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Companies which are performing well in terms of people management tend to use compensation and benefits programs not only as a means of rewarding employees, but also as a mechanism to influence behaviour, gain commitment, and ensure tightness of fit. For example, about two thirds of the companies within the case study sample have adopted an all employee share ownership program. The philosophy behind employee stock ownership plans is that “when employees are owners, they think and act like owners”. By encouraging employees to purchase shares in the stock ownership program, companies such as Procter & Gamble, ABB, and IBM garner a high level of psychological commitment and “buy in” to the organization. Profit sharing programs that require a significant stock purchase commitment, various forms of individual and team incentives, and the use of non-monetary rewards (e.g., excellence awards, employee parties, etc.) serve essentially the same purpose – to gain commitment and inculcate the company’s core values and business principles.

A clear trend that emerged from this study is that companies are increasingly recognizing that new business models and changes in the market place will necessitate the incorporation of ‘softer’, non-tangible and behavioural-based performance measures within the objective setting and performance appraisal process. We found that companies as diverse as Oracle, BAE Systems, Shell, KPMG, GlaxoSmithKline or Matsushita actively promote a culture which values not only short-term financial performance but also the intangible aspects of long term value creation, with an emphasis not only on the what of performance targets, but also on the how – the means by which those targets are best achieved. The desired competencies or value adding behaviours extend to: the ability to see things others don’t; strong communication that inspires and energizes others; translating the company vision into action; inspiring trust and loyalty within the team; leading by example; acting in socially responsible ways; and so on. This necessarily requires a subjective assessment of performance against non-financial targets and measures, and necessitates a significant overhaul of the existing performance management systems, investment in line management capability and a change of line manager and employee mindset in most companies.

Consistent with this trend, some companies have introduced what might be called a “values-based” performance management system, which means that employees are assessed not only on how well they perform but also on shared values, and they tie compensation and benefits to it. To give one example, the performance management system of Novartis, one of the largest pharmaceutical companies, combines two dimensions: the extent to which individual performance objectives are achieved (the 36 / 52 what question) and the related values and behaviours required to deliver the results (the how question). Thus, Novartis managers are assessed on and rewarded for shared values, not just for meeting short-term performance targets. The combined ratings for achieving targets and displaying shared values and behaviours are linked to managers’ variable pay. Like Novartis, many of the excellent companies that we studied have come to realize that they must somehow balance priorities – the financial success of the company with principles such as sustainability, compliance, or social responsibility – and have adopted similar systems.

Another way to integrate core values in the performance management process and link them to compensation and rewards is through the Balanced Scorecard. Shell, for example, has made sustainable development an important aspect of the evaluation and remuneration of senior staff. Since 1997, it has included environmental or social metrics in the overall Shell scorecard. The scorecard defines how Shell appraises its business performance and impacts the bonuses of all senior executives. The environmental and social aspects of sustainable development currently account for approximately a fifth of the Shell scorecard. The social measures of the scorecard include: reputation and trust with the general public compared with competitors, based on an annual “reputation tracker survey”; success in attracting and retaining staff, which includes success in delivering Shell’s recruitment, diversity and training targets. Shell is also integrating sustainable development more systematically into leadership development, training and internal communications. The goal is for all staff to understand the concept and its relevance to their jobs, and to have the skills and enthusiasm they need to put sustainable development thinking into practice.

Symbolic and values-based leadership

Not all of the successful companies that we studied have highly visible and charismatic leaders at the helm; some do (e.g., the CEOs of companies like Oracle, IBM, and Infosys have appeared consistently in the Business Week and Financial Times lists of the world’s most respected business leaders), but many don’t. However, what the companies within the sample have in common is a top management team that succeeded in developing a clear strategic intent and vision, as well as a strong culture, built around a values system that provides direction and a sense of shared identity and purpose.

