handbook of human resource management practic

1. Michael Armstrong th edition 10 HUMAN RESOURCE MANAGEMENT PRACTICE A Handbook of

2. HUMAN RESOURCE MANAGEMENT PRACTICE A Handbook of

3. London and Philadelphia Michael Armstrong HUMAN RESOURCE MANAGEMENT PRACTICE A Handbook of 10TH EDITION

4. First published by Kogan Page Limited as A Handbook of Personnel Management Practice in 1977 Second edition 1984 Third edition 1988 Fourth edition 1991 Fifth edition 1995 Sixth edition 1996 Seventh edition published by Kogan Page Limited as A Handbook of Human Resource Management Practice in 1999 Eighth edition 2001 Ninth edition 2003 Tenth edition 2006 Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road 525 South 4th Street, #241 London N1 9JN Philadelphia, PA 19147 United Kingdom USA www.kogan-page.co.uk Michael Armstrong, 1977, 1984, 1988, 1991, 1995, 1996, 1999, 2001, 2003, 2006 The right of Michael Armstrong to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library. ISBN 0 7494 4631 5 Library of Congress Cataloging-in-Publication Data Armstrong, Michael, 1928- A handbook of human resource management practice/Michael Armstrong.10th ed. p.cm. Includes bibliographical references and index. ISBN 0-7494-4631-5 1. Personnel managementHandbooks, manuals, etc. I. Title. HF5549.17.A76 2006 658.3dc22 2005032487 Typeset by Jean Cussons Typesetting, Diss, Norfolk Printed and bound in Great Britain by Cambridge University Press

5. Contents List of figures xvii List of tables xxi About the author xxiii Preface xxv PART I MANAGING PEOPLE 1 Human resource management 3 Human resource management defined 3; Human resource system 4; Models of HRM 5; Aims of HRM 8; Policy goals of HRM 10; Characteristics of HRM 11; Reservations about HRM 15; HRM and personnel management 18; How HR impacts on organizational performance 20; HRM in context 24 2 Human capital management 29 Human capital management defined 29; Human capital management and human resource management 30; The concept of human capital 33; Human capital management: practice and strategy 36; Human capital measurement 37; Human capital reporting 47

6. 3 Role of the HR function 53 The overall role of the HR function 54; The role of HR in facilitating and managing change 54; Variations in the practice of HR 56; Organizing the HR function 57; Marketing the HR function 59; Preparing, justifying and protecting the HR budget 60; Outsourcing HR work 61; Shared HR services 63; Using management consultants 64; Evaluating the HR function 66 4 The role of the HR practitioner 71 The basic roles 71; Models of the practitioners of HR 76; Gaining support and commitment 81; Ethical considerations 84; Professionalism in HRM 85; Ambiguities in the role of HR practitioners 87; Conflict in the HR contribution 88; The competencies required by HR professionals 89 5 Role of the front-line manager 93 The basic role 93; The line manager and people management 94; The respective roles of HR and line management 95; The line managers role in implementing HR policies 97; How to improve front-line managers as people managers 98 6 International HRM 99 International HRM defined 99; Issues in international HRM 99; International organizational models 100; Convergence and divergence 101; Cultural diversity 102; Think globally and act locally 104; International HR policies 104; Managing expatriates 104 PART II HUMAN RESOURCE MANAGEMENT PROCESSES 7 Strategic HRM 113 The concept of strategy 113; Strategic HRM defined 115; Aims of strategic HRM 116; Approaches to strategic HRM 117; Implementing strategic HRM 121 8 HR strategies 123 HR strategies defined 123; Purpose 124; The distinction between strategic HRM and HR strategies 124; Types of HR strategies 124; Criteria for an effective HR strategy 129 vi Contents

7. 9 Developing and implementing HR strategies 131 Propositions about the development process 132; Levels of strategic decision-making 132; Strategic options and choices 133; Approaches to HR strategy development 134; Methodology for strategy development 140; Conducting a strategic review 141; Setting out the strategy 143; Implementing HR strategies 143 10 HRM policies 147 What human resource policies are 147; Why have HR policies 147; Do policies need to be formalized? 148; HR policy areas 148; Formulating HR policies 156; Implementing HR policies 157 11 Competency-based HRM 159 Types of competencies 160; Competency frameworks 161; Reasons for using competencies 163; Coverage of competencies 164; Use of competencies 165; Developing a competency framework 167; Defining technical competencies 169; Keys to success in using competencies 169; Emotional intelligence 170 12 Knowledge management 173 Knowledge management defined 174; The concept of knowledge 175; The purpose and significance of knowledge management 176; Approaches to knowledge management 176; Knowledge management systems 178; Knowledge management issues 178; The contribution of HR to knowledge management 180 13 Analysing roles, competencies and skills 181 Role analysis 187; Competency analysis 193; Skills analysis 198 PART III WORK AND EMPLOYMENT 14 The nature of work 205 What is work? 205; Theories about work 206; Organizational factors affecting work 208; Changing patterns of work 210; Unemployment 212; Attitudes to work 212; Job-related well-being 212 Contents vii

