Human resources in Russia

The “war for talent” is a cliché, but an accurate one. In nearly all major emerging markets, such as China, India and Russia, management of human resources is the critical operational business issue today. Over the next 5-10 years, HR managers and senior executives in Russia will be facing a number of challenges and the complexity of these challenges will intensify. Human resources is the number one critical business issue for multinationals operating in Russia, and it will only get tougher. Human resources are the greatest positive factor for western companies operating in Russia; human resources are the greatest operational challenge to business in Russia.

Russian staff: among the best in the world

The quality and talent of Russian staff, whose education was based on the Soviet educational system, is unquestioned. Russian staff are rated among the best in the world, often better than Western European or US staff, and throughout all levels: office staff, secretarial support, engineers, managers, operational staff…During the rigorous disciplined education, superior skills e.g. in sciences, maths or engineering were developed. But Russian staff are also extremely cultured and educated in fields such as literature or music. And culture and education are something companies ought to be able to build on.

The best Russian employees are regarded as those who were about 20-25 years old in 1991. These people as a generation were very well-educated under the Soviet educational system, but were not “contaminated” by Soviet ideology and experience. As a result, they were more open to new ideas and training than their older peers, and were willing to work extremely hard for moderate salaries.

Nevertheless, since 2004 western companies have noted a deterioration in the quality of people they were employing in Russia. The broad consensus today is that the quality of staff has eroded. The problem is that the Soviet educational system is long dead and the low investment in education since 1991 is starting to show its consequences. But even this fall is relative: the key point is, given the dramatic underinvestment in education in the last 15 years, Russian educational standards are still very high and have not totally collapsed. The announced belated investment taking place in 2006-08 may help stop the rot.

Salaries— The role of pay in staff motivation

The debates continue, and will always do so, about the role of money in staff motivation. For the most part, pay will remain the number one key driver for recruiting and retaining Russian staff (as well as in emerging markets more generally), even if, of course, training, good work conditions, career development, corporate pensions, stock options etc. are all very valuable parts of an employment package.

For many years in Russia western companies got away with paying mediocre salaries for top quality staff. But companies must realise that they have to pay competitive salaries now, that these salaries will become ever more competitive as the market continues to tighten and that this is a global trend. Kurt Marx, a senior consultant with Neumann International, says: "Money counts. Everything else (apart from certified training) is just nice to have."

Competition for talent forcing pay rises

From 1998-2004 western companies had the benefit of worldclass staff at very reasonable, if not cheap salaries. As demand for staff rose and the supply could not meet it, the old model was no longer sustainable. Especially after 2004 the situation in Russia caught up. Since then, especially in Moscow, the catch-up with CEE markets has been very rapid. Salary inflation is also being stoked by many of the larger Russian companies who are simply buying up the best Russian staff at 25-100% above market rates.

In order to retain quality staff, FMCG and other consumer goods companies found they were obliged to offer salary increases of 15-28% (when inflation rose annually at about 12-15%). This level of annual increases contrasted with industrial and IT companies who were offering annual pay rises of only 5-8%. Since 2004, these salary increases have tended to converge, with most companies offering increases above inflation: with inflation averaging about 10% in the last two years, companies on average have offered pay rises of 13-17%. However, for key staff in business critical positions, averages apply much less now and annual or exceptional pay rises of 20-30-40% are not unknown and are becoming more common.

However, there are two points to remember, which often get lost in the debate:

• While salaries have jumped in recent years, they were often starting from a low base.

• Most western companies have gotten used to higher salary levels and are coping with

human resource headaches reasonably well, issues which 2-3 years ago seemed insurmountable.

Since 2003, salaries across the board at senior management level have been rising by 15-20% per year according to both Ernst & Young and Neumann International data. Obtaining good HR managers is one of the hardest challenges. As HR issues come to the fore, HR managers—and good ones—are needed to handle them.

These tendencies entail frequent conflicts between Russian-based country/regional managers and global headquarters, who are mandating real salary increases in all offices around the world of 2-4%. In Russia today, this will just not do and country managers in Russia are spending time educating (and fighting with) headquarters about the HR market.

At the moment there is some willingness to listen from some headquarters, as long as Russian sales (and profits) keep coming in. But some/many managers of western MNCs are frustrated that they have to fight so much just in order to get the required resources they need to do the job of rapid sales/profits expansion.

Defending against the lure of Russian companies

The major Russian companies (those belonging to the “oligarchs”) are cash-rich and jacking up the price for top-quality staff. As Boban Ilic, a principal at Neumann International, puts it:

“Russia is a luxury market for cars, jewellery, and phones…it’s also a luxury market for human resources. Local businesses will pay top dollars for top western management talent.”

The best Russian companies are offering not just more pay, but increasingly a work environment which rivals or betters that on offer in the multinationals operating in Russia. Senior management teams in the biggest Russian companies are increasingly experienced, and these firms can be quite a bit more dynamic and fast paced than their western rivals. Decisions get made faster, changes get implemented faster, and there’s no global HQ to fight with. In addition, many of these companies are planning for listings abroad, meaning they’re under heavy pressure to clean up some of the murky management practices that have kept senior foreign managers away in the past.  The key poaching point, though, is money.

