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HR in Mexico What You Should Know

August 1, 1994
Related Topics: Global Business Issues, Global Employment Law, Expatriate Management, Featured Article
Rumors abound: The labor is cheap—compensation's a snap. Nepotism is rampant—recruiting's a nightmare. Workers are unmotivated—training takes forever. And the stories continue, twisting on themselves, contradicting until it seems that HR issues in Mexico are scattered sections of a puzzle that may never quite fit.

The truth is, as usual, somewhere in the middle. Work issues in Mexico are neither as sunny and simple as the pro-NAFTA rhetoric proclaims nor as gloomy and unnegotiable as anti-NAFTA forces would have you think. Some practices are drastically different and require some serious maneuvering, others are mild variations of U.S. notions. "You should expect differences in the details, but you should expect to be practicing the good basics of HR professionalism," says Bob McIlmoyle, director of administration, Latin America Group for Wayne, New Jersey-based American Cyanamid Co., a Fortune 100 life-sciences firm that's operated in Mexico for 30 years.

As more and more companies acknowledge the post-NAFTA business opportunities in Mexico, more and more HR professionals are feeling the pressure to prepare themselves. But how to begin? "The first thing is to get familiar," says Arturo Fisher, an international consultant for Latin America with Hewitt Associates. Indeed, the key to HR in Mexico, the solution to the puzzle, may be found by simply understanding the pieces. Identify the issues, get to know the country and adjust HR actions accordingly.

Staffing in Mexico: U.S. recruitment amplified.
Obviously, one of the first HR concerns arising when a company opens operations in Mexico will be staffing. Recruiting for the low-wage workers is relatively uncomplicated, because these workers constitute the majority of the labor pool. At operations in cities on the U.S.-Mexican border, for instance, approximately 90% of personnel are low-compensation employees.

It's not as cut and dried when it comes to staffing high-level positions. To begin with, there's the usual question of whether to hire locally or use an expatriate. One thing to consider here, particularly for smaller companies, is that under current Mexican labor law, no more than 10% of a company's employees may be non-Mexicans. So expats can't be used simply as a back-up measure. Their inclusion in a start-up operation must be a planned, necessary choice.

But even when these key professionals are identified, many companies have difficulty getting their American employees to relocate. Expats worry about the pollution and its effects on children's health, says Kevin Duffy, director of employee relations for Nabisco International, a division of New York City-based RJR Nabisco. Duffy says that other situations in Mexico contribute to its image problem: "The infrastructure in general, from roads to schools to sewers to housing, is a problem." Does this mean that expats should be excluded from consideration? Says Duffy: "If you have critical areas of expertise that you need that do not seem to be available in the market, then it may require an expat, but it should be relatively short-term, say two to three years, while developing the local talent."

Schaumburg, Illinois-based Motorola, which has had operations in Mexico for more than 20 years, has used expatriates, but views it more as a strategic choice than an act of desperation. "If you're a start-up company, brand-new fresh, you might need to have some expats down there to get the philosophy and the training going—to make sure the ideals are instilled in the new organization," says Rebecca Lotsoff, manager of international compensation. "That's probably not something you'll do long-term, because expats are very expensive."

But that doesn't mean that everything's rosy in local recruitment either. Those deciding to focus on the Mexican market for their high-level talent may have some tough maneuvering ahead. Because of the generally low educational levels in Mexico and the past lack of management development, a good manager may be hard to find. "What makes it difficult is not that there are no good Mexican executives. In fact, I think the Mexican executives are excellent," says Fermin Diez, principal and general manager of Towers Perrin's Mexico City of- fice. "The problem is, there are so many companies opening doors and growing their businesses, there's just not enough to go around."