IBM – a company widely known for its strong, almost cult-like culture – is a case in point. The IBM culture, centered on the core beliefs of client service, innovation, and personal responsibility, is inculcated and reinforced through what the CEO, Sam Palmisano, has termed a “values-based” management system. In 2003, six months into a top-to-bottom review of its management organization and culture, IBM held a three-day discussion via the corporate intranet about the company’s core values. The forum, dubbed ValuesJam, joined thousands of employees in a debate about the very nature of the computer giant and what it stood for. Over the three days, an estimated 50,000 of IBM employees – including Sam Palmisano – checked out the discussion, posting nearly 10,000 comments about the proposed new corporate values. According to Palmisano, “a strong value system is crucial to bringing together and motivating a workforce as large and diverse as ours has become. We have nearly one-third of a million employees serving clients in 170 countries. … There’s no way to optimize IBM through organizational structure or by management dictate, you have to 37 / 52 empower people while ensuring that they’re making the right calls the right way”. The ValuesJam is an innovative practice pioneered by IBM that can help companies to shape or change their corporate culture.

Although the focus of this study was not on leadership, another way to promote shared values and to create a strong culture that we witnessed is through identification with leaders. By continuously reinforcing cultural messages and deliberate role modeling, senior executives are able to instill values in employees and align their interests and actions with the strategic goals of the organization. To give one example, the IKEA culture emphasizes efficiency and low cost which is not to be achieved on the expense of quality or service. The firm founder, Ingvar Kamprad, believes that “simplicity and common sense should characterize planning and strategic direction”, and bureaucracy is fought at all levels in the organization. Ingvar Kamprad personifies these values. Although ranked the world’s fourth richest man, he is purported to drive a 15-year-old Volvo and always flies economy class, in part

because he wants to inspire his 90,000 employees to see the virtue of frugality:

“People say I am cheap and I don't mind if they do. But I am very proud to follow the rules of our company.” Symbolic policies, such as only flying economy class and staying at budget hotels, and employing mainly young executives made cost part of the IKEA culture and have further inspired the influx of entrepreneurship into the organization.

Alignment is critical

Our research shows that excellent companies consider their culture a source of sustainable competitive advantage and make deliberate efforts to integrate their stated core values and business principles into HR-related processes such as hiring methods, induction programs, leadership development activities, performance management system, compensation and benefits programs, and other HR activities. However, there is substantial case study evidence to suggest that a strong culture can be a mixed blessing for a company – it can become cult-like, rigid, and a barrier to change. A strong culture is beneficial only if the company’s value system is linked to the strategy and helps the company achieve key business goals such as lower costs, innovation, responsiveness to customer needs, and so forth. Similarly, in order to be effective the “best practices” documented in this report must be part of an integrated system of complementary activities and closely linked to the strategic goals of the organization. Implementing practices in isolation may not have much effect and can actually be counterproductive. As we have learned from the excellent companies that participated in this study, alignment is crucial.

38 / 52


The importance of achieving and measuring HR functional excellence in MNCs has arisen from a number of significant pressures on the department, including evidence to support the link between business performance and the quality of HRM practices; a push for increased cost-effectiveness; and a belief in organizational myths such as not being able to manage what you cannot measure. At the same time, there are critical decisions to be made regarding the delivery of HRM, such as the balance between the HR function’s responsibility for developing strategy and policies and line management’s responsibility for implementation; whether to keep all HRM activities in-house or whether to outsource; and the extent to which technology can play a facilitating role in HRM delivery through the use of, for example, eHRM and shared service centres. Therefore, we look here at some of the key themes to be explored with regard to developments in the internationalisation of the HR department, and in HR function excellence in MNCs in particular. In the sections below we address the

following questions:

1. What is the role of the HR department, especially the relationship between corporate and subsidiary HR functions?

2. How is the performance of the HR function monitored or controlled?

3. How do companies choose between different HR delivery mechanisms?

The roles of corporate and subsidiary HR departments Based on evidence from the companies interviewed, the division of responsibilities

was most common in the following structure:

• Global HR: responsible for developing global strategy and policies including mandatory and advisory guidelines, focusing on senior management policies, and providing the infrastructure for group-wide HR communication;

• Regional/Divisional HR: provides translation and co-ordination of global activities for the specific area of concern;

• Country/Territory HR: translates policies further to coincide with the national context, as well as developing locally specific policies;

• Shared service centres: provide administrative support and specialist advice;

• Business unit level: local HR business partners provide advice, sometimes also administration services where no shared-service centre is present;

• Line management: providing local interpretation and implementation of HRM practices;

• Employees: end-users of self-service systems with personal responsibility for their own administration.

As discussed, there is the option available to companies as to whether to take a centralised or decentralised approach to HRM strategy. We found examples of both approaches working successfully amongst our case companies. In general, the more common form of organising was to adopt an increasingly centralised model of global HRM. This was in evidence in particular in Siemens, Unilever, ABB, IKEA, and Shell. However, all of these companies also realised that local adaptations for HRM priorities (business driven or mandated by legislation) were nevertheless essential.

What these companies were most keen to emphasise was the need for strong internal alignment mechanisms to ensure an as integrated as possible approach to HRM across 39 / 52 national boundaries. At the other extreme, EDF, Infosys, TCL, and Matsushita are examples of companies wishing to maintain a decentralised model of international HR. This is largely related to their choice of corporate internationalisation strategy – that of a multi-domestic approach to global organising.

Going beyond the centralisation/decentralisation discussion, one company in particular, P&G, is aiming to achieve a truly global approach to HRM. The company strives towards a single employment experience for all employees, no matter where they are in the world. In line with this, the HR function itself is also structured in a global manner, with global expertise groups (or Communities of Practice) established to develop HRM strategy across national boundaries driven by business needs. One criterion for achieving this, which was also observed in Rolls Royce and ABB for example, is clear articulation of values and vision for the HR function. These companies have taken the overarching corporate strategy, and have translated this directly into HR terms to ensure tight strategic fit.

At the level of HR practitioners themselves, Shell and IBM are examples of companies that also have innovative structures in place to develop global HR capability. In Shell, use is made of an Experience Navigator program for HR function career development. Shell HR employees found that in developing a career strategy, they often became perplexed with both the many opportunities at hand and the confusing marketing language some used to advertise jobs. In order to alleviate this problem, senior officials created a database of job details that would give HR employees a straightforward and clear approach to plan their careers. All Shell HR career coaches are trained as experts in the Experience Navigator, and the program is used in all coaching situations to help both generalists and specialists develop their careers. Consequently, HR employees can map their current job, their desired job, and all the experiences they will need to accomplish to reach their preferred position.

At IBM, all HR employees are prepared for leadership opportunities through the HR Development Programme. The programme is composed of three modules of both elearning and in-class education. The first module educates HR employees on business strategy and how HR in their particular division relates to the business area. The second module instructs employees on HR competencies. The third module trains HR employees in techniques that allow them to become HR consultants. In addition, all new HR employees who come in with the standard entrance level rotate jobs and duties during a five year period. Such programmes are seen as essential elements of developing a world-class HR function.

Monitoring HR department effectiveness

The question still remains however, how a company knows when it has achieved world-class HR function excellence. The clear answer is that the company of course needs to be monitoring effectiveness. Systems of monitoring often employed by companies include the benchmarking of HR costs, employee surveys, customer surveys and customer feedback (as found, for example, in Oracle, IBM, Infosys, and Siemens). However, at the same time, many case companies admitted that measuring performance was a particularly hard task, and many were looking for innovative ideas about how they should approach this.

40 / 52 Based on the online survey data, the most popular mechanism for monitoring HR department performance is a formal employee climate survey, which is seen as very effective by 81% of companies. Also popular is informal gathering of management opinion which is again seen as effective by a majority of companies. Other methods used are few and far between and range from formal metrics and surveys to informal gathering of opinion (see Table 9).

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