The rationale behind this discussion paper is to determine the relationship between Human Resource Management and Organisational Performance. It is a general believe that the relationship between HRM policies and practices (sophisticated selection based on human resource planning, Involvement and commitment of human resource, reward planning and training and development) and organisational performance is interrelated through HRM outcomes (employees' behaviour, skills and attitudes) and this is influenced by organisational strategies (standard and quality, cost, creativity and innovation). Hence, this paper will be of benefit to both academics and HRM practitioners, and contribute in supporting the hypothesis that HRM policies associated with organisational strategies will be of beneficial effect to organisational performance through HRM outcomes.
It is still hard to believe and highly surprising that the question on how Human Resource Management has contributed to organisational performance is still being asked up till this present day.
As stated by Tyson, 2006 "HRM appears to be a field of work which has constantly justified itself. Unlike other managerial functions, there is difficulty distinguishing what the distinctive activities are in which HR Departments engage, which affect performance as opposed to the people management work of line managers and supervisors". Many researchers had carried out a research work in identifying the relationship between Human resource management and organisation performance and they have arrived at various conclusions. Over the last ten years important steps have been made in identifying the Human Resource Management - organisation performance relationship. However, severe gaps in our understanding still remain with respect to the causal ordering of the variables involved in the HRM -performance relationship (Purcell, Kinnie, Hutchinson, Rayton, and Swart, 2003)
Particularly, in studying the role of Human Resource Management on organisational performance, there are many models which have been developed, and each HRM-performance linkage models developed supports each other by adding variables, constructs or relationships.
There are debates that while there is an increasing body of theory and
empirical research demonstrating relationships between HRM policies, collective employee attributes, and firm outcomes, further studies in this area are essential . Additionally, although it was accepted that HRM is positively linked to organizational performance, there is a great need for further proof to support the HRM-performance relationship from different angle.
Literature review/Theoretical Background
The Chartered Institute of Personnel and Development suggested that high performance working could be understood as having the following characteristics: Achievement of organisational objectives, innovation in quality and customer satisfaction, customer and continuous improvement focus, viewing the work place as a source of added value, clear links between training and development and organisational objectives, support for organisational and individual learning and use of self managed work teams. (Stevens and Ashton, 1999 as cited by John Martins, 2010)
Organisations that invest in its employees are more effective, efficient and flexible.
Organisations should make an effort to achieve a kind of positive 'fit' between work, manpower, information and technology, by so doing it will enhance employees' loyalty and motivation, effectiveness, efficiency, skills and abilities, and also affect positively firm performance. Delaney and Huselid (1996) stated that employee participation and empowerment as well as extensive employee training, and related HRM practices can improve organisational performance. Active participation of employee in organisational affairs will positively affect innovation and employee loyalty.
There are several objective performance indicators that can be apply in assessing organisational performance and this include return on sales, customer loyalty, volume of sale, Productivity by employee, profit per employee, rate of expansion etc
This study topic will be discussed around different models developed by different researchers.
Operational model linking HRM to organisational performance.
The operational HRM-performance linkage model
The model is adapted from Paauwe and Richardson (1997), which argues that HRM outcomes mediate the relationship between HRM activities and firm performance, and which recognises that HRM outcomes connect HRM policies to business performance, and furthermore it assumes that HRM policies and business strategies are independent.
HRM policies may play an important role in building the organisation's human
capital pool by developing its rare, unique and non-substitutable internal
resources (resource-based view). According to the resource-based view, HRM
policies have a direct impact on employee attributes such as skills, attitudes and behaviour, the so-called HRM outcomes, which are subsequently translated into improved organisational performance (Boxal & Steeneveld, 1999).
This means that organisations do not operate in a vacuum, but controls may influence the adoption of business strategies and HRM policies, and may have a positive or negative impact on HRM outputs and organisational performance (Huselid, 1995).
This shows the simple relationship between HRM and organisation performance, this will be look into in a broader way.
HRM come to existence so that the goals of an organisation can be achieved through people resources. Most organisations believe that the way people are manage will determine how successful the organisation will be i.e. organisation see people management as a key factor for organisational success.
Human Resources and Business strategies
Many researchers and HRM scholars have tried to describe and explain the interlinkages between HRM and organisational goals. Harvard model developed by Beer et al. (1985) as cited by Shaun Tyson (2006) characterizes human resource management as a system which links corporate objectives into societal needs and back into human resources activities. The term 'Business Strategy' means strategy pursue by an organisation which includes port folio of interests which the organisation which to acquire or retain, together with the financial ratio such as return on investment, return on sale, return on capital employed etc these are used to measure the performance of the organisation. Porras and Robertson, 1991 as cited by Pilbeam and Corbridge (2002) state that "organisational performance and personal outcomes are interdependent. In the long-run one cannot be achieved without the other and emphasizing one at the expense of the other will yield neither". Human resources strategies need to be designed based on the needs of the organisation or business, and with this it can be seen that business strategies have a key impact on the way businesses are managed.
