Human resources practices influence customer satisfaction

The focus of this research is on examining the process through which human resource practices influences customer satisfaction in banking sector of Pakistan. Drawing on literature from strategic human resource management, organizational behavior, and marketing, a model of HRP-CS is proposed with employee commitment as its central plank. It is argued that such commitment is influenced by organizational human resource practices and in turn it influences employee behavior towards organizational customers which is then translated into customer satisfaction.

Despite heavily documented performance link between human resource practices and organizational, the term "HR practices" has rarely been adequately defined in the literature. In fact researchers have tested for link between HR practices and firm performance with different HR practices as input and different performance outcomes as output. Boselie and his colleagues have very rightly noted that, "Still no consensus has emerged on what employee management activities should be in a comprehensive 'HRM checklist', since no widely accepted theoretical rationale exists for selecting practices as definitively essential to HRM."

Selection of HR practices for this dissertation is based on the review of relevant studies. Liao and Chuang noted that involvement, training and performance incentives are among the "most relevant for employee performance in service settings." Similarly, Boselie and his colleagues have identified training, performance based rewards and performance appraisal as the top three researched human resource practices. They argue that this might be because these practices "reflect the main objectives of most conceptualisations of a 'strategic' HRM programme". Result oriented appraisals, employment security, and profit sharing have also been reported to be strongly related to organizational performance .

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In the light of the above discussion, I selected human resource practices that adequately cover the areas identified by the strategic HR researchers as being important in improving organizational performance. The practices include internal career opportunities, training, result oriented appraisals, employment security, participation, and compensation. All these practices are supposed to enhance organizational human capital which will then serve as a competitive advantage for the firm. Nevertheless, a group of researchers including Jackson and Schuler , Ferris and his colleagues and Uhl- Bien et al called for more focus on social context of the relationships within the organization. These researchers argue that employee interaction within organization comprises social capital, and no firm can effectively achieve its goals until it actively utilizes its social capital along with its human capital.

"The central proposition of social capital theory is that network of relationships constitute valuable resource for the conduct of social affairs." As supervisor-employee interaction is among the most frequent experiences in organizational life, the importance of this relationship in social capital formation is very much understandable. Additionally, as supervisors are viewed as agents of organization, who are responsible for directing and facilitating employees job responsibilities, their attitude and behavior is viewed as indicative of organizational orientation towards their employees . Although, supervisor support or supervisor behavior may not qualify itself as firm's HR practice, I have added it to the list of HR practices in my dissertation due to its importance in eliciting employee responses towards organization and its customers. Thus the list of HR practices which will be the subject of study in this dissertation are as following:

Supervisor support (SS)

Internal career opportunities (ICO)

Training (Trg)

Result-oriented appraisal (ROA)

Employment security (ES)

Participation in Decision Making (Part)

Compensation (Comp)

3.2 Human Resource Management Practices and Customer Satisfaction:

In one of the early studies on relationship between employees' perception of organizational practices and customers perception of service quality, Schneider, Parkington, and Buxton noted that both are significantly correlated. They conducted a study of twenty three bank branches of a full service bank and observed a strong correlation (r = 0.67) between employees' perception of branch service and customers' perception of quality of service at the branch. Although, this study did not measure the role of organizational human resource practices on customers' perception of service quality or customer satisfaction, it laid down the foundation for studying the role of employee attitudes and behavior in connection with customer satisfaction. In order to yield better perceptions of service quality from customers, the study emphasized "to focus attention on the role of boundary personnel in retail service organizations like the branch banks" .

Rogg, Schmidt, Shull, and Schmitt conducted a study of 351 franchise dealerships of an automobile company to examine the impact of human resource practices on customer satisfaction. They found that HR practices effects customer satisfaction through its influence on organizational climate. This is to say that they tested for a mediating role of climate in HR-CS relationship. Their data analysis supported the hypothesis that human resource practices are significantly related to customer satisfaction, though most of the correlations were less than 0.20. While this study adds to our belief that firm's human resource practices are related to its customers' satisfaction, it is not without its problems. First, the data on HR practices and climate variables were collected using single instrument, thus increasing the chance of same source bias. Secondly, the data on, human resource practices and climate, variables were collected from single respondent in the organization. While the data of human resource practices were factual, the data on climate were attitudinal and is highly prone to single rater error. Both these problems (same source bias and single rater error) have been taken care of in this study.

