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Organization performance is generally defined as the actual performance of an entity - outputs and results - measured against the objectives and goals set by the management. Many factors and stakeholders affect the level of organizational performance including human resource management. Human resource management encompasses the employees of a firm and the policies and practices that govern this group of stakeholders (Boohene & Asuinura, 2011). These policies include matters regarding to employee motivation, remuneration and compensation, training and development and retention of quality staff among others (Bjorkman & Fan, 2002). Over the years, much research and study have been carried out to determine whether HRM affects the level of organizational performance, and if it does, to what extent. This report critically analyzes and discusses three theories to build a link between HRM and performance management. The three theories are human capital theory, best fit theory, and motivation & communication theory. The three theories describe a strong link b/w organization's human resource management funcion and performance. Then it highlights the role of employees' attitude and organization's environment in the performance of a firm.
2.0 Description of Theories
2.1 Human Capital Theory
Human capital comprises the individual armory of knowledge implanted in the corporate's ability to dig up the most effective output from its human resources (Bontis, 2002). Human capital is regarded as the foundation of intellectual capital and is a significant resource in various industries including but not limited to software development, consulting, and ¬nancial services (Seleim et. al., 2007). The link between human capital and organization performance can thus be discovered back to several researches such as economic human capital theory and organizational learning (Bontis et al., 2002). Guest et al. (2003) showed that high quality HRM investments and practices is linked to lower labor turnover and higher profitability in an analysis of over 300 UK companies. Corporations are more and more acknowledging that high degree of competency is crucial to prospective success. In fact it is universally agreed that as individuals get more education and training throughout a lifespan, human capital not only boosts the output but also endorses new innovations in the market (Seleim et. al., 2006).
2.2 Best Fit Theory
Bets fit theory emphasizes on integrating HRM straegy with the environmental framework of organization to ensure its effective implementation. This way, an organization can achieve high overall perfomance (Boxall and Purcell, 2002).
2.3 Motivation and Communication Theory
This theory plays central role in forming up the human resources of organization which can actively contribute in improving organization better performance. Endorsing and motivating employees can lead an organization to achieve its goals more consistently and effectively. Similarly a proper communication system is also essential to facilitate important human resource management activities and functions (Dessler, 2004).
3.0 Employee Attitude and Firm Performance
In relation to the motivation and communication theory, studies have generally highlighted the role of employees' attitude in organizational performance. Wright et al. (2003) derived from his studies that HR policies and employee commitment is highly correlated with higher operating pre-tax revenues. Edwards and Sengupta (2010) carry out a quantitative study on small and medium sized enterprises to determine whether a link exists between organizational performance, employee attitudes and HRM practices. They insist that the implementation of effective HRM policies can affect the attitude of employees to achieve the goals of the firm.
Tsai, Edwards and Sengupta (2010) study the effects of positive employee attitudes on the performance of an organization. Positive employee attitudes like high job satisfaction and low turnover rate can benefit the firm by ensuring that high quality employees stay loyal and hardworking to the firm and also increase the profitability of the firm - by leading to increased customer satisfaction and customer loyalty (Koys, 2001). The premise in question here is whether 'desirable employee attitude leads to better firm performance' or does 'better firm performance leads to desirable employee attitude'. Various studies have produced results that support both sides of the premise. In Koy's (2001) research, it was concluded that organizational citizenship behavior and employee satisfaction led to higher profitability. But on the other hand, (Schneider, Hanges, Smith, & Salvaggio, 2003) derived from his study that employee satisfaction and security was determined by the firm's financial performance, indicating that firm performance causes a change in employee attitude.
Tsai, Edwards and Sengupta (2010) shows that three attitude measures supports the premise that employee attitude affects firm performance. The three indicators are overall perceptions of the job, job empowerment and performance-rewards relationship. This simply confirms the fact that these three measures shows that effective HRM will lead to improved firm performance. By having policies which ensures empowerment and adequate compensation, employees will be motivated to perform better (Gallie, Felstead, & Green, 2004). Nevertheless, based on this study, there are other attitude indicators which do not prove that HRM is the only factor that supports improved performance. Therefore, it is safe to conclude that not all types of employee attitude lead to improved performance. The management and HR team of the entity holds the responsibility to study and prioritize the employee attitude measures and indicators that lead to better performance, and try to improve in these critical areas.
