Do High Performance Work Systems Help Organisational Performance?

To what extent do you agree with the assertion, that high performance work systems offer a simple path to improved organisational performance?

Now more than ever, in today’s ever-changing, fiercely competitive business environment, there is a growing emphasis on organisations to devise innovative, new ways of gaining a competitive advantage over their rivals in the marketplace. Although conventional methods such as Michael Porter’s (1985) three generic strategies – cost leadership, differentiation, and focus – continue to form the basis of how many firms seek to achieve a competitive advantage contemporarily, an increasingly popular tactic employed by businesses is the implementation of high performance work systems (HPWSs). However, whether or not a correlation between HPWSs and enhanced organisational performance does in fact exist in reality remains open to question. Thus, by drawing upon a number of empirical studies, this essay will discuss the extent to which HPWSs offer a simple path to improved organisational performance. In order to do so in a logical manner, this essay will adopt the following structure. To begin with, this essay will clarify, for the avoidance of doubt, what HPWSs are and explain how organisational performance is measured. Only once these theoretical foundations have been laid will it discuss the relationship between HPWSs and company performance through the use of empirical studies. Ultimately, this essay will strongly agree with the assertion that HPWSs offer a simple path to improved organisational performance, based on a number of pieces of research. Firstly, Kling’s (1995) review examining the influence of three high performance work practices (HPWPs) – training, alternative pay systems, and employee involvement in decision-making – on labour productivity. Secondly, Sung and Ashton’s (2005) survey exploring the extent to which organisations adopt HPWSs; thirdly, Combs et al.’s (2006) meta-analysis; and finally, Huselid’s (1995) research highlighting the benefits of HPWSs in respect of both financial and HR-related outcomes. That is not to say, however, that this essay will neglect the counterargument, that the assertion is false. On the contrary, it too will be acknowledged in the main body, through reference to Ramsay et al.’s (2000) scepticism over how this so-called causal relationship comes to exist in the first place and Godard’s (2004) comparison between HPWSs and traditional personnel practices.

For the purposes of definitional clarity, this essay will, firstly, define high performance work systems. In this regard, it is important to acknowledge that, as is customary in scholarly literature, HPWSs is a contested concept – that is, there is no universally agreed upon definition of HPWSs. Rather, what there are is a set of competing definitions put forward by different scholars over time. For example, Belt and Giles (2009) define HPWSs as “a general approach to managing organisations that aim to stimulate more effective employee involvement and commitment in order to achieve high levels of performance. They are designed to enhance the discretionary effort employees put into their work, and to fully utilise the skills that they possess” (Belt and Giles, 2009: 3). Based on this definition alone, it is apparent that autonomy has a major role to play in the concept of HPWSs as it is through an increase in autonomy that employee empowerment is fostered, the entailment of which, hopefully for an organisation’s sake, will be improved organisational performance. Alternatively, Wei and Lau (2010) argues that HPWSs “represent a systematic and integrated approach of managing human resources toward the alignment of HR functions and the achievement of firm strategy” (Wei and Lau, 2010: 1487). More specifically, Godard (2004) deconstructs the concept further, referring to HPWSs as a ‘high-performance paradigm’. Godard’s paradigm revolves around the idea that HPWSs are constructed from both alternative working practices and high-commitment employment practices (Godard, 2004). Thus, to summarise it is clear that there are a number of different conceptualisations of HPWSs. Nonetheless, the different conceptualisations that do exist happen to share similar undertones. From these, we are able to deduce that HPWSs are, in essence, systems that incorporate groups of management practices which are designed to improve organisational performance by creating an environment in which employees are involved to a greater extent and delegated additional responsibility.

Prior to this essay’s discussion on the relationship between HPWSs and organisational performance, it is helpful to understand how the latter is measured. To that end, Guest (1997) argues that it is more practical to describe organisational performance in terms of ‘outcomes’ as the latter is more effectively able to encapsulate the wide variety of dependent variables, such as job satisfaction, that are represented in studies (Guest, 1997: 266). Henceforth, therefore, the terms performance and outcomes will be used interchangeably throughout this essay. According to Paauwe’s (2009) tripartite classification, adapted from Dyer and Reeves (1995), performance outcomes of HRM can be divided into financial outcomes, organisational outcomes, and HR-related outcomes (Paauwe, 2009: 135). Financial outcomes are monetary-related and therefore encompass, for example, an organisation’s market share, profitability, and sales (Paauwe, 2009: 135). Organisational outcomes, by contrast, refer to measures of production in an organisation. Thus, specific examples include productivity, quality and efficiency (Paauwe, 2009: 135). Finally, HR-related outcomes are centred on the employees. That is, they focus on levels of job satisfaction and commitment (Paauwe, 2009: 135). Some of these measures of organisational performance will be of particular relevance in the ensuing discussion.

