Literature Review of the Impact of Human Resource Management on Organisational performance

Organisations worldwide are under pressure today to continually improve their performance. The major trends behind these competitive pressures are globalisation, advances in information technology, and increasing deregulation of global markets (Becker & Gerhart, 1996; Dany, Guedri, and Hatt, 2008). These changes have a strong impact on a country’s ability to maintain its competitiveness (Laprade, 2005). Without an efficient workforce organisations lose their ability to compete, both locally and internationally, eventually leading to poor organisational performance and thus ending up with little or no economic success (Tomaka, 2001). Unlike in the past when natural resources, technology, and capital used to be the key factors to determine the competitive advantage of the firms of one nation over the other nations, human resources today in modern times have become the most important resource for the firms to obtain strategic advantage over the other firms (Dany et al, 2008). This is because managers in both the public and private sector organisations regard the human resources of their organisation as its major source of sustaining competitive advantage by having the ‘best of the best’ Human resource systems in place for recruiting, selecting, motivating, and efficiently managing their people (Mesch, 2010).

As a result of these changes in the global economic environment business strategy, the field of human resource management is rapidly changing more than ever today (Becker & Gerhart, 1996). Furthermore, among all the organisation factors which contribute to organisational performance, the human resources are now regarded as the most fundamental factor (Mesch, 2010).

Recent researches on HRM show strong and positive relationship between HRM practices and organisational performance (Carlson, Upton, and Seaman, 2006; Collins & Smith, 2006). Therefore, it is vital for managers to have a better understanding of the role of HRM in order to create successful organisational performance.

Accordingly this chapter presents a review of the literature, relevant to this research study, on the relationship between HRM practices and organisational performance.

HRM and Organisational Performance

Human Resource Management

Armstrong (2006, p3) defines ‘Human Resource Management’ as, “a strategic and coherent approach to the management of an organization’s most valued assets the people working there whom individually and collectively contribute to the achievement of its objectives.”

Human Resource Management is, “the policies, practices and systems that influence employees’ behaviour, attitudes and performance” (De Cieri, Kramar, Noe, Hollenbeck, Gerhart, and Wright, 2008, p5).

Delery and Doty (1996) assert that the HRM best practices, once identified and implemented would always produce improved organisational performance.

Fox and McLeay (1992) found from their landmark empirical study of forty-nine companies, composed of companies mainly from the UK engineering and electronics sectors, strong supportive influence between six critical HRM practices in achieving successful above average sector performance relationship, over a 10 year period. These HRM practices are (ibid):

Recruitment and Selection,

Management Education,

Training and Development,

Performance Appraisal,

Remuneration and Rewards, and

Company-wide Career Planning.

Organisational Performance

A recent definition of ‘Organisational Performance’ is given by Antony and Bhattacharyya (2010, p43). They define ‘Organisational Performance’ as, “a measure of how well organizations are managed and the value they deliver to customers and other stakeholders”.

According to Daft (2000) ‘Organisational Performance’ is the organisation’s ability to achieve its objectives efficiently and effectively.

Organisational Performance represents the value of the organisation in terms of the total contribution made by the efficient and effective management of its human resources (Neumann & Segev, 1978).

Chien (2004) strongly posits that organisational performance is composed of five major critical components. And these are (ibid, p290):

“Motivation Models,

The Leadership,

The Organizational Culture and Environment,

The Work Design, and

The Human Resource Management Policy.”

Relationship between HRM and Organisational Performance

The traditional role of HRM in organisations was mainly to support the operations through managing people to win the employees’ organisational commitment to the goals of the organisation (McGunnigle & Jameson, 2000). In consequence, HR managers had to strictly comply with the detailed procedures of personnel administration which drove the ways in which the organisations handled their human resource activities (Huselid, Jackson, and Schuler, 1997). The key HRM activities included in this regard are: recruitment, selection, performance measurement, training and development, and administration of compensation and rewards (Dany et al, 2008). In addition to performing these HRM activities HR managers have to create value for the organisations in which they work (Huselid et al, 1997).