Certainly, there are ways of attracting talent: compensation, benefits, a good reputation. But recruitment in Mexico is further entangled by its intense emphasis on networking. Fisher says that this is the way a lot of business is done. "It's very common in staffing in Mexico for one of the best sources to be networking, especially for professionals and supervisor levels, even manager levels. That's because of the culture." Of course, there is nothing wrong with networking itself, as long as it's simply a way of guiding good people to good jobs. The problem occurs when networking turns to nepotism, or begins to reflect the It's not what you know, it's who you know attitude. Nabisco, which has maintained a presence in Mexico for some time, but initiated new operations two years ago, has run into this problem more than once. Says Duffy: "The problem is that even with executive recruiters, you may get a social referral as opposed to a person who's been referred on his or her technical merits."

The solution to this problem is that HR professionals simply must recruit more actively, more diligently and more creatively. For instance, Lotsoff warns that it's important to screen individuals for their actual experience and abilities, and not their executive status. Don't put blinders on when a vice president's resume crosses your desk. "Really find out what that person's responsibilities were and what their talents are," she says. "Because job titles can be inflated in Mexico; they don't necessarily reflect the job abilities."

Also, HR recruiters need to look beyond what's presented them. Locals and U.S. expatriates are not the only options. Diez suggests investigating other Latin- American countries: The cost may be less than for other expats, because they already have the language and cultural background and so require little training. Also, many Latin-American executives view a move to Mexico as a career stepping stone, and so may be willing to take a more modest compensation. Recruitment can also be successful closer to home. Nabisco hunts down entry-level professionals at such U.S. colleges as University of Texas and Texas A&M, which have high populations of well-educated Mexicans with every desire to return to their home.

Compensation involves more than meets the eye.
Although the inexpensive low-skill labor in Mexico has been a recurring theme in NAFTA talks, this picture has been slightly obscured. In truth, the "cheap" labor isn't as cheap as many have been led to believe. For one thing, the numbers are not necessarily indicative of real pay. Under Mexican labor law, employees' pay is figured to include compensation for holidays and weekends, so the concept of per-hour pay is one that doesn't translate. As a result, straight comparisons between hourly pay in the United States and Mexico can understate Mexican wages by 40%.

In addition, as crowds of companies snatch up available cheap labor and call for more, lower-skilled workers are beginning to have more leverage in pay demands. "One of the long-term expectations that people have about NAFTA is that the salary levels, particularly for lower-echelon employees, will rise," says Diez. "And the advantage that presumably Mexico has of having cheap labor will evaporate."

Other factors about the low-pay labor force also have been misrepresented. "[Labor] may be cheaper, but it's not as cheap as originally believed," says Fisher. "I remember people saying [pre-NAFTA] that in Mexico, minimum wage is low. In practice, you must be aware that in Mexico, almost nobody works for minimum wage. And on top of minimum wage, there are a lot of cash allowances."

Cash allowances definitely play a major role in compensation in Mexico. Employees receive them as part of their total compensation package in addition to base pay. Some are required by law, many are customary. Those required by law are:

  • Christmas Bonus (Aguinaldo):
    Fifteen days' pay to all employees with one year or more of service. The majority of employers, however, provide a month of pay
  • Vacation Premium (Prima vacacional):
    An additional 25% of pay is the required minimum. Most employers provide 80%, although on the border it's common to see only the minimum provided
  • Profit Sharing (Reparto de utilidades):
    Most companies (new operations are sometimes exempted) must distribute 10% of their pretax profits each year among all employees, excluding the CEO.

In addition to these statutory cash payments, many other pay practices are so common that they've become vital to a competitive compensation package (see, "An Overview of Legal and Compensation Practices").

As for executives in Mexico, they too have been underestimated in terms of compensation. A 1994 Hewitt report states that executives in Mexico may earn 10% to 25% more than their U.S. counterparts. This, of course, is due to supply and demand. And this limited supply is expected to be able to demand more as companies continue to flood into Mexico. This is particularly true for execs with skills specific to industries becoming more prevalent in Mexico: telecommunications, computer hardware/software companies, consumer products firms and banking.