4.0 Building the Right Organizational and Psychological Climate
In addition to the theories above, many other researchers have also underpinned the same theoretical argument in their studies. Bowen and Ostroff (2004) study the link between the strength of HRM and organizational performance by proposing two intermediary factors, which is the corporate climate and the strength of the HRM in the firm. The paper discusses the theory of whether a strong HRM system - with proper content and process - has the authority to mould better corporate climate at an organizational and individual level among the employees of the firm. Bowen and
Ostroff's (2003) also researched two climates which exist in an organization, which is the psychological climate and the organizational climate. The study looks into the issue of whether the right 'climate' can lead to better firm performance. The psychological climate refers to perception at an individual level. It includes the kinds of employee behavior that is preferred by the management, management practices and general conceptions on how employees are to carry out their daily duties (Schneider B. , 2000).
Organizational climate is a shared perception between two stakeholders - the employees and the management. Organizational climate is a bigger take on issues like firm practices and policies, rewards, and the expected and general code of conduct in the firm as it involves the community of the company as a whole (Schneider B. , 2000). The culture of an entity is a big contributor to its climate. The assumptions and values of a firm are important to shape the employees and the structure of the organization. Researchers argue that organizational climate is a critical mediator between strategic HRM practices and organizational performance.
Despite the ability of the management to understand the climate of the firm, the big issue is about how to suit the HRM practices of a firm to fit the culture and values of the organization. Schneider (2000) observed in his study that there is very little research carried out to understand the development process of organizational climate. The knowledge of HRM tools and techniques are widespread, but implementing them within a particular climate or context is not a straightforward task (Schneider B. , 2000). Due to this matter, firms are obliged to have a strong HR team which is capable of understanding an entity's climate and use corporate culture and values to implement various practice and policies. Due to the fact that corporate climate shifts from time to time, employees are expected to be adaptable to change. In modern corporations, a firm which puts great importance in innovation and flexibility seem to outperform other firms who do not.
It has thus been cleared that there is an importance for firms to have the right HRM practices and policies, and its effective implementation at an organizational level. As each business entity has a different working environment and culture, there is no one right HRM formula that fits all firms. Therefore, it is vital that human resource policies to be based upon the distinct characteristics of the firm to suit the employees. HRM content and process should be prepared and integrated carefully to ensure successful implementation that leads to improved firm performance. This premise is true; as employee consensus and co-operation is vital to enforce HRM policies at the individual level and organizational level (Bowen and Ostroff's 2004). Edward and Sengupta's (2010) also argue that HRM is hugely linked with better company performance. Despite the positive results, certain limitations are present in this field of study. Researchers have argued that the causal effect of strategic HRM on organizational performance has not been strongly established. This is due to the theoretical assumptions and also limitations in terms of methodology (Godard, 2004). Researchers also argue that effective HRM is not the only contributor to improved performance, but other factors - which are not accounted for - are also accountable for better organizational performance (Schneider, Hanges, Smith, & Salvaggio, 2003). Though all in all, certain researchers justify that better organizational performance will flow to effective HRM practices (Harter, Schmidt, & Hayes, 2002). The common school of thought is that excellent HRM leads to better firm results. But they might not have taken into consideration the fact that improved firm results might also lead to better HRM practice in the firm (Schneider, Hanges, Smith, & Salvaggio, 2003). As profitable companies have more funds to spend to develop employees and improve remuneration, it is true to say that better firm performance does lead to better HRM practices.
Based on this assignment, it is evident that each of the factors studied - organizational climate, strategic HRM, employee attitude and organizational performance - are all linked to one another. One factor flows to another and vice versa. Therefore, it is vital for an entity to oversee all four aspects involved. Besides these four factors, there are also other categories and indicators which have not been covered in this assignment. Strategic HRM does affect the level of organizational performance. But at the same time, the level of organizational performance also affects the quality of HRM. Studies have proven that HRM is a potential contributor to long-term cost reduction and improved organizational performance. Many organizations have invested huge amount of funds to improve their HR function to acquire and retain the best talent to provide services to the company and its stakeholders. Hopefully, this assignment has provided a critical analysis and a deeper insight of some of the factors that affect HRM and operational performance.