In another study of 137 BDG (Branch Director Group) of a full service bank, Gelade and Ivery documented that BDG's HRM practices are positively associated with customer satisfaction. They analyzed the relationship between HRM indicators (staffing level, overtime, and professional development) and organizational performance indicators (sales against targets, customer satisfaction, staff retention, and clerical accuracy) and found that almost all the three HRM indicators are positively associated with organizational performance indicators including customer satisfaction and that such association is moderated by organizational climate.

Whereas most of the studies which examined the relationship between human resource practices and customer satisfaction were conducted on organizational or DMU level of analysis , Liao and Chaung investigated the factors influencing customer satisfaction using a multi-level conceptual framework. There data comprised responses of 257 employees, 44 managers, and 1993 customers from 25 franchised restaurants. The human resource practices data were collected from restaurant manager while employee performance and customer satisfaction data were based on self-reports of employees and customers respectively. The data gathered thus gathered from employees and customers were aggregated to restaurant level to analyze the HR practices - customer outcome relationship at unit level. The results of the study showed that of the human resource practices only employee involvement was significantly related to the service performance, while other two HR practices (service training, and performance incentives) did not have any significant relationship with employee performance. The study did not examine the direct effect of human resource practices on customer satisfaction; however the relationship between restaurant-level service performance and customer satisfaction was found significant. Although, this study provided a better understanding of how employees' actions and perceptions influences organizational context, still it did not explicitly examines the role of employees' perception of human resource practices in eliciting customer perception of service quality and customer satisfaction.

While most of studies conducted on human resource management - customer satisfaction relationship have focused on organizational climate as mediating variable between the two, Nishii, et al is the first one to examines the role of employees' perceptions, attitudes and behaviors as the central plank of such relationship. There sample included 95 stores each with approximately 18 departments. Data was collected from 4208 employees from 362 departments across these 95 stores. Nishii and her colleagues in a multilevel analysis investigated the role of employee' perceptions of 'why' organization adopted certain human resource policies (HR attribution) in shaping their work attitudes and behaviors and the relationship between such attitudes/behaviors and customer satisfaction. The data regarding employee HR attributions, commitment and satisfaction were collected from employees at individual level, while data regarding employee behavior and customer satisfaction were collected from store managers and customers respectively at store-level. The individual level data were than aggregated to store level in order to analyze the relationship at store level unit of analysis. The results of this study revealed that employees' attributions of human resource practices (HR attributions) are positively related to employee attitudes. They further found that unit-level attitudes were positively related to two aspects of employee behavior, measured in terms of OCB (organizational citizenship behavior). One dimension of OCB (OCB-helping) was found significantly associated with customer satisfaction. The most important finding of the study was, "that the same set of HR practices may not even exhibit similar effects within a single organization. The implication is that it is not just the HR practices themselves but rather also employees' perceptions of those HR practices that are important for achieving desired organizational outcomes. [italics added]" .

In fact focus on employee (or member) perception is not a new phenomenon in organizational studies. Almost thirty years ago Schneider, et al based on Heider , Miller, Galanter, and Pribram and Bowers noted that,

"Member perceptions of organizational practices and procedures are the critical data in understanding organizational behavior. No behavior in, or of, organizations occurs in the absence of perceptions. To conceptualize an organization requires a consideration of human behavior, and human behavior does not exist without perception."

Similarly, drawing on Endler and Magnusson and Drazin, Glynn, and Kazanjian Bowen and Ostroff argued that individual behavior potential are 'not' based on ". . . actual situation per se, rather, the situation individuals "see" based on their perceptions, …". Finally, Nishii and her colleagues emphasized the need for "focusing more future SHRM research on the way that HR practices are enacted in organizations, as revealed in human perception …".

Though the study undertaken by Nishi and her colleagues is among the first to empirically test the role of employees' perception of HR practices in influencing customer satisfaction, it did not actually measured the employees' perception of HR practices per se, rather, it took a different approach and examined the employees' perception of 'why' particular HR practices exists and the effect of this 'why' on customer satisfaction. Thus, the important and frequently sought after question regarding the role of employees' perception of human resource practices in influencing their attitude, behavior and customer satisfaction is still unanswered in the existing literature.

Based on past literature, which demonstrates a positive link between organizational HR practices and customer satisfaction, and to answer a very important, but still unanswered, question in strategic human resource management literature, I hypothesized the relationship between employees' perception of HR practices and customer satisfaction as follows:

H1: There will be a positive relationship between perceptions of

Supervisor Support (SS)

Internal Career Opportunities (ICO) Organizational

Training (Trg) Human

Result Oriented Appraisal (ROA) Resource

Employment Security (ES) Practices (HRP)

Participation in Decision Making (Part), and

Compensation

and customer satisfaction such that the customers interacting with employees who more positively perceive HR practices will be more satisfied and vice-versa.