8. 15 The employment relationship 215 The employment relationship defined 215; Nature of the employment relationship 215; Basis of the employment relationship 217; Defining the employment relationship 217; Significance of the employment relationship concept 218; Changes in the employment relationship 218; Managing the employment relationship 218; Trust and the employment relationship 220 16 The psychological contract 225 The psychological contract defined 225; The significance of the psychological contract 227; The nature of the psychological contract 228; How psychological contracts develop 229; The changing nature of the psychological contract 231; The state of the psychological contract 233; Developing and maintaining a positive psychological contract 234; The state of the psychological contract 2004 235 PART IV ORGANIZATIONAL BEHAVIOUR 17 Characteristics of people 239 Individual differences 239; Attitudes 244; Influences on behaviour at work 244; Attribution theory how we make judgements about people 245; Orientation to work 246; Roles 247; Implications for HR specialists 248 18 Motivation 251 The process of motivation 252; Types of motivation 253; Motivation theory 254; Instrumentality theory 254; Content (needs) theory 255; Process theory 258; Herzbergs two-factor model 262; The relationship between motivation, job satisfaction and money 263; Job satisfaction 264; Motivation and money 267; Motivation strategies 268 19 Organizational commitment and engagement 271 The concepts of commitment and engagement 271; Organizational commitment 273; Influences on commitment and employee satisfaction 279; Engagement 281 viii Contents

9. 20 How organizations function 283 Basic considerations 283; Organization theories 283; Organization structure 288; Types of organization 289; Organizational processes 292 21 Organizational culture 303 Definitions 303; The significance of culture 305; How organizational culture develops 306; The diversity of culture 306; The components of culture 307; Classifying organizational culture 309; Assessing organizational culture 311; Measuring organizational climate 312; Appropriate cultures 313; Supporting and changing cultures 314 PART V ORGANIZATION, DESIGN AND DEVELOPMENT 22 Organization design 319 The process of organizing 319; Aim 320; Conducting organization reviews 321; Organization analysis 321; Organization diagnosis 322; Organization planning 324; Responsibility for organization design 325 23 Job design and role development 327 Jobs and roles 327; Factors affecting job design 328; Job design 330; Job enrichment 332; Self-managing teams 333; High-performance work design 334; Role development 334 24 Organizational development, change and transformation 337 What is organizational development? 337; Organization development 338; Change management 343; Organizational transformation 352; Development and change processes 355 PART VI PEOPLE RESOURCING People resourcing defined 359; People resourcing and HRM 359; Plan 361 25 Human resource planning 363 The role of human resource planning 363; Aims of human resource planning 368; The process of human resource planning 368; Resourcing strategy 371; Scenario planning 372; Estimating future human resource requirements 373; Labour turnover 375; Action planning 382; The contribution of HR to human resource planning 388 Contents ix

10. 26 Talent management 389 Talent management defined 390; The elements of talent management 390; Creating a great place to work 394; Attraction strategies 395; Retention strategies 397; Career management 399; Talent management for knowledge workers 407; Talent management in practice 407 27 Recruitment and selection 409 The recruitment and selection process 409; Defining requirements 409; Attracting candidates 414; Advertising 416; E-recruitment 420; Outsourcing recruitment 423; Educational and training establishments 424; Application forms 425; Sifting applications 425; Selection methods 429; Types of interviews 430; Assessment centres 430; Graphology 431; Choice of selection methods 432; Improving the effectiveness of recruitment and selection 432; References, qualifications and offers 434; Final stages 436 28 Selection interviewing 439 Purpose 439; Advantages and disadvantages of interviews 440; The nature of an interview 441; Interviewing arrangements 442; Preparation 443; Timing 444; Planning and structuring interviews 444; Interviewing approaches 445; Interview techniques starting and finishing 450; Interviewing techniques asking questions 450; Selection interviewing skills 457; Coming to a conclusion 458; Dos and donts of selection interviewing 459 29 Selection tests 461 Psychological tests: definition 461; Purpose of psychological tests 461; Characteristics of a good test 462; Types of test 463; Interpreting test results 467; Choosing tests 468; The use of tests in a selection procedure 468 30 Introduction to the organization 471 Induction defined 471; Why taking care about induction is important 472; Reception 473; Documentation 474; Company induction initial briefing 475; Introduction to the workplace 475; Formal induction courses 476; On-the-job induction training 477 x Contents

