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Contents
Introduction

Part One: Wages and incomes aro0und the world who wins, who loses
Are you one of the big winners of globalisation?

North Africa and Western Europe

Highway robbery: wages in the big developed markets

The worst off of the lot: American workers

Wage trends in China: We want Chinese workers to be well

paid, but not too well

Why is this happening?

So what? Low wages are great for companies. Low wages are
terrible for companies

10

Part Two: Corporate Human Resources

First the bad news

11

HR the ignored backroom function

12

Most companies think they are great at HR. Most companies are wrong 12
What are the 20 worst things that companies do with their
staff and HR functions?

13

A HR generation gap of bitterness

15

Transfers in the global company: the eternal question of expatriates

16

Human resource issues in several major emerging markets

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Russia

17

Central Europe

17

China and India

18

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Global Human Resources

The 20 worst HR mistakes that companies make

Workers of the world, unite!

The stimulus to write this paper stems from two sources. An increasing amount of
research shows that workers in the major developed economies are being very poorly
paid in real terms. To the query, So what?, the answer is that poorly paid workers make
bad and poorly motivated employees and also poor consumers with less spending power
or ones who constantly hunt out discount goods and shun expensive brands. Neither of
these outcomes is good for business. The second reason is that companies think that their
HR policies are good, but when I speak with dozens of HR directors, middle managers,
senior managers and board members of western multinational companies, hardly anyone
has a good word to say about HR in their own companies; in fact just the reverse: many
executives are extremely dissatisfied with how their companies treat their staff and
themselves. This dissatisfaction is of a broad nature and often stems from the excessive,
short-term performance demands made on staff.

One wonders: can a company have a decent HR policy when the strategy of the
company is dictated by short-termistic, stretch budgets, dictated and imposed by
financial markets, demanding steep, endless returns for the shareholders with only a
small proportion of the profits coming to the workforce (blue collar and white collar).
Or is there a deep underlying contradiction at the heart of how companies function
today?
To repeat: keeping wage levels too low disincentivises and alienates the work force and
then they dont have enough money to spend on your products. Latin America was like
this for most of the post-war period: low real wages and a subdued consumer goods
market. The danger is that this model has been exported to the rest of the world.

This paper is in two parts: the first looks at workers in the context of the global economy
and globalisation; the second part looks at HR in the corporate world and suggests that
most companies get their HR policies badly wrong. I end with a short section summarising
HR trends in key emerging markets.

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Part One:
Wages and incomes around the world:
who wins, who loses?
Are you one of the big
winners of globalisation?

If youre reading this paper, probably not.

To be a real winner you have to be either a Chinese peasant on less than $2 per day or a
Manhattan mega-tycoon earning a minimum $100m per annum.

The very good news is that hundreds of millions of Chinese and Indian peasants (and
others in developing Asia and Latin America) have climbed out of abject poverty. They
still live on very low incomes but from their perspective their lives are greatly
improved. This upward wave of income is also affecting positively most social classes in
emerging markets such as China, India, Russia, Asia, and parts of Latin America. But the
vast majority of Africans in Sub-Saharan Africa have been left out
The mega-rich in the West a few hundred thousand people are getting even richer at
the fastest rates; non-salary assets and property play the biggest role in their income
growth.
In other words, globalisation has benefited incomes at the very, very top and at the
absolute bottom: those in the middle have lost out.

In North America and Western

Europe:

The working class (which encompasses most of the so-called middle class in the US),
including office clerical and junior corporate executives, have fared poorly; their real wages
(and total income) have flattened or fallen in real terms many are going backwards.

The lower-middle/middle class in the US and Europe have also not done so well. Their
real wages and incomes are mostly flat but some benefit from property and stocks (the real
median wage of American graduates for example has fallen by 6% since 2000, a bigger
decline than in average wages).

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Highway robbery: Wages in

the big developed markets

Annual average change in real wages, consumption, credit and investment

0.25(2)

real wages
private consumption

3.2

domestic credit growth 4-8

fixed investment

4.5

0(3)
(1)

0.5

0
3.5(6)

CE
E

Ch
in
a

Ru
s

U
K

sia

e
Fr
an
c

Ja
pa

G
er
m

U
SA

an
y

2004-10 annual average change in %

1.2

10(4)

12

2
0.2(5)

2.2

2.3

10

3-6

30+

12

20+

2.2

3.5

10

11

2-5

(1) 2003-06 = 0%, 2007-10 = 1,3%

(4) 2005 = 22%, 2007 = 12%

(2) 1963-97 = 1% in total (not annual average)

(5) 2005-07 = 1,5% annual average, 2008-18 = 2,5%

(3) 2006 = -1%, 2007 = 0,4%

(6) 2004-05 = negative or flat, 2006-10 = 4% per annum

Source: EIU

The above table is one of the most remarkable I have ever seen:

It indicates that in the USA, Japan and Germany during a seven-year period, workers have
not been paid properly. In this period real wages (after inflation) have not risen at all. All
the workers efforts have been for nothing; well, to keep up with inflation, and low
inflation at that. The table also indicates what are the drivers and differences between
some developed markets, and between them and emerging ones.