One of the most prominent pieces of empirical research which corroborates the assertion that HPWSs offer a simple path to improved organisational performance derives from a study conducted by Kling (1995). The aims of the study were twofold. Firstly, it was designed to explore the impact of three particular high performance work practices (HPWPs) – training, alternative pay systems, and employee involvement in decision-making – on organisational performance as measured by labour productivity. Secondly, it was intended to look into HPWSs in which such practices were brought in at the same time. The research findings yielded striking results. More specifically, with regards to the effects of training on labour productivity, it was found that, in a study of 155 manufacturing firms in the United States, those organisations that implemented a formal training programme “experienced a 19 percent larger rise in productivity on average over the next 3 years than firms that did not introduce a training programme” (Kling, 1995: 30). Furthermore, in relation to the effects of profit sharing on productivity, a study of 112 manufacturing firms revealed that “defect and downtime rates fell 23 percent each in the first year after the approach was introduced” (Kling, 1995: 30). Meanwhile, as concerns the effects of employee involvement in decision-making on productivity, “of the 29 studies reviewed, 14 indicated that workplace participation has a positive effect on productivity, only 2 indicated negative effects, and in the remainder the effects were inconclusive” (Kling, 1995: 32). Thus, regardless of the work practices examined, the results unanimously indicate a positive correlation between HPWSs and organisational performance as measured by labour productivity. Indeed, this is confirmed by a survey of Fortune 1000 companies – a list of the 1,000 largest American companies – which found that 60 percent of those, “using at least one practice that increased the responsibility of employees in the business, reported that these practices increased productivity and 70 percent reported that they improved quality” (Kling, 1995: 29). That being said, Kling (1995) also argues that these positive effects are more widely felt when a collaborative approach to implementation is adopted, rather than when each component is put into practice individually. In other words, these positive effects are said to be “mutually reinforcing” (Kling, 1995: 30).

Similarly, Sung and Ashton’s (2005) survey further substantiates the assertion that HPWSs offer a simple path to improved organisational performance. They conducted a study of 294 firms over a five-month period in 2004 in an attempt to comprehend not only the extent to which companies apply high performance work practices (HPWPs) – that is, “a set of complementary work practices covering three broad categories: high employee involvement practices, human resource practices, and reward and commitment practices” (Sung and Ashton, 2005: 5) – but also the benefits of doing so. High employee involvement practices are those which increase the level of autonomy given to a workforce. Self-governed teams constitute merely one example of such practices in action (Sung and Ashton, 2005: 6). Human resource practices, by contrast, allude to activities that are designed to enhance employee performance in the long-term. For instance, appraisals are often carried out on a yearly basis to review how a particular individual has performed over the previous 12 months and identify areas that can be improved upon (Sung and Ashton, 2005: 6). Reward and commitment practices, meanwhile, refer to those which offer recognition to the groups or individuals who have positively contributed to the achievement of organisational outcomes. Examples of these include performance-related pay and flexible working (Sung and Ashton, 2005: 7). In total, Sung and Ashton included 35 HPWPs, incorporating each of these three broad categories, in the survey. Of those 35, it was revealed that approximately 60% of organisations adopted less than 20, with only 1.4% adopting more than 30 (Sung and Ashton, 2005: 12). This reflects particularly poorly on these firms as it is, but perhaps to an even greater extent when it is contextualised by other research findings from the study. More specifically, it was discovered that the greater the number of HPWPs employed by an organisation, the more successful it was in accomplishing a variety of organisational outcomes, such as fostering employee involvement, motivating workers, and offering career opportunities (Sung and Ashton, 2005: 13). For example, the correlation measure between a high level of HPWP adoption and fostering employee involvement was .391 (“0.1 – .29 represents a small correlation; 0.3 – .49 represents a medium correlation” (Sung and Ashton, 2005: 13)). What’s more, a high level of HPWP adoption yields a negative correlation measure of -.103 in relation to staff turnover. In practice, this means that the greater the number of HPWPs employed by an organisation, the lower the staff turnover, which can only be viewed positively in the long run with respect to organisational performance. Moreover, Sung and Ashton reaffirmed the findings of Kling (1995) in advocating that “the practices may be more effective when grouped together in ‘bundles’” (Sung and Ashton, 2005: 9), akin to the latter’s recommendation of a collaborative approach to implementation.     

