Managing Your International Workforce
Five key issues to consider.
March 18, 2010
As the world economy has become increasingly integrated, American international executives have too often underperformed the Japanese and Europeans. Two of the reasons for Americans’ high failure rate are lack of training and insularity. Few Americans speak foreign languages and few spend significant amounts of time overseas. An executive of a large, international computer technology firm told me that although she had been on more than a dozen international assignments she had never received a minute’s worth of training. Likewise, a former president of the international division of a global construction firm told me that he saw no point in learning foreign languages because “everyone else speaks English.”
Although it is difficult to generalize, it is evident that there are important cultural differences across nations. Geert Hofstede, a Dutch sociologist, studied cultural differences among more than 100,000 IBM employees in more than 100 countries. He was able to reduce a wide range of psychological variables into four dimensions that he claims differentiate managers across cultures:
Fons Trompenaars, also a Dutch sociologist, and Charles Hampden-Turner, a British management scholar, argue that there are seven dimensions which differentiate culture, including:
These schemas are useful for broad thinking and theory, but may not help in dealing with particular real-world circumstances. Both learning about the culture in which you do business and cultural sensitivity have no substitute. It is helpful to remember that there are cultural differences within countries that can be significant as well as differences across countries. In the U.S., Alaska has a different culture from Massachusetts and parts of upstate New York have cultures that diverge sharply from New York City’s. Countries like India and China are hardly homogenous, with dozens of languages spoken in each. Thus, a general outlook of inquisitiveness and sensitivity and a willingness to learn, is most effective.
Traditionally, firms have provided housing or housing allowances and on top of that tried to keep employees whole with respect to compensation. Some firms have even paid foreign-service premiums. Some have paid for private, English-speaking schools.
Since tax systems differ, firms have computed the amounts that will make the employee as well off in the host country as they were in the home country. The key problem is that the U.S. taxes citizens even if they are resident in foreign countries, while foreign governments base taxation on residency. To counter this policy, Section 911 of the Internal Revenue Code allowed a $91,400 exclusion in 2009. A $25,710 housing-cost exclusion was passed in 2006 as was a “high cost localities” exclusion. For instance, the housing limit in Mumbai, India was $67,920 per year in 2008 according IRS.gov (Notice 2008-107).
The limitation on housing expenses is generally 30 percent of the maximum foreign-earned-income exclusion. However, this limit varies based on the location of the qualifying individual’s foreign tax home and the number of qualifying days in the tax year. The housing cost amount is calculated by taking into account the total of an employee’s foreign-housing expenses for the year and deducting a base housing amount. The base housing amount is 16 percent of the maximum foreign-earned-income exclusion for the tax year, computed on a daily basis for the number of days in the qualifying period that fall within the tax year. Firms have often covered excess taxation so that employees would be as well off as they were in the U.S.
There are also complications with respect to pension benefits. In most foreign countries, public plans are more generous than in the U.S. but private plans are less so. Firms have aimed at keeping the employee whole. That often means they need to adjust the employee’s pension benefit to offset the larger foreign Social Security benefit.
In recent years, though, some firms have aimed at cutting back housing allowances and other premiums after five or a similar number of years overseas. There has been a concern that expatriates become too comfortable and tend to grow used to luxurious accommodations that may be standard in the U.S. but not in the host country. If employees aim to stay in a country for many years, they need to become accustomed to the host country’s standard-of-living, these firms argue.
At the same time, many firms fail to appreciate the contributions that expatriates make. It has not been unheard of for firms to terminate employees when an overseas assignment comes to an end. This is despite the common observation that it is difficult to find well-qualified international executives. Thus, employees who are asked to go on foreign assignments need to clarify how they will be reassigned when the foreign assignment ends. Out-of-sight, out-of-mind does not necessarily lead to career advancement.
Another issue is how spouses will be treated. There are many adjustments that a spouse may be asked to make such as new ways of shopping, making friends, communicating and finding a job. To what degree will the firm provide support and training in these areas?
One of the many areas in which overseas managers need to develop skills is with respect to cross-cultural negotiation. Americans have both strengths and weaknesses compared to negotiators from other countries. Some of our strengths are that we tend to be well prepared, pragmatic, candid and fair. Americans also tend to focus on integrative negotiation, the win-win approach to negotiation described in Roger Fisher and William Ury’s Getting to Yes, which uses creative approaches to develop synergistic solutions. Integrative negotiation increases the pie rather than just dividing it.
But U.S. negotiators also have weaknesses. Americans tend to be culturally insensitive; to be impatient; to have poor listening skills; to be too quick to concede; and to be too legalistic.
Negotiators should aim to employ processes that fit the culture in which they are doing business. But that requires knowledge. Some environmental knowledge includes understanding of the political and bureaucratic context and who the key external stakeholders may be. Cultures differ as how they define how a negotiation is to be conducted; protocol (Americans tend to be more familiar than managers of other countries); perception of time; use of groups and teams; and propensity to take risks.
Managers with little familiarity with other countries might be well advised to employ consultants, outside agents or a mediator to assist with negotiation. Those with high familiarity with a culture might embrace the other side’s style or work with the other side to develop a negotiation style jointly.
Security is also an important concern. In his book Terrorism: Avoidance and Survival, Chester R. Quarles quotes security guru Neil C. Livingstone as stating that international executives face a heightened security threat. He argues that too many firms have not adequately prepared to cope with crime and terrorism. Firms need to develop strategies and reaction plans. Going back as far as the 1970s, about half of the victims of terrorism have been businesspeople. However, it is important to keep in mind that the base rate is low. It is a small fraction of the murder rate in the US. Nevertheless, firms should develop plans.
Quarles argues that the executive needs to develop habits that minimize risk. High outside walls, re-enforced doors, safe rooms, neighborhood-watch programs and bodyguards may be employed. Firms need to develop contingency plans for security, anti-terrorism and for hostage negotiation.
International business remains an important source of opportunity. The key to success is quality of management. Human resources managers have to deal with many complex issues ranging from compensation and tax equalization to career development of international executives to security. At the same time, managers who are considering an overseas assignment need to assess it in light of the degree to which it provides an opportunity for career enhancement.
Rate this article 5 (excellent) to 1 (poor). Send your responses here.
Mitchell Langbert, PhD, is an Associate Professor at Brooklyn College. Widely published on the subject of human resource management, Langbert has consulted and served as an expert witness.