Most people obtain income from either their pay packet or by borrowing (asset
management is for the minority). So whats happening in various markets?

In France and the UK, things are not too bad. Workers have seen their real wages rise at a
quite moderate rate of 1-2% per annum UK workers are better off than their French ones,
though. Domestic credit is steadily growing at 6-8% per annum. This combination of strong
credit and steady real wages means that private consumption is ticking along nicely at 2.2%
each year in both countries. This in turn means that selling into these two domestic
markets has been good in the current decade.

But the picture is very different in the US, Germany and Japan where workers have not
seen their pay rise at all. There are differences though. The Germans are not getting wage
rises, are not borrowing and therefore not surprisingly are not spending. The Japanese get
weak wage rises, dont borrow much either but do consume and spend more than the
Germans the explanation for this is that they must be eating into their sizeable savings.
Americans are the worst paid in terms of real wage increases but borrow a lot and spend
quite a lot.

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The worst-off of the

lot: American workers

US workers overall are the most poorly paid in real terms but compensate this with strong
borrowing. The size of the market and these borrowing levels make the US the key global
consumer market but it does not grow much.

Between the assassination of John F Kennedy in Dallas, Texas in November 1963 until
2000, a period of 37 years, US labour productivity rose about 85% while during the
same period real wages rose 2%. That is not 2% per annum but 2% in the whole 37 years.
This is one of the most shocking economic facts of the twentieth century.

US workers are not only under wage pressure. Given the comparatively inadequate
provision of social welfare, pensions and health insurance, US workers feel the need to
work longer hours to save money to provide for themselves. For this reason they work
about 500 hours or seven weeks each year longer than their West European counterparts.
In the private sector, 25% of workers receive no paid vacation at all and the average
holiday time is only nine days paid holiday and six public ones. This typical US two
weeks compares with 4-6 weeks in most parts of Western Europe.

The consensus view is that all this work equates with huge productivity: it does but only
because the American worker works so long and there are so many of them, due to a
steadily rising birth rate (faster than in Europe) and higher levels of immigration to date.
But on the key criterion of output per worker per hour i.e. judging the workforces on
comparable time, US workers productivity is no better than in France or Germany.
Western European workers are just as productive as Americans ones, its just they take
holidays and enjoy life. As our American cousins might say, They get a life.

So we can sum up the American workers position as:

They dont get decent pay
They dont get decent holidays
They dont get decent social security
And after all that, theyre not so productive either

In fact, though, with all that extra work, the Americans still do not have enough money to
save; saving ratios have been negative since the start of the decade. It seems Americans
need to work all those long hours and still need to borrow either to make ends meet or for
conspicuous consumption.

Social welfare is also very good in Germany and France which distinguishes these
societies from the UK and especially the US. This is one reason why opposition to offshoring in Europe is less vocal than in America: European social security systems tend to
be independent of employment and the workers are better protected. In the US job losses
really hurt and this is why political protectionism against foreign imports and off-shoring is
stronger, if no more effective.

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For the average citizens the quality of life is infinitely superior in western Europe (and
certainly in Germany and France) than in the US. Average GDP per capita figures and
consumption figures simply do not reflect this as these are very strong in the US.
Inequality is masked. Imagine if Bill Gates were to emigrate and live in Albania; on his
arrival, average GDP per capita would rise say 400% but the quality of life of everyone in
Albania, except Bill, would not have changed at all.

Just how much average figures mask is getting more discussion as income inequality
accelerates in the US. This is getting more attention in World Bank and IMF reports and
even in the pages of the Wall Street Journal.

While the hourly wage of the American non-supervisory worker is actually lower than it
was in 1970, CEO pay has soared from less than 30 times the average wage to 300 times
the typical workers pay, with the greatest acceleration in CEO pay taking place in 20032006. The tax cuts of the Bush administration exacerbated this inequality with 33% of the
tax-cut benefits going to 0.8% of the population. Higher earners have pocketed a huge slice
of the gains in income, causing inequality to widen. Americas top 1% of earners now
receives 16% of all income, up from 8% in 1980.