However, today’s HRM focuses heavily on the organisation’s successful outcomes through the integration of the various HR functions (Dany et al, 2008). Ulrich (1996, p2) strongly suggests that human resources determine an organisation’s success in overcoming major challenges facing executives today: “globalisation, value chain for business competitiveness and HR services, change, attracting and retaining intellectual capital”. Together these major challenges require that HR practices create and add value that can be measured reliably (ibid).

Today’s top performing companies pay extraordinary attention to managing effectively the HR dimensions which affect employee behaviours: “morale, motivation, attitude, commitment, etc” (Cadle & Yeates, 2008, p28). Each of these HR dimensions plays powerful part in determining organisational success (ibid).

Modern HRM global best practices include Lawler’s (1986) ‘High-Involvement Work Systems’ (HIWS), Appelbaum and Batt’s (1994) ‘High Performance Work Systems (HPWS)’, and Wood and Albanese’s (1995) ‘High Commitment Management’. Research shows that these modern HRM practices have a strong and positive influence on organisational performance (Ramsay, Scholarios, and Harley, 2000).

More and more researches strongly indicate that that there are positive links between HRM practices and organisational performance (Carlson et al, 2006; Collins & Smith, 2006). For instance, Delery (1998, p289) asserts that, “the methods used by an organization to manage its human resources can have a substantial impact on many organizationally relevant outcomes.”

Gerhart and Milkovich (1992) conducted studies to measure the impacts of compensation and rewards systems on the successful accomplishment of organisational goals and objectives. Likewise research study conducted by Terpstra and Rozell (1993) shows that five key HRM selection practices are linked to business profit. In his review of the key empirical studies on the relationship between HRM and organisational performance Ulrich (1997) writes that these studies investigated the impact of specific HR practices on specific successful organisational outcomes; for example, effective HR practices in training and compensation were related to business turnover, labour productivity, and organisational performance. Ulrich’s (1997) review summarised that the empirical studies were based on the assumption that efficient use of human resources through best HR practices would lead to successful organisational performance.

Empirical studies conducted by Huselid (1995, p635) to assess the relationship between a set of HRM practices (referred by Huselid as HPWS – High Performance Work Systems, which included: “extensive recruitment, selection, training procedures, formal information sharing, attitude assessment, and job design”) and organisational performance of “968 large companies” have shown that there is a positive relationship between HRM and successful organisational performance. The key organisational performance measures used to evaluate the high performance HRM practices in the empirical studies included: labour productivity, financial performance, and turnover (ibid).

Delaney and Huselid (1996) investigated the effects of recruitment and selection, compensation, training and development, decision making, complaints and grievance procedures, promotion practices, and the combined synergetic impact of these HRM practices in 590 for-profit and not-for-profit companies. Overall, their study concluded that these progressive of HRM practices were positively associated with firm performance.

Harel and Tzafrir (1999, p186), based on their extensive theoretical and empirical research as well as from the prior studies conducted by other researchers in the HR field, have identified six core components of “strategic and universalistic” HRM best practices that are strongly related to organisational performance. These 6 core components of HR best practices are (ibid):

“Recruitment;

Selection;

Compensation;

Employee Participation;

Internal Labor Market; and

Training.”

Likewise Becker and Huselid (1999) strongly agree with the seven high performance HRM best practices put forward by Pfeffer (1998) as having strong links to organisational performance. These 7 high performance HR best practices are (Pfeffer, 1998, cited in Huselid & Becker, 1999, p297):

“Employment Security

Selective Hiring

Teams and Decentralized Decision-making

High Pay

Extensive Training

Reduced Status Distinctions

Extensive Information Sharing.”

Each of these seven high performance HRM best practices offer options for the HR professionals to choose the appropriate ones for enhancing the organisational performance and at the same time one should remember that each of these HRM best practices form “an integrated high performance HRM system” (Huselid & Becker, 1999, p298).

