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Post-Soviet HR Reforms

April 1, 1994
Related Topics: Global Business Issues, Featured Article
It was a moment impossible to replicate, impossible to anticipate. I was sitting at a long table, laden with much food and drink, that had been set up in a trade-union director's office. I was surrounded by the closest friends and compatriots of the director. They were singing birthday songs in Russian. It was mid-afternoon, but in front of us were bottles of champagne and vodka, accompanying the abundant zakuski, or hors d'oeuvres, that precede most Russian meals. As I nibbled some smoked fish and marinated mushrooms, and barely touched the vodka to my lips with each successive toast, I couldn't help but compare this office birthday party with the sober coffee-and-cake routine of my office in Houston.

I was 11 time zones east and 45 degrees latitude north of my home, in a town on the Arctic Circle in Siberia, witnessing the warmth these workers expressed for their union leader. To them, the leader represented the real progress in their lives: a shorter wait for an apartment, preferential rights to the holiday dacha, or cottage, on the Black Sea coast, subsidized tuition for their children at the kindergarten and the music school, and other benefits. I'd begun to learn about the roles and responsibilities of the Russian trade union, as well as the makeup of Russian HR.

In my job as senior HR specialist for Amoco Eurasia Petroleum Co., a wholly owned subsidiary of Houston-based Amoco Production Co., which explores for and produces oil and gas around the world, I've made eight trips to Russia and have participated in hosting several Russian delegations to Houston. Amoco Eurasia is negotiating several major projects around Russia, and part of my job is to help Amoco management figure out how it will successfully run a joint operation with our various Russian partners. To do that, I have had to develop a good understanding of their views and precedents on personnel management.

Although things are changing rapidly as a result of the fall of communism and Russia's exposure to the West, I've learned from meeting with a number of Russian "human resources" managers that not only is their HR vastly different from that in the U.S., but also the differences between their staffing, compensation, social-benefit and labor-law systems and ours run deep. The art and science of management wasn't studied or applied at businesses in the former Soviet Union. As a result, many practices common in the U.S., such as continuous-improvement programs and flattening the organization by limiting authority, are practically unknown in Russia.

Besides that, even the term human resources is all but unheard of in Russia, although increasing contact with Westerners is beginning to make it more familiar. In most Russian organizations, the personnel director handles the functions of hiring, personnel recordkeeping, employment terminations and retirements. A director of social development administers benefits such as housing, kindergartens, medical facilities, vacation travel and accommodation, food from the company farm, and so on. Yet another manager, the director of wages (or in smaller companies, the director of economics), addresses all matters pertaining to compensation. And, at all state-owned (and formerly state-owned) companies throughout Russia, the trade union is involved with all matters pertaining to wages, social benefits, allocation of social guarantees, such as sick pay and other matters of social insurance, and health and safety in the workplace.

Russian companies categorize employees as workers (equivalent to our hourly job classifications and eligible for overtime pay), specialists (roughly equivalent to our exempt staff, and as such ineligible for overtime pay) and managers. (Throughout this text, the word employee is used to refer to all of these people, and the words worker, specialist and manager are used to refer only to that specific category of employees.)

Old habits die slowly.
Much of the current personnel practice in Russia is derived from pre-breakup USSR. During this period, Moscow issued five-year plans, and companies were required to meet a specified output. The government allocated all required resources to companies, including raw material, equipment and staff. Because the government's primary interest was in full employment (a social guarantee under the old regime), the result was state-owned enterprises saturated with employees.

Under this old system, the central authorities asked the enterprises to provide a certain number of new university graduates with jobs each year. This often resulted in the underuse of highly trained young people. In one of the enterprises with which Amoco is negotiating, for example, several of the senior managers started their careers as roustabouts, despite having the equivalent of a master's degree when hired. Today, these same companies no longer are forced to take on additional manpower, and are developing a greater appreciation of the impact of labor costs on the bottom line of the business. In addition, within the oil and gas industries, the more prestigious Russian universities and technical institutes proactively are forging strategic alliances with key enterprises, recognizing that a partnership between academia and industry works to both parties' advantages.

Another attribute of the old Soviet system was that wages were established by decree from Moscow. Base salaries changed only if the government issued a new decree. Within an industry, the relative equity between and among jobs was governed strictly by a set of historical norms that dictated the appropriate wage disparity, relative to the decreed minimum wage. Before 1991, Western methods of job evaluation and pay determination were virtually unknown.

Today, many Russian companies still use the old system of norms, and the central government continues to issue wage decrees, or tariff agreements, which the central trade-body union must sign. Theoretically, companies are now free to exceed these stipulated wage levels. In practice, however, many enterprises lack the cash flow to meet current payroll expenses, ever-increasing as a result of rampant inflation.

