Global Integration of Performance Management within MNCs.

A theoretical framework.

Nina Hellqvist
University of Vaasa, Finland
Department of Management and Organization
P.O. Box 700, FIN-65101 Vaasa
Voice: + 358 50 557 5159, Fax: + 358 6 3248195
Email: [Link]@[Link]

Abstract
The aim of this theoretical paper is to explain about global Performance Management (PM) in
MNCs and link it to a suitable theory, which can be socialization, agency or institutional theory.
The approach is to focus on the tension between subsidiaries (host) and headquarter (HQ), how PM
is implemented, integrated or imitated and how it has worked out. Will the transfer of performance be
centralized or formalized? Is there a mismatch between literature and theories and empirical results
of the real world? This article is not dealing with corporate performance compared against
defined objectives but the process, development and design of performance management itself.

Introduction
The development of international human resource management (IHRM) is specific in the
international context and demands understanding of issues that multinational enterprises face.
Managing a foreign workforce is more difficult than managing a domestic one. In the global
world that we live in with the WWW, improving education and frequent travelling many
companies now compete in an international environment with a more diffuse line between
countries borders. One of the most difficult challenges to international operations is the
management of human resources (Briscoe & Schuler, 2004). Slowly a distinction is emerging
between international and global HRM. Traditionally, international HRM has been about
managing international workforce (like expatriates). Global is not only covering these but
instead all the staff around the world. It is concerned with managing international HRM
activities through the application of global rule sets to HRM processes. Most organizations
are slowly making this transition from international to global HR. (Sparrow, Brewster &
Harris, 2004). But still I decided to use the term Global Human Resource Management
parallel with IHRM
The aim of this paper is to;

Built on review of literature on global integration of HRM - in particular of

Performance Management (PM) and the global integration mechanism present
evidence on global integration of PM design
a) aims b) process and c) outcome

In addition, analyze how PM system is utilized in integrating corporate values

Empirical studies show that there is a trend towards globalization and HRM are swept away
by global forces and changes are demanded from multinational companies in the 21st
century. The task of this paper is to explain the concept of performance management and to
link the analyses of PM to global integration of human resource management in order to
contribute to the literature about PM that already exists. It is only recently that the subject of
globally integrated PM has gotten publications and books on their own. The subject of global
PM was triggered by this gap of how MNCs deal with it on a daily basis. In order for
companies to succeed with such global integration, supporting global HR-systems such as
PM-systems needs to be developed.
Performance management is one HRM practice that is of most importance for the company
and closely linked to the companys strategy and values and a way to control the subsidiary.
But how much saying does the subsidiary have in the matter and how much is just
ceremonial adoption? This leads to pressure between the headquarter (HQ) and the subsidiary
relationship. The subsidiary perceives or reacts to a new practice, so the key question is still
to which extent the PM design should be adapted to local conditions? Should it be
standardized, implemented or integrated in the subsidiary?
2

Globalizations effect on MNCs

Globalization can be seen as a strategic effort to treat the world, or part of it, as a single
market (Sparrow, Brewster & Harris, 2004). In the world that we live it is of most
importance for MNCs to have their human resource management adapted to a global
environment in order to receive success in the increasing competitive business world.
(Briscoe & Schuler, 2004) Finding the right staff is essential for success (Briscoe & Schuler,
2004) and to operate successfully, the company need to have sufficient information regarding
the management and cultural aspects of doing so in another country.
Now is also commonplace for managers to describe their organizations as global firms. Many
large MNCs are no longer dependent on their original home base, but operate on a global
market responding to pressures and demands of the global economy and draw on knowledge
and expertise from across the globe. (Edward & Rees 2006) There has been an increase in
globalization and of the world economy, and debates tend to be either too much or too little
about globalization and defining the term. So how should we understand the term
globalization? Different paradigms are used to explain and identify the differences between
countries. Globalization can be understood as the impact and consequences that international
markets and industries have on behaviors, attitudes and mindsets. It is seen from an economic
perspective as a dynamic process between flows of goods, services, capital, people, ideas and
technologies according to demand. Few MNCs sees the world as borderless, instead
operating internationally is very diverse. (Sparrow, Brewster & Harris, 2004)But
globalization has by no means brought an end to territorial geography and economies,
governments and identities. Global and territorial coexist and interrelate in a complex way. In
short can globalization be defied as an outcome of multifaceted dynamics of social relations.
(Scholte, 2005) Competitive advantage comes from speed and adaptation, differentiation
rather than imitation. There is increasing emphasis on global management. Social
architecture becomes the frontier challenge for HRM. (Evans, Pucik & Barsoux , 2002)
There is tension between forces of globalization and the characteristics of MNC that still bear
the national effect. International HR issues only arise in, and need to be worried about in
more global operations. The more basic level of internationalization the simpler need for HR
functions. (Sparrow, Brewster & Harris, 2004) A more global perspective of HRM arise
when the MNC operate worldwide

