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This chapter reviews existing knowledge about the HR best practices- firm performance link. It provides a foundation for developing a comprehensive theoretical framework. From a strategic human resource management perspective, an organisation's human resource strategy must be integrated with the business strategy to ensure that the HRM practices add value to the organisation. The main reason of this study is to outline what is seen within the human resource management literature as 'best practice", that is, how it is regarded as a best practice, what are the main function of the practice and how it is related to a firm performance. It is argued by Johnson (2000) that complementary best practices compound to further increase the performance of the firm.
2.2 An overview of HRM
The meaning of HRM is far clearly established in the literature: different authorities imply or state different definitions and draw on different evidence. Many have attempted to classify the various areas that HRM covers. One of the classic texts sees a four-fold typology; employee influence, human resource flow (into, through, and out of the organisation), reward systems and work systems (Beer et al. 1985). DeCenzo and Robbins (1998) identify four rather different areas: the acquisition, maintenance, motivation and development of human resources, and Fombrun et al. (1984), a five-step HRM cycle: selection, performance, rewards and development.
2.3 HRM and Performance
The relationship between HRM and organisational performance has been a much debated area in HRM literature. In fact the models reviewed earlier give a glimpse of the type of linkages which exists between HRM and performance, which are summarized below:
An HRM system which highly fits the organisational strategy and structure will help to meet organisational objectives.
A set of HR policies, chosen under the influence of stakeholders' interest and situational factors, such as market, implemented through a set of tasks designed by managers will lead to a set of outcomes.
Elements of the environment such as the national context (Brewster, 1995) have an influence on HRM and, possibly mediates the impact of HRM on performance.
A number of pre-requisites should be present if HRM is to have a positive impact on performance. There is a strategic role for HRM and commitment of top managers, the critical role of line managers, a number of key levels and overarching all these items, is a value system at the core of the organisation's culture (Storey 1995).
2.4 Theories on HRM and performance
While it is established that HRM has a positive impact on firm performance (Arthur 1992 Huselid 1995, Truss 2001), one of the challenges of HRM-performance link is to define the specific mechanisms through which HR practices influence firm performance.
It has been stated that there is a direct relationship between HR best practices and firm performance. To better understand this we have gone through the sixteen best practices for managing people as proposed by Pfeffer (1994).
2.4.1 Employment security
Employment security can be defined as the assurance that an employee derives from his current work position. That is how the employee estimates his professional life on the long term. Whether he/she will still be employed and will still be able to maintain and assumes his responsibilities from his personal life.
No one wants to lose his/her job and be jobless with no income at all at the end of the month. But still no one is fond of working; it is something that we need to do to keep surviving. If someone has to choose between working an entire life or win the Lotto, we all know what will be the most popular answer. But still, the type of work that an individual does, defines what kind of person he/she actually is. It also defines where he/she lies on the social ladder. Everyone wants his /her effort in his/her professional life leads to an acceptable level of satisfaction in his/her personal life. Therefore, in order not to step down on this ladder, employment security is very important for that individual. It gives the guarantee that is needed to continue moving forward in life and not be left behind.
Therefore, we can conclude that employment security is of such importance that without it a company cannot continue operating properly. We all know that a company's most valuable asset is its man power. Keeping this in mind we can easily conclude that the company has everything to win to keep staff morale high upon employment security. When the level of employment security is low, high turnover rates is sure to prevail, leading to the collapsing of the company from the inside.
From the employee point of view, when employment security is high, he/she can strive to climb up the hierarchy in the company. This is only possible when employment security gives enough assurance.
But is employment security really 100% profitable?
Well, if we look further in details we will find out that an employee who knows that he will not be shown the door unless for something that is very bad he may start to stop progressing within the company and does the minimum of what is really expected of him/her. This aspect of employment security harms the company. The employer should put it in such a way that only the best employees with the best performance will be guaranteed with high level of employment security. This practice is sure to boost the performance of the employee and the company in general. In sports it is like this, they have to keep on fighting for their place within the team.
Consequently, we can conclude that high employment security boosts the individual performance and directly leads to the benefit of the company.
2.4.2 Selectivity in recruiting
Selection is one of the most important processes of HRM in general. It is important for both new and fully implanted firms. A company's main asset today is its people. It is like the root of a plant. It brings inside the organisation important components to allow continuity and growth of business same as the root of a plant absorbs nutrients for the plant's survival and growth.
Selection can be defined as the process of selecting the right candidate for the specific job, at the right time and for the right cost. It is the process whereby eligible candidates are selected for pre defined post based on various criteria that best fits the company's profile.
The selection process is something vital for the company as it will define the shape and the competitive edge of the company in the near future. If selection is wrongly done then we are sure to have gaps and problems at all levels in the organisation. This may eventually tarnish the company's goodwill and reputation.