11. 31 Release from the organization 479 General considerations 479; Redundancy 482; Outplacement 485; Dismissal 487; Voluntary leavers 490; Retirement 490 PART VII PERFORMANCE MANAGEMENT 32 The basis of performance management 495 Performance management defined 495; Aims of performance management 496; Characteristics of performance management 496; Understanding performance management 497; Guiding principles of performance management 499; Performance appraisal and performance management 500; Views on performance management 500 33 The process of performance management 503 Performance management as a process 503; Performance management as a cycle 503; Performance agreements 504; Managing performance throughout the year 508; Reviewing performance 509; Rating performance 512; Dealing with under-performers 515; Introducing performance management 517 34 360-degree feedback 521 360-degree feedback defined 521; Use of 360-degree feedback 522; Rationale for 360-degree feedback 523; 360-degree feedback methodology 524; Development and implementation 526; 360-degree feedback advantages and disadvantages 527; 360-degree feedback criteria for success 528 PART VIII HUMAN RESOURCE DEVELOPMENT 35 Strategic human resource development 533 Strategic HRD defined 533; Strategic HRD aims 534; Components of HRD 534; HRD and HRM 535; The process of learning and development 535; Strategies for HRD 536; Human resource development philosophy 537 36 Organizational learning and the learning organization 539 Organizational learning 540; The learning organization 543 Contents xi

12. 37 How people learn 549 Learning defined 549; The learning process 550; Learning theory 550; Learning styles 552; Learning to learn 554; The learning curve 554; The motivation to learn 555; The implications of learning theory and concepts 556 38 Learning and development 559 Learning 559; Development 570; Training 575 39 E-learning 583 What is e-learning? 583; Aim of e-learning 584; The technology of e-learning 584; The e-learning process 585; The business case for e-learning 586; Developing e-learning processes 588 40 Management development 591 Aims of management development 592; Management development: needs and priorities 592; The requirements, nature and elements of management development 593; Management development activities 594; Approaches to management development 596; Emotional intelligence and leadership qualities 602; Responsibility for management development 603 41 Formulating and implementing learning and development strategies 607 Making the business case 607; Developing a learning culture 609; Identifying learning needs 610; Planning and implementing learning and development programmes 612; Evaluation of learning 615 PART IX REWARDING PEOPLE 42 Reward management 623 Reward management defined 623; The aims of reward management 624; The philosophy of reward management 624; The elements of reward management 625; Total reward 629; Reward management for directors and executives 634; Reward management for sales staff 636; Paying manual workers 636 xii Contents

13. 43 Strategic reward 643 Reward strategy defined 643; Why have a reward strategy? 644; The structure of reward strategy 644; The content of reward strategy 645; Guiding principles 649; Developing reward strategy 649; Components of an effective reward strategy 651; Reward strategy priorities 652; Examples of reward strategies 653; Implementing reward strategy 656; Reward strategy and line management capability 657 44 Job evaluation 659 Job evaluation defined 660; Analytical job evaluation 660; Non-analytical job evaluation 664; The incidence of job evaluation 666; Computer- assisted job evaluation 667; Criteria for choice 668; The case for and against job evaluation 671; Designing a point-factor job evaluation scheme 672; Conclusions 679 45 Market rate analysis 681 Purpose 681; The concept of the market rate 681; The information required 682; Job matching 682; Presentation of data 683; Sources of information 683 46 Grade and pay structures 689 Grade structure defined 689; Pay structure defined 690; Guiding principles for grade and pay structures 690; Types of grade and pay structure 691; Designing grade and pay structures 698 47 Contingent pay 707 Contingent pay defined 708; The incidence of contingent pay 708; The nature of individual contingent pay 709; Individual contingent pay as a motivator 709; Arguments for and against individual contingent pay 710; Alternatives to individual contingent pay 712; Criteria for success 713; Performance-related pay 713; Competence-related pay 714; Contribution-related pay 716; Skill-based pay 718; Service-related pay 720; Choice of approach 721; Readiness for individual contingent pay 721; Developing and implementing individual contingent pay 724; Team-based pay 724; Organization-wide schemes 725 Contents xiii

14. 48 Employee benefits, pensions and allowances 729 Employee benefits 729; Occupational pension schemes 731; Allowances and other payments to employees 734 49 Managing reward systems 737 Reward budgets and forecasts 737; Evaluating the reward system 739; Conducting pay reviews 740; Control 744; Reward procedures 745; Responsibility for reward 746; Communicating to employees 748 PART X EMPLOYEE RELATIONS Employee relations defined 751; Plan 752 50 The framework of employee relations 753 The elements of employee relations 754; Industrial relations as a system of rules 754; Types of regulations and rules 755; Collective bargaining 756; The unitary and pluralist views 758; The reconciliation of interests 759; Individualism and collectivism 759; Voluntarism and its decline 759; The HRM approach to employee relations 761; The context of industrial relations 762; Developments in industrial relations 763; The parties to industrial relations 766; Role of the HR function in employee relations 771 51 Employee relations processes 773 Employee relations policies 774; Employee relations strategies 778; Employee relations climate 779; Union recognition and de-recognition 781; Collective bargaining arrangements 783; Informal employee relations processes 788; Other features of the industrial relations scene 789; Managing with trade unions 791; Managing without trade unions 792 52 Negotiating and bargaining 795 The nature of negotiating and bargaining 795; Negotiating 796; Negotiating and bargaining skills 803 xiv Contents