The issue from a business point of view is that if Joe Shmo gets $3,000 in tax cuts, he will
spend it on cars, booze, consumer goods this helps the sales of many companies,
especially when it is multiplied by millions of consumers. But if, say, Larry Ellison, CEO of
Oracle, gets another $200,000 in tax cuts, he will not spend much or any of the money; he
will either get his financial advisers to put it into some assets or maybe buy a new boat
which only helps boat builders!

In other words if salaries and total income distribution was more equitable, then
corporate sales would be broader and better. Its a good idea to pay consumers well.
The US consumer market could be much better than it is.
Globalisation is benefiting Americas economy by $1 trillion a year (mostly through
corporate cost savings, higher corporate profits and lower prices), equivalent to $9,000 a
year for every family. But in practice the average family has not seen such a gain because
much of it has gone to those at the top or into profits. The only significant benefit that
lower-income families garner is lower prices in the stores thanks to the Chinese exporting
deflation. One estimate is that US consumers are cumulatively $100bn dollars better off
thanks to Chinese imports which have lowered prices and inflation. As much as 70% of
Wal Mart products are sourced in China. Although workers will continue to see their pay
squeezed, they can still gain as consumers or as shareholders, either directly or through
pensions.

But if US consumers have benefited by $100bn and the whole US economy has
benefited $1,000bn, then someone has pocketed $900bn.
Also unless a solution is found to sluggish real wages and rising inequality, there is a
serious risk of more protectionist backlash which will disrupt global business.

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In Russia and Central Europe, economic development is at a lower stage and catch up is
taking place. Developments in Russia are driving western business at some of the best
rates in the world. The Russian worker benefits from strong real wage growth of at least
10% (and 20% just 18 months ago) these are the highest levels in the world, along with
China. At the same time he/she is expanding borrowing at over 30% each year to buy cars,
houses, white goods (admittedly from low levels per capita). These trends are the reverse
of those in Germany where workers are not getting wage rises and not borrowing. In
Central Europe the trend mirrors that in Russia but at slower rates since these transition
economies have in some sense already transitioned. In Central Europe wages rose rapidly
ten years ago and have since slowed down but are still at reasonable levels and some
catch up remains. One point also needs underlining: not everyone in Russia is swimming
along on a tide of wages and credit; real poverty still exists for tens of millions of people.
But the middle class is growing in size and represents a big boost to business.

Wage trends in China: We

want Chinese workers to be
well-paid, but not too well-

When Chinese (or Indian) workers are well paid, this is good in that they can spend their
money on consumer items, boost regional/national GDP and drive sales of Chinese and
international companies.

But one of the greatest threats to the world economy today is if Chinese wages and
inflation rise too much. This would turn China into a net exporter of inflation instead of
deflation, which has been its role to date and which has kept global inflation and interest
rates down.

In May 2007 the 12-month change in the average price of American imports from China
rose for the first time since the index was first published in 2004. This news was combined
with that of Chinese consumer prices shooting up 4.4% in June. When one reckons that
average annual wages are rising in China at 15%, the picture starts to look very worrying. If
inflation and wages were to shoot up in China, the global economy would be quickly
destabilised and corporate results crash.

The good news is that they are probably not. It has been US pressure that has played a role
in the renminbi rising by 9% in the last two years. As a result Chinese exporters of apparel
and textile have had to raise their export prices to keep margins positive: the dollar price of
Chinese clothing exports to the US was up 4% in the first half of this year for example. So
part of the problem is the weaker dollar and not Chinese inflation. Chinese manufacturing
costs and export prices are actually falling in renminbi terms.

The good news on the inflation front is that virtually the entire 4.4% inflation hike was
due to seasonal food price rises which does not impact export prices.

And there is good news on wages too: the rapid pace of average wage growth is due to
productivity gains rather than labour shortages: average urban wages have been rising by
more than 10% a year over the past decade, but productivity in manufacturing has been
growing faster still, so unit labour costs have fallen. And it could take 20 years before
Chinas surplus rural labour is fully absorbed by industry.

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To summarise:
Workers in the UK have reasonable real wage trends and borrow a lot of money this makes
the UK a very good consumer market for companies
Workers in France are well paid but do not borrow as much as the British, but this means that
France is a steady to good consumption market
Workers in Germany have had zero real wage growth and never borrow money. This makes
Germany the hell of consumer markets, probably the toughest in the world. But good
social welfare means that the general quality of life is good.
Workers in Japan are poorly paid in real terms but borrow reasonably and consumption is
steady
Workers in Russia are catching up in real wages and borrowing strongly. This makes
Russia an excellent consumer market, one of the best in the world
The trends in Central Europe are similar to those in Russia at lower levels, making the region
a good to steady one for consumer spending
Workers in the US are the worst paid globally in terms of increases in real wages, but they
borrow a lot and consume a lot; their social welfare provisions are the worst of those
developed markets compared here and of nearly all the major OECD economies.