But in addition to base pay and cash allowances, Mexican executives are accustomed to a generous sprinkling of perks. "One thing that is very much rewarded is prestige," says Lotsoff. "A Mexican compensation package for an executive includes such things as a club membership and a big fat title." Although Motorola hasn't used such gifts, Lotsoff says cars were often a major part of the package also. This practice has been dwindling since 1992, however, when company cars were ruled to no longer be tax-deductible.

"Work issues in Mexico are neither as sunny and simple as pro-NAFTA rhetoric proclaims nor as gloomy and unnegotiable as anti-NAFTA forces portend."

Alejandro Palma, intercultural business specialist for Redwood City, California-based Clarke Consulting Group, says that the craving for status perks is particularly true at middle-management levels. This, he says, is because in Mexico's hierarchical culture, mid-level managers have a very limited decision-making role. "They are very interested in personal status and the semblance of authority, because in reality, they don't have that authority," he says.

Although it's important to recognize the practice of adding extras, experienced companies warn newcomers to first take a step back, and figure in such labor laws as profit sharing and acquired rights before issuing a compensation package.

Under the acquired rights law, if an employer provides a benefit, bonus or other term of employment two years in a row, the employees have a right to continue receiving it. This is true even if the employer hasn't formally agreed on continued provisions. "You can't reduce salary, you can't take away benefits. You simply can not," says Fisher. To do so would be considered a breach of contract, unless each individual employee's contract is renegotiated.

The prudent HR professional starts small in such things as benefits and bonuses. "We advise companies not to go overboard, not to have the most sophisticated package on the market," says Diez. "You can always do better, but you can never go back. Be conservative in what you provide at first. At the same time, be aggressive in the amount you're going to provide. It's a delicate balance."

The same consideration should be taken in view of the 10% of profits that are funneled to employees under the profit-sharing law. Duffy warns that for a small, high-tech, low-labor company, 10% can amount to quite a lot for each employee, and should be figured accordingly into the compensation package.

Once you get employees, how do you keep them?
Just as executives can demand higher pay in Mexico, they can also flow easily from company to company. It's difficult to forge loyalty among the dizzying amount of competition and constant wooing of execs by rival operations. Oak Brook, Illinois-based McDonald's Corp., which has approximately 80 franchises in Mexico, knows this all too well. "We're experiencing a little bit of pirating right now," says Rudy Mendez, director international HR. "We've had to look at our benefits and compensation structure to ensure that we're positioned competitively."

Yes, it's back to compensation. Because as much as the right pay and benefits can attract good executives to a company, better pay and benefits can lure them away.

Lotsoff agrees that pay is an important feature of employee retention. With approximately 2,600 employees in Mexico, Motorola keeps a watchful eye on the market to ensure it's keeping up to speed. "You have to benchmark," says Lotsoff. "You have to do market surveys on a regular basis on your competition."

She warns that salary surveys should compare job duties rather than job titles. Titles in Mexico are often mismatched with the actual level of responsibility. For example, the power and decision-making capability of a senior vice president at one company may make a counterpart seem like an administrator in comparison.

Although a company can lose workers if it ignores their monetary needs, a refusal to understand family needs can also cause execs to bail out. Fisher says that one touchy area is relocation: It's difficult, generally speaking, to uproot Mexicans because of Mexicans' strong family ties. A move doesn't involve just the typical nuclear family, but often aunts, uncles and parents. And the problem is, if an executive doesn't want to relocate, another company is generally waiting with open arms. "We've had some instances of trying to get workers to relocate from Monterrey to Mexico City, and we're not too successful at it," says Duffy. "Workers can jump pretty quickly if they want to."

So what else can HR do to forge loyalty? Companies are still experimenting, says Diez, but he sees a pattern beginning. "I think the fastest-growing trend, as far as retention, is providing deferred pay—through stock grants or stock options. In the last year and a half that has increased tremendously." Motorola is one firm that has used this type of golden handcuff. It offers stock options to some workers, in addition to performance-based pay issued at the end of the year. Lotsoff says that Motorola is also exploring pension plans. "But we need to do some work in that area of long-term retention tools."