Global HRM
Of all the management domains, HR management is the most sensitive to local context. The
study of IHRM or global human resource management is relatively new; it is also highly
dynamic and constantly evolving. It involves the same activities and dimensions as domestic
HRM but operates on a much larger scale. There is more external influence, higher level of
risks and more insight into employees lives and family situation. There have been arguments
that it differ from domestic one not only in degree but also in kind. (Stahl & Bjrkman, 2006)
In general, IHRM practices is about understanding, researching, applying and revising all
human resource activities in their internal and external contexts as part of the process of
managing human resources in MNCs throughout the global environment for multiple
stakeholders, including investors, customers, employees, partners, suppliers, environment
and society (Briscoe & Schuler, 2004) IHRM is about how organizations manage their

people across national borders and how complex that can be (Sparrow, Brewster & Harris
2004).
When comparing HRM policies and practices across geographical borders there is a
distinguishing between comparative and international HRM. IHRM is concerned with the
way that organizations that operate across national borders manage their employees, which is
much more complicated than doing it in just one country. Given the dual requirements
systematizing their management processes (global integration) and being aware of
differences between countries (local responsiveness) it is not possible or even rational to
manage people in exactly the same way in different circumstances. And also, the employees
and the management team do not have the same perspective and expectations in the
organization. To believe too much in cultural and national differences puts it in a danger of
becoming a purely statistic analysis, not able to cope with changes over time. (Brewster,
2006) According to Brewster, Sparrow and Harris (2005) the international HRM is changing
rapidly and significantly. They argue that five organizational drivers of international HRM
are identified. They are efficiency orientation, global service provision, information
exchange, core business processes and localization of decision-making.
The role of the IHR is to organize and develop international operations and deal with global
human resource problems such as global pension and health care systems, management
recruiting and development throughout the global enterprise, compensation systems etc. The
global and cultural aspects of international business boil down to finding ways for
individuals with varying backgrounds and perspectives to work together; that is, finding
ways to develop a corporate glue that will hold the organization effectively together.
(Briscoe & Schuler, 2004) One of the HRM practices that can be used as a tool for this is the
performance management process.

THEORETICAL FRAMEWORK
Performance Management
The expression PM appeared in late 1980s as an extension of performance appraisal, a
practice used to evaluate an individual employees past performance. Today the appraisal is
seen as a one of several elements of PM (Tahvanainen, 1998). Others are the communication
of company strategy through individual objective setting, job design, feedback and
monitoring, linking it to training and development planning and possibly compensation.
(Vance & Paik, 2006) As Tahvanainen, 1998 points out strong goal setting and more
traditional appraisal are key elements of performance management system that might also
include training and development and performance related-pay. PM can be defined as
performance on a job, which companies aim at managing and dealing with employee
behavior or outcome in job function during a specific period of time (Tahvanainen, 1998).
Performance can be defined by three key elements; goals, measures and assessment. Included
is also feedback to employees at all levels and development of skills. (Cascio, 2006)

The design of PM
Performance is what one organization hires one to do, and to do well. Current theories
suggest that performance domain is multifaceted. Performance evaluation system includes

developmental, result and behavioral measures. (Rosenzweig, 2006) Performance

management enables the evaluation and development of the individual, a unit or a company.
It reflects and evaluates the achievement of pre-determined clear goals and targets. (Dowling,
Welch & Schuler, 1999)
Few frameworks or models exist that describe the PM development process in a global
context, so here is one model;
GLOBAL
CONTEXT

ORGANIZATIONAL
CONTEXT
Company/
subsidiary strategy,
values and goals

INDIVIDUAL
CONTEXT
Expectations
from the
company

New skills

5.
Measurement

6.
Evaluation
&
Feedback

4. Training
&
Development

PM
process

1. Job
description
&
Job design

3. Goal
setting and
agreeing on
goals

2.
Appraisal

Figure 1. Global PM Process Design

Elements in the process:

In going through the (effective) process, following elements should be looked at;
GLOBAL CONTEXT which the company exist in. Priorities are different in guiding a global
company.
ORGANIZATIONAL CONTEXT includes company/ subsidiary strategy and goals.

