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It has become a widely held premise that people provide organizations with an important source of sustainable competitive advantage (Prahalad, 1983; Pfeffer, 1994; Wright, McMahan, & McWilliams, 1994) and that the effective management of human capital, not physical capital, may be the ultimate determinant of organizational performance (cf. Adler, 1988; Reich, 1991).
if peak organizational performance is to be achieved. Supporting the HR systems and internal fit viewpoints, Arthur (1992, 1994) found that HR practices focused on enhancing employee commitment (e.g., decentralized decision making, comprehensive training, salaried com-pensation, employee participation) were related to higher performance. Con-versely, he also found that HR practices that focused on control, efficiency, and the reduction of employee skills and discretion were associated with August 838
increased turnover and poorer manufacturing performance. Similarly, in a study of high performance work practices, Huselid (1995) found that investments in HR activities such as incentive compensation, selective staffing techniques, and employee participation resulted in lower turnover, greater productivity, and increased organizational performance through their impact on employee skill development and motivation.
"if we are to improve our understanding of the impact of HRM on performance, we need a theory about HRM, a theory about performance and a theory about how they are linked" (Guest 1997, 263).
During the last decade, evidence has accumulated demonstrating a positive
link between Human Resource Management (HRM) and organizational
performance (Arthur 1994; Huselid 1995; Becker and Gerhard 1996). To a large
extent such evidence supports the 'common sense belief that improving the
way people [are] managed inevitably [leads] to enhanced firm performance'
(Truss 2001, p. 1124). The dominant approach used in testing the link
between HRM and performance has considered HRM as an ideal set of practices
(Huselid 1995; Delaney and Huselid 1996). These practices are very
loosely labelled 'high performance', 'high commitment', or 'high involvement'
practices as they are thought to release untapped reserves of 'human
resourcefulness' by increasing employee commitment, participation and
involvement (Blyton and Turnbull 1992, p. 4).
'the use of high performance work practices should lead to positive outcomes for all types of firms' (Huselid 1995, p. 644); and 'there is clear evidence that adopting these innovative
practices is associated with more effective organisational performance'
(Thompson 1998, p. 40). This perspective is based on normative theories of
HRM in which it is proposed that 'appropriate' HRM practices lead to
enhanced employee motivation and commitment. Arthur (1994) and others
(Walton 1985; Iles et al. 1990) suggest that 'high commitment' HR systems
shape employee behaviours and attitudes by developing 'psychological
links' between organizational and employee goals. Arthur argues that managers
using 'high commitment' HRM practices are essentially endeavouring
to 'develop committed employees who can be trusted to use their discretion
to carry out job tasks in ways that are consistent with organisational goals'
(1994, p. 672). Similarly, Huselid (1995), Delaney and Huselid (1996) and
Guest (1997) recommend that managers should focus on those practices that
tap employee motivation and direct individual behaviour towards the
achievement of organizational goals. As such, Guest (1997, p. 268)
It is therefore essential to explore not only what practices are being implemented, but also how they are enacted by line management and the HR department, and how they are received by employees (Truss, 2001).
The issue of how firm performance should be measured is also crucial to this
discussion. Much researdi in this field adopts a shareholder perspective, focusing on
productivity or finandal performance indicators such as retum on investment, assets or
equity (see eg Arthur 1994; Huselid, 1995). These studies do not consider the impact of
HRM on other stakeholders such as employees, trade unions and sodety (Paauwe, 2004).
A balanced scorecard approach has been proposed to counter this trend to gather financial,
customer and employee indicators of firm performance (Becker et at, 2001). Broadly
speaking, adopting only finandal measures of success is recognised as limiting and more
subject to time-lag factors, while the balance scorecard approach is more immediafe and
useful (Truss, 2001).
Role of the HR department
The widely cited Ulrich (1997) typology is a useful starting point. The typology defines
people and process aspects of HR roles, and operational and strafegic activities. The largest
part of the corporafe HR department role is the 'administrative expert', which is process orientated with a day-to-day, operational focus, based on the management of the firm
infrastmcture. The role contrasts with the other process-orientated role, 'strategic partner',
which is future-focused, based on the strategic management of people and aligning HRM
strategy with business strategy. The operationally focused, people-orientated role of
'employee champion', in which HR is responsible for listening and responding to employees, contrasts with the people-orientated strategic role of 'change agent', which
focuses on managing organisational transformation and change.
Linking HR roles with organisational performance, Ulrich's (1997) model suggests that
all four roles should be carried out simultaneously to improve firm performance.
However, this is a prescriptive model and there is currently a scarcity of empirical
evidence of how these roles are carried out (Truss et al, 2002). In his framework, Ulrich
(1997) sets out a vision of an unproblematic, collaborative partnership between line
managers, senior executives and the HR department. A pluralist perspective of competing
stakeholder groups, not all of whom are united behind the corporate aim of increased
competitive advantage, is not considered.