15. 53 Employee voice 807 The concept of employee voice 807; Involvement and participation 808; Purposes of employee voice 808; The framework for employee voice 808; Expression of employee voice 809; Factors affecting choice 810; Forms of employee voice 810; Joint consultation 811; Attitude surveys 812; Suggestion schemes 814; Planning for voice 815 54 Communications 817 Communication areas and objectives 819; Communications strategy 819; Communication systems 821 PART XI HEALTH, SAFETY AND WELFARE 55 Health and safety 829 Managing health and safety at work 830; The importance of health and safety in the workplace 830; Benefits of workplace health and safety 831; Health and safety policies 832; Conducting risk assessments 833; Health and safety audits 836; Safety inspections 838; Occupational health programmes 838; Managing stress 839; Accident prevention 841; Measuring health and safety performance 841; Communicating the need for better health and safety practices 842; Health and safety training 843; Organizing health and safety 843 56 Welfare services 845 Why provide welfare services? 845; What sort of welfare services? 847; Individual services 848; Group welfare services 851; Provision of employee welfare services 851; Internal counselling services 852; Employee assistance programmes 852 PART XII EMPLOYMENT AND HRM SERVICES 57 Employment practices 857 Terms and conditions and contracts of employment 858; Mobility clauses 860; Transfer practices 860; Promotion practices 861; Flexible working 862; Attendance management 863; Equal opportunity 866; Ethnic monitoring 867; Managing diversity 868; The Data Protection Act 869; Sexual harassment 870; Smoking 872; Substance abuse at work 873; Bullying 873; AIDS 874; E-mails 874; Work-life balance 875 Contents xv

16. 58 HRM procedures 879 Grievance procedure 880; Disciplinary procedure 881; Capability procedure 883; Redundancy procedure 885 59 Computerized human resource information systems 889 Benefits of a computerized human resource information system 890; HR information strategy 890; The functions of a computerized HR system 891; The technical infrastructure 892; Rating of system features 892; An effective system 893; Problems and how to deal with them 894; Developing a computerized HR information system 895; Applications 899; Auditing the system 906 Appendix: Example of an attitude survey 907 References 911 Subject index 953 Author index 977 xvi Contents

17. List of figures 0.1 Route map xxvi 0.2 Relationship between aspects of people management 2 1.1 HRM activities 5 1.2 The Human Resource Cycle 6 1.3 The Harvard Framework for Human Resource Management 7 1.4 Model of the link between HRM and performance 23 2.1 The Sears Roebuck Model: Employee-Customer-Profit chain 41 2.2 The balanced scorecard 43 2.3 The EFQM model 44 2.4 Human capital external reporting framework 49 2.5 Human capital reporting dashboard for area managers: Nationwide 51 4.1 Types of personnel management 78 4.2 The changing role of the HR practitioner 79 9.1 Strategic review sequence 142 13.1 Example of a role profile 192 15.1 Dimensions of the employment relationship 216 16.1 A model of the psychological contract 230 18.1 The process of motivation 253 18.2 Motivation model 260 20.1 Channels of communication within groups 294 25.1 The process of human resource planning 370

18. 25.2 A survival curve 378 26.1 The elements of talent management 391 26.2 Career progression curves 401 26.3 The process of career management 401 26.4 Management succession schedule 404 26.5 Competence band career progression system 405 26.6 Career paths in a career family structure 406 26.7 Talent acquisition and development at Centrica 408 27.1 Person specification for an HR officer 412 27.2 Example of an application form (compressed) 426 27.3 Accuracy of some methods of selection 433 28.1 Part of a critical-incident interview for sales people 448 28.2 Behavioural-based interview set 449 29.1 A normal curve 467 33.1 The performance management cycle 504 34.1 360-degree feedback model 522 34.2 360-degree feedback profile 525 35.1 Components of human resource development 534 36.1 Single- and double-loop learning 541 36.2 Managing learning to add value; the learning cycle 542 37.1 The Kolb learning cycle 552 37.2 A standard learning curve 555 37.3 Different rates of learning 555 37.4 A stepped learning curve 556 38.1 Stages in preparing and implementing a personal development plan 572 38.2 Impact of development 575 38.3 Systematic training model 577 39.1 A blended learning programme 587 41.1 Learning needs analysis areas and methods 611 41.2 A learning specification 613 42.1 Reward management: elements and interrelationships 630 42.2 The components of total reward 631 42.3 Model of total reward 633 43.1 A reward gap analysis 646 43.2 Reward philosophy and guiding principles at B&Q 650 43.3 A model of the reward strategy development process 651 43.4 Reward strategy priorities 652 43.5 The Norwich Union Insurance Progression, Performance & Pay 654 framework xviii List of figures

