Human Resource Management in Russia and Germany - a Comparison

Table of Contents

Table of Figures

1. Introduction

2. General Aspects of Human Resource Management
2.1. Definition of HRM
2.2. International and Comparative HRM

3. Russia and Germany in Comparison
3.1. Country Profiles
3.2. Welfare and Unemployment
3.3. General Cultural Differences between Russia and Germany

4. HRM Profile of Russia
4.1. The Context for Human Resource Management in Russia
4.2. Labor Law and Tax Regulations
4.3. The HR Function in Russian Organizations
4.5. Recruiting and Selection
4.6. Income and Compensation Strategies

5. The Key Commandments of Successful Management in Russia
5.1. Practice Authoritative but not Authoritarian Leadership
5.2. Build a strong organizational culture with visible foreign elements
5.3. Work to Create an Empowered Organization
5.4. Respect Local Rules, But Play your own Game
5.5. Stand Firm on Major Goals and be Flexible on Details
5.6. Learn to Live and Manage in a Crisis
5.7. Recognize that Corruption is omnipresent in Russia and must be managed
5.8. Cultivate Relationships with Government Agencies at all Levels

6. Conclusion

7. References

Table of Figures

Table 1: Facts & Figures Table 2: Cultural Profile

Table 3: Hofstede’s cultural dimensions

Table 4: Functions of personnel departments

Table 5: Requirements to the recruited personnel by Russian Executives

Table 6: Forms of personnel recruitment in companies of various ownership forms

Abbreviations:

illustration not visible in this excerpt

1. Introduction

In the last two decades, Russia went through an uneasy state of continuous transition - economic, social, political and commercial. New professions emerged; some of the old ones became unimportant in a very short period. The labor market and the management of human resources had to adapt to these environmental changes rapidly.

Russia’s unique, very dynamic and complex business environment has not only caused great business prospects but also some difficult, painful upheaval. Therefore many Western entrepreneurs still associate risk rather than opportunity with Russia. But nevertheless, Russia still remains the world’s largest country in terms of territory spanning nine time zones with a population of over 140 million people. Russia possesses a vast variety of natural resources and can be proud of the world’s fastest growing GDP of 7.4% from 2001-2008.¹

Even during the global financial crisis Russia being in a deep recession still obtained a GDP growth and the forecasts remain very positive - it will reach again the precrisis peak level by mid of 2011.²

Such massive changes as the liberalization and rapid growth of the Russian economy, its substantial growth in purchasing power and a relative lack of competition in some sectors make that challenging environment an attractive destination for foreign investment - especially for the German.

Since 1997 Germany remains Russia’s most important trade partner worldwide.

Russia’s exports to Germany went up to 30 Billion Euros in 2006 and 28.8 in 2007. But for the German companies Russian market is not less important - in 2007 the exports to Russia have had an impressing value of 28.2 Billion Euros which has increased to 20.6% from the year before.³ It must be noted however, that Russia’s traditional exchange of goods with its Western partners mainly sustains of the export of its raw materials (energy) and the import of manufactured goods.

Anyway, the close link and the growing dependency of both countries over the years become more and more evident. And both trade partners are considered as quite compatible as it can shortly be described by: “The German Market can deliver whatever the Russian Market desires”.⁴

But these business engagement opportunities now appear in an environment significantly different from the German investor’s habitual home culture - and culture is a crucial factor of human resource management.

The essential knowledge of the institutional, managerial and contextual nuances is the key-factor for an effective management of human resources and successful formation of multinational enterprises.

This term paper provides the main aspects of HRM in Russia and Germany and an overview about the cultural context in which human resource management takes place. Further on it examines the key human resource issues and concerns of businesses operating in this transitional environment.

Moreover, some of Russia’s HR specifics are analyzed and the most effective tools are presented for how to overcome the difficulties and how to succeed in doing business in Russia.

2. General Aspects of Human Resource Management

2.1. Definition of HRM

Whenever organizations operate in a competitive environment they are forced to formulate and implement value-creating strategies by maximizing the long-term cash-generating capability in order to gain a competitive advantage to survive, grow and prosper.⁵ For a successful implementation of this strategy the organization's employees as its most valued assets and stakeholders have to be put on the right track.

Human Resource Management is the function within an organization that focuses on employing people, developing their capacities and talents, utilizing, maintaining and compensating their services due to the job and organizational requirement. HRM deals with issues related to the people in an organization, such as hiring, compensation, performance management, organization development, safety, wellness, benefits, employee motivation, communication, administration, training and reducing staff.⁶

2.2. International and Comparative HRM

The rise of multinational ant transnational corporations which operate in two or more different countries simultaneously initiated international trade, forced the globalization and placed new requirements on the human resource managers.⁷ International Human Resource Management (IHRM) was established to consider the needs and assumption of the organization from the perspective of its international environment, the world economy and the open market with all its challenges, such as cross-cultural communication and diversity, the global knowledge management or local and global sustainability.⁸

The international HR managers have to handle all the human resources issues related to a company's foreign operations, like the expatriation of employees, dealing with an international workforce, taxation, international relocation, performance appraisals, cross-cultural training and repatriation. They are automatically involved in employee’s personal life e.g. personal taxation, voter registration, housing, children’s education, health, recreation and spouse employment. His sphere of action is influenced by many nuances, such as a complex employee mix with different cultural, political, religious, ethical, educational and legal backgrounds.