The selection processes are as follows:
Analysing the vacant post
Post an advertisement and make the vacancy notice public
Analysing the resumes and selecting who is to be called for an interview
Conducting interviews with selected candidates
Offer the job to the right candidate(s)
Based on the above the recruiter selects the best candidates based on the company's pre-defined requirements. Selection has to be done in the right way. If selection is wrongly done the company might face harsh problem in the future. The production level might fall drastically; the marketing department might no longer be able to attract potential customers/buyers to mention the least.
Nowadays we live in a global village, meaning that the world though being immense is now very small due to technological advancements in the field of communication and transport. For a company to be profitable on the market today, it has to be very competitive at all level. Achieving daily target is something vital today as time is money.
For a company to recruit it has to invest money in advertising, interviewing, and selection. Then it needs to give appropriate training to the individual. It is only after thorough training that the newly recruited employee becomes finally operational. Therefore if we find out after that he/she is not the right person at the right place, all these resources has been wasted for nothing as the above steps have to be carried out again to find the right candidate as the vacancy has still not been filled yet.
As a result we can conclude that if a company does not recruit properly it may be no longer competitive and may be forced to close down as it will no longer be able to operate above break-even point and eventually make profit. Investors might no longer invest in the company.
2.4.3 High wages
High wages can be defined as 'wages that are higher than required by the market'. It refers to those wages that are paid by competitors to attract valuable workforce. High wages may be a very powerful tool to build up a very competitive company, but it can also be that that end up the harmony and productivity of the company.
From an employee's point of view, earning a big cheque at the end of the month is always something pleasant. In return the employee is sure to continue working for that company for a very long time. It is not just a matter of being faithful but also it forces the employee to carry on working for that particular company as he/she is remunerated higher than required by the market and is sure that he/she will not be earning the same thing somewhere else.
From a company's point of view, paying high wages may also have some extremely interesting advantages like the labour turnover rate is sure to be at its lowest. When a company pays high wages, it attracts employees from other companies. It's like hitting two birds at a time. That is, increasing the company's technical knowhow and at the same time decreasing a competitor's technical level.
Therefore we can say that paying high wages is a win-win situation, where both the employer and the employee benefit from the actual situation.
2.4.4 Incentive pay
Incentive pay, also known as pay per performance, is the action of rewarding an employee solely based on his work performance. Incentive pay is very beneficial for a company as the company will only pay for the exact service that it has received.
From a company's point of view, this is extremely cost economic and a very good way of compensating high performing employees. However, it is very important to note that this system may not be applied to all categories of jobs. It is mainly applied to the manufacturing industry where production figures are very important for a day to day basis.
As the manufacturing industry is very competitive, a company aspiring to survive must be very competitive and provide only value added products and services. Therefore, the application of incentive pay system is very beneficial for the company. From a company's point of view, incentive pay provides a high boosts up in the production level and a drastic decrease in the cost of manufacturing. This system may provide the exact amount of employees needed to carry out the level of expected production.
From an employee's point of view, incentive pay represents both advantages and disadvantages. The advantages are that the employee is sure to be rewarded for the work performed immediately rather than just keep waiting when he/she will receive an increase in salary by his employer.
Employees are mainly happy to be paid per performance as this represent a high step forward in their basic salary. Therefore, we can conclude that incentive pay helps to increase the level of production and at the same time decrease the manufacturing cost of the company and it also increase the staff morale and production.
2.4.5 Employee Ownership
"Employee ownership is seen as a method whereby employees are allowed to have shares of the organisation, thus if the employee owns part of the organisation they will only work towards its success, (Pfeffer, 1995)." For that reason, it has been said that employees having ownership advantage in the organisation will protect the company from having external owners.
Employee ownership brings in two advantages. Firstly, employees having shares in the organizations for which they work have less conflict between capital and labour - they are both capital and labour. Secondly, employee ownership puts stock in the hands of people who are more prompted to take a long-term view of the organization, its strategy, and its investment policies, and who are less likely to support hostile and leveraged takeovers.
2.4.6 Information Sharing
Information sharing is an essential component of high-performance work systems. This allows employees to understand and discuss issues pertaining to the business. This includes strategic, financial and operational issues which ensure that employees hear the information from managers and not the grapevine. If teamwork is to succeed and be encouraged, employees should have information at their disposal.
There are a number of reasons why information sharing is a key aspect of the high commitment paradigm (Marchington and Wilkinson 2005). First, open communications about financial performance, strategy and operational matters not only ensures workers are informed about organisational issues, it also conveys a symbolic and substantive message that they are to be trusted and treated in an open and positive manner. Second, for teamworking to be successful, workers need information in order to provide their suggestions and contribute to improvements in organisational performance. Third, participation can provide management with some legitimacy for its actions on the grounds that ideas have been put forward by workers and/or at least considered by them before decisions are ultimately made.
