How Does Human Resources Management Impact Profitability?

Finance and Accounting Assignment #1

“How Does Human Resources Management Impact Profitability?”

Human resources management can be described as a strategic, integrated and coherent approach to employment, development and well-being of the people working in an organization. It is the policies, practices, and procedures that influence employees’ behaviours, attitudes, and performance (Singh & Kassa, 2016). Human resources management is a very critical piece of an organization’s strategy because it covers many important processes including: hiring and firing, performance management, training and development, labour relations, health and safety, HR planning, etc. It links all of these concepts together and if effective, can contribute greatly to the overall company direction and accomplishments of its strategy, goals and objectives. Looking specifically at profitability, human resources management has been found to have a direct correlation to employee behavior which in turn can lead to having a positive and instrumental impact on profitability. Research shows that when employees are given the necessary tools when hired for the job and while working on the job, there is no reason for them and the organization to not be successful (Warech & Tracey, 2004). Below, I will discuss some viewpoints based on different research regarding human resources management and the impact that it has on profitability. 

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Human resources management practices can have a positive impact on a firm’s profitability if used effectively.  More and more companies are finding out that human resource practices do improve the effectiveness of an organization and will ultimately lead to bottom line profits. In an article I found titled, “Evaluating the Impact of Human Resources”, Warech and Tracey discuss how not all HR policies, practices, or systems are critical for creating value/driving a firm’s performance or creating shareholder value. In research conducted, they were able to determine that favorable employee behavior was found to have a direct and causal effect on customer satisfaction and retention, which, in turn, influenced revenue growth, operating margins, and return on assets (Warech & Tracey, 2004). Warech and Tracey exaggerated that it was clear that certain human resources practices had an impact on profits and important to a company’s financial position, but the issue was determining which one makes the greatest contribution (Warech & Tracey, 2004). Further research indicated a number of human resources management practices as value drivers (e.g., treating health care benefits as important for both recruiting and retention) and threw cautionary flags in front of some conventional practices found to actually be associated with a decrease in financial performance (e.g., 360-degree feedback) (Warech & Tracey, 2004). It identified specific HR practices that are found to drive the bottom line and grouped them into six overarching factors: (1) total rewards and accountability; (2) collegial, flexible workplace; (3) recruiting and retention excellence; (4) communications integrity; (5) focused HR service technologies; and (6) prudent use of resources (Warech & Tracey, 2004). The research quantifies exactly how much of an improvement each practice could be expected to increase a company’s market value (Warech & Tracey, 2004). A second study within the article discusses how a well-designed and well-executed training program, one that is directly related to an individual’s current performance requirement, would have a direct and negative effect on employee turnover (i.e., higher levels of training would lead to lower employee turnover) and that turnover would in turn have a direct and inverse effect on sales performance (i.e., lower levels of turnover would lead to increased sales performance) (Warech & Tracey, 2016). When employees experience a good working environment, turnover will decrease and satisfaction will increase. This will result in higher productivity and efficiency. This signifies that human resources practices do indeed have an impact on a firm’s profitability but certain practices may have a more profound impact than others dependent on the firm’s specific strategy.

In a second article I found titled, “The Relationships among Participatory Management Practices for Improving Firm Profitability”, also looks at how how certain human resources practices can have a more positive effect on firm profitability than others. They found that an organization performs at its best when all functions of human resources management are managed well (Singh & Kassa, 2016). At companies with effective human resource management practices, employees and customers tend to be more satisfied and organizations are more innovative, have greater productivity, and develop a better reputation in the community (Singh & Kassa, 2016). In a study conducted, they discovered a positive interaction between skill-enhancing and motivation-enhancing HR practices which tend to be more related to financial performance. They also found a linkage between the positive interaction of participative management practices and return on investment (Singh & Kassa, 2016). This makes sense because involvement-oriented practices immediately enhance the knowledge, skills, abilities, and experience of employees. As human capital is enhanced at the organizational level, manufacturing costs can be reduced. Employees will be happier when they are properly trained and stimulated on a continuous basis which in turn leads to a more efficient organization. 

A final article that I found examines both concepts that I mentioned above and reaffirms the notion that certain HR practices will have a more significant impact on profitability than others and will also depend on the firm’s strategy and organizations goals. Companies using human resources management practices, such as flexible job design, effective workplace communication, and formal training, have the highest level of economic productivity. In contrast, practices such as grievance procedures, seniority-based promotions, and standard non-flexible work schedule had substantially lower productivity (Lee et al, 2017). They noted that it seems that the ‘old style’ of HR practices are less productive in today’s business world (Lee et all, 2017). This makes sense because the world and human resources management is changing on a continuous basis. Others findings indicate that a valid set of strategic HRM practices (training, participation, results‐oriented appraisals, and internal career opportunities) affect both product/service performance and financial performance (Akhtar et al, 2008). Organization’s must ensure that their HRM policies are staying up to date with current trends as well as changing technologies. Organizations have begun to realize the role of human resources management in terms of survival and development with competitive advantage being a critical role in it. This may be reflected in better financial performance (higher sales, increased profit), or by non-financial performance (organizational reputation with customers and potential employees) (Anca-Ioana, 2013).

 In conclusion, it is evident that human resources management practices will have an impact on profitability but will depend on a variety of factors. Human resources has been identified to be both valuable as well as a source of competitive advantage for organizations (Singh & Kassa, 2016). Human resources practices may not directly produce revenue, but it certainly improves the overall effectiveness of the organization (Warech & Tracey, 2016). Investment in human resources can be viewed as a strategic approach to be constantly optimized and not as an element of costs to be (Anca-Ioana, 2013). Success or failure of an organization is probably not entirely due to the practice of human resources management but practices are likely to be critical (Anca-Ioana, 2013).

References

• Anca-Ioana, M. (2013). New Approaches of the Concepts of Human Resources, Human Resource Management and Strategic Human Resource Management. Annals of the University of Oradea, Economic Science Series, 22(1), 1520–1525. Retrieved from http://ra.ocls.ca/ra/login.aspx?inst=georgian&url=http://search.ebscohost.com.eztest.ocls.ca/login.aspx?direct=true&db=bth&AN=90545849&site=eds-live&scope=site
• Akhtar, S., Ding, D. Z., & Ge, G. L. (2008). Strategic HRM practices and their impact on company performance in Chinese enterprises. Human Resource Management, 47(1), 15–32. https://doi-org.eztest.ocls.ca/10.1002/hrm.20195
• Lee, C, et al. “Impacts of Human Resources Management on Productivity and Effectiveness in a Medium-Size Non-Profit Organization.” Vol.1, no.1, 2017.
• Singh, N, and B Kassa. “The Impact of Human Resource Management Practice on Organizational Performance – A Study on Debre Brehan University.” Vol. 1, no. 1, 2016, pp.643-662.
• Warech, and Tracey. “Evaluating the Impact of Human Resources: Identifying What Matters.” Vol.45, no. 4, 2004, doi:10.1177/0010880404266247.