19. 43.6 Integrated reward model Kwik-fit 655 44.1 A paired comparison 665 44.2 A typical job evaluation programme 675 44.3 Design sequence 676 46.1 A narrow, multi-graded structure 692 46.2 A broad-graded structure 693 46.3 Narrow and broad-banded structures 694 46.4 A broad-banded structure with zones 694 46.5 A job family structure 694 46.6 A career family structure 696 46.7 A pay spine 697 46.8 Type of grade and pay structure 701 46.9 Flow chart: design of a new grade and pay structure 705 47.1 Incidence of contingent pay schemes 708 47.2 Line of sight model 713 47.3 Performance-related pay 713 47.4 Competence-related pay 714 47.5 Contribution pay model (1) 716 47.6 Contribution pay model (2) 716 47.7 Contribution-related pay 717 47.8 Contribution-related pay model (Shaw Trust) 718 50.1 Employee relations: reconciliation of interests 760 52.1 Negotiating range within a settlement range 799 52.2 Negotiating range with a negotiating gap 800 52.3 Stages of a negotiation 801 53.1 A framework for employee voice 809 List of figures xix

20. List of tables 1.1 Similarities and differences between HRM and personnel management 19 1.2 Outcomes of research on the link between HR and organizational performance 21 4.1 Competency framework for HR professionals 90 4.2 Key competency areas 91 9.1 Linking HR and competitive strategies 136 9.2 HRM best practices 137 11.1 Incidence of different competency headings 162 14.1 Feelings at work 213 16.1 Job satisfaction 235 18.1 Summary of motivation theories 256 18.2 Motivation strategies 269 19.1 The Hay Group model of engaged performance 282 25.1 Survival rate analysis 378 25.2 Leavers by length of service 380 32.1 Performance appraisal compared with performance management 501 37.1 The implications of learning theory and concepts 557 38.1 Characteristics of formal and informal learning 565 41.1 Use of learning activities 615 41.2 Use of evaluation tools 619

21. 42.1 Economic theories explaining pay levels 626 42.2 Summary of payment and incentive arrangements for sales staff 637 42.3 Comparison of shopfloor payment-by-result schemes 639 43.1 Examples of reward strategies and their derivation 656 44.1 Comparison of approaches to job evaluation 669 45.1 Summary of sources of market data 686 46.1 Summary analysis of different grade and pay structures 699 47.1 Comparison of individual contingent pay schemes 722 50.1 Contrasting dimensions of industrial relations and HRM 761 54.1 Communication areas and objectives 820 59.1 Computer system problems and solutions 894 xxii List of tables

22. About the author Michael Armstrong is an honours graduate in economics from the London School of Economics, a Companion of the Chartered Institute of Personnel and Development and a Fellow of the Institute of Management Consultancy. This book is largely based on Michael Armstrongs hands-on experience as a personnel practitioner, initially in the engineering industry, specializing in industrial relations, and then in the engineering and food industries as an employee development specialist. For 12 years he was an executive director with responsibility for HR in a large publishing firm and for three years of that period also acted as general manager for an operating division. For a further 10 years he headed up the HR consultancy division of Coopers & Lybrand. He is Managing Partner of e-reward.uk and also practises as an independent consultant. This experience has been supplemented recently by a number of research projects carried out on behalf of the Chartered Institute of Personnel and Development. These covered the personnel functions contribution to the bottom line, strategic HRM, incentive pay, job evaluation, team rewards, broad- banded pay structures, and performance management. He was Chief Examiner Employee Reward for the CIPD from 19972001. His publications for Kogan Page include Reward Management, Performance Manage- ment, How to Be an Even Better Manager, A Handbook of Management Techniques and A Handbook of Employee Reward, Management and Leadership.

23. Preface This tenth edition of A Handbook of Human Resource Management Practice contains many additions and revisions. It refers to major developments in HR practice in the last two to three years such as the development of the theory and practice of human capital management, talent management and approaches to learning and development, all covered in new or substantially revised chapters. Reference is also made to a number of significant research projects including those conducted by the CIPD, IES and e-reward. Chapters on the following subjects have been either wholly replaced or extensively revised in the light of new concepts of good practice, the experience of the author as a practitioner and the outcomes of research: human resource management; role of the HR function; role of the HR practitioner; strategic human resource management; competency-based HRM; the delivery of learning and training; performance management; reward management fundamentals; grade and pay structures. The plan of the handbook is illustrated in the route map shown in Figure 0.1.

24. xxvi Preface 3 Role of HR function 4 Role of HR practitioner 5 Role of line manager II HRM processes 7 Strategic HRM 8 HR strategies 9 Developing HR strategies 10 HRM policies 11 Competency-based HRM 12 Knowledge management 13 Analysing roles, competencies and skills V Organization 22 Organization design 23 Job and role design 24 Organization development VI People resourcing 25 Human resource planning 26 Talent management 27 Recruitment and selection 28 Selection tests 29 Introduction to the organization 30 Release from the organization VII Performance management 32 Basis of performance management 33 Performance management processes 34 360-degree feedback VIII Human resource development 35 Strategic HRD 36 Organizational learning 37 How people learn 38 Learning and development 39 E-learning 40 Management development 41 Learning and development strategies IX Rewarding people 42 Reward management 43 Strategic reward 44 Job evaluation 45 Market rate analysis 46 Grade and pay structures 47 Contingent pay 48 Employee benefits 49 Managing reward systems X Employee relations 50 Framework of employee relations 51 Employee relations processes 52 Negotiating and bargaining 53 Employee voice 54 Communications XI Health, safety and welfare 55 Health and safety 56 Welfare services XII Employment and HRM services 57 Employment practices 58 HRM procedures 59 Computerised HR information systems Factors affecting HRM strategy policy and practice III Work and employment 14 The nature of work 15 The employment relationship 16 The psychological contract IV Organizational behaviour 17 Characteristics of people 18 Motivation 19 Commitment and engagement 20 How organizations function 21 Organizational culture I People management 1 Human resource management 2 Human capital management HRM strategy, policy and practice 6 International HRM Figure 0.1 Route map