For some managerial staff, long-term retention may be achieved simply by giving that person what no amount of pay can provide: specific recognition as an important member of the company. It goes back to acknowledgment of status. For instance, Palma says that mid-level managers generally act more as buffers between upper execs and line workers than as strategic business partners. Accordingly, loyalty can be encouraged simply by giving them a taste of power, such as membership in the memo loop, even if the information or decisions made are completely out of their areas.

Ensuring long-term executive loyalty takes on increased importance in Mexico, because losing executives often means losing several of their direct reports. This is because in the vertical orientation of Mexican business, loyalty is very often forged to one's immediate superiors rather than the company as a whole. Says Fisher: "It's very common when managers move to Company B that, six or eight months later, a good portion of the staff also moves to the other company."

With the correct incentives, however, retaining employees is not as daunting as it may sound. Lotsoff says that Motorola has had very little trouble with employee loyalty in its many years in Mexico. Duffy also reports success at retention: "Our business hasn't been all that healthy, but folks have certainly stuck with us during some very difficult times."

Train, incent and introduce corporate culture—carefully.
As with any sort of non-U.S. operations, Mexico has its share of host-country issues when it comes to aligning workers with company goals. In this arena, Mexico's long-standing business and cultural practices collide with more "Americanized" programs such as TQM and participative management. It's not impossible to transfer a company's culture to Mexico, but such a transaction must be negotiated thoughtfully. "You can't just export whatever you have in the United States and try to adopt it as-is in Mexico," says Fisher. "You have to customize it a bit." Fisher gives an example of a U.S. company that had a strict policy against drinking on the job. The company was, of course, entitled to continue that policy in Mexico, but it instituted it with no explanation of the reasoning behind it. Workers who were accustomed to having a beer at lunch continued to do so, and the company fired many employees. As a result, it lost a large part of the work force that it may have saved with a more reasonable policy introduction.

Implementation of corporate culture goes more smoothly if it's done in steps, says Palma. For instance, to get buy-in at the line level, it should be those workers' direct supervisors who explain a policy to them. Because these two groups share a loyalty, workers are more likely to take the policy seriously if it seems to originate from their direct superiors. Fisher agrees that culture must be phased in with care: "Don't just put something on the bulletin board that says 'You can't do this, because this is the way we do business.' "

The way Americans do business is an important point: HR professionals need to keep in mind that what may be clearly acceptable or unacceptable business in the States may not be so clear south of the border. For example, Lotsoff says that Motorola has made special efforts to provide a clear message on one of its corporate policies: No gifts, tokens or allowances should be taken in exchange for anything. Although this is an obvious statement to most American business people, in Mexico, the practice does occur. To ensure workers understand Motorola's key beliefs, each employee—on all levels—receives a card stating the company's code of conduct, and posters with the information repeated are plastered all around operational facilities. "It's communicated since day one," says Lotsoff.

Nabisco has also had its share of misunderstandings. For instance, Duffy says that workers at some plants were taking the product and either using it themselves or selling it to supplement their income. He says they weren't being deliberately dishonest, but rather continuing an already established practice. "We fully believe that the [former] owners had paid at an unsustainable level and knew workers were taking product," says Duffy. "So when you correct wages, you also have to correct certain culturally accepted practices."

Other problems such as attendance also must be addressed. Duffy says that, because of the importance of family to most Mexicans, if a child is sick or a special family need comes up, work will take a back seat. Nabisco is spending extra time on this issue because it is so closely linked to culture. "What we're trying to do," says Duffy, "is to make the workers understand that the health of the business affects the health of the family. We're trying to tie the two together. We've got a lot of new workers, so it's going to take some time."