But there are significant differences between countries in the way how they manage their human resources. The fact that some of the richest countries apply different HRM techniques does not allow defining a particular “good” or “bad” HRM.⁹ For the implementation of an effective HRM policy to an internationally operating organization it is necessary to understand the different national cultures and institutional constraints - to “solve a multidimensional puzzle located in the crossroad of national and organizational culture”¹⁰.

In our globalization-driven society dealing with expatriates and international workforce, analyzing and comparing HRM policies and practices and the major perspective on how to look at HRM in an international setting the Comparative Human Resource Management (CHRM) has become an established part of IHRM.

3. Russia and Germany in Comparison

3.1. Country Profiles

Table 1: Facts & Figures

illustration not visible in this excerpt

Source: https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html as on 03.01.2011 And Library of Congress, Federal Research Division, Country Profile of Russia (2006)

3.3. Welfare and Unemployment

The economic transition and the end of Soviet-era public welfare forced many Russians into poverty. State social support programs failed to meet the social needs of a new economic system.

Most enterprises provide an extensive social safety net for their workers. Worker pensions are funded by employers through a single social tax and by a direct assessment on self-employed workers. However, many workers are forced to postpone retirement because the post-Soviet pension system, which is Russia’s largest expenditure for social welfare, has not been adequate to provide for retirees. Participation in private pension funds increased rapidly.

In 2005 a major welfare reform program began with a very unpopular monetization of privileges such as free transportation and medicine.

In 2006 the government called for a fundamental overhaul of Russia’s state welfare system. Most welfare agencies are run at the local or regional rather than the national level, and they suffer from inadequate funding and corruption. No agency ministers specifically to the homeless, whose number has grown since 1991. Private charities do not function as freely or as actively as in the West.

In 2000-2005 the total number of unemployed stood at the level of 2 million (2,8% of the active population). The number of unemployed calculated accordingly to the methodology of the International Labor Office was in April 2005 around 5,8 million, or 7,9% of economically active population .¹¹

Low unemployment in many aspects is due to the expansion of the “informal” sector - unregistered employment that is free from income and social taxation as well as from any legal regulation of working conditions, payment systems etc. The major spheres of unregistered employment are construction, retail trade and catering, agriculture and different types of private services. The informal sector is also a primary destination of migrants from other countries of the former Soviet Union (especially Moldova, Ukraine, Azerbaijan). That low unemployment figures disguise ineffective functioning of the labor market. First, there is low adjustment of employment regarding the fluctuation of production levels. Second, there is low cross-sectional and especially territorial mobility within Russia.¹²

The next years of the Russian labor market will be characterized by the gradual decline of the working. In an effort to stem Russia’s demographic crisis, in 2006 the government doubled child support payments to US$55 per month and offered a onetime payment of US$9,200 to women who had a second child.¹³

Russia didn’t even try to afford Germany’s expensive social security system with its pension insurance, unemployment insurance, health insurance, nursing care insurance and some companies’ accident insurance.

3.4. General Cultural Differences between Russia and Germany

“More than technical or infrastructure problems, cultural problems will be the biggest issue that merchants will face in the global marketplace.”¹⁴

Language and mentality have the greatest influence on peoples’ behavior in everyday live and in business. Moreover they build the foundations for particular behavior patterns. Therefore, each successful cooperation starts with attention, knowledge and understanding concerning the national language, values, norms and mindset of the business partner.

Table 2.: Cultural Profile

illustration not visible in this excerpt

Source: Blom/Meier, Interkulturelles Management (2004)

Table 3.: Hofstede’s cultural dimensions

illustration not visible in this excerpt

Source: Blom/Meier, Interkulturelles Management (2004)

Russia’s traditional need for strong authorities, for powerful charismatic leaders, is deeply rooted in its history with its larger-than-life mavericks, such as Peter the Great, Stalin and now Putin - totalitarianism and tight control for several hundred years as shown by the high power distance score in T.3. This kind of idealization of power is also transferred into business: no matter if the entrepreneur is competent, intelligent, educated or a good manager - he has the power and so he has unique rights within the organization and deserves compliance only by definition.¹⁵

German managers who often believe in delegation of authority, management by objectives and in a hands-off approach are in danger to be regarded as “nice guys” but weak leaders. Workplace democracy can be punished by the staff which is used to the command-and-control management practice (due to the high uncertainty avoidance score, table 3) and can lead to conflicts or even to an irreparable damage of the intercultural dialogue.¹⁶

“Russian executives show a high level of anxiety about the future which manifests itself in a tendency to be nervous, emotional and aggressive.”¹⁷

Based on the communistic ideology, where the group was the basic building block of the society, it is not surprising, that Russians continue to score low in individualism.¹⁸ Members of the Communistic Party where regarded as the elite in the Soviet era.