25. Managing people This part underpins the rest of the Handbook. It deals with the approaches and philosophies that affect how people are managed in organizations, the roles of the HR function and its members, and the special considerations that affect international people management. The term people management embraces the two related concepts of human resource management (HRM) and human capital management (HCM), which are defined and explained in the first two chapters. These have virtually replaced the term personnel management, although the philosophies and practices of personnel management still provide the foundations for the philosophy and practices of HRM and HCM. The relationships between these aspects of people management are modelled in Figure 0.2. Part I

26. 2 Managing people People management The policies and practices which govern how people are managed and developed in organizations. Human resource management A strategic and coherent approach to the management of an organizations most valued assets the people working there who individually and collectively contribute to the achievement of its objectives. Human capital management An approach to obtaining, analysing and reporting on data which informs the direction of value-adding people management strategic investment and operational decisions at corporate level and at the level of front line management. Personnel management Personnel management is concerned with obtaining, organizing and motivating the human resources required by the enterprise. (Armstrong, 1977) Figure 0.2 Relationship between aspects of people management

27. Human resource management The terms human resource management (HRM) and human resources (HR) have largely replaced the term personnel management as a description of the processes involved in managing people in organizations. The concept of HRM underpins all the activities described in this book, and the aim of this chapter is to provide a framework for what follows by defining the concepts of HRM and an HR system, describing the various models of HRM and discussing its aims and characteristics. The chapter continues with a review of reservations about HRM and the relationship between HRM and personnel management and concludes with a discussion of the impact HRM can make on organizational performance. HUMAN RESOURCE MANAGEMENT DEFINED Human resource management is defined as a strategic and coherent approach to the management of an organizations most valued assets the people working there who individually and collectively contribute to the achievement of its objectives. Storey (1989) believes that HRM can be regarded as a set of interrelated policies with an ideological and philosophical underpinning. He suggests four aspects that constitute the meaningful version of HRM: 1

28. 1. a particular constellation of beliefs and assumptions; 2. a strategic thrust informing decisions about people management; 3. the central involvement of line managers; and 4. reliance upon a set of levers to shape the employment relationship. HUMAN RESOURCE SYSTEM Human resource management operates through human resource systems that bring together in a coherent way: HR philosophies describing the overarching values and guiding principles adopted in managing people. HR strategies defining the direction in which HRM intends to go. HR policies, which are the guidelines defining how these values, principles and the strategies should be applied and implemented in specific areas of HRM. HR processes consisting of the formal procedures and methods used to put HR strategic plans and policies into effect. HR practices comprising the informal approaches used in managing people. HR programmes, which enable HR strategies, policies and practices to be implemented according to plan. Becker and Gerhart (1996) have classified these components into three levels: the system architecture (guiding principles), policy alternatives and processes and practices. See Figure 1.1. MODELS OF HRM The matching model of HRM One of the first explicit statements of the HRM concept was made by the Michigan School (Fombrun et al, 1984). They held that HR systems and the organization structure should be managed in a way that is congruent with organizational strategy (hence the name matching model). They further explained that there is a human resource cycle (an adaptation of which is illustrated in Figure 1.2), which consists of four generic processes or functions that are performed in all organizations. These are: 1. selection matching available human resources to jobs; 4 Managing people

29. 2. appraisal performance management; 3. rewards the reward system is one of the most under-utilized and mishandled managerial tools for driving organizational performance; it must reward short as well as long-term achievements, bearing in mind that business must perform in the present to succeed in the future; 4. development developing high quality employees. Human resource management 5 Organization Resourcing Human resource planning Recruitment and selection Talent management HR services HR development Reward management Employee relations Design Organizational learning Job evaluation/ Market surveys Industrial relations Development Individual learning Grade and pay structures Employee voice Job/role design Management development Contingent pay Communications Performance management Employee benefits Health/safety and welfare Knowledge management Human capital management HUMAN RESOURCE MANAGEMENT Figure 1.1 HRM activities