In many Russian companies today, the director of wages tries to assess the inflation rate to adjust salaries. This isn't easy because no authoritative data is available for other than the Moscow economy. In Siberia, my counterparts guess at inflation rates based on prices of a typical basket of goods.

Russian enterprises also are beginning to recognize the value of the external salary survey, enabling them to peg wages relative to their competitors or to other enterprises in the same town. Informal surveys are done through one's personal network. To the best of my knowledge, no formal surveys have yet been instituted outside Moscow.

If the cash reserves of the company can't accommodate a general wage increase (in recent times, employees have waited several months to receive even one month's pay), the company will try to provide additional social benefits, such as more food at a cheaper price. This can be accomplished without cash because of the barter system, which still is a prevalent management tool in Russia.

HR personnel in Russia are learning from the Americans.
One of the most intriguing subjects for Russian HR managers is our system of formal, annual performance appraisals, and the subsequent individual salary increases tied to performance. Traditionally, the Russian employee has received a formal appraisal once every three years, and may be promoted to a higher job classification as a result. Pay increases, however, still largely are driven by state wage decrees and companywide general increases, and are administered proportionately to everyone in the organization regardless of individual performance or contribution.

It's a novel concept to some in Russia that two engineers hired in the West at the same time and at the same starting salary may earn very different salaries from one another after just a few years because of different levels of job performance. Our philosophy of pay for performance has no comparable concept in Russia. Salary equity with all others in one's job classification is a linchpin of Russian wage philosophy, rooted in the centuries-old view of the collective. Individual will and initiative should be subordinated for the greater benefit of the collective. Pay should be based solely on the contributions of the collective—it would be divisive to base compensation on individual accomplishments. It's widely accepted, however, that employees in certain industries should earn more than those in other industries. For example, the minimum wage for workers in the oil and gas concerns is automatically four times that of the state-decreed general minimum.

Payment of bonuses at all levels of the organizational hierarchy is much more widespread in Russia than in the U.S. Typically, all employees receive a 13th-month's pay as a bonus at the end of each year. Because this is standard practice, it isn't really an incentive but rather an entitlement. There's often an incentive bonus based on monthly production quotas or output figures as well, but this is paid by division or organizational unit and is meant as a team incentive. Finally, there's often some mechanism for providing special cash awards for extraordinary accomplishments. One manager told me that sometimes this bonus was promised in advance as a sort of bribe to get workers to do extra work outside their normal jobs.

Compensation includes generous time-off benefits. The minimum vacation time guaranteed by the statutory vacation entitlement is 24 days. People in the North, however, are entitled to far more than that. On the basis of a system of increasing time off for increasing northern latitude, those on the Arctic Circle get seven weeks off. If employed in a hazardous job, even more time off is granted. As a result, the oil towns of Siberia often seem like ghost towns during the summer vacation season. In fact, one personnel director told me that scheduling vacation time in such a way that the company would still have enough staff to function in the summer was one of his biggest challenges. He asked me if we had the same problem in the U.S.

Holidays don't seem excessive. Depending upon who you ask, the absolute number of holidays hovers around 10. The Russian people, however, are accustomed to celebrating every holiday on a workday, no matter on which day of the week it falls. Also, it's customary for the companies to shut down early on the afternoons before holidays. So if a holiday falls on a Sunday, expect the office or plant to be shut from noon on Friday until Tuesday morning.

From day care to dormitories, social programs abound.
Russian companies place a high value on social benefits. Female employees who take extended leaves for maternity and child care have numerous job guarantees. In addition, it's difficult to find a Russian company that doesn't own at least one kindergarten for the children of employees. Often, the enterprise sponsors the construction of many facilities for children, ranging from schools and playgrounds to medical clinics. It's with genuine surprise that many Russian managers learn that these benefits aren't commonplace in the U.S.

Russian managers are quick to point to their progressive policies on female employment, necessary because most Russian women work full time. In addition to child-care policies and facilities, Russian companies provide women with shorter working hours and, by law, an earlier retirement age than in the U.S. However, this is something of a double-edged sword. It's rare to find women in the senior-management ranks of Russian enterprises. Instead, large numbers of women fill jobs of low pay or prestige.

Not all social benefits are regulated. Many have been left to the discretion of individual enterprises. This permissibility has had interesting organizational repercussions. In one of my visits to a city in the far north of Russia, the housing director escorted me on a tour of his enterprise's newest apartment block. He spoke proudly of the large number of staff in his department and the importance of their role in the organization. In another town, the director of social benefits was apologetic that business results hadn't been good enough yet to enable the company to build better lodgings for its new hires, who now bunked in dorm-like housing for their first several years of employment.