INDIVIDUAL CONTEXT compared to the expectations from the company. Essential

element in successful PM is to understand the conditions and situations in which employees
work.
Then going on to the individual PM process, which consists of;
1. Job description and job design should not be abstract but include specific tasks. It is based
on the companys strategy in the first phase when a specific job is designed. But still it can
change over time to meet a demanding, dynamic and flexible work environment. (Vance &
Paik, 2006) Job description is based on the job analyses and design and is especially
important when a new job is created. Job analyses involve the duties, tasks, reporting
relationships and responsibilities. (Tahvanainen, 1998)
2. Performance appraisal emphasizes measurement but not necessarily between pre agreed
performances goals, which makes it part of PM. Appraisals are an ongoing process and
important aspect of everyday life. (Tahvanainen, 1998) When it comes to appraisals it is
important that it is done by the right person with a good instrument, is objective and give
constructive feedback.(Latham, Almost, Mann & Moore, 2005) Even though appraisal is an
important part of the evaluation process, the others should not be neglected. (Vance & Paik,
2006) Left out in this discussion is the reward system, while many companies dont wish to
link salary and bonus discussions to the appraisal. Data used for determine pay and
promotion should be discussed in another meeting. Others, like Tahvanainen, 1998 includes
it in PM saying that performance is typically linked to pay. Without linking it to pay or other
reinforcement it is often difficult to sustain.
3. Goals can also be set for the employees own personal development and can be set both by
employee or superior. Goal setting can be particularly difficult when a physical product or
time required to produce a product can not be measured. The goal needs to be for a crucial
aspect of the job in a key area. It is also a way to control and monitor employee behavior.
Therefore many employee set lower goals so that they can look good when achieving them
rather than too high that they can not be met. According to the acronym SMART the goals
should be Specific, Measurable, Agreed, Realistic and Time-related to improve performance.
(Tahvanainen, 1998)
4. Training and development requirements can come from both parties, for examples to
identify the need for language courses. (Vance & Paik, 2006) Development can be long or
short term. (Tahvanainen, 1998)
5. Measurement is essential for a growth in the company, both for the individual and for the
ability of the managers to learn better skills to improve performance and using the right tools.
One can be the 360 feedback process, which include collection of data from peers, superior
and self (multisource evaluation data) that lead to training and support and a report. After that
the process starts all over again. (Shipper, Hoffman & Rotondo, 2007)
6. Evaluation and feedback of the outcomes are feedback to those planning the future of the
business. Most organizations require a written document of evaluation with each one for
legal reasons (evidence of equity), support and clarification and as a reminder for next time
of mutually understood action. (Tahvanainen, 1998) Frequent feedback sharing specially in
manager-subordinate coaching relationship and in a more informal context, can be very
successful in leading to optimal employee performance. (Vance & Paik, 2006)

Global Performance Management

Cascio (2006) have written about global performance management. There are two broad
categories of performance factors; task performance and contextual performance. The task
performance represents the core technical activity of the organization, for example software
development. Contextual performance factors represent the performance components that
support the organizational, social and psychological environment in which the technical core
must function. At the most basic level, performance management refers to the evaluation
and continuous improvement of individual or individual team performance. Naturally it
is as important in the global environment, even though managing host-country nationals
makes it challenging. International performance focuses on two things; host-country
nationals of MNCs and expatriates. The last one will not be explained about here. There are
surveys done about performance management, also in multinationals, from different
countries. Results being that PM are used, at three-quarters for more than 70 % of their
employees. More than half have a yearly review, about 40% more often than once a year.
Soft-ware is used in 20 % and about a third plan to introduce it. Training for managers has
doubled. Managers tend to balance on subjective and objective data in performance review.
Ranking systems are used but few find them effective. The most effective performance
systems are consistently used throughout the organization, integrated with other systems (ex.
promotion, compensations, succession planning and promotions), involve senior managers
and employees and are linked to organizational strategy.
There are major differences in implementation on the international operations, even if the
goals and purpose is quite the same as in the domestic. One thing that affects this is the
degree of support and interaction with the parent. The goals comprise two domains:
evaluation and development. The evaluation goals in the international environment include:
providing feedback to employees at all levels so they will know where they stand
developing valid bases for employment decisions involving pay, promotion, job
assignment, retention and termination
provide a mean to warn employees about unsatisfactory performance
The developmental goal for global performance management systems include:
helping employees at all levels to improve their performance and develop their
professional skills
diagnosing individual and organizational problems
enhancing commitment to the organization through discussion of career opportunities,
action plans and need for training and development
using recognition to motivate continued or improved high performance
(Cascio, 2006)
Common things for the process seem to be three key elements according to Cascio, 2006.
They are defining performance, facilitate performance and encourage performance. Going
through them one by one; defining performance ensures that individual employee know what
is expected of them. To do this well it needs to pay attention to goal, measurement and
assessment. A goal can be for example a certain % of satisfied customers. They need to be
specific and clarify precisely what is expected. An individual can be expected to improve the
productivity with ten % using goal setting. Goals also need to be measurable and not too
vague. The employee also needs to know how they will be measured. In an international
environment that can be for example making customer contacts. The third requirement is
assessment, where performance appraisal and feedback come into play. Regular assessment
of progress toward goals focuses the attention and efforts of an employee and also helps
7