As owners, employees have more control and expect to be treated as owners. Being or not being owners, employees must have information if they are to remain competitive in the market. Therefore it can be concluded that information sharing does have an impact on organisational performance.
2.4.7 Participation and Empowerment
Empowerment is the addition of knowledge and experience to an employee that in turns result to the empowerment of the company. Participation and empowerment is very important to the development of a company. Nowadays, we are living in a constantly changing environment and therefore the need for a company to be competitive is very crucial.
Participation and empowerment is simply the action that makes the employee participates in some sort of action related to his job that increases his self-confidence. This can have a major impact on the company's performance as the employee is empowered; he has the ability to propose cost savings decisions that can benefit the company.
It also reduces the level of job dissatisfaction and job alienation. At the same time it boosts up the employee's productivity level and this will surely benefit the company in both the short run and long run.
From the employee's point of view, participation and empowerment can lead to the employee being a long term employee and therefore having a considerable impact on the company. This will surely contribute the promotion of the employee within the company and contribute in an increase in financial rewards.
Therefore participation and empowerment is a programme designed to benefit both the employee and employer.
2.4.8 Team and Job Redesign
Team and job redesign means work rearrangement and it aims at reducing job dissatisfaction by constantly proposing new ways of working to break up the job routine.
Job redesign is very important nowadays as more and more companies aspire at having long term employees to increase and constantly develops its competitive edge. Therefore, this has one major bad effect on the company: the employees tend to be more dormant and fall into some routine work where they can at times becomes alienated to their job.
Team and job redesign is one way of preventing that and it also boosts the level of the employee's production as they will be more at ease in doing their job. They will also feel empowered as they work in an environment of cross training and cross utilisation. A company has everything to win to have a dynamic work environment than a dormant working environment.
From an employee's point of view, team and job redesign breaks his routine work and his work is always changing. Therefore he constantly meets new people and overcome new problems. This result in the employee being more competitive and may well be financially rewarded for his knowledge.
Therefore team and job redesign is a win-win situation but must have the complete support of the senior management for it to be a success.
2.4.9 Training and Development
Training and development refers to the inception of specific skills, abilities and knowledge to an employee. Training is given to increase the knowhow level of employees in a company. One important difference between training and development is that training is temporary whereas development is continuous.
The need for training is determined by the actual level of the employee compared to what is expected of him or her. Then management decides to give training to the employee to help improve his level at work. Training is costly and so is development, but a company has everything to win in having its staff well trained.
If training is not well dispensed, the company will not be able to cope with the external factors as it would have wanted to be. Therefore, the company will find itself on the losing side as its level of staff would be very low and will have to perform selection and recruitment again. Recruitment is a very long process and it is also costly. Therefore, instead of making money, the company will find itself spending more money for the same things. If these steps are repeated too many times, then the company may eventually close down as a result of the inability to cope with the market.
From an employee's point of view, if training is not well given, then the employee will become frustrated with his job and may eventually quit his job. This lack of adequate training may result in the alienation to the job by the employee and will eventually quit his job due to no chance of being promoted as he currently cannot cope with his actual job position.
This is a lose-lose situation for both the company and the individual. If management does not take actions severe actions immediately they may lose employees with a high potential due to the inability to develop them. Therefore, training is important for both individual and organisational performance.
2.4.10 Cross Training and Cross Utilisation
Cross training and utilisation is simply the process of training and using an employee that has been employed for job A to perform job B and/or job C efficiently. Cross training has numerous advantages and some disadvantages also. But it is overwhelmingly a winning strategy.
Nowadays with the arrival of financial complications and problems, each and every company has to be very competitive on the market to be able to survive and eventually make profit. Therefore, in order to be competitive a company must compress its operating cost to its minimum. One way of doing so is the application of the cross training and cross utilisation concept.
Cross training and cross utilisation makes a company saves money in the long run even though it may spend a little to implement the concept of cross training and cross utilisation. For the concept to be fully successful, it must have the complete approval and support of senior management.
Cross training helps reduce cost in a way that the company has well trained employees that may take additional work task for just a small increase in salary. This way, the employee becomes more empowered and can help the company by proposing cost savings solutions and improvements as he has knowledge for all the jobs surrounding his major assigned job.
The company has everything to gain by cross training and cross utilisation as it would surely reduce the turnover rates of the company and less money will have to be spent on recruitment and selection.
Cross training and cross utilisation also results in job rotation which in turns breaks the routine of the employee and making him feel more at ease with his current job. As staff morale is high, work will be done in a more precise and effective way. Cross utilisation and cross training also provides some kind of self-confidence to the employee as the latter finds that he/she is valued by the company.