Why is this happening?

In America, Japan and the Euro area, profits as a share of GDP are at, or near to, all-time
highs. Corporate America has increased its share of national income from 7% in mid-2001
to 13% in 2007. Yet the workers share of the cake in rich countries is now the smallest it
has been for at least three decades.

Why are wages flat?

1.

Since 2001 global MNCs and small sized enterprises have come under
tremendous sales and cost pressures; companies responded by being brutal with
their cost cuttings. The first thing they cut was people: they cut staff and reduced
real wages for their workforce; factory workers were badly affected but so too
were white-collar employees, who saw the quality of their remuneration
packages deteriorate.

2.

The sheer size of emerging giants labour forces has shifted the global capitallabour ratio: relatively there is now a lot of labour around and less capital. The
entry of China, India and the former Soviet Union into market capitalism has, in
effect, doubled the world supply of workers, from 1.5bn to 3bn.

3.

Off-shoring to low-wage countries has reduced firms costs and at the same time
curbed the bargaining power of workers in rich countries. Either companies have
off-shored and sacked employees or negotiated lower or flat salaries by
threatening to do so.

4.

Increased immigration has depressed wages in sectors such as catering, farming

and construction. Downward pressure on wages in rich countries could continue
for a long time. China still has perhaps 200m underemployed rural workers.

Western workers are fighting for their full share of the fruits of globalisation, and losing.
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10

The consensus was always that developed markets could go up the value chain (and this is
still what they must do). Information technology would aid this process by raising the
demand for skilled workers relative to unskilled ones; more western workers would get
better trained and earn higher wages: workers as a whole would be better off. But this
traditional theory may need modifying. Another potential threat to labour in developed
markets is the rise in emerging countries skill levels. China overtook America as the
worlds leading exporter of information-technology goods in 2005 (admittedly much of
that was pure assembly the brains are still in the US). In 1970 America accounted for 30%
of all university enrolments worldwide; now its share is down to around 12%. Every year
1.2m engineers and scientists graduate from Chinese and Indian universities (see below for
quality question). Potentially China and India could steal all the low-paid jobs and,
worst still, all the medium-paid jobs.

Globalisation might be stopped if millions of western lawyers, bankers and stocktraders were downsized and off-shored!
The good news for now from the western point of view is that many of the emerging
market graduates are not that good yet: only 10% of engineering graduates in China and
one-quarter in India would meet the standards expected by big American firms. But the
day when more high-value jobs are exported from the West is coming closer: rich countries
no longer have a monopoly on high-tech capital and know-how as global labour
arbitrage moves rapidly to the better kinds of jobs: software programming, medical
diagnostic, engineering design, law, accounting and finance.

So far, fewer then one million American service-sector jobs have been lost to off-shoring.
By 2015 a total of 3.4m jobs in services will have moved abroad, but that is tiny compared
to the 30m jobs destroyed and created in America every year.

So what? Low wages are great

for companies. Low wages are
terrible for companies

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So western corporations are keeping wages down; whats the problem? Lower real wages
is excellent news and spurs corporate profits and returns to shareholders. Indeed. Keeping
wages down is very good for most companies in their role as employers but not
necessarily in their role as sellers. Lets take the best/worst example: Germany. Low wages
paid to German workers in Germany are excellent for, say, a manufacturing company that
produces machinery, the large proportion of which is then exported. This company can
then decide what to do with its profits but it wont often reinvest them in organic growth
in its home market. This company contributes to German GDP growth and good profit
results for German companies. This explains why confidence indices are currently rising in
Germany because these are corporate confidence indices and not personal/consumer
ones. Corporate executives making big profits on-shore or off-shore and with the option of
switching from one to the other, are upbeat; when they leave the office and become
consumers, they are downbeat. This gloomy consumer outlook which still persists (and to
some degree in Japan, France and Italy) makes Germany the toughest consumer goods
market in the world.

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11

PART TWO:
Corporate Human Resources

Human resources will be the most important business issue for next 10 years

The key issues tend to be the same everywhere:

Recruitment
Retention
Declining quality of candidates or not enough candidates for a growing number of posts
(emerging markets issue)
The role of expatriates
Salary increases
Compensation package benefits (pensions, shares, medical insurance, cars, health club
memberships etc)
Leadership development where are the leaders of tomorrow?
Succession policies

First the bad news.