ensuring that there are no surprises. When talking about facilitating performance a big
responsibility is to eliminate roadblocks, for example by providing adequate resources (also
human resources) and equipment to get a job done on time and in a right way. If the tools are
missing so that one can meet the challenging goals, they will just be frustrated. One aspect of
performance facilitation is the selection of employees. Costs can be high if there are
overstaffing, excessive labour costs and reduced productivity. Looking at each factor and
leaving nothing to chance help, this also leads to better self-management without having to
monitor all the time. Encouraging performance can be providing sufficient, clear, relevant
and fair rewards or recognition, for example if something is done ahead of time or under
budget. The reward can consist of money, benefits, free time, merchandise or special
privileges. Loses of rewards or delays can lead to motivational lack and low performance.
The issue of global performance management need an effective system to be able to evaluate
in a local cultural environment. It is necessary to make some adjustment to problems with
cultural adaptation and associated with the complexity of conducting international business.
According to guidelines for adequate global PM it is important to consider the fairness of the
evaluation to ensure that the MNC receives full value from its managers. There need also to
be decided who conducts the appraisals. (Briscoe & Schuler, 2004) PM might be the most
challenging HR process in the international context because of geographical spread and
product and operation mode diversity. To manage performance in various locations requires
some planning. Firstly, MNCs need to recognize the difference between overall strategic
goals and subsidiary goals, to look at it in the right context and recognize various constrain
that may affect goal attainment. They can be whole versus part (the good of the whole is
more important than one subsidiarys short-term profitability), non comparable data (for
example, quality checks can be different from one country to another) turbulence of the
international environment (even long-term goals need to be flexible), separation by time and
distance and variable levels of maturity (for example more time is might be needed to
achieve results). (Dowling, Welch & Schuler, 1999).

Changes in HQ/host relationship influence performance management

Rozenzweig and Singh (1991) feel that degree of similarity to local practice is significantly
influenced by method of founding, dependence of local inputs and the extent of
communication with the parent. Performance management is subject to the tension between
consistency versus adaptation to local environment in MNC and their subsidiaries (Lervik,
2005).
The pay and reward system is also a part of human reward system, but it is still the case
many times around the word that employees get rewarded for turning up and getting older.
National culture influences the various pay formula and techniques. In China for example,
the equality solution in a collectivist culture is that people belonging to ones in-group
should be given bonuses and incentives regardless of the productivity. The pay can be less
important than the range of benefits such as housing, food and childcare typically provided
for employees. One reason is that tax is based on basic pay and not benefits. But with the
new glorious rich a more free market challenge is the underlying value. (Harris, Brewster &
Sparrow, 2003)
The issues that have led to this use of international employees are increased needs that
companies experience as they increase their level of international commerce and the

problems they face when dealing with these increased needs. This variety of employees
presents new challenges for selection, preparation, motivation, compensation and
management of the workforce. Critical concerns are also standards for performance, review
ability and who does the reviews. (Briscoe & Schuler, 2004)

Importance of linking PM to strategy

Performance management as a strategic HRM process enables the MNC to continuously
evaluate and improve individual subsidiary unit (Lindholm, 2000). To be able to evaluate
performance it should be linked to a companys vision and strategy and possible growth.
(Cascio, 2006)
The purpose is to turn employees potential into desired results, with company goals and
strategy in mind. PM is typically about goal setting and evaluation, often also training and
development, and performance related pay. Effective PM is important as a competitive
advantage. It is an area of HR that has the potential to make the most significant contribution
to organizational effectiveness and growth. The differences in PM should be clear in terms
of for example who sets the goals, if there is a linkage between performance and pay, the
type of goal and who conduct the evaluation and organizational structure. At an individual
level it will result in an action plan. Given a high position in a company is already a proof of
oness skills and abilities, still there is always room for development in each individual and
the aim is that training issues should be taken up (Tahvanainen, 1998)
The IHR department often also need to take into account the distance and multiculturalism
which differ from domestic HRM. One aspect to consider is which practices should be
designed at the headquarters, and how much should the company rely on subsidiaries and to
what extent does HRM fit into and contributes to an international strategy? (Briscoe &
Schuler, 2004) The theory behind HRM is that is fits, that there is an interaction between an
organization and its environment. The payoff in terms of performance comes only if HRM is
linked to a strategy that reflects the industry, the strategy linked to performance might of
course also be negative. For many reasons HRM is difficult to prove or demonstrate
empirically, the payoff lies more in the assumption that the strategy is valid. (Evans & co,
2002) The same is naturally also accurate when talking global.