Approaches to Examine HRM and Organisational Performance Relationship

There are two major fundamental approaches to study the relationship between HRM and organisational performance. These are termed as:

‘Best-Practice’ approach, and

‘Best-Fit’ approach.

‘Best-Practice’ Approach

The ‘best-practice’ approach claims that HRM practices are universalistic and thus any organisation can obtain enhanced organisational performance by adopting the HRM best practices for managing people in any organisational context (Boxall & Purcell, 2000).

‘Best-Fit’ Approach

On the other hand the ‘best-fit’ approach argues for a ‘vertical fit’ whereby the HRM systems are integrated with the corporate strategy of the organisation for obtaining improved organisational performance within a specific organisational context (Boselie, Paauwe, and Richardson, 2003).

Between these two approaches, the ‘best-practice’ approach is considered to be superior by HRM professionals and researchers for examining the impact of HRM practices on organisational performance ((Hoque, 1999, p422).

Cautions in Examining the HRM and Organisational Performance Relationship

Although there is wide support to the idea that HRM practices lead to improved organisational performance yet there are some cautions that have to be observed. Huselid (1995), states that successful organisational performance has been obtained by high-performance firms since they were able to afford expensive HRM systems and practices and this may not be affordable to most other firms.

Furthermore, leadership style could have a stronger impact over the deployment of HRM practices due to the different types of influences which the leaders can exert on their people (Becker & Huselid, 2006).

Organisational Performance in Public Sector Organisations

The power and water sector in Oman is a not-for-profit sector. As stated earlier (in chapter 1) the power and water sector in Oman is striving for reducing its operating costs. Only those not-for-profit organisations which possess human capital resources that operate with increased professionalism and more advanced multi-tasking skills through enhanced productivity (and thus ensuring and effecting control over operating costs) can accomplish their mission successfully (Mesch, 2010). Furthermore, in the times to come, the not-for-profit sector has to inevitably pursue more efficiency and with more economies of scale in order to provide cost-effective services to their stakeholders and prove organisational effectiveness (ibid).

Evaluating organisational performance in the public sector organisations is not easy and this is further compounded by the fact that measurement of organisational performance in the public sector has not been developed in the organisation theory literature (Waheed, Mansor, and Ismail, 2010). This primarily because of the following factors that are unique to public sector organisations (ibid, p330):

Lack of well-defined objectives and large number of multiple objectives;

Central administration;

Absence of “generally accepted performance indicators” for measuring organisational performance;

Diffused and largely fragmented responsibility because of the interdependency of the performance of the public sector organisations. As a result of which accountability is difficult to extract.

Evidence from their review of the limited literature available on organisational performance in the public sector organisations show that the three most common major indicators (the other not common indicators are: relevance, and efficacy) of organisational performance used in the frameworks provided by the various researchers are (ibid, pp331-336):

Efficiency,

Effectiveness, and

Innovation.

Katou and Budhwar (2006) studied 178 manufacturing organisations in Greece to investigate the relationship between the HRM systems and policies and organisational performance. Their study used the following indicators of organisational performance from their literature review (ibid, p1226) which can also be applied to service organisations as well:

“Efficiency”: usage of fewer resources to achieve organisational objectives;

“Effectiveness”: achieving the organisational objectives successfully;

“Development”: developing and building the capacity of the organisation for meeting the future challenges and opportunities;

“Satisfaction”: satisfying all the key participants – customers, stakeholders, and employees;

“Innovation”: of products and the related processes; and

“Quality”: enhanced higher quality of products (services).

Summary

This chapter reviewed the available literature relevant to this study on HRM practices that can improve organisational performance. The above review of HRM literature shows that HRM best practices is distinctly composed of recruitment and selection, training and development, compensation and rewards system, information sharing, and employee participation.

Organisational performance can be measured through the successful organisational outcomes in the form of efficiency and effectiveness, customer satisfaction, service quality, and labour productivity.