Human resource management in emerging markets and in developed ones will get
tougher in the next 5-10 years. Indeed the level of challenges will intensify and more time
and resources will have to be dedicated to human resources in order to win in the
increasingly competitive market place.

The war for talent is a clich but actually an accurate one. As global MNCs and small
and medium enterprises struggle with demanding consumers, cost-cutting, M&As,
consolidation, savage competition from western competitors and even more so from
newly rising Chinese, Indian and other Asian companies, real competitive advantage will
stem from human resources.

In nearly all major emerging markets (Russia, China and India among many others),
human resources are the critical operational business issue today: finding staff, retaining
staff, and paying staff are the three major aspects of HR problems facing companies. In
recent EIU surveys of business in China and India, HR issues rated as three of the top six
challenges facing western MNCs (see below). The same applies to Russia too. Put 25

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12

country/regional managers together in a room to talk about business in emerging or

developed markets and sooner or later the conversation moves to HR issues and stays
there for a long time.

The importance of HR can be defined as follow. What is the key defining criterion for
business success in the next 10 years?

Your company knows its products; you know how to sell and to market, to advertise; you
know your customers; you know how to distribute and manage the supply chain; you
know how to do strategy and planning; you know how to structure partnerships, alliances
and JVs; you know how to invest and buy companies and do M&A; you know tax and
legal. Thats good, but so do all other companies. All these things being equal, and they
often are, what will distinguish your company in the next 5 -10 years? What is the key
defining criterion for success? The answer is human resources.

If you can get the best 1-2-3 (or 10) staff members running your country, market or regional
division or product line, then this will generate the crucial competitive advantage.

Another tip: when you have the best-quality staff in position, do not move them around
too quickly, do not disrupt winning teams. Companies tend too often to ship good staff
around prematurely. It is advisable to transfer good people around the company to spread
their knowledge and talents but if this is done too quickly, it can destabilise the current
success they are showing in a particular market or product. It would be better to keep
them in their roles for somewhat longer, but to let them act as mentors and presenters at
in-house gatherings so that their experience is communicated quickly throughout the
organisation.

HR the ignored backroom

function

For many companies, HR has been seen as a backroom function. This will change
fundamentally. In the future companies will demand more of their HR departments: hiring
and firing and benefits will not be enough. Companies will seek a more definite return on
investment from their HR departments (although this will be difficult to define). But in
response for demanding this return, companies will have to invest more in their HR
departments and get the brightest of talents into the function of HR director, a role which
is already critical in emerging markets.

Most companies think they are

great at HR; most companies
are wrong

Nearly all companies in the world parrot the view that their staff is their most important
asset. They say human resources are the most important business issue today and claim
they are people companies. Those remarks apply to about 95% of companies. The
trouble is about 85% of companies get human resources all wrong.

The remarkable thing is that when I talk to middle level management, 90% support this
opinion and even 60% of international board members and CEOs do so too.

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13

What are the 20 worst things that

companies do with their staff and HR
functions?
Several of the following points might not be defined by some readers as strictly HR ones
but I include here issues that relate to staff, the quality of the work environment and
executive employee satisfaction; in other words, how the company can gain or lose the
respect of its workforce.
One proviso before proceeding: the list below is bleak. But there are still many western
companies who provide an excellent working environment with good team spirit and job
satisfaction, and are able to manage reasonably well the pressures from the financial
markets with those of keeping staff contented and motivated. But most companies
probably fall down at least on some/many of the following points.

The HR function:
1.

the HR function has been too often marginalised and not put at the centre of
corporate strategy

Loyalty (the lack of it):

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2.

most companies dont show enough loyalty to their staff

3.

they dismiss staff in emerging markets during cyclical downturns to save costs

4.

they spend lots of money on training people but often with inappropriate and
general training so that unmotivated HR departments can tick boxes showing that
the training budgets have been spent and HR targets met

5.

or companies spend lots of money on good staff training but then downsize staff
too quickly for short-term reasons and waste all the money invested in them

6.

downsize staff in offices and factories when it suits corporate restructuring; at

least 50% of such corporate restructuring fails in its goals but staff are still
sacrificed

7.

make unattractive offers to executives in their 50s, either on pay or relocation,

who are then essentially forced into unwanted early retirement after running
around the world for 35 years and sacrificing their family lives for the benefit of
the company

8.

and then many companies have the nerve to complain that their staff are not
loyal to them

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14

Money:
9.

real wages and compensation packages have been the first targets for corporate
cost cutting