Value based PM
The aim of MNC`s is to establish a shared set of values and beliefs across the units.
(Bjrkman, Barner-Rasmussen & Li, 2004) This is closely linked to company culture and
strategy. An alignment of common values, priorities and performance expectations
throughout the MNC can also contribute to the development of a common global business
culture that in turn can have a unifying influence on individual employee thought, behavior
and performance. (Vance & Paik, 2006) Sparrow (2007) has looked at values-based HR
strategies in the UK and found out that this can be a new context for PM. Organizations
were giving more attention to the nature of effective managerial performance and had
introduced competencies into the processes, in terms of external recruitment and internal
career assessment processes. That means not just to measure outputs, for example the
achievement of objectives, targets or standards but also inputs, such as the values that an
employee brought to a job, or the behaviors or competencies they were capable of
9

demonstrating. By the late 1990s the context moved towards organizations giving more
attention to the link between values and the execution of strategy and the need for a persons
organization fit in values terms. This can be for example in customer service values or
personal needs and desires of their employees and the factors that might, or might not,
persuade them to commit strongly to the organization. Organizations began to understand
this power of their PM system as a vehicle for engaging their workforce interviews with staff.
Improving the quality of the PM in terms of the dialogue that it contained seemed an obvious
mechanism for achieving this. The focus had shifted from the need for a PM design to
provide sophisticated evaluation and appraisal skills, towards a broader agenda of improving
performance, and then into a mechanism for enabling more open and honest communications
about behaviors and outcomes, issues and problems surrounding the execution of strategy,
and the need to engage and motivate employees in this.

The relationship between MNCs and subsidiary

Effective global organization structure is a key to dealing with challenges and pressure to
compete in a new environment (Briscoe & Schuler, 2004). The subsidiary-headquarter (HQ)
relations examine the subsidiary role, strategies and subsidiary control. These include the
degree to which a subsidiary is embedded in the local environment, the strengths of the flow
of resources such as capital, information and people between the parent and the subsidiary;
the characteristics of the parent, cultural of home country and the degree of distance between
the two cultures that meet. To try to harmonize core HR processes in this environment can be
a challenge. (Sparrow, Brewster & Harris 2004) The geographic and cultural distance
increase the cost of establishing control, and this question of control is an ongoing subject for
MNCs. How do they make individual behavior to fit the goals of the MNC? (Hennart, 2005)
Due to differences in rating, cultures, rules and laws it is difficult to compare performance of
host-country subsidiaries in different countries. There is a need to see if this also applies to
all cultures. Diverse cultural background may lead to distinctly different frames of reference,
for example about ratings. Members of culture assume that their way of thinking is obviously
correct, and therefore need not to ignore the differences for example about individualism and
collectivism. In a collectivistic society, discussion a persons performance openly is against
the norm of harmony and open unacceptable loss of face. In those cultures the
communication need to be more indirect. In some cultures like India it is inappropriate and
disrespectful to disagree with ones supervisor. Training for managers about how to conduct
global performance management systems is essential; otherwise it is just waste of time and
money to implement it. Once rating is trained, the next step is to provide feedback to rates.
(Cascio, 2006)
What happens after the company has decided on PM? According to Rosenweig & Singh
(1991) PM is subject to the tension between the need for global integration, on one hand and
local adoption on the other. Many elements of the institutional environment, such as culture
and legal system are often specific to a nation.
The struggle between host and HQ can be investigated using different theories. In this paper I
will use institutional theory, agency theory and socialization theory to see how they
positively influence the subsidiary in the case company when looking at global performance
management. They describe transfer within the MNC, not a more general view of across
borders communication.