30. The Harvard framework The other founding fathers of HRM were the Harvard School of Beer et al (1984) who developed what Boxall (1992) calls the Harvard framework. This framework is based on the belief that the problems of historical personnel management can only be solved: when general managers develop a viewpoint of how they wish to see employees involved in and developed by the enterprise, and of what HRM policies and practices may achieve those goals. Without either a central philosophy or a strategic vision which can be provided only by general managers HRM is likely to remain a set of independent activities, each guided by its own practice tradition. Beer and his colleagues believed that Today, many pressures are demanding a broader, more comprehensive and more strategic perspective with regard to the organizations human resources. These pressures have created a need for: A longer-term perspective in managing people and consideration of people as potential assets rather than merely a variable cost. They were the first to underline the HRM tenet that it belongs to line managers. They also stated that: Human resource management involves all management decisions and action that affect the nature of the relationship between the organization and its employees its human resources. 6 Managing people Selection Performance management Performance Rewards Development Figure 1.2 The Human Resource Cycle (adapted from Fombrun et al, 1984)

31. The Harvard school suggested that HRM had two characteristic features: 1) line managers accept more responsibility for ensuring the alignment of competitive strategy and personnel policies; 2) personnel has the mission of setting policies that govern how personnel activities are developed and implemented in ways that make them more mutually reinforcing. The Harvard framework as modelled by Beer et al is shown in Figure 1.3. According to Boxall (1992) the advantages of this model are that it: incorporates recognition of a range of stakeholder interests; recognizes the importance of trade-offs, either explicitly or implicitly, between the interests of owners and those of employees as well as between various interest groups; widens the context of HRM to include employee influence, the organization of work and the associated question of supervisory style; Human resource management 7 Stakeholder interests: shareholders management employees government unions Situational factors: work force characteristics business strategy and conditions management philosophy labour market unions task technology laws and social values HR outcomes: commitment congruence cost effectiveness Long-term consequences individual well- being organizational effectiveness societal well- being HRM policy choices: employee influence human resource flow reward systems work systems Figure 1.3 The Harvard Framework for Human Resource Management (Source: Beer et al, 1984)

32. acknowledges a broad range of contextual influences on managements choice of strategy, suggesting a meshing of both product-market and socio-cultural logics; emphasizes strategic choice it is not driven by situational or environmental determinism. The Harvard model has exerted considerable influence over the theory and practice of HRM, particularly in its emphasis on the fact that HRM is the concern of management in general rather than the personnel function in particular. AIMS OF HRM The overall purpose of human resource management is to ensure that the organization is able to achieve success through people. As Ulrich and Lake (1990) remark: HRM systems can be the source of organizational capabilities that allow firms to learn and capitalize on new opportunities. Specifically, HRM is concerned with achieving objectives in the areas summarized below. Organizational effectiveness Distinctive human resource practices shape the core competencies that determine how firms compete (Cappelli and Crocker-Hefter, 1996). Extensive research has shown that such practices can make a significant impact on firm performance. HRM strategies aim to support programmes for improving organizational effectiveness by developing policies in such areas as knowledge management, talent management and generally creating a great place to work. This is the big idea as described by Purcell et al (2003), which consists of a clear vision and a set of integrated values. More specifically, HR strategies can be concerned with the development of continuous improvement and customer relations policies. Human capital management The human capital of an organization consists of the people who work there and on whom the success of the business depends. Human capital has been defined by Bontis et al (1999) as follows: Human capital represents the human factor in the organization; the combined intelligence, skills and expertise that give the organization its distinctive character. The human elements of the organization are those that are capable of learning, changing, innovating and providing the creative thrust which if properly motivated can ensure the long-term survival of the organization. 8 Managing people

33. Human capital can be regarded as the prime asset of an organization and businesses need to invest in that asset to ensure their survival and growth. HRM aims to ensure that the organization obtains and retains the skilled, committed and well-motivated workforce it needs. This means taking steps to assess and satisfy future people needs and to enhance and develop the inherent capacities of people their contributions, potential and employability by providing learning and continuous development opportunities. It involves the operation of rigorous recruitment and selection procedures, performance-contingent incentive compensation systems, and management development and training activities linked to the needs of the business (Becker et al, 1997). It also means engaging in talent management the process of acquiring and nurturing talent, wherever it is and wherever it is needed, by using a number of inter- dependent HRM policies and practices in the fields of resourcing, learning and development, performance management and succession planning. The process of human capital management (HCM) as described in the next chapter is closely associated with human resource management. However, the focus of HCM is more on the use of metrics (measurements of HR and people performance) as a means of providing guidance on people management strategy and practice. Knowledge management Knowledge management is any process or practice of creating, acquiring, capturing, sharing and using knowledge, wherever it resides, to enhance learning and performance in organizations (Scarborough et al, 1999). HRM aims to support the development of firm-specific knowledge and skills that are the result of organizational learning processes. Reward management HRM aims to enhance motivation, job engagement and commitment by introducing policies and processes that ensure that people are valued and rewarded for what they do and achieve and for the levels of skill and competence they reach. Employee relations The aim is to create a climate in which productive and harmonious relationships can be maintained through partnerships between management and employees and their trade unions. Human resource management 9