10. at the same time CEOs and the top 2-4 executives in a company usually grant
themselves multi-million dollar packages, invariably not linked to performance
and signed off by lax remuneration committees at board level; shareholder
meetings rarely revolt against this despite occasional press campaigns
11. to add insult to injury corporate leaderships impose comprehensive, tight salary
belts on the remainder of the staff, often including middle management
12. they insist that global salary increases of 1-2% apply to all global markets equally,
ignoring regional and country nuances; regional managers then have to waste
time and energy explaining that the average salary increase in some markets is 58-12-18%, and that this is the going rate
13. pension schemes have been made more unattractive and insecure

Unsustainable stress, short-termism, stupid budgets:

14. many senior managers are obsessed by costs and have been almost physically
averse to raising headcount in recent years this has stressed existing teams
15. nearly all companies put too many pressures on most of their staff. Name one
company CEO who has said, Hey, you guys and girls performed great the last
year; you beat that stretch budget by 26% and out-performed your colleagues
globally and our competitors. Do you know what? I think you deserve: a lower
budget this year, take it easier, catch your breath, consolidate your position and
build long-term plans for the future, take some time out to do some blue-sky
thinking. Dont bust a gut again this next year. Im worried about you. I love you.
16. companies are short-termistic: most companies make long-term plans (those
stupid five-year ones, the ones that change every three months) but when things
go invariably wrong, the companies move into knee-jerk mode and demand
immediate short-term results
17. companies invariably under-invest in projects and plans and do not provide their
staff with the tools to do a job properly, to meet challenging targets. Some years
ago a regional executive informed me that his company was taking on ambitious
plans to radically expand the business in a new sub-region. The potential
increased revenue would number in the very high tens of millions of dollars.
When I asked him how many new staff were being taken on, I expected the
answer to be about 12-15; his reply was one. I also know of another company
who was looking to develop business in a new region; they were planning to
raise the headcount by half. Let me explain: not a 50% increase in headcount
but by half of one person. One wonders which half? The top or bottom.
18. the accounts department and budget drive the business
19. the budget process is a soulless, silly and dispiriting process in all companies; no
company has found a way to enfranchise executives in the process; the budget is
either an imposed mandate or a Machiavellian game of shadow boxing that
transforms all budget holders into scheming liars. I personally have never been
able to find any difference between modern global MNC budgets and those of

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the Soviet union under Joseph Stalin (and I have a doctorate in Soviet political
economy); both systems set arbitrary, ratchet targets; executives lie about their
available resources and needs; revenues/cost are shifted from one period to
another; everyone storms during the final budget period to meet or to pretend
to meet targets; everyone is exhausted after this storming and the next first
quarter is always wobbly. Plus ca change
20. the budget process is a 365 day process constant playing with numbers
(deferred revenue and accrued revenue, revenue switched from one quarter to
another for accounting reasons), constant reforecasting and monthly reporting or
weekly reporting or daily sales reporting detract from what should be the core of
real business: developing the product, ensuring quality and focusing on the
customer.

Senior management spends more time looking at their accounts than they do at their
customers
Points 9-13 and 14-20 above are mentioned to me by executives almost every week. While
executives go through the grind of this process, many think it ridiculous and worthy of
contempt. It certainly demotivates them and removes much job satisfaction that they do

thankfully obtain in other aspects of work: working with good colleagues, satisfying loyal
customers, coming up with new ideas etc.

A HR generation gap of
bitterness

In recent years a generation gap has opened up within companies. As the retired EMEA
President of one of the worlds largest companies told me:

Danny, my generation who retired in 2000, we had it great. Corporate pressures were
there but stretch budgets and corporate madness were not what they are today. Business
pressures were not so insane. And we had better packages than the younger
generations: they get all the stress, but not the benefits. In my day, salary, bonus
schemes, health coverage and, most importantly, pension benefits were hugely superior
to whats on offer today.
This executive retired very happily; one wonders how many future ones will do so.

Many middle managers who are a long way from retirement echo these sentiments with
more bitterness. One European manager from a US pharmaceutical company confided in
me that,

I and thousands like me are the unlucky generation. We see a clear gap opening up
with older executives who have great benefits and their younger colleagues who are
much worse off. Obviously people share this information and those under 50 today feel
hard done by.

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Transfers in the global

company: The eternal question
of expatriates

It is increasingly difficult to get the right quantity of the right quality staff in any one place
at one time. Companies are therefore looking to all types of transfers and hiring
techniques.

Companies will have to look more at their globalisation of staff: moving expatriates from
all sorts of markets to all sorts of others. Staff from emerging markets will be promoted
into developed markets, while western staff will be dropped back into emerging markets
to fill a growing number of gaps. Staff will transfer from one emerging market to another;
we are seeing Czech managers being moved to run operations in Russia. Some of the Big-4
companies have dozens of expatriates working in Russia, but more Russians working in
the West.