10

Institutional theory

Institutional theory has been used to explain organizations including HRM practices in
foreign subsidiaries according to Rozenzweig & Singh (1991). They continue to say that
foreign-owned subsidiaries can be conceptualized as being influenced both by institutional
factors in the local environment and by international processes, including pressures from the
MNC parent company. The tension between HQ and host is also mentioned in Lervik, 2005,
in the perspective that the same images can be imitated or integrated and accepted into the
subsidiary depending on the relationship between host and HQ. It is grounded in the premises
that organisations are social as well as technical phenomena, and that the structures and
processes are not shaped purely by technical rationality (Westney, 2005)

Kostova (1999) notice that on many occasions a subsidiary manager is frustrated with HQs
request to implement yet another new program. That may lead to a decision, intentionally
or not, to implement a particular practice while reporting otherwise to HQ. The transfers are
not always smooth and successful in a MNC. If the subsidiary feel alienated from the parent
organization, they might have problems with following the request. Institutional theory is
explained in an article by Kostova & Roth (2002) and is in short summarized here. Using
institutional theory is useful, where the institutional pressures comes from MNC (parent),
subsidiary in the middle and the local environment (foreign to the MNC but local to the
subsidiary, for example a legal or cultural aspect is usually specific only to one nation).
There is an isomorphic pull from both, pressure from legitimacy action from both. It can be
coercive, mimetic and normative. Central theme is that organizations sharing the same theme
will employ similar practices and anyway become isomorphic with each other. This
explains how an organization adopts an organizational practice in the subsidiary of a MNC,
the affects it will have on institutional profile of the host and relational context in the MNC.
(=Institutional duality). Organizational practices can vary among nations. Hereby lays the
tension for the need for global integration on one hand and local adaptation on the other and
how the subsidiaries respond. Particularly important is that a subsidiary is not independent. It
is affected by any transfer, which is also affected by the active agency of subsidiary
management, its discourse and discretion. Given the institutional duality, the practice might
be viewed as inappropriate or ineffective for the host. Particular functions have evolved over
time under the influence of the organization. But subsidiary is in practice mandated by the
parent, and the subsidiary is obligated to comply. Ceremonial adoption is therefore used as an
expression. (Meaning adoption only on paper and not in real life). A model of practice
adoption focuses on institutional context and implementation on external and objective
behaviors. And they separately examine the three pillars: coercive, mimetic and normative.
Relation context can be inside, but foreign subsidiaries can also confront pressures within
their MNC to conform to organization based structures and practices. The characteristics are
dependence, trust and identity.
According to Harris, Brewster and Sparrow (2003) the institutional perspective focuses on
the manner in which societal bodies accord social legitimacy to organizations and thereby
contribute to the achievement of organizational success criteria and survival. Institutional
pressures from multiple stakeholders may be powerful influences on HR strategy. Global
HRM tend to be closer to local practices, because they are often mandated by strong local
conventions. That can be seen in for example practices of time off, benefits, gender, training,

11

executive bonus and participation. Bjrkman (2006) again means that most organizations and
sub organisations are under pressure to adapt and be consistent with their institutional
environment. Foreign owned (by MNCs) subsidiaries can be seen as being influenced both
by institutional factors in the local environment and by international isomorphic processes,
including pressures from the MNC parent company. When subsidiaries managers have been
asked to estimate the extent to which the HRM practices resemble those of local firms and
the MNC parent organization, in Chinese-Western joint ventures it was revealed that HRM
practices were more similar to those of MNC than to local custom
The institutional theory can be used in analyzing global PM, specially the institutional
distance between home and recipient. But while I want to focus more on the relationship
between HQ and host and not the surrounding institutions, other models to consider is agency
and socialization theory.

Agency theory

Agency theory is how the subsidiary suit in to the headquarters strategy, how HQ control the
behaviour of the host, ex financially by influencing the behaviour by tying it to
compensation. According to Mudambi & Navarra (2004) and Roth & ODonnell (1996) the
relation between headquarter and subsidiary can be characterized as a principal-agent
relationship. The social relationship is seen as an interaction between a principal and an agent
and in essence the principal delegate work to the agent. Within this perspective it is
recognized that the subsidiary pursues its own interest and is not a mechanical instrument of
headquarters will. Also, of importance, Mudambi & Navarra (2004) says is the fact that the
local interest or goal of the subsidiary may not always be the same as those of the HQ or with
the MNC as a whole. The agency theory view subsidiary managers as agents of the
headquarter. Within this framework, agents (the subsidiaries) bargain with the principal
(HQ) to maximize their share. Subsidiaries are initially set up by the parent MNC with
certain goals and objectives. But subsidiaries evolve over time in responsibilities, and the
evolution can occur in both directions. They can expand or its roles can be reduced or even
eliminated. Many aspects have to do with control. Control over knowledge, R&D and so on.
If the subsidiary has limited control over such information they also have little bargaining
power in dealing with the headquarters.

