â€˜The distinctive feature of HRM is its assumption that improved performance is achieved through the people in the organization.â€™ (Guest, 1997) conditional therefore for performance improvement is that Organisation makes policies and processes that would facilitate HR at work, it could be assumed that Human Resource would have a substantial impact on the business performance.
The assumption requires the following questions to be answered.
What is performance?
What impact does HRM make on performance?
How does HRM make that impact?
Concept of Organisational Performance covers both the What and How of achievement. Different means could be utilised to measure firms performance, Overt way to do so is by reference to key performance indicators (KPIs), which are usually to do with financial results (profitability) or productivity. Measuring the â€˜howâ€™ is more difficult thus it relies on qualitative aspects of assessment of effectiveness.
Organizational capability is defined as the capacity of a business to function effectively in order to compete and achieve its objectives in the available resources. CEOâ€™s and Top Management are always interested to know in the expression of numbers to see the impact of HRM practices. Although considerable amount of research has been carried out to see how varied HR practices make an impact on business, still questions are raised on the ROI on HRM. The section will highlight a few of the researches in the respective category.
The Impact made by HRM
Basis of most researches in HR is to establish the relationship between HRM practices and resultant improvements in the organizational performance. The need to do so is that HR theorists and practitioners both are in desperate need to justify their existence to the reality.
Researches on the link between HRM and Business performance
Analysis of the responses of 968 US firms to a questionnaire exploring the use of high performance work practices
Productivity is influenced by employee motivation; financial performance is influenced by employee skills, motivation and organizational structures
Patterson et al(1997)
The research examined the link between business performance and organization culture and the use of a number of HR practices
HR practices explained significant variations in profitability and productivity (19% and 18% respectively). Two HR practices were particularly significant: (1) the acquisition and development of employee skills and (2) job design including flexibility, responsibility and variety
Appelbaum et al (2000)
Study of the impact of high performance work systems (HPWSs) in 44 manufacturing facilities â€“ over 4,000 employees were surveyed.
HPWSs produced strong positive effects on performance. They are associated with workshop practices that raise the levels of trust, increase workersâ€™ intrinsic reward from work and thereby enhance organizational commitment.
Guest et al(2000a)
An analysis of the 1998 WERS survey which sampled some 2,000 workplaces and obtained the views of about 28,000 employees
A strong association exists between HRM and both employee attitudes and workplace performance
Critical Review of the Research Approach
The methodology used in many of the studies listed above was to measure the association between the number of HR practices used by the firm and the financial results achieved by the firm, treating the number of practices as the input variable and profit or market value as the dependent variable. Purcell et al (2003) have cast doubts on the validity of this approach. The reason there are doublts over the approach used by the researcher is that there is an increasing disregard for the mechanisms linking them. This has meant that there has been no systematic link between HR outcomes and performance. Moreover, there has been an increasing neglect of the psychological processes that mediate or moderate the link between HR practices and performanceâ€™. Stephen Wood (1999). But there is another school of thought that the association is hopeful.
In 1997 David Guest commented that: â€˜At present the studies report a promising association between HRM and outcomes, but we are not yet in a position to assert cause and effectâ€™. Ulrich (1997a) has pointed out that: â€˜HR practices seem to matter; logic says it is so; survey findings confirm it. Direct relationships between performance and attention to HR practices are often fuzzy, however, and vary according to the population sampled and the measures used.â€™
Appelbaum, E, Bailey, T, Berg, P and Kalleberg, A L (2000) Manufacturing Advantage: Why high performance work systems pay off, ILR Press, Ithaca, NY.
Guest, D E (1997) Human resource management and performance; a review of the research agenda, The International Journal of Human Resource Management, 8 (3), 263â€“76.
Guest, D E, Michie, J, Sheehan, M and Conway, N (2000a) Employee Relations, HRM and Business Performance: An analysis of the 1998 workplace employee relations survey, CIPD, London.
Huselid, M A (1995) The impact of human resource management practices on turnover, productivity and corporate fi nancial performance, Academy of Management Journal, 38 (3), pp 635â€“72.
Patterson, M G, West, M A, Lawthom, R and Nickell, S (1997) Impact of People Management Practices on Performance, Institute of Personnel and Development, London.
Purcell, J, Kinnie, K, Hutchinson, S, Rayton, B and Swart, J (2003) People and Performance: How people management impacts on organisational performance, CIPD, London.
Wood, S (1999) Human resource management and performance, International Journal of Management Reviews, 1 (4), pp 397â€“413.