A further ringing endorsement of the assertion that HPWSs offer a simple path to improved organisational performance comes from Combs et al. (2006). They carried out a meta-analysis of more than ninety studies. Based on this meta-analysis, they concluded that firms can improve their performance by .20 of a standard deviation every time they increase their utilisation of HPWPs by one standard deviation (Combs et al., 2006: 517-518). In other words, “20% of the utility available from predicting performance differences among organisations is given by HPWPs” (Combs et al., 2006: 517). Additionally, Combs et al. (2006) observed that there are, in particular, three employee oriented benefits of introducing HPWPs, each of which have knock on effects for organisational performance. Chief among them, they argue, are amelioration in the knowledge, skills and abilities (KSAs) of the workforce and a sense of empowerment is transferred to employees as their direct involvement in decision-making is increased (Combs et al., 2006: 502). They, in turn, act as a source of motivation to the labour force (Combs et al., 2006: 502). Jointly, these factors result in employees experiencing improved job satisfaction, an increase in productivity, more effective decision-making, and the organisation encountering a decrease in labour turnover, thereby ameliorating organisational performance (Combs et al., 2006: 502). They also note that “HPWPs improve the internal social structure within organisations, which facilitates communication and cooperation among employees” (Combs et al., 2006: 504). This constitutes yet another example of how organisational performance can be improved through the use of HPWPs.

Finally, based on answers to a questionnaire distributed to approximately one thousand U.S. companies, Huselid (1995) found in his research that a HPWS increase of one standard deviation triggered an increase in market value per employee of more than $18,500 (Huselid, 1995: 667). In addition, an increase of nearly $4,000 in profitability was registered after each increase in HPWS of one standard deviation was taken into account (Huselid, 1995: 667). Similarly, HPWS was found to have had a positive impact upon sales – a one standard deviation increase in it triggered growth in sales of upwards of $27,000 (Huselid, 1995: 667). Finally, staff turnover also dropped by some 7% (Huselid, 1995: 667), corroborating a similar finding in Sung and Ashton’s (2005) prior mentioned study. All in all, therefore, Huselid’s study demonstrates the extent to which HPWSs can not only be beneficial in terms of financial outcomes but also in terms of HR-related outcomes.

That is not to say, however, that the literature is entirely devoid of research questioning the impact of HPWSs on organisational performance. For example, although Ramsay et al. (2000) found that there is a link between HPWSs and outcomes, they raise doubts about how this causal relationship comes to exist in the first place, due to a lack of research in the field. Hence, they coined the term ‘black box’ in reference to this vacuum of evidence (Ramsay et al., 2000: 501). Another fundamental point of contention in relation to the effects of HPWSs was put forward by Godard (2004). Contrary to the vast majority of studies, he claims that “support for the high-performance paradigm is at best limited” (Godard, 2004: 363). Godard justifies this assertion by arguing that HPWSs yield no more positive outcomes than do traditional personnel practices, such as group work organisation and information sharing (Godard, 2004: 363). Moreover, whilst acknowledging that HPWSs may have some positive influences on performance, he notes that, in many cases, the degree of positivity claimed to ensue as a result of its adoption is in all probability overplayed to the extent that, these effects “in a great many workplaces, may not be sufficient to justify full adoption” (Godard, 2004: 363).

In conclusion, it is clear from the evidence presented throughout this essay that the assertion is true to a large extent – high performance work systems (HPWSs) do indeed offer a simple path to improved organisational performance. This is borne out by a number of empirical studies. Firstly, Kling (1995) looked into the individual effects of three high performance work practices (HPWPs) – training, alternative pay systems, and employee involvement in decision-making – on labour productivity, one of the ways in which organisational performance can be measured. The findings of the research were that there is a profoundly positive correlation between HPWSs and organisational outcomes. No matter what HPWP was under the microscope, the results remained consistent for the most part. Secondly, this essay explored Sung and Ashton’s (2005) study, in which it was revealed that the more HPWPs a company uses, the more successful it will be in accomplishing organisational outcomes. Furthermore, it was found that in order to maximise the positive effects of HPWPs, it is recommended that they are grouped together in bundles, akin to Kling’s recommendation of a collaborative approach to implementation, rather than adopted separately. Thirdly, Combs et al.’s (2006) meta-analysis found that companies can boost their performance by .20 of a standard deviation each and every time they adopt an additional HPWP. Finally, Huselid’s (1995) research demonstrated the benefits of HPWSs to both financial and HR-related outcomes. That said, this essay has also acknowledged, in the interests of balance, the counterargument that HPWSs do not necessarily offer a simple path to improved organisational performance. For example, this essay expressed Ramsay et al.’s (2000) reservations about how this so-called causal relationship comes to exist in the first place and touched upon Godard’s (2004) claim that HPWSs are no more effective than traditional personnel practices. All in all, however, it is plain to see that taken together, there are far more empirical studies evidencing a positive correlation between HPWSs and organisational performance than there are evidencing a negative correlation, from which the conclusion can be drawn that the assertion is true to a large extent – HPWSs do indeed offer a simple path to improved organisational performance.

Bibliography

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