When there is a question of compensation strategy in global industries there can be an agency
problem, meaning that the subsidiarys cultural distance from headquarter regarding
commitment and centralization. How agency problem associate with foreign subsidiaries
within the global industry is a critical influence in the determination of the compensation
strategies necessary to produce desired organizational outcomes. (Roth & ODonnell, 1996)
Although agency theory is useful in MNC research to explain foreign subsidiary
compensation strategy, ODonell (2000) has acknowledged that foundation for studies of
control in MNCs is limited in itss ability to explain fully the phenomenon of foreign
subsidiary control. Instead she suggests a model based on the intra-firm interdependence as
having much greater ability. The agency theory serves as a basis for a model that predicts the
use of monitoring mechanisms and incentive compensation. These can however be
insufficient for independent subunits, so it is argued that several social mechanisms be used
also. Mudambi & Navarra (2004) mean that subsidiary managers can control significant
amounts of the MNC knowledge asset and therefore have power in the company. In the MNC
12

context, monitoring can be defined as activities or mechanisms used by headquarters to

obtain information about the behaviour and decisions of subsidiary management (ODonnell,
2000).
Hennart (2005) deals with the question of how to make geographical and cultural distance
makes it difficult to establish control, and also make it difficult for MNCs to establish the
cooperation of the subsidiary. Over centralization (all decisions taken by HQ) can lead to
paralysis and decentralization to chaos. Bjrkman, Barner-Rasmussen & Li (2004) outline
that in the potential asymmetry between the goals of headquarters and those of the
subsidiary, the latter may not act according to corporate interest. The MNC use several
mechanisms to control and coordinate the foreign subsidiary. One is naturally a performance
management evaluation system.

Socialization Theory

To study the literature of coordination mechanisms in MNCs, such as the relationship

between degree of centralization and independence of parent to foreign subsidiary, one can
also consider socialization theory.
Corporate socialization mechanisms are positively related to transfer in foreign subunits
when a practice is integrated, but not when just imitated. This depends on the degree of
autonomy in decision-making in the foreign subunit. (Lervik, 2005) A transfer does not occur
in a social vacuum but rather is contextually embedded; social, organizational and relational.
Social context is being the distance between the parent company and the receiving unit
between counties. Organizational distance is between the players in the company and
relational in conceptions in terms of the perception of the members of activities based on past
relationship. In other words trust, commitment and identity to parent. (Kostova, 1999).In the
article from Bjrkman, Barner-Rasussen and Li (2004) they use both agency theory and
socialisation theory to explain about managing knowledge transfer in a sample about 134
Finnish and Chinese MNC subsidiaries. They found that MNCs can influence inter unit
knowledge transfer and flow by specifying the objectives of the subsidiary and by utilising
corporate socialisation mechanism. But there was no support for the management
compensation influencing or expatriation influencing. A crucial design problem for MNC top
management is how to choose organisational mechanisms that enhance knowledge flows,
especially within the MNC. There is still a lack of research on the mechanisms to ensure that
the competence is transferred from subsidiaries to other units. As an example, a subsidiary
can be reluctant to transfer information to another unit because of fear of loosing their own
position, or they will not be compensated for their own efforts or costs. Therefore it is in the
subsidiarys self-interest not to transfer knowledge to other units, even if it would benefit the
MNC as a whole. Agency theory have been used extensively in MNC research recently, in
view of the HQ-subsidiary relationships and compared to a principal-agent relationship 2000.
The article uses as a hypothesis that several kinds of mechanism are used against
opportunism of the subsidiary. Also it can be argued that self-serving behaviour on the part
of managers can be mitigated by company socialisation. Knowledge flows are positively
related to corporate socialisation mechanism and therefore also performance management.

13

IN PRACTICE
Research agenda

The increased interest of academics regarding the management of human resources in

different parts of the world (due to globalization) shows the need for more research and
publications to provide a reliable and comprehensive picture of HRM systems relevant to
different parts on the world. (Budhwar, 2004) Possible research question can be that if there
is a good PM system in the company, what does that mean for the company, profit,
competitor advantages, and information benefits? Another researcher (Cascio, 2006) says
that PM systems are tools that can have positive outcomes when done properly, by putting
results together with rewards. Then the system is taken seriously and the company will spend
more time on developing and training individuals.
Global PM in a theoretical framework;

Issues related to the

implementation of PM systems.
Possible focus on;
IT (electronic HR)
Power/politics
The role of language
(barriers, translation x 2)

HOW Theoretical
framework (theories)
Agency
Socialization
Institutional
Mechanism behind

Level:

WHY?