Therefore, whilst using the concept of cross training and cross utilisation the company gains by having more employees that are multi skilled and the employee gains with having less routine works to do and also by having more income at the end of the month to satisfy his personal needs
2.4.11 Symbolic egalitarianism
Pfeffer (2005) argues that symbolic egalitarianism lead to superior organisational performance. Symbolic egalitarianism relates to the fact that when decentralizing the decision making process, decreasing the boundaries within an organisation, and using autonomous teams, one important measure is to remove symbols that alienate employees from management. They advocates actions such as having a common cafeteria, no booked parking spaces, everyone wears the same work cloth.
Pfeffer argues, "Symbolic egalitarianism relates to equality and enhance communication". It creates a situation where everyone share their ideas thereby creating a more collaborative environment where information is shared regularly and there is better cooperation between everyone due to the diminishing hierarchical barrier between employees and managers. Communication across different levels is greatly enhanced because interaction is done in a less formal way. This means that top management is likely to have a better overview of what is going on in the organisation and there is direct communication between everyone in the organisation. By this employees will feel more motivated, committed and productive.
Therefore, it can be argued that symbolic egalitarianism is important because it has both a positive impact on organisational and individual performance.
2.4.12 Wage compression
Another best practice is the wage compression. Wage compression is defined as horizontal similar wage level. This was introduced because of the decreasing level of motivation within teams if the salary levels differ to a large extent. This practice is a substitute of individual incentive pays. Consequently this can lead to higher organisational performance.
Wage compression does motivate employees. For example, if the works are interdependent and it requires help from other employees, wage compression can lead to an increase in efficiency. Both of the co-workers will work towards achieving the organisational rewards.
2.4.13 Promotion from within
Huselid(1995) also adds that, "the reason behind using promotion is that it as an important means of arising trust and create a committed workforce and also suggests that nay promotional opportunity should be justified".
Promotion from within encourages training and skills development. Because of the availability of promotion from within, people will be more encouraged to go on training. It encourages participation and delegation because it promotes trust among different levels in the organisation. In other words, promotion from within means recognizing the efforts of people for which the different supervisors are responsible.
Promotion from within encourage individual to perform better. The employees know that there is incentive for higher position as well as higher pay they will work towards achieving this and thus leading to an increase in performance and better quality output.
An advantage of promotion from within is that senior managers tend to ensure that people for whom they are responsible know something about the business and the operation for which they are responsible. Therefore, it can be argued that promotion from within is appropriate for both individual and organisational performance.
2.4.14 Long-term perspective
The bad news about achieving competitive advantage via people is that it it is a time-consuming process. The good news is that once achieved, competitive advantage obtained is likely to be more on a long term basis and more difficult to duplicate. Therefore, a long term perspective is needed.
The long-term perspective is a practice handling the need for a long-term view upon the workforce, since the short-term profits of investing in the employees are comparably small compared to investing in for example new production facilities or production technology. However, the long- term benefits of recruiting and training employees are of great value and can greatly add value to the performance of the firm.
However, many organisations do not emphasise on long term perspective because according to them in the short term reducing the number of employees in the organisation is more profitable compared to maintained employee security.
2.4.15 Measurement of practices
Measurement is a critical element in any management process and also for managing the organisation workforce. Likewise, there is a practice which deals with measuring the practices and policies being adopted in the organisation. This is called measurement of practices. . The first reason for using this practice is that it measures how good an organisation is implementing its practices or policies. For example, there are organisations who adopt the practice of promotion from within but at the end do not this objective.
The second reason of using measurement of practices is that organisation should be in focus, that is not only measuring the financial performance but instead the consequences of human resource practices. In a world, in which financial results are measured, failure to measure the implementation of human resource policy and practice is considered as a second class status and potential failure. The feedback obtained from the measurement is essential to improve and further develop implementations ideas as well as to learn how practices implemented are actually achieving the planned results.
Therefore adopting such practice is important to determine the performance of the organisation not only financially but also in terms of having a good workforce.
2.4.16 Overarching philosophy
Lastly is the practice of having an overarching philosophy or view upon management. This practice gives a connection of the different individual practices, as well as it provides the organisation with a framework for the personnel to experiment within but also as an aid when failure occurs. Having an overarching philosophy is crucial.
This practice is easier to explain what the organisation is doing. It provides a sense of direction to the organisation by making them aware on what direction they are going and which direction to choose because "it is hard to get somewhere if you don't know where you are going".
However, not having a proper and deeper understanding of the practices adopted and why they are important to the organisation can add to some external and internal problems and may not result to planned outcomes. Therefore having an overarching philosophy is important for both individual and organisational performance because organisational performance will depend on individual performance. If worker does not help when failure occurs this is going to have a negative effect on organisational performance.
According to Pfeffer (1994), theses practices are interrelated and give positive results when they are combined. Single practices standing alone might not give as much results as several practices combined in a system.