More questions will be asked of what is an expatriate? The clichd and sexist picture is of
a white, 44-year old, Anglo-Saxon male with his wife and two kids in tow (I said it was
sexist!). In the past this standard expatriate would serve 3.2 years in one foreign capital city
on some hardship salary and then move on to his next posting. Is this still the best model
for all concerned? Expatriate spouses in Russia, China and India are feeling the wear and
tear, just as they did 20 years ago some things never change. Just as then, now spouses
(usually wives), find it very hard to settle and this disrupts the posting. Schooling for all
those kids in tow is also a major problem in Russia and other emerging markets. Two
western executives have told me within one week that either they would not go to Russia
because of their teenagers schooling or they would return westwards earlier than
planned.

There are other issues with expatriates: how long do you keep them on the road? How
often do you bring them back to headquarters or regional HQs for periods of relative R&R?
Do expatriates nowadays really want to be pulled about so much with their young
families? But if they dont take the families with them, do they travel back frequently or do
two months on, one month off? Is this really effective? When do you bring back the
expatriate permanently? And here contrasting problems arise: many expatriates want to
get back home quickly especially to fit their teenage children into western lifestyles and
educational systems, but some enjoy the experience (often single staffers) and do not want
to leave a location where they have established themselves this latter point certainly
applies to Moscow. And finally, what is the career path of returned expatriates?

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Human resource issues in several major

emerging markets:
Russia

Human resources in Russia will be treated in an in-depth report which will be published
in early September in association with Baker McKenzie, Ernst & Young and Neumann
International.

Some of the key findings are that:

Human resources in Russia are the best operational aspect of business
This is because they are the best in the world thanks to the Soviet educational system
The problem is that human resources are also the biggest operational headache for
regional/country managers
This is because salaries are rising and retention is becoming more of a threat
Salaries for critical positions are rising fast and the number of key positions is growing
Russian oligarch companies are poaching staff at very high salaries, more so than in
India and China
Managers are looking to the regions in the hope of finding more and cheaper staff
Companies are recruiting straight from university and training up
Creating leaders of the future is a growing issue
Companies are questioning whether to use more expatriates and are weighing up the
cost equation of that

Managers in Russia probably feel under more strain over human resources than their
counterparts in other emerging markets because the problem is fresher in Russia, only
having been a relatively critical issue for about two years.

Central Europe

Many of the HR issues faced in Central Europe mirror those in Russia and the CIS. The
only difference is that companies underwent a tightening HR market and rising salaries
some 5-10 years ago. In core central Europe (the mature markets of Hungary, Poland, Czech
Republic, Slovakia and Slovenia for example), HR markets function in the capital cities and
in second tier cities almost as they do in the West.

Salaries for local senior managers at managing director level of western MNCs often match
those of their counterparts in the West and this applies more often to Polish ones. Finding
the right staff in the capital cities is always challenging: some 18 months ago one of the
major western IT companies could not fill the post of general manager for several months
as suitable candidates were either unavailable, i.e. not poachable from anyone else, or
were asking for salaries that were simply astronomical well above that of similar
positions in New York or London.

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Salaries overall in Central Europe rose steadily in the 1990s and up to EU accession in
2004. As we anticipated, entry into the EU did not entail any major spike in salaries
simply because salaries had been rising steadily for several years before. The process of
catch-up of average salaries to their counterparts in Portugal and Greece will still take
about 12-15 years at current levels. So while senior managers in core CEE markets are
relatively well-paid, overall salary levels remain attractive, especially given the high level
of productivity in these CEE markets.

Many reports point out that labour costs in China are hugely cheaper than in core CEE or
even in Romania. This is true. But when labour productivity is taken into account, it is
much less clear how cost-effective China is: certainly in posts that require high skill sets or
products that have high added-value, salary levels in CEE and SEE are not so
uncompetitive with China where wages are rising at about 15% per annum. Taking into
account other costs such as transport and closeness to market and distribution challenges,
salary levels actually make CEE look appealing.

China and India

In China, the market is described as white-hot, forcing wages up across the board.
Retention of managers is very difficult with reports that turnover of senior managers is 3040% per annum; clearly this is hugely disruptive. Average salaries in China at executive
level have been rising 13-15% per annum since 2000. As in Russia, local companies are
coming into the market place for talent. But the challenge from local Chinese companies is
not as powerful as that of their Russian counterparts; the Russian oligarchs have been
able to create a bigger and more quickly expanding private sector than in China. Estimates
suggest that Chinese companies will need another 75,000 senior managers within 10 years
compared with the 4,000 they possess today.