Individual/team/
subsidiary/organizational

OUTCOMES
PM integration

WHAT
PM description and
design in MNCs
Why?
Theory vs
Practice
Effect on
PM?

Longitudinal study, 3- 4 years

(retrospective) What have done?

Standardizationadaptation
dilemma

Measures:
Stages of
implementation,
integration or
internationalization.
Ceremonial adaptation
Explanation:
Parent vs. host pressure
Impact of culture

Quantitative study, 1 company, European

Figure [Link] design

In the case study there will be explained the design of global performance management
system and practices, including reasons behind the mechanism used, how they are globally
integrated or implemented into the foreign subsidiary.
14

Conclusion
It is widely agreed by management researchers that globally distributed networks of
subsidiaries constitute an important source of competitive advantage for multinational
corporations, MNCs (Bjrkman, Barner-Rasussen and Li, 2004) To make the IHR practices
more proactive and globally strategic and a fully integrated global business partner and find
developing talent on a global basis, PM is a suitable instrument and practice. Integration
research so far has been limited, how organizations are integrating IHRM and global PM to
work in progress.
The paper focuses on exploring the different forms of design, implementation and outcomes
of PM. It looks at individual evaluation, the employee performance management, neither
team nor company focus. Company goal are the base for developing individual employees
performance goals, and achievement of the company goal depends on how well the
employees can achieve their performance goals. It is important to link PM to company level
strategy.
Even if performance management represent a tool for control in implementing company
strategy, it should also consider local business conditions and be arranged in a way that fit
and is responsive to those. External factors affecting local performance include economic
circumstances, competition, demographic, supporting infrastructure, unions and national
culture. (Vance & Paik, 2006) How this affects PM, subsidiary and MNC relationship is what
have been discussed in this paper. Studying the process of performance management and its
effectiveness for host-country nationals is an important benefit. This approach is applied in
international context. Little research has been done about how to transfer HR practices across
border, and specifically the subject of PM even if it is of most importance to the companies
since it is closely related to strategy. There is almost no published empirical research on the
relative effectiveness of PM practices for MNCs. (Cascio, 2006) Transferring PM to another
country means more things to consider for the MNC. The integration stage of PM begins
after the recipient achieves satisfactory results with the transferred tool.
There is a lack of theoretical framework about PM (Tahvanainen, 1998) so therefore my own
attempt to design one and place it in a global context. The focus is how a PM process
happens. Performance can be measured according to an individuals past performance and
then linked to goal settings which in turn leads to training and development planning, and
possible compensation. (The last issue is being a subject for debate). The payoff in terms of
performance comes only if HRM is linked to a strategy that reflects the industry and the
competition. Organizational culture also consists of a set of values, beliefs, priorities and
assumptions of an organization that guide individual and collective behavior. The culture can
be shaped naturally by the members in the organization but it can also be shaped and changed
through systematic programs by the managers of an MNC. (Vance & Paik, 2006) Even if
there is controversy about the question of HRM practices contribution for a companys
performance, (Evans, Pucik, & Barsoux,, 2002) PM systems successfully integrated in the
company can effectively affect the outcome.
Effective performance management is beneficial both to the individual and the firm. It is also
an important source of information on which other personnel-related activities such as
training and development are based. But multinationals can not allow the subsidiaries to
become autonomous in for example financial terms and place control on the managers.

15

What does the theories have to say about PM and relationships between HQ and subsidiary?
One useful theoretical framework is the institutional theory, but another is the agency theory
because agency theory is about social control mechanisms, from host point of view.
According to Roth & ODonnell (1996), from an agency perspective, social relationships are
interaction between a principal and an agent, which can easily be compared to a MNC and a
subsidiary. The problem is when the goals are in incongruence or there is a difficulty in
monitoring the performance. The degree of monitoring according to agency theory depends
mostly of two things, the asymmetry of information between principal and agent and the
agents (subsidiaries) role in decision making, in other words degree of independence.
Notable is also that the relationship between agent and MNC can change over time.
Difficulties in monitoring can occur when the subsidiary management have high level of
specific information that the MNC dont have.
Taking care of globalization requires a building up in the company. Here the MNC can use
Performance Management, which find its roots in the strategic management and adds value
to the activities at different range of operations.

Acknowledgement
The author would like to thank TEKES (Finnish Funding Agency for Technology and
Innovation) for financial support and the Evald and Hilda Nissin Sti for financial support
for the travel and accommodation arrangements to the conference.

16

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