3.3 Research Model: The Process through which HR Practices Influences Customer Satisfaction:

As earlier noted in the introduction, the primary aim of this research is to investigate the process/path through which human resource practices influence customer satisfaction, as this is the dynamics of such process which is of immense importance to the owners and managers of the organizations. It is only through the clear and proper understanding of mediating mechanisms between HR practices and customer satisfaction that managers can avoid engaging in conflicting, and at time counter-productive, HR policies.

The proposed model indicating the mediating process between perceptions of human resource practices and customer satisfaction is shown in figure 3-1.

HR Practices

Employee Perceptions

Employee Outcome

Organizational Outcome

Internal Career Opportunities

Result Oriented Appraisal

Participation in Decision Making

Employment Security

Supervisor Support

Training

Compensation

Perceived Organizational Support

Customer Satisfaction

Affective Commitment

Customer Oriented Behavior

Theoretical Framework

Research Model

Figure 3-1: Research Model - The Influence of HR Practices on Employee Commitment and Customer Satisfaction

An examination of the figure 3-1 depicts the relationship of various variables in the model. It is proposed that for human resource practices to influence customer satisfaction they are to be first perceived by the organizational employees in favorable or unfavorable manner. The cumulative employee perception about HR practices is then translated into perceived organizational support (POS), a concept which indicates the organizational commitment towards employee wellbeing. It is further proposed that this POS is reciprocated by the employees in the form of their commitment to organization, which then forms the basis for customer-oriented behavior on their part. The final part of the model deals with the boundary spanning role of the employees and hypothesizes that employee behavior influences the customers' perception of service quality in organizations which ultimately leads to customer satisfaction with the organization.

In what follows each of the relationships proposed in the model is examined in greater detail in the light of relevant literature. Research hypotheses based on such relationships are formulated within each section.

3.4 Human Resource Practices and Perceived Organizational Support:

Perceived organizational support is defined as employees' perceptions about the degree to which the organization cares about their well-being and values their contribution . Studies have shown that human resource practices signaling investments in employees are positively related to perceived organizational support . Organization support theory argues that employees assign humanlike characteristics to organizations. This tendency to personify organizations is encouraged by the organizational norms, practices and policies that prescribe employee role behaviors . This personification leads employees to believe that treatment met to them by their organizations is its indication of favor or disfavor to them . The treatment met to employees signal organization's readiness to reward increased work performance and to meet its employees' needs for approval and recognition. As the organization treat its employees through the implementation of various human resource practices, I argue that the development of employees global belief regarding the extent to which organizations value its members contribution and care about their wellbeing (perceived organizational support) is the reciprocation of such HR practices. Further, Eisenberger and his colleagues noted that 'perceived organizational support' depends on attribution processes and is based on employees' judgments, among other things, of organizational sincerity. Similarly, Whitener , while identifying the possible causes of different employee outcomes towards same HR practice, stressed upon the future researchers to ". . . measure employees' perceptions of the characteristics of human resource practices as an intervening variable between managers' descriptions of human resource practices and employees' perceptions of support." . In fact more and more researchers today are realizing the important role of employees' perceptions in HR practices - employee outcomes relationship. In a very recent publication Nishii et al have argued that, ". . . in order for HR practices to exert their desired effect on employee attitudes and behaviors, they first have to be perceived and interpreted subjectively by employees . . ." . Thus I refine my earlier argument regarding the relationship between HR practices and POS by accommodating the role of employees' perception in HR-POS relationship; I hypothesize that it is employees' perceptions of organizational human resource practices, instead of practices themselves, which leads to development of employees' POS.

The following sub-sections will review the literature about the relationship between the hypothesized HR practices and POS in detail.

3.4.1 Supervisor Support:

Levinson observed that supervisory actions are often viewed as more indicative of organization's intent than solely based on supervisor's personal motive. This is in part due to the fact that employees consider organizations to be responsible for legal, moral, and financial actions of its agents' actions. "Because supervisors act as organizational agents, the employee's receipt of favorable treatment from a supervisor should contribute to POS." Additionally employees believe that managers forward their evaluation of subordinates to upper management which considerably influences management's treatment of their employees, thus perceptions of supervisor support should contribute to development of POS . Reciprocity norm dictates that perceived supervisor support should increase employees felt obligation towards supervisor and organization .