Managers with 3-5 years experience are the prime targets in the Chinese managerial labour
markets and these are the worst employees to lose for any company after investing in
their training, just when they have built their experience internally and can move up in
the company and give a return on investment in them.

China and India represent 40% of the worlds labour supply. Both countries have a
massive pool of unskilled and under/unemployed workers. Over the next five years the
two markets will contribute an additional 71m and 44m to the global labour force: during
the same period, the US rises 10m, Europe by zero and Japan will fall by 3m!!

Despite this, labour markets have tightened much more quickly than expected because
most of this labour is unskilled. Surveys of global companies operating in China indicate a
vast pool of employees, but executives suggest that only 1 in 10 of job seekers is suitable
for hiring by multinationals; senior software developers in New Delhi say only 1 in 20
candidates is suitable for employment, i.e. trainable.

Both countries produce millions of graduates annually but again the quality of these is
questionable. China produces annually 600,000 university trained graduates but again
only 1 in 4, at best, are employable in western MNCs; of Indian graduates only 25% of
engineering graduates and 10-15% of other graduates are suitable for western or top Indian
companies. Employers say the situation is worse in India than China.
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The Indian IT sector faces a shortfall of some 500,000 professionals by 2010 which
threatens Indias IT dominance. Demand for suitable engineers in Hyderabad will hit 138%
of supply in 2008: supply and demand discrepancies means that salaries are rising sharply.

And against this background of insufficient employees, only 10% of the global
addressable $300bn market for global off-shoring is being tapped. At the same time, of
those it does employ, the global off-shoring markets suffers 40% staff turnover.

The Indian educational system is inequitable with 85% of the budget going to elite
institutions that cater for just 2% of students, while India spends only 0.5% of total GDP on
higher education. And then 17% of graduates end up unemployed.

Poor English is one of the biggest barriers in China. Executives often comment that: There
are people with skills and there are those with English i.e. it is rare that they match. As in
many emerging markets, labour mobility is an issue: only 30% of Chinese staff are willing
to relocate outside their province. The same problem applies in India.

More companies question their ability to scale up staff effectively in both markets.
Chinas big problem is finding decent managerial staff and there is also a shortage of good
engineers and R&D managers. The best Chinese managers are getting paid the same level
as expatriates (same here as in Russia). Even poor-quality staff are being moved around
from company to company and it takes 6-9 months to figure out that they are not up to
their role, thus causing disruption. As in Russia, the big cities have the tightest HR markets
and companies in all three big geographies are looking to the regions for more and cheaper
staff.

Salary increases and staff turnover are higher in China and India than in Russia. Salaries
are rising at about 15% per annum in both India and China and have been doing so for 2-3
years (Infosys of India boosted salaries at entry level by 12.5% from April 2007). In Russia
salaries are rising on average 11-14%. In China salary increases are about six times current
inflation, in India about 3 times inflation (while in Russia only about 50-70% over
inflation).

Turnover levels in China and India reach 15-20% per annum (in Suzhou, China, for
example, the turnover rate for engineers is 30% and for middle managers 10-12%). Average
turnover levels in Russia are about 8-12%. Western MNCs report that it is very tough to get
expatriates to see out their assignments in China (again unlike Russia).

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The two tables below indicate how critical HR issues are in both China and India. In
both markets three out of the top five operational business issues are to do with HR.
Have you found any of the following to be a serious issue in China?

Shortage of qualified staff

Bureaucracy & inefficient
Staff turnover
Lack of legal certainty
Wage inflation
Poor data, information, market
Intellectual property theft
Corruption
Cultural & linguistic differences
Inadequate physical infrastructure
Under-developed financial systems
Political instability
Terrorism
1

(1 = not an issue, 5 = serious issue)

Have you found any of the following to be a serious issue in India?

Shortage of qualified staff
Bureaucracy & inefficient government
Staff turnover
Lack of legal certainty
Wage inflation
Poor data, information, market research
Intellectual property theft
Corruption
Cultural & linguistic differences
Inadequate physical infrastructure
Under-developed financial systems
Political instability
Terrorism
1

(1 = not an issue, 5 = serious issue)

In closing, it is curious that when one talks with managers responsible for operations in
China and India, they are generally more relaxed about HR issues than their peers in
Russia. The reason is probably that managers in China and India have had longer to
become accustomed to these problems than those in Russia. In Moscow the problems
seem new and more horrible.

As we note above, human resources are just going to get more difficult for everyone and
we better get used to it!
Good luck!

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