The last decade of empirical research on the added value of HRM, also known as the 'HRM
and performance' debate, demonstrates evidence that HRM does matter (Huselid, 1995;
Wright et al, 2003). Unfortunately, the relatwnships are often statistically
weak and the results ambiguous.
how the employee perceives HR pracfices and whether that perception aligns with the values and goals of the organisation. That kind of fit is well known under the heading of person-organisafion fit (P-O fit), which Kristof (1996) defines as the compatibility between people and organizations that occurs when: (a) at least one entity provides what the other needs, or (b) they
share similar fundamental characteristics, or (c) both. A number of authors in the field of HRM and performance emphasise the importance of including workers' percepfions. As Van den Berg and colleagues note (1999: 302), 'an organisation may have an abundance of written policies concerning [HRM], and top management may even believe it is practised, but these policies and beliefs are meaningless until the individual perceives them as something important to her or his organisafional "wellbeing"'. Wright and Boswell (2002: 263) also note that in measuring HRM it is vital to distinguish between policies and practices. The former are the organisation's stated
intenfions regarding its various 'employee management acfivifies', whereas the latter
are the actual, funcfioning, observable acfivifies, as experienced by employees. This is
yet another plea to pay more attenfion to workers' percepfions and the importance of
If we look more closely at the conceptualization and operationalisation of HR practices
or systems of practices, we observe little or no attention paid to the degree of coverage
of HRM - differentiation between employee groups and the percentage of employees
covered by the practices - and the intensity of HRM in terms of, for example, daily,
weekly, monthly or yearly interventions. Most prior research either uses simplistic
scales focusing on the application (or lack thereof) of a specific practice (Guest et al,
2003) or some kind of scale that is supposed to capture the 'degree to which the target
group has to do with' a specific practice (Huselid, 1995).
To make life even more complicated, Wright and Nishii (2004) build a strong argument
to make a clear distinction between intended HR practices (those designed on a
strategic level), actual - or implemented - HR practices (those implemented by, for
example, the direct supervisor) and perceived HR practices (those perceived by the
employees). The majority of prior research on HRM and performance appears to focus
on intended HR practices, mainly designed at the strategic level of the organisation.
Little is known about the actual enactment or implementation of HR practices and
employees' perception of them,
Profit is the most common, followed by various measures for sales. This is quite problematic
as financial indicators are being inñuenced by a whole range of factors (both internal
and external) that have nothing to do with employees and their related skills or human
capital. As already noted by Kanfer (1994) and Guest (1997), the distance between
some of the performance indicators (eg profits, market value) and HR interventions
is simply too large and potentially subject to other business interventions (eg research
and development activities, marketing strategies). For example, having smart policies
for managing working capital can increase earnings substantially, but have nothing
to do with the proclaimed effect of HR practices (apart from apparently having
selected the right treasury manager). The use of these kind of indicators becomes
even more serious if we take a closer look at an analysis carried out by Wright et al
as summarized by Wright and Haggerty (2005),
In recent years scholars have devoted a great deal of attention to examining the linkage be tween HR practices and firm performance. Based on research evidence to datef it is becom ing increasingly clear that the HR system is one important component that can help an organi zation become more effective and achieve a competitive advantage (Becker & Huselid, 1998).
A second approach has been the strategic per spective on HRM, which has taken on different meanings in the literature (Ferris et al., 1999). In one strategic-based approach, researchers have examined the particular "fit" between various HRM practices and the organization's competi tive strategy (e.g., Miles & Snow, 1994). Embedded in this view is the notion that organizations must also horizontally align their various HRM practices toward their strate gic goal and that practices must complement one another to achieve the firm's business strat egy ( Wright & Snell, 1991). The guiding logic is that a firm's HRM practices must develop employees' skills, knowledge, and motivation such that employees behave in ways that are instrumental to the implementation a particular strategy. Similarly, researchers have taken a contingency perspective, with the assumption that the effectiveness of the HR system depends on contextual features such as indus try, firm size, or manufacturing policies (Youndt, Snell, Dean, & Lepak, 1996).
related approach within the strategic per spective on HRM pertains to how the overall set of HRM practices is generally associated with firm performance and competitive advantage (Ferris et al., 1999). Central here is the resource based perspective (Barney, 1991) such that, collectively, a firm's human resources are believed to have implications for firm performance and provide a unique source of competitive advan tage that is difficult to replicate (Wright et al., 1994). The guiding proposition is that HRM prac tices are socially complex and intricately linked in ways that make them difficult for competitors to copy (Boxall, 1996). More fully, the complexi ties of the human resource value creation process make HRM a source of competitive ad vantage that is rare, inimitable, and nonsubsti tutable (Barney, 1991).
HRM-firm performance relationship?the sys tems and strategic perspectives?help stage how HRM practices and their influence on em ployee attributes can lead to desired outcomes at the firm level, such as productivity, financial performance, and competitive advantage.
yet still left unanswered is the process through which this occurs. Although both perspectives take a macro approach, they assume implicit, multilevel relationships among HRM practices, individual employee attributes, and organiza tional performance (Huselid, 1995; Wright et al., 1994).