However, working in a Russian company is still risky for a western expat. The loss of job is sometimes linked to poor performance or companies downsizing or going bust. But in most cases, success for senior western managers in rising Russian firms still depends crucially on support from the owner, says Kurt Marx, a senior consultant with Neumann International in Moscow. The fast decision-making processes which can seem attractive can also mean that these firms’ strategic focus can shift overnight, leaving an expensive western manager out in the cold and isolated within the firm.

Case study: Neumann International

For the executive search firm Neumann International, Russia is a booming market—“it’s getting the most attention within the Neumann network at the moment,” says Boban Ilic, a principal covering the CEE region. It's so important that the company has staff across Europe scouring their local markets for potential candidates for top jobs in Moscow and St Petersburg. One trend that Mr Ilic highlights is the increasing interest of owners of Russian companies in human resource management as a strategic tool. “Human resources was traditionally 1,785th on their priority list, but they now realise it’s a critical issue,” he says. This means that Neumann is increasingly acting in a consultative role with senior leaders of fast-growing local firms, helping get CEOs up to speed on a whole range of human resource management practices—recruitment, retention, performance appraisal, benefits, career development, and the like. "Company chairmen from some of the more traditional industries are coming to us saying, 'I've been getting reports from my HR director for years and I've never really known what she does—now that she's running a team of 18 people it's time for me to figure it out'", says Mr Ilic. Mr Ilic puts his firm’s success in Russia down to practicing what it preaches: “we do exactly what we advise our clients—invest in training, professional development and transparent communication.”

Managing staff turnover and retention

As the market heats up, retaining staff is more difficult. Russian staff are becoming more aware of their capabilities and their value in the market. But the average figure for turnover suggests that, while anecdotally many more companies are complaining about retention issues and finding ways to keep top staff, the problem actually may not be so bad….yet. The key word is of course “yet” and more turnover risks could well be on the horizon.

How to retain? The base salary must be competitive. After that there is no golden answer to this, but the standard tricks include among others: golden handcuffs, differed remuneration, share options, mortgages, low interest loans, career development and training, and travel abroad. Another response is to recruit from within (it’s cheaper and almost always results in a better fit), to hire expatriates, to bring back Russian expats or to search for good staff in the Russian regions and to transfer hires from the regions to the two “capital” cities Moscow and St. Petersburg.

The changing role of the expatriates

Anecdotal evidence suggests that - given the increasing lack of qualified Russian staff - 20% of western companies have or are considering bringing back expatriates to Russia for some posts. In today’s market, Westerners have lower salary expectations than Russian staff and for expatriates themselves a move to Russia is often a great career move. But you have to get the spouse’s package right as well. Keeping the spouse happy has been a perennial problem in emerging markets and in Russia. Obviously, the cost equation is usually only attractive when the westerner does not bring spouse and children, but as one European confectionery company noted: “We can afford a single young west-European for the same cost as a talented Russian”.

There is, of course, a third route—the “repatriate” Russian who has moved to western Europe or the US to work his way up and is now ready to take up a senior management position in Russia. This demographic is an important one, says Boban Ilic of Neumann International, because these staff combine the best of western management techniques with a deeper understanding of the local market and of course the language. The big problem, though, is their cost.

The challenge of Russia’s legal environment

Human resource management in Russia is made tougher by a labour code which is “extremely employee friendly,” relative to the US and the UK. Paul Melling, a senior partner at Baker & McKenzie, says, “There are three things about Russia’s labour code which shock British and American investors in particular: it’s virtually impossible to terminate an employee, fixed-duration employment contracts are virtually unheard of, and by law, regardless of seniority or nationality any employee can leave the company after just two weeks’ notice, and can go to work for a competitor immediately.” What this means is that in 95% of cases terminations take place by mutual consent, and even still former employees are usually getting anywhere from 6-12 months’ severance pay (and packages of up to 2-3 years’ pay are not unheard of).

The restrictiveness of the labour code has several obvious implications for western companies working in Russia: It’s really important to keep your employees happy and maintain an ongoing dialogue, to build loyalty, and to be aware that the Russian labour code applies to all nationalities (i.e. expats too). But probably most important of all, the difficulty of getting rid of poor people, and the ease with which good people can leave, means that the initial recruiting process is crucial.

In fact, the substance of the labour code in Russia is in many cases not all that different from the requirements of EU labour law, but the big difference—and the one that drives western HR managers crazy—is the degree to which everything in Russia must be done formally and on paper.

Leadership issues. Women outperform men

More companies have complained in the last 18 months about leadership issues. One common complaint is that young Russians are simply too ambitious and want “to be CEO in 6 months”. That can be very disruptive to regular HR career developmental and leadership planning. Curiously (or not) this is less the case with Russian women (and probably all women). The point we’re going to make here is that: Women are better than men. They are perceived as being the better employees - more rational and stable and dedicated.