Once the corporate culture has been established, training is often necessary to meet actual business goals. "Even though the cost of labor is low on a unit basis, the cost is not necessarily lower, because of the low productivity in Mexico," says Diez. "Many companies are finding that cheap labor is not enough, it has to be effective labor for it to be worthwhile having plants down here." Statistics back him up. In a 1993 Towers Perrin survey of more than 150 Fortune 1000 CEOs and senior executives, three-fourths said that a skilled work force would be critical to the success of companies in Mexico whose strategies depend on quality or know-how.

Training plays a significant part of readying the work force to compete. Diez says that up to 3% of a company's payroll is currently being spent on training, mainly getting lower-level workers up to speed on working on teams, statistical control measures and computers.

"Executives in Mexico can flow easily from company to company. It's difficult to forge loyalty among the dizzying amount of competition."

McIlmoyle suggests that training for line workers should be done by a person who is comfortable in the Spanish language, so the information doesn't come across in a stilted manner. As for upper-level employees, emphasis is being placed on bilingual and bicultural skills.

Training also plays a role in improving performance. Most line workers have never been involved in participative management, so they'll need more background on what's expected of them, and may need to be coaxed from time to time. Because line workers tend to be more interested in pleasing their direct boss than striving for the company as a whole, there tends to be a wariness of instituting change. "There's a lack of initiative to take risks," says Palma. "You know what your boss wants, you know what your boss likes, so this has fostered a lack of accountability [to the company] among most employees."

Continued reinforcement of the value of employee ideas can help to alleviate apathy—and when employees are empowered to do their best, they usually do. For instance, Nabisco had a problem: Every time it switched cutters at its cookie operation to change the shape of a cookie being made, changeover time for the heavy, awkward equipment was about 35 minutes. It videotaped the workers in the activity, played the tape for them and asked them what to do. Workers had the solution: A handrun crane to lift the cutters and a guide to fit the rollers easily onto the equipment. Changeover time is now seven minutes.

Duffy adds that employees who are given a little support can go a long way. "When the effort is put in to train the people and to recruit, any preconceived notion that people are unwilling to work or unable to work or low in motivation are not true at all."

Of course, with employee involvement comes employee incentives. But here too, HR must step carefully, because again success depends on balancing group dynamics with the perception of importance. For instance, such popular initiatives in the United States as performance-based pay may ruffle a few feathers in Mexico. Palma says that the practice isn't impossible to implement, but companies must keep close track of employees' reactions. This is especially true of line employees, who may resist more. Why? A worker receiving more pay could be viewed as having connections to the higher echelons. It creates a distance. "It's much more important for a Mexican person to have a congenial working environment than it is to make more money," says Palma. "There have been cases where very good workers, ones who have performed well and received [pay] recognition for that, have left the company because they felt ostracized by their co-workers."

Although Fisher knows of variable-pay plans that have worked, he too expresses concern at their use. "[Mexicans] are more oriented to guaranteed situations, guaranteed pay. So, pay at risk is OK, but you have to communicate it a little bit more."

Instead, Palma suggests other reward strategies, such as making the outstanding worker a team leader. This plays into the desire for respect without isolating the worker, he says. "Employees-of-the- month programs, where it's on a rotating basis, not permanent like salary compensation, seem to be OK, because everyone has a chance." Other incentives include family days or other activities including workers' families.

Palma says that so much depends on—what else?—a respect for the work force. HR has a major stake in a company's success in Mexico, he adds. Because, rather than profit figures or business growth, it's such things as con sideration for culture, family, performance and pay needs that employees look for when deciding the company for which they'll work. "Word spreads," he says. "Word spreads very quickly, and the reputation increases."

The trick is to make all the pieces of the HR puzzle combine to form the picture of a successful business and a healthy, satisfied work force. Certain policies and procedures may have to be held up to the light, looked at from a different angle. But with the proper HR tools, some dedication, elbow grease and imagination, human resources can make the pieces fit.

Personnel Journal, August 1994, Vol.73, No. 8, pp. 34-44.

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