Organizational or business strategy can be defined as "The attempt by those who control an organisation to find ways to position their business/organization objectives so they can exploit the planning environment and maximize the future use of the capital and human assets. Johnson and Scholes as cited by Shaun Tyson. The importance of this definition for HR is how to maximize the usage of human assets in other to achieve the objective of the business and a competitive advantage as a result of the human assets owned by an organisation. A standard and innovative business strategy positively determines the connection between HRM policies and organisational performance.
Strategic HRM is often described as a process of aligning human resources and human behaviour more closely to the strategic and operating objectives of the organisation. Strategic HRM is about the alignment of people activity as closely as possible with the direction, purpose and objectives of the organisation in order to achieve a competitive advantage. (John Martin, 2010)
HRM Policies and practices
There is a compilation of key human resources and development policies and practices or level which support human resource management approach, seek to shape a new employment relationship and aid the pursuit of the horizontal and vertical integration which include sophisticated selection based on proactive human resource planning, involvement and commitment of human resources, performance management, reward management, training and development. Pilbeam and Corbridge (2002), if policies concerning the aforementioned are well harness it will lead to improvement in organisational performance. HRM policies may play an important role in building the organisation's human capital pool by developing its rare, inimitable and non-substitutable internal resources (resource-based view). According to the resource-based view, HRM policies have a direct impact on employee attributes such as skills, attitudes and behaviour, the so-called HRM outcomes, which are subsequently translated into improved organisational performance (Boxal & Steeneveld, 1999).
Recruitment and Selection
The first stage in becoming a member of an organisation is through recruitment and selection which is a primary action in HRM and from these stages all other requirements of employment flows. Pilbeam and Corbridge (2002, p. 114) state that "Good recruitment and selection is important because well thought out , agreed and communicated policies, procedures and practices can significantly contribute to effective organisational performance, ineffectiveness in recruitment and selection may lead to poor work performance".
Armstrong and Baron (2000) as cited by Pilbeam and Corbridge (2002) defined performance management as " a strategic and integrated approach to delivering sustained success to organisations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors".
The term reward has different meaning to different people; it can also be called remuneration or pay and in fundamental nature very closely linked to what employees contribute, and what they get in return. Kressler, (2003, p.113) states, whatever the individual and cultural variations, rewards, along with the strategies and systems related to it, forms a significant part of a business' personnel policy. It can appeal to both the material and immaterial values of employees. Entrepreneur and managers perceive in reward strategies a unique challenge and opportunity to make the most of what employees can contribute and be offered in return, in order to increase the potential of the net product. The reward prospect of employees is more than just remuneration; it includes other benefits and pension. There should be reward strategy in place that will meet both employee and organisational need
Training and development
This has to do with equipping workforce with the right skills, knowledge and capability to maximize performance. As stated by Shaun Tyson (2006) "Training in a work organisation is essentially a learning process , in which learning opportunities are purposefully structured by the managerial, HR and training staff working in collaboration, or by external agents acting on their behalf . The aim of the process is to develop in the organisation's employees the knowledge, skills and attitude s that have been defined as necessary for effective performance of their work and hence the achievement of organisational aims and objectives". From this it can be seen that employers depend on the quality of their employees' performance to achieve organisational aims and objectives.
Human Resources Management Output
After putting in place a systematically designed HRM policies and practices what is been expected is to have an output of high standard in the following area of HRM: motivation, satisfaction, corporation with management, corporation with employee, commitment, retention, and competence etc the list is inexhaustible.
Human Resources Management and Organisational Performance
Study has shown that no singular process can predetermine organisational achievement and success; rather most studies have shown that groups of processes or policies are the factors responsible for organisational growth and improvements.
There are proofs that employee job satisfaction can be linked with customer satisfaction in retail business environments and that this can result in better and improved sales/turnover which will directly or indirectly resulted into improve levels of profitability and organisational success.
Measuring organisational policy effectiveness and efficiency
In evaluating HRM we should differentiate between effectiveness and efficiency studies. Efficiency is the technical efficiency of any particular policy and the cost against budget or the cost effectiveness of any policy. See table for kind of measures used.
Effectiveness is best expressed as the extent to which the HR function is able to achieve organizational objectives through HR policies.