And still are the relationships more important than individual careers, which are hardly possible for a Russian person to achieve without a good integration into a strong network of family, friends, schoolmates and colleagues.¹⁹ Parents never stop playing a big role in a Russian person’s live.

A nice atmosphere of the workplace and a close personal relationship among colleagues is a basis for a good working morale in Russia’s organizations. The relatively low score in Hofstede’s masculinity dimension is based on the lack of belief that the small individual can influence his own future in the Russian society. Russians and Germans also have different concepts of time - while Germans tend to be very punctual, it is socially acceptable for Russians to be late, perhaps because of “the many legitimate obstacles that can arise in everyday life in Russia”²⁰. Further on some typical Russian characteristics such as hospitability, resourcefulness and the importance of political influence and informal arrangements are to be mentioned.

Traditionally education has played a big role in the Russian society. But through the achievements of many self-made millionaires in the “bloody nineties”, when murder and robbery where possible tools to solve business problems, the situation in the Russian economy has changed. Most of the specialists and line managers are well educated people of one or two university degrees whereas their direct supervisor or the owner of the company can be a person without any college or even high school degree. And it is obvious to whose disadvantage a conflict between these two people in a strong hierarchy structure may be solved.

But there has accrued another hierarchy problem in Russian organizations - a so called “double hierarchy”. Many of the older specialists, who have been educated in the Soviet times, nowadays don’t have enough knowledge and competence to be in a leading position in a modern company. Therefore many young professionals have been promoted to achieve leading positions in a very short period. Conflicts here can’t be avoided as well, because respect for elder people is one of the important values in the Russian society. These situations lead to two different hierarchical systems within one organization - the official and the unofficial one.

4. HRM Profile of Russia

4.1. The Context for Human Resource Management in Russia

The current context for labor relations is again predetermined by the growing force and involvement of the state into the economy and the clearly visible desire “to maintain peace and tranquility” in political as well as in social spheres. It cannot even be compared with Germany’s democratic free market economy. The major trade-unions united in the Russian Confederation of Independent Trade Unions are “tame” and do not dare to organize large actions which could be easily stopped by police as is it usually done with any loud opposition.²¹ But there is another form of social partnership on Russia’s labor market. The collective agreement is a contract between employer and employees favored by the Government. The sides in the contract are the General Director and the local unit of a trade union or an elected employees’ representative.

The major clauses of the collective agreement are:

- Forms, systems and levels of wages and salaries;
- Other types of compensations;
- Employment levels, re-training and firing;
- Working time, including leaves and holidays;
- Work safety;
- Interests of employees in privatization of a company, including privatization of dwelling in company’s ownership.²²

[...]

¹ Cf. Fey, Shekshina (2010), P. 1

² Cf. Sutela (2010), P.2

³ http://www.destatis.de, Pressemitteilung Nr.116 , 17.03.2008 as of 03.01.2011

⁴ Cf. Lasch, Löw, (2008) P. 7

⁵ Cf. Harzing, Pinnington (2011), P. 48

⁶ Cf. DeCenzo, Robbins (2010), P. 33

⁷ Cf. DeCenzo, Robbins (2010), P. 4

⁸ Cf. Harzing, Pinnington (2011), P. 30

⁹ Cf. Harzing, Pinnington (2011), P. 49

¹⁰ Laurent (1986) in Harzing, Pinnington (2011), P. 49

¹¹ Cf. Gurkov, Zelenova (2009) P. 5

¹² Cf. Gurkov, Zelenova (2009) P. 6

¹³ Cf. Library of Congress, Federal Research Division, Country Profile of Russia (2006)

¹⁴ Bruce Guptill (The Gartner Group) in IHRM Skript, FOM 2010

¹⁵ Cf. Fey, Shekshnia (2010), P. 2

¹⁶ Cf. Valiullina, Valiullin (2006), P. 47

¹⁷ Cf. Fey, Kusnarenko (2000) P. 5, as in Bollinger (1994, P.50)

¹⁸ Cf. Fey, Kusnarenko (2000) P. 5

¹⁹ Cf. Valiullina, Valiullin (2006), P. 49

²⁰ Cf. Fey, Kusnarenko (2000) P. 6

²¹ Cf. Gurkov, Zelenova (2009) P. 4

²² Cf. Gurkov, Zelenova (2009) P. 5