At all the locations I've visited, one of the most critical benefits for the employees was access to food grown on the company farm, available at much less than market prices. For enterprises in the South, this isn't a difficult arrangement. For those in the North, however, the variety of locally produced food is limited, and there are numerous complications involved with transporting food over thousands of miles from the South. Nonetheless, the goods must be sold at below-market prices.

Dealing with frustrations.
The Russian work ethic is a topic of endless discussion among staff at Amoco. Our own experience with our Russian employees proves they're extremely hardworking and willing to do whatever it takes to get the job done. Yet, even these employees admit that the old ethic of doing as little as possible is still prevalent, especially at state-owned companies where the wages aren't keeping pace with inflation. "They think they're paying us; let them think we're working," is a common saying among workers in Russia. They're frustrated at a system that, at least in the past, offered no reward for individual initiative, no additional compensation for consistent high performance and, at times, no meaningful work either.

This frustration is echoed by Russian management. The most telling example is the question that I'm asked most frequently by my Russian counterparts: "How often do your workers show up drunk?" Apparently, this is a real problem among discontented Russian workers. A Russian safety film shown to employees includes a clip on the dangers of drinking on the job, and firing someone who drinks at work is permissible. In reality, however, employees rarely lose their jobs as a result of drinking, and the practice continues.

Indeed, my Russian counterparts are surprised by our employment at will philosophy and its legal basis, which permits us to fire anyone at any time, without permission of the trade union. That's a fantastic notion in a country where lifetime employment still has some meaning.

The concept of the employment contract is very much alive in Russia. The employee and the enterprise are deemed to have a contractual relationship regardless of whether the terms thereof are reduced to writing. The employment contract, unless written specifically to cover a finite length of time, is understood to mean indefinite employment. This relationship can be terminated only if one of several contingencies is brought to bear, such as the employee committing criminal acts or voluntarily quitting, or the company closing a plant. Substandard job performance also is a legitimate cause for termination, but in practice this reason never seems to be acknowledged even on the rare occasions when an employee is terminated involuntarily.

There's no system of evolving law governing the workplace in Russia. Instead, there's the Russia Labor Code, a comprehensive piece of legislation introduced in 1971 and oftamended since, most recently in October 1992. The Code contains some provisions that are typical of company policy in the West. For example, Article 135 contains specific instructions for issuing first a reproof, then a reprimand, and finally a severe reprimand in the case of progressive discipline.

Other articles seem unnecessary to the Westerner but are quite valid in Russia. Article 150, for example, guarantees that workers performing jobs in a dirty environment be given soap. The next Article after that stipulates that workers performing jobs in hazardous conditions be issued milk and health food.

Article 251 guarantees additional time off work and supplemental compensation for those employed in the Arctic regions. This supplemental compensation is worked out on the basis of coefficients. For example, if one works north of 60 degrees latitude, he or she receives an additional .6 times base salary. The coefficient increases based on northerly distance. Longtime residents of northern towns receive additional supplements using a graduated scale of increasing pay. The top marginal rate is reached after seven years. Actual coefficients and amounts seem to vary by locality, and in at least one town, the supplemental pay attributable to residency in the North is considered non-taxable income.

Most Russian HR managers with whom I've met consider the Labor Code to be a basic to do their job. Typically they have a dogeared copy at hand in the top drawer of their desk.

Times are a-changing.
In October 1992, an amendment to the Labor Code was passed that, for the first time, acknowledged the reality that not all enterprises need to have a trade union. The future of the trade unions is somewhat in doubt, especially as management increasingly realizes the inherent contradictions in a system that places all employees, including themselves, in the bargaining unit, and requires them to negotiate with the trade-union officers for wages, benefits and personnel terminations. Management must represent the interests of the business while the trade union represents the interests of the employees. Yet, management is the union.

Perhaps this, more than any other feature, reflects the contrasts, the unresolved dilemmas and even the riddles of modern personnel practices in Russia. Certainly, rapid societal changes have impacted personnel issues at Russian companies. In Moscow, a city of 8 million people and burgeoning capitalism, new companies and joint ventures are springing up constantly, none of them with trade unions, none of them adhering to state-decreed wages, and many of them offering no social benefits whatsoever. In a place where one can pay $300 for a room in a new Western-owned hotel and then pay the equivalent of $10 in rubles for a full dinner with all the vodka and caviar six people possibly can consume, it seems anything goes. Companies hoping to join in must be prepared.

Personnel Journal, April 1994, Vol.73, No. 4, pp. 41-49.

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