The underlying assumption is that HRM practices lead to employee knowl edge, skills, and abilities (KSAs) that, in turn, influence firm performance at the collective level (Sch?ler & lackson, 1995). Additionally, there are perspectives that focus on "higher-order" socially interactive constructs?what Ferris and his colleagues (1998) term social context theory views of the relationship between HRM and performance. By higher order, we mean social structures that cannot be reduced to an aggregation of the per ceptions of the individuals currently composing the organization.
HRM, climate is an appropriate construct for de veloping our framework, based on the recent emphasis on climates around strategic objec tives that are purported to enhance effective ness (e.g., Schneider, 2000). Psychological climate is an experiential based perception of what people "see" and re port happening to them as they make sense of their environment (Schneider, 1990, 2000). This sensemaking is relative to the goals the organi zation pursues; how employees are to perform their daily activities; the management practices under which employees work; and the percep tions of the kinds of behaviors that management expects, supports, and rewards (Schneider, Brief, & Guzzo, 1996).
Organizational climate is a shared perception of what the organization is like in terms of practices, policies, procedures, routines, and rewards?what is important and what behaviors are expected and rewarded (e.g., lames & Jones, 1974; Jones & James, 1979; Schneider, 2000)?and is based on shared per ceptions among employees within formal organ izational units.
There is considerable support among those involved in strategic HRM for the notion that
how a firm manages its workforce affects its performance. This idea is strongly reflected
in the high performance human resource management (HPHR) discussion where the
effect of HR is assumed to impact positively at the employee level (Appelbaum et al.,
2000; Batt, 2002; Schuler and Jackson, 1987).
The employee level in turn is considered to be an important mediator of the relationship between the system and corporate
performance or between the system and company production level outcomes
(e.g., Horgan, 2003; Huselid, 1995; MacDuffie, 1995). In terms of explaining this,
there is widespread consensus for the idea that the main benefits come from using a
coherent bundle or set of HR dimensions (Huselid, 1995; Ichniowski et al., 1997).
a coreassumption of this literature is that the direction of causality of human resource
management runs through employee performance and subsequently on to corporate
performance. The most immediate effects of human resource management - i.e. the
effects on employee performance are, however, rarely studied.
A core hypothesis applied in this study is based on the popular view that the focus of a
HR system should be to make improvements to employees' training, skills and
knowledge, to stimulate their motivation and provide opportunities for discretionary
effort (Appelbaum et al., 2000; Becker et al., 1997; Delery, 1998; MacDuffie, 1995) as
well as to establish work norms that support trust and cooperation in the firm.
It is widely accepted that HRM can help firms improve organizational behaviour in such
areas as staff commitment, competency and flexibility, which in turn leads to improved
staff performance (Koch and McGrath, 1996). Indeed, claims about the impact of HRM
on organizational performance are common in theoretical discussions of HRM (e.g. Beer
et al., 1984; Devanna et al., 1984; Guest, 1997)
the relationship between HRM and
performance indicate that high commitment and/or high involvement HRM practices
have a positive impact on firm performance (e.g. Arthur, 1994; Bartel, 2004;
It is virtually impossible to read a business periodical or newspaper anywhere in the
world without seeing stories detailing that the success of a firm is due to how effectively
it manages its people (Schuler, 2000). Accordingly, it is important for a company to
implement HRM practices that make the best use of its employees. Investments in HRM
practices can substantially assist a firm in improving performance (Fey and BjoÂ¨rkman,
Evidence of the impact of HRM on performance is quite appealing. Recent studies
produce evidence that the effective management of people results in better organizational
performance. For instance, a study by Ahmad and Schroeder (2003) and RodrÄ±Â´guez and
Ventura (2003) indicate that HRM practices have significant impact on employee
turnover and operational performance of firms. Similarly, the research by BjoÂ¨rkman and
Xiucheng (2002) on HRM and performance of Western firms in China and Bartel (2000)
on branch operations of Canadian banks found a positive relationship between HRM
systems and organizational performance. These studies suggest that firms with effective
HRM show significant improvement.
HRM practices such as extensive training, employee development, compensation
systems, rigorous recruitment and selection processes, have been found to have a positive
relationship with firm performance (Bartel, 1994; Chiu et al., 2002; Terpstra and Rozell,
1993). According to Harel and Tzafrir (1996), HRM activities can influence an
organization's performance through improvement of employees' skills and quality
(selection and training) and through the increase of employee motivation (incentive
compensation). Research has shown that investment in HRM practices that aim at the
recruitment, development and motivation of the employees of the organization may
produce human assets that are valuable and rare (Becker and Huselid, 1998).
Hiltrop (1996) also argued that hiring competent employees and developing them
through effective human resource practices, underpins organizational capability.
Explaining variations in performance is one of the more enduring themes in the study of
organizations (March and Sutton, 1997). The claim that firms can achieve performance
improvements by implementing effective HRM practices has received much attention.
Arguably, the impact of HRM practices on performance has become the dominant
research issue in the field (Guest, 1997). Consequently, an abundance of studies have
sought to clarify the association between HRM practices and performance (Horgan and