Cost per hire, labour turnover, ratio roll back from selection
Labour turnover and retention rates, probation reports, training cost
Promotion rates, numbers of days training per employee, training costs as percentage of pay, cost of errors, appraisal reports
Productivity/output measures, benchmarked pay rates, budget, actual, overtime %, incentive impact ratio, compa ratio
Labour turnover, days lost to strikes, absenteeism, sickness, morale survey, grievances, tribunal cases
Audits, surveys, email monitoring, upward communication channels, Number and quality of meetings, briefing group
Shaun Tyson (2006)
Jaap Paauwe (2004) proposes a model which argues that there are specific links between HR policies (such as rewards, recognition, and Development and performance management) and HR outcomes (such as motivation, job satisfaction and learning ability). Measuring the impact of HRM depends upon the detail of the policies, and these are the levers for achieving strategic objectives. Shaun Tyson (2006)
Senior line manager objectives
Diagram of relationships in the contribution of HRM to organizational performance. Shaun Tyson (2006)
The estimated model using LISREL (Joreskog and Sorbom, 2004).
Cooperation with Management
Cooperation with employees
Cooperation with Management
Cooperation with employees
While past study has established that there exists a connection between HRM policies and organisational performance, HRM is seen as input and organisational performance as output, taking into account as well that HRM policies are also influenced by contingencies such as business strategies.
Moreover, it argues that HRM policies are extensively, directly and absolutely related to organisational performance. In addition, it assumes that HRM policies are influenced by business strategies.
Measuring the impact and contribution of HRM on organisational performance, recognise that HRM policies and business strategies are not mutually independent, HRM policies of an organisation should be developed around on the business strategies they follow.
In conclusion, we could say that even though past researchers have established that there exists a relationship between HRM policies and organisational performance, the connection involving the two is mediated through the HRM outcomes of behaviour, attitude and skills and this is controlled by business strategies, organisational context and other contingencies. Hence, this write up not only agrees that HRM policies have an assenting impact on organisational performance, but it additionally explains how HRM has contributed to organizational performance through employees training and development, reward management etc which will surely resulted into employee loyalty and improved customer service.
The operational model in this study recommends that HRM policies directly influence HRM outcomes such as attitudes, collective skills, and behaviours, and therefore, ultimately HRM outcomes improve organisational performance. To achieving this improvement and growth, all organization should have HRM departments and people representing these departments at the management level.
Alcazar, F.M., Fernandez, P.M.R., & Gardey, G.S. (2005). Researching on SHRM: An analysis of the debate over the role played by human resources in firm success. Management Revue, 16, 213-241
Boxall, P., & Steeneveld, M. (1999). Human resource strategy and competitive
advantage: A longitudinal study of engineering consultancies. Journal of
Management Studies, 36, 443-463.
Delaney, J.T. & Huselid, M.A. (1996). 'The Impact of Human Resource Management Practices on Perceptions of Organizational Performance.' Academy of Management Journal,
39 (4), pp. 949-969.
Gerhart, B. (2005). Human resources and business performance: Findings,
unanswered questions, and an alternative approach. Management Revue, 16,
Harter, J.K., Schmidt, F.L., & Hayes T.L. (2002). Business-unit-level relationship
between employee satisfaction, employee engagement, and business outcomes: A meta-analysis. Journal of Applied Psychology, 87, 268-279
Huselid, M (1995). The impact of human resource management practices on turnover, productivity and corporate financial performance. Academy of management journal, 38 (3), 635-672.
Ichniowski, C., Kochan, T., Levine, D., Olson, C., and strauss, G. (1996). What works at work: overview and assessment. Industrial Relations, 35 (3), 299-333.
K. Joreskog, D. Sorbom. LISREL 8: User's Reference Guide, 2nd ed. Lincolnwood, Scientific Software International, 1996-2001.
Katou, A.A., & Budhwar, P.S. (2007). The effect of human resource management policies on organisational performance in Greek manufacturing firms. Thunderbird International Business Review, 49, 1-35.
Kressler, H.W. (2003). Motivate and reward: performance appraisal and incentive systems for business success. Basingstoke: Palgrave Macmillan 2003
Martin, J. (2010).Key Concept in Human Resources Management. 1st ed. London: SAGE Publications Ltd.
Murphy, T.E. and Zandvakili, S. (2000). Data and metrics driven approach to human resource practices: using customers, employees, and financial metrics. Human Resource Management, 39 (1), 93-105.
Paauwe, J.,2004. HRM and performance, achieving long term viability. Oxford University Press. IN LIBRARY
Paauwe, J., & Richardson, R. (1997). Introduction: Special issue on HRM and
performance. International Journal of Human Resource Management, 8, 257-262.
Pilbeam, S. and M. Corbridge, 2002. People resourcing: HRM in practice.2nd ed. Essex: Pearson Education Limited.
Purcell, J., Kinnie, N., Hutchinson, S., Rayton, B., & Swart, J. (2003).
Understanding the people and performance link: Unlocking the black box. London:Chartered Institute of Personnel and Development.
Schuler, R.S., & Jackson, S.E. (1987). Linking competitive strategies with human
resource management practices. Academy of Management Executive, 1, 207-219.