34. Meeting diverse needs HRM aims to develop and implement policies that balance and adapt to the needs of its stakeholders and provide for the management of a diverse workforce, taking into account individual and group differences in employment, personal needs, work style and aspirations and the provision of equal opportunities for all. Bridging the gap between rhetoric and reality The research conducted by Gratton et al (1999) found that there was generally a wide gap between the sort of rhetoric expressed above and reality. Managements may start with good intentions to do some or all of these things but the realization of them theory in use is often very difficult. This arises because of contextual and process problems: other business priorities, short-termism, limited support from line managers, an inadequate infrastructure of supporting processes, lack of resources, resistance to change and lack of trust. An overarching aim of HRM is to bridge this gap by making every attempt to ensure that aspirations are translated into sustained and effective action. To do this, members of the HR function have to remember that it is relatively easy to come up with new and innovatory policies and practice. The challenge is to get them to work. They must appreciate, in the phrase used by Purcell et al (2003) that it is the front line managers who bring HR policies to life, and act accordingly. POLICY GOALS OF HRM The models of HRM, the aims set out above and other definitions of HRM have been distilled by Caldwell (2004) into 12 policy goals: 1. Managing people as assets that are fundamental to the competitive advantage of the organization. 2. Aligning HRM policies with business policies and corporate strategy. 3. Developing a close fit of HR policies, procedures and systems with one another. 4. Creating a flatter and more flexible organization capable of responding more quickly to change. 5. Encouraging team working and co-operation across internal organizational boundaries. 6. Creating a strong customer-first philosophy throughout the organization. 7. Empowering employees to manage their own self-development and learning. 10 Managing people

35. 8. Developing reward strategies designed to support a performance-driven culture. 9. Improving employee involvement through better internal communication. 10. Building greater employee commitment to the organization. 11. Increasing line management responsibility for HR policies. 12. Developing the facilitating role of managers as enablers. CHARACTERISTICS OF HRM The characteristics of the HRM concept as they emerged from the writings of the pioneers and later commentators are that it is: diverse; strategic with an emphasis on integration; commitment-oriented; based on the belief that people should be treated as assets (human capital); unitarist rather than pluralist, individualistic rather than collective in its approach to employee relations; a management-driven activity the delivery of HRM is a line management responsibility; focused on business values. The diversity of HRM But these characteristics of HRM are by no means universal. There are many models, and practices within different organizations are diverse, often only corresponding to the conceptual version of HRM in a few respects. Hendry and Pettigrew (1990) play down the prescriptive element of the HRM model and extend the analytical elements. As pointed out by Boxall (1992), such an approach rightly avoids labelling HRM as a single form and advances more slowly by proceeding more analytically. It is argued by Hendry and Pettigrew that better descriptions of structures and strategy-making in complex organizations, and of frameworks for understanding them, are an essential underpinning for HRM. A distinction was made by Storey (1989) between the hard and soft versions of HRM. The hard version of HRM emphasizes that people are important resources through which organizations achieve competitive advantage. These resources have therefore to be acquired, developed and deployed in ways that will benefit the organization. The focus is on the quantitative, calculative and business-strategic aspects of Human resource management 11

36. managing human resources in as rational a way as for any other economic factor. As Guest (1999a) comments: The drive to adopt HRM is... based on the business case of a need to respond to an external threat from increasing competition. It is a philosophy that appeals to managements who are striving to increase competitive advantage and appreciate that to do this they must invest in human resources as well as new technology. He also commented that HRM reflects a long-standing capitalist tradition in which the worker is regarded as a commodity. The emphasis is therefore on the interests of management, integration with business strategy, obtaining added value from people by the processes of human resource development and performance management and the need for a strong corporate culture expressed in mission and value statements and reinforced by communications, training and performance management processes. The soft version of HRM traces its roots to the human-relations school; it emphasizes communication, motivation and leadership. As described by Storey (1989) it involves treating employees as valued assets, a source of competitive advantage through their commitment, adaptability and high quality (of skills, performance and so on). It therefore views employees, in the words of Guest (1999a), as means rather than objects, but it does not go as far as following Kants advice: Treat people as ends unto themselves rather than as means to an end. The soft approach to HRM stresses the need to gain the commitment the hearts and minds of employees through involvement, communications and other methods of developing a high-commitment, high-trust organization. Attention is also drawn to the key role of organizational culture. In 1998, Legge defined the hard model of HRM as a process emphasizing the close integration of human resource policies with business strategy which regards employees as a resource to be managed in the same rational way as any other resource being exploited for maximum return. In contrast, the soft version of HRM sees employees as valued assets and as a source of competitive advantage through their commitment, adaptability and high level of skills and performance. It has, however, been observed by Truss (1999) that even if the rhetoric of HRM is soft, the reality is often hard, with the interests of the organization prevailing over those of the individual. And research carried out by Gratton et al (1999) found that in the eight organizations they studied, a mixture of hard and soft HRM approaches was identified. This suggested to the researchers that the distinction between hard and soft HRM was not as precise as some commentators have implied. 12 Managing people

37. The strategic nature of HRM Perhaps the most significant feature of HRM is the importance attached to strