience and
tional or multidomestic strategy, the firm may implement a education. We will say more about required skills and abili-
“knowledge contract” by which the organization systemati- ties later in the chapter.
cally debriefs expatriate managers to make sure it has all the The recruitment of employees for international busi-
ness is an important step in the HRM process. International
businesses attempt to recruit experienced managers through
TABLE 11.2  Threat of Opportunism and
Asymmetry of Information as
a Function of International
various channels. One common source of recruits is the firm
itself. A good starting place may be to seek employees already
Corporate Strategy working for the firm and in the host country who might be
prepared for international assignment. In some cases, the firm
Strategy Risk for Potential may be selecting individuals for their first international assign-
Agency Problems
ment, but in other cases they may be selecting people for their
Global (one strategy for all) Lowest second or third international assignment. Nestlé, for example,
maintains a cadre of approximately 200 managers who are
International (one strategy adapted for Low
local needs)
capable of and willing to accept an international assignment
anywhere the firm does business.28
© Cengage Learning

Transnational (high transfer with much High International businesses also frequently look to other
independence) organizations as a source of prospective managers. These
Multidomestic (strategy developed in each High may be home-country managers who are qualified for an
country) international assignment or managers already working in

Chapter 11: The Global Environment 325

 an international assign- and adaptability to new situations. It is extremely important
© Palto/Shutterstock

ment for another firm. that organizations select managers for international assign-
For higher-level posi- ments with deliberate care.
tions in an organization, The cost of a failed inter-
international businesses national assignment is
often rely on profes- extremely high. Expatriate
sional recruiting firms failure is defined as the
to help them identify early return of an
prospective mana- expatriate manager
gerial candidates. to his or her home
These recruiters, country because of
often called head- an inability to per-
hunters, are recruit- form in the over-
ing firms that actively seas assignment.31
seek qualified managers Experts sug-
and other profession- gest that a
als for possible place- failed expa-
ment in positions in triate assign-
other organizations. ment for a
Headhunting has long top manager
been an accepted practice in might cost the organization as
the United States. In both Japan and Europe, headhunting much as $250,000 in addition to any salary losses. This
was considered unethical until recently. Within the last figure includes the expatriate’s original training, mov-
decade or so, however, headhunting has become a more ing expenses, and lost managerial productivity. Failure
accepted practice in most industrialized countries.29 of expatriate assignments is quite high. Estimates place
Increasingly, many firms are finding it necessary to hire the expatriate failure rate in U.S. companies at between
new college graduates for immediate foreign assignment. 20 percent and 50 percent. Japanese and European firms
Tradi­tionally, this practice has been relatively unpopular appear to do a somewhat better job of selecting interna-
because organiza­tions believed that managers needed to tional managers and, as a result, experience a lower expa-
develop experience in a firm’s domestic operations before triate failure rate.32 We should note, however, that there
taking on an international assignment. Because of both the is actually a great deal of debate over how to define failure
shortage of global managers and the recent emphasis that and the true failure rates for expatriate assignments in
many colleges of business are placing on training interna- general.33
tional managers, however, firms are finding that they can Several factors may contribute to this pattern. One
hire younger managers and place them in foreign assign- is the inability of the manager or the manager’s spouse
ments more quickly than in and family to adjust to a new loca-
the past. Potential manage- tion. Evidence suggests that this
rial candidates with foreign- inability interferes with the
language skills, interna- “It has been manager’s ability to adjust
tional travel experience, and
course work in international
said that to the new setting and
subsequently contributes
business or related fields arguing against to failure.34 As a result of
are especially attractive this pattern, some firms
candidates for firms in this globalization are beginning to pay
position.30
After a pool of quali-
is like arguing more attention to help-
ing spouses and children
fied applicants has been against the laws adjust to the new envi-
© Ryan McVay/Photodisc/Getty Images

identified, the organization ronment, and many other

must then select the manag- of gravity.” firms are placing a greater
ers that it needs for inter- emphasis on the nontech-
national assignments. In —Kofi Annan, nical aspects of a prospec-
general, organizations look Ghanaian diplomat, tive manager’s suitability
at three sets of criteria for seventh secretary-general of the for a foreign assignment.
selecting people for interna- United Nations, and winner of For example, they look
tional assignments: managerial 2001 Nobel Peace Prize closely at a person’s cul-
competence, language training, tural adaptability, as well

326 Human Resource Management

as the adaptability of his or her family. It is also important 11-5c Performance Management
to consider the perspective of an international manager’s of Expatriates
motivation for and real interest in the foreign assign-
Expatriate performance appraisal meets with certain chal-
ment. Some managers are attracted to foreign assign-
lenges: First question comes who will appraise subsidiary
ments because they relish the thought of living abroad or
manager’s performance? Is it the host country manager or
perhaps they see the experience as being useful in their
the managers from headquarter? Second question comes,
career plans.35 In addition, personality and international
what would be the exact criteria on the basis of which per-
experience (of any type) also seem to be important deter-
formance should be evaluated? Generally, the parent com-
minants of expatriate success.36
pany defines the roles for HCNs and HCNs are expected
Regardless of their motives in seeking international
to enact the roles in a country culture which is different
assignments, and regardless of their skills and abilities to
from that of headquarter. It becomes more challenging
carry out those assignments, many managers who do not
when HCN reports to a PCN who does not immerse in
have a realistic preview of what an international assign-
the realities of the host country. Third, no two subsidiar-
ment really is become disillusioned within a few months
ies are exactly the same, hence evaluating the financial or
of accepting such an assignment. Thus, it is critical that
market performance of a subsidiary as a proxy to evaluate
organizations prepare managers completely for what they
subsidiary manager’s performance also becomes faulty. To
might expect when they move overseas. It is also becom-
solve some of these problems, generally a team of evalua-
ing clear that once expatriate managers arrive at their new
tors (either from home or host country), the expatriate’s
assignments, they must receive support and help from the
own self ratings and HR Manager (either from home or
HCNs with whom they will be working.37 This realiza-
host country) constitutes a panel of evaluators and the
tion is quite important because it may have far-reaching
expatriate’s get appraised. Also, customization of perfor-
implications for other expatriate HR policies. Specifically,
mance evaluation format based on subsidiary situation can
as we shall see later, a great deal of attention is given to
tackle some troubles. For this HCN’s inputs need to be
the problem of how to compensate expatriate manag-
incorporated in the performance management system.
ers. Most of the policies and practices result in expatriate
managers earning considerably more than any host-coun-
try counterparts. In the past, this problem was not that 11-5d Training Expatriates
serious because few local managers had the background Given the potential costs involved in failure, it is not surpris-
and training of the expatriates. In fact, it was this very ing that organizations also spend a great deal of time and
lack of local competence that led many organizations to money on training expatriate managers. General Motors
assign expatriate managers. But, as noted earlier, organi- spends almost $500,000 a year on cross-cultural training
zations increasingly see expatriate assignments as helpful for 150 or so U.S. managers and their families heading to
to the home-country manager. As a result, he or she may international assignments. The firm reports that less than
be assigned to a foreign post even though other HCNs 1 percent of its expatriate assignments fail, and it attributes
or local employees are capable of doing the same job. As much of its success to its training program.39 Training is
many countries more routinely send potential managers instruction directed at enhancing specific job-related skills
abroad for training and education, the
local employee may well be as qualified
in every way as the expatriate. To date,
however, most expatriate policies dictate
that the expatriate manager would earn
more than the local doing the same or
a similar job. This situation can lead to
resentment on the part of the HCN and
can potentially lead the HCN to with-
hold the help and support the expatriate
needs to be successful. Does this mean
that expatriates should not be compen-
sated for their overseas assignments?
© StockLite/Shutterstock

Surely not, but it does mean that orga-

nizations may have to take a closer look
at their expatriate policies and practices
and evaluate them in light of the impor-
tance of obtaining HCN support for the
expatriate once he or she arrives in the
new assignment.38

Chapter 11: The Global Environment 327

and abilities and most often focuses on operating employ- and nonsalary items and are jointly determined by labor-
ees and technical specialists. For example, a training pro- market forces such as the supply and demand of managerial
gram might be designed to help employees learn to use a talent, professional licensing requirements, the standard of
new software package as part of an international communi- living, occupational status, and government regulations.45
cation network. Development is general education devoted Most international businesses need to provide expatri-
to preparing future managers for higher-level positions or ate managers with differential compensation to make up for
new assignments within the organization. For example, a differences in currency valuation, standards of living, lifestyle
development program might span several months or even norms, and so on. When managers are on short-term assign-
years and be targeted to help managers improve their ability ments at a foreign location, their salaries are often tied to
to make decisions, motivate subordinates to work harder, their domestic currency and home-country living standards.
and develop more effective strategies for theorganization.40 Of course, these managers are reimbursed for short-term liv-
Training for expatriate managers may be as “simple” ing expenses such as the cost of hotel rooms, meals, and local
as language training (which is not especially simple if it transportation. If the foreign assignment is for a longer time
involves a completely unfamiliar language such as Japanese period, however, compensation is usually adjusted to allow the
or Arabic for the English speaker) or it can be rather manager to maintain her or his home-country standard of liv-
involved. For example, language-training programs and ing. This adjustment is particularly important if the manager
other forms of language training from CD-ROMs, videos, is transferred from a low-cost location to a high-cost location
and similar media are common and fairly inexpensive.41 or from a country with a relatively high standard of living to
In addition, it is common to have some type of classroom one with a relatively low standard of living.46
training dealing with the history of the country or the area Differential compensation usually starts with a cost-of-
and with daily living conditions (e.g., how to make a phone living allowance. This basic difference in salary is intended
call or hail a taxicab). It is also typical to have some train- to offset the differences in the cost of living between home
ing component that deals with social manners and issues and host countries. The logic is that if managers accept a
involved in social exchanges (when one should and should foreign assignment, they should enjoy the same standard
not shake hands, for example, and how deeply to bow).42 of living as they would have enjoyed had they remained
The Cultural Assimilator is a more complex training in their home country. If the cost of living in the foreign
program built around short case studies and critical inci- country is higher than that at home, then the manager’s
dents. It asks the manager how he or she would react to dif- existing base pay alone will result in a lower standard of
ferent situations, and it provides detailed feedback on the living. The firm may therefore need to supplement the base
correct responses.43 In addition, firms are more often sending pay to offset the difference. On the other hand, if the cost
prospective expatriates to their ultimate foreign destination of living at a foreign location is lower than that at home, no
for short periods of time before their permanent move. This such allowance is needed (few companies would actually
experience allows them to become acculturated on a gradual lower the manager’s salary).
basis and to obtain a truly realistic picture of what life will Occasionally, organizations might have to provide an
be like. But whatever the exact nature of the training, the additional salary inducement simply to convince people to
goals of expatriate training are becoming clearer and more accept a foreign assignment. Many employees may be rela-
consistent. Increasingly, multinational organizations are rec- tively interested in accepting assignments to countries such
ognizing that managers given overseas assignments must be as England, France, Italy, or Japan, but it may be more dif-
able to communicate with others in the host country and be ficult to entice people to accept a position in Haiti, Pakistan,
able to adapt to different lifestyles and values. When we con- or Vietnam. Thus, organizations sometimes find it neces-
sider all the factors that seem to go into expatriate success, sary to provide what is called a hardship premium or a foreign-
it becomes clearer why some have suggested that a manager service premium. Total Fina Elf S.A. is a large French oil
given an assignment in a foreign country must possess “the company. The firm has substantial holdings in the African
patience of a diplomat, the zeal of a missionary, and the lan- country of Angola. During a recent bloody civil war in the
guage skills of a U.N. interpreter.”44 country, however, Total pulled its employees out. When
the war ended, Total began to again assign managers to run
11-5e Compensating Expatriates its Angolan operations. But because of lingering violence
As noted earlier, compensation is another important issue and other concerns, the firm had to provide them with a
in international human resource management. To remain 25-percent salary premium and many other incentives to
competitive, an organiza- get the desired mix of managers who would agree to accept
tion must provide com- their new assignments. Likewise, during the reconstruction
A hardship premium (also
called a foreign service
pensation packages for its efforts in Iraq in 2004–07, U.S. contractors such as KBR
premium) is an additional managers that are compa- (a large military contractor) also paid substantial premiums
financial incentive offered to rable to those in a given to attract and retain employees willing to work there. This
individuals to entice them to
accept a “less than attractive”
market. Compensation premium (called an uplift by the firm) was sometimes more
international assignment. packages include salary than the individual employee’s base salary.

328 Human Resource Management

 Many international businesses also find that they world. As a result, managers assigned to foreign posts in
must set up a tax-equalization system for their manag- Japan may be given supplemental benefits to cover the
ers on foreign assignments. This system ensures that the costs of memberships and be able to conduct business
expatriates’ after-tax income in the host country is compa- effectively.47 When we take all these factors into consid-
rable to what the after-tax income would have been in the eration, it is easy to see how HCNs could become resent-
person’s home country. Every country has its own unique ful about the salary and perks that expatriates receive.
income tax laws that apply to the earnings of its citizens On the other hand, most companies believe that only by
or to earnings within its borders by foreign citizens, and providing such inducements can they persuade qualified
companies must develop plans to make sure that the tax managers to accept overseas assignments.
burden for individuals is equalized relative to the amount Figure 11.8 illustrates how one company conceptualizes
of salary they earn. its compensation package for expatriates. The left side
The other part of compensation besides salary is of its “balance sheet” summarizes what an employee cur-
benefits. Most international businesses find that, in rently earns and spends in the United States as broken
addition to salary adjustments, they must also provide down into taxes, consumption, and savings. The right
benefit adjustments. Special benefits for managers on side of the sheet provides more detail for these categories,
foreign assignments usually include housing, education, allowing managers to provide comparable income to man-
medical treatment, travel to the home country, and club agers taking international assignments. Although more
membership. Housing benefits are usually provided as a than 85 percent of North American companies use this
way to help equalize housing expenses in different areas. approach, it is not without its critics.48 Furthermore, the
Equalizing the type of housing an executive enjoys in her high costs associated with this approach have led some
or his home country may be expensive, so housing is usu- critics to call for shorter-term assignments and some
ally treated as a separate benefit for expatriate managers. forms of cost sharing by the expatriates.49
If a manager is going on a long-term or permanent foreign
assignment, then the organization may buy the manager’s 11-5f Two Approaches of
existing home and help the manager buy a home in the Compensation Management
host country.
Firms also find it increasingly necessary to provide There are two approaches of compensation management
job-location assistance for the spouse of an executive being in international human resource management field: Going
transferred abroad and to help cover the education costs Rate Approach, and Balance Sheet Approach50.
for their children. Children may need to attend private
schools, and the firm would pay the tuition and perhaps Going rate approach In this case the base salary is
other school fees. Medical benefits are also often adjusted determined on the basis of the rates prevailing in the host
for managers on international assignment. For example, country. For example, a US company operating in India
some people consider medical facilities in Malaysia to be would need to decide whether the reference point while
substandard; as a result, firms that transfer employees determining salary would be local US salary, or prevalent
to that country often find it necessary to agree that their rates in India. The base pay may be determined by the
employees can travel to Singapore whenever they need local rates prevalent in Indian labor market. An additional
something other than routine medical attention. benefit or payment may get added subsequently. This
International businesses may also provide expatriates method has the advantage that host country nationals will
with a travel allowance for trips back to the home country accept the local rate easily since they will know the preva-
for personal reasons such as visiting other family members lent local market rates. However, since no two subsidiaries
or celebrating holidays. Managers and their families may are the same, variations in country assignments can create
typically be allowed one or two trips home per year for per- substantial pay disparity amongst expatriates. Also dur-
sonal reasons at the company’s expense. If the assignment ing repatriation if the expatriate gets less salary at home
is relatively short term and a manager’s family remains at country than what s/he was entitled at the host country,
home, then the manager may be provided with even more then some expatriates may feel disgruntled. Once a par-
trips home to compensate for the fact that the manager and ticular standard of living gets built up, it becomes difficult
her or his family are separated. to change that.
Finally, it may be necessary to provide certain kinds
of club memberships. In some cultures, for example, Balance sheet approach In this approach, the
belonging to a specific club or participating in a particu- objective becomes to maintain the same standard of liv-
lar activity is a necessary part of the business world. The ing of expatriates that they were entitled to in their home
Japanese, for instance, often conduct business during a country. Home country compensation structure remains
round of golf. At the same time, golf-club memberships the primary template of determining the overall compen-
in Japan cost thousands of dollars, and a single round of sation of expatriates. Some financial incentives are added
golf costs many times more what it costs in the rest of the for the hardship involved in expatriation. Majority of

Chapter 11: The Global Environment 329

 FIG 11.8  Expatriate Compensation
Balance Sheet
U.S. Domestic U.S. Expatriate
Base Salary Balance Sheet

U.S. hypothetical tax

Taxes and Social Security

Foreign and excess U.S.

taxes paid by company

U.S. spendable income

U.S. hypothetical housing
Consumption
and utility
U.S. auto purchase

Excess foreign costs

paid by company

© Cengage Learning
Savings U.S. levels

Foreign service premium/

hardship added by company

the MNCs use this approach. Benefits of this approach program. Through this program, spouse can opt for the
include, first, employees operating in the same subsidiary opportunity of tuition reimbursement, assistance of work
will not face disparity in the salary structure due to differ- permit, seed money for setting up of own business, while
ent foreign assignments; second, repatriation of executives the couple leave their homeland. Completely reimbursing
to their home base does not require major salary adjust- one spouse for the loss of career opportunity still remains
ment. Problem may occur when both PCN and HCN do difficult. Other options include intercompany networking
the same or similar job yet the salary structures of both or intra-company employment of spouse of the working
differ due to their different home country locations. When executive going abroad. Under intercompany networking,
companies headquartered in developing nation and oper- MNCs on the basis of reciprocal arrangement try to place
ating in the developed country, send their expatriates to the accompanying spouse to another MNC. Through
developed nation, these executives will see that they are intra-company arrangement couples are placed under the
underpaid compared to the existing rates prevalent in same or similar foreign assignments. However, all the com-
the foreign country. MNCs headquartered at developing panies may not be comfortable to give employment to both
nation at times become reluctant to take employees from the spouses. Another option remains that of arranging to
developed nations as HCNs or as TCN because this will and fro airline tickets up to certain limits for one of the
entail substantial cost to the company. spouses.

11-5g Dual Career Couple

Managing careers of dual career couple is gaining increased 11-5h Repatriation
attention in today’s work sphere. This problem becomes The final step in managing the human resources of global
even more pronounced in the international human resource business involves bringing the expatriate manager home.
management field, when one spouse needs to move to a This issue may seem quite simple, but it is much more
different country and the other spouse in the current involved than simply packing belongings and putting the
country has an equally lucrative career. Particularly, when manager and his or her family on a plane. A great deal of
country contexts are different, it may not be possible for adjustment is often required (more or less depending on
the couple to get equally rewarding career opportuni- how long the assignment was) on both the personal and
ties. In certain countries, getting work permits for both professional levels.51
spouses may become difficult. Companies, i.e., Colgate On a personal level, the expatriate manager may
Palmolive, Motorola, and other MNCs, address the issues have to become accustomed to living on less real income
of dual earners by providing well-crafted spouse assistance and going without perks such as club membership or an

330 Human Resource Management

 includes regular phone calls and visits, and it also means
© Corbis Flirt/Alamy ensuring that expatriated managers are considered when
other opportunities present themselves. Finally, most
experts agree that some type of career counseling is help-
ful at the time of repatriation. Note, however, that few
companies actually follow the advice of these experts and
fail to complete the process successfully. A recent survey
indicated that 40 percent of expatriates leave their com-
panies within 2 years of repatriation because of reported
poor career opportunities.53

11-6 INTERNATIONAL LABOR

RELATIONS
Labor relations, which we will discuss more fully in
Chapter 11, are the processes of dealing with employees
who are organized into labor unions. Labor relations
are also heavily regulated by law, as we noted briefly in
Chapter 2, and the actions of management toward labor
and the actions of labor toward management are heavily
restricted. Different situations, however, exist in other
countries. In many countries throughout the world, labor
parties seek to achieve the political goals of unions in
those countries, and these parties are often quite power-
ful. Also, in many countries, labor unions are much more
concerned with social issues than they are in the United
States, and so their political activism often extends
beyond the wages and conditions of employment. In any
assigned car. In addition, the manager and the manager’s case, union membership is quite large in many countries
family may all have to become reaccustomed to U.S. prac- and continues to grow. In fact, more than half the world’s
tices, including driving on the right-hand side of the road, workforce outside the United States belongs to labor
tipping at restaurants, and not bargaining over the price unions.
of everything they buy. If the overseas assignment was for Different norms or expectations exist in other coun-
a longer period of time, then the returning managers may tries about the relationships between unions and manage-
also need to learn new styles in clothing, food, and music. ment. In England, labor “contracts” are not really legal
For some managers who were not living in the United contracts at all but are merely understandings that can
States before the tragedy of September 11, 2001, but who be broken at any time by either party with no penalty.
returned home afterward, there may be a need to adjust to And throughout Europe, temporary work stoppages are
a much different way of life. frequently used by unions in a bid for public backing of
The repatriation process could be even more diffi- their demands. In Paris, for example, 1-day work stop-
cult on a professional level. The expatriate manager has pages by employees who work in the city’s buses, sub-
been out of sight for awhile and may have lost some status ways, and railroads are frequently used for this purpose.
within the organization. The manager’s old job may no And during recent contentious contract negotiations at
longer exist, and he or she may be concerned about the French operations for Caterpillar, Sony, and 3M, angry
nature of the new assignment and have questions about labor officials actually took senior managers hostage in
how much the company truly values the manager’s over- efforts to win better employment contracts.54 In contrast
seas experience. Perhaps these are some of the reasons to the situation in Europe, labor relations in Japan tend
why roughly one-half of repatriated managers leave their to be cordial. Unions are created and run by the busi-
companies within 2 years of repatriation.52 In any event, nesses themselves. Because Japanese culture discourages
most experts emphasize the importance of explaining the confrontation and hostility, unions and management
entire expatriation and repatriation process to managers tend to work together cooperatively. Disputes are usually
before they are sent overseas. It is also critical to stay in dissolved cordially and through mutual agreement, and
touch with expatriates so that they can maintain their it is rare that a third-party mediator must be consulted.
social and network ties within the company. This step Strikes are also rare in Japan.

Chapter 11: The Global Environment 331