H2a: There will be a positive relationship between employee's perception of supervisor support (SS) and his/her perceived organizational support (POS).

3.4.2 Internal Career Opportunities:

The opportunities to grow internally within the organization signals a strong positive message to employees that they are being cared and their work being valued . Such a policy also inculcates a sense of justice and fairness in the employees who feel that their stay and attachment with the organization for longer tenures is valued and rewarded . Thus the perception of availability of internal career opportunities will be linked to employees' perception of organizational support.

H2b: There will be positive relationship between employee's perception of internal career opportunities (ICO) and his/her level of POS.

3.4.3 Training

Training may be viewed as a form of capital investment in humans whether such an investment is made by firm or individual . A number of authors including Huselid and MacDuffie have counted organizational training as one of the important high-performance human resource (HR) practices. Employees, just like other human beings, have a desire to enhance their capabilities and learn new skills to improve their survivability in the environment. Training provides opportunities for both, enhancement of existing capabilities and learning of new skills. Thus provision of adequate training facilities by the organization to its employees signals its commitment to them. By providing career development opportunities, the organization conveys its willingness and dedication to the personal growth of its employees.

The provision of training opportunities is indicative of the importance which the organization attaches to the contributions of its employees and is a token of its recognition for such contributions . In Pakistan most of the times such trainings and other career development opportunities go beyond any formal union contract and is thus viewed by the employees as out-of-will treatment by the organization. Such discretionary treatment on part of the organization is viewed by its employees as indicative of organizational support for them . Previous studies have found evidence that career development opportunities are positively related to perceptions of organizational support and that training predicts POS . Similarly, a significant relationship between career development opportunities and POS is also been reported by Meyer and Smith .

Based on the review of past research, I hypothesize that an employee's level of POS will be positively related to his/her belief of the training and career development opportunities provided by the organization.

H2c: Employees' perceptions about training opportunities (Trg) will be positively related to the level of his/her POS.

3.4.4 Result-Oriented Appraisal:

Previous researches has documented a positive relationship between result-oriented appraisal and firm performance . These authors reported a correlation of r = .13 at p< .05 between performance appraisal and firm's return on asset (RoA). The existence of result-oriented appraisals is indicative of procedural justice in the organization and thus enhances the employees' perception of organizational support. Based on social exchange theory Erdogan noted that, "individuals will reciprocate to sources of fairness through behaviors that benefit the source" . Therefore, following has been predicted:

H2d: Employees' perception of result oriented appraisal (ROA) will be positively related to their perceptions of organizational support (POS).

3.4.5 Employment Security:

Delery and Doty in their research on banking sector of US have found a positive relationship between employment security and firm performance. The positive relationship was attributed to increased employee commitment and motivation due to secure jobs in banks. Similarly Fey, Bjorkman, and Pavlovskaya argued that provision of long term job security to employees signal organizational commitment to them. Pfeffer asserts that 'norm of reciprocity' bounds employees to reciprocate such commitment in the form to their support to the organization and its goals. On the other hand organizational commitment of employees working for an employer who treats its employees as unimportant or dispensable tends to be low. Further, in times of economic turbulence when people are finding it increasingly difficult to find jobs, long term job security by the organization to the employees enhance their perceptions of organizational support. In light of the existing theoretical and empirical rationale I predict about the relationship between employment security and perceived organizational support (POS) as following:

H2e: There will be a positive relationship between employees' perception of employment security (ES) and his/her perceived organizational support (POS).

3.4.6 Participation in Decision Making:

Studies have concluded that organizations will yield better results if they gave their employees participation or voice in decision making activities . Providing opportunities to the employees to participate in decision making should indicate that their contribution is being valued by the organization . Researchers, have previously suggested that having say in decision making and voice in formulating organizational policy should be tested as a precursor of perceived organizational support . Whitener argued the fact that it is not only the existence of participation practice which is enough to elicit positive response from the the employees rather it is the perception regarding the existence and usefulness of such participatory mechanism which enhances employees perception of organizational support. Thus, the following relationship between participation and perceived organizational support is predicted:

H2f: Employees' perception of participation in organizational decision making (Part) will be positively related to his/her perceptions of organizational support (POS).

3.4.7 Compensation

Organizational Support Theory argues that organizational rewards signals the nature of employee concern by the organization. Thus, favorable rewards signal that employee contributions are being valued by organization . More specifically this theory holds that favorable organizational rewards are conceived as organization's recognition and appreciation of employees' work, and therefore, a major source of POS development .

Organizational rewards may take the form of different variables when it comes to measuring its relationship with POS. In literature variables such as pay itself , distributive justice , procedural justice and general organizational rewards are researched for their relationship with POS. A common theme which emerges out of these studies is that POS is positively influenced by organizational rewards.

Perceived organizational support is found to be positively related to employee pay satisfaction in a study conducted by Shore and Tetrick . Another study, which tested the relationship between employees' perception about procedural justice and their perception of organizational support, found that both are positively related . Similarly, Wayne et al. noted a positive association between perceptions of procedural justice and POS.

One can easily note from the above studies that though different indicators have been used to capture the concept of organizational rewards and then test their relationship with perceived organizational support, these researches converge in their conclusion about positive link between reward and development of POS. As the focus of this dissertation on measuring the influence of organizational human resource practices on employee commitment and customer satisfaction, the issues of relationship between rewards like distributive and procedural justice is somewhat out of scope for this study. Of particular importance to this study is the role of "compensation" as organizational reward, and the role it plays in development of POS.

Willis noted that compensation "is the most critical issue when it comes to attracting and keeping talent". Compensation is the cornerstone of the majority employment contracts. As Parker and Wright noted that basic reason for such centrality to the issue of compensation is the assumption that money influences behavior.

In 1999 a study conducted by Bassi and Van Buren revealed that firms using high-performance work practices provide compensation based on group-performance and company profit sharing to enhance the employees' feeling of organizational support. Especially, profit-sharing mechanism is a clear sign that organization does not only recognize and value its employees' efforts in its profit but is ready to share it with them. This line of thinking clearly indicates a positive possibility of relationship between employees' compensation and their perceptions of organizational support.

Thus based on review of existing literature and logic which dictates a relationship between compensation and POS, I hypothesize as under:

H2g: Employees' perceptions of compensation (Comp) will be positively related to the level of his/her POS.

3.5 Perceived Organizational Support (POS) and Organizational Commitment (OC)

During the last two decades the concept of organizational commitment (OC) remained a major focus of research in organizational studies. One of the reasons for such focus is the assumed relationship between organizational commitment and performance . In the following lines I will first explain the concept of commitment and will then explain the logic of proposing relationship between POS and OC.

The term 'commitment' has been widely used in research and is being variedly used to explain the antecedents, consequences and process of being committed to organization . This variety of definitions of commitment led Meyer and Allen to note that OC may be a multidimensional concept that has the potential to be interpreted in variety of ways. Nevertheless, the major definitions of OC appear to be affective or attitudinal , normative , behavioral and calculative . However, as Allen and Grisaffe noted, "most researchers would agree that organizational commitment refers to a psychological state that characterizes an employee's relationship with the organization for which he or she works and that has implications for whether or not the employee will choose to remain with the organization."

Researchers differ in their opinion about why or how commitment occurs. Meyer and Allen conceptualizes that "commitment develops as a result of experiences of satisfying employees' needs motivational and/or compatible with their values" . They further argued that desired "commitment profile" of employees may be developed by managing the employee work experience.

Some researchers have described commitment as a "strong belief in and acceptance of the organization's goals and values, a willingness to exert considerable effort on behalf of the organization, and a definite desire to maintain organizational membership" . This definition highlights the role which commitment plays in enhancing individual performance such that more committed employees are supposed to be exerting more effort in achievement of organizational goals.

Another important way of conceptualizing commitment is through individual's attitude towards employer organization. Researchers have noted that "virtually all the research conducted on organizational commitment, per se, has used the attitudinal conceptualization." The following description of attitudinal commitment is forwarded by Mowday et al. :

Attitudinal commitment focuses on the process by which people come to think about their relationship with the organization. In many ways it can be thought of as a mind set in which individuals consider the extent to which their own values and goals are congruent with those of the organization.

Such a description suggests that strongly committed individuals will put in more work required for attainment of desired organizational outcomes as such outcomes are consistent with their personal values and goals.

Meyer and Allen noted that organizational commitment is a "mind set or psychological state (i.e., feelings and/or beliefs concerning the employee's relationship with an organization)" They conceptualized commitment through a three component framework. The three components are affective commitment, continuance commitment and normative commitment and has been described by Allen and Meyer as under:

". . . employees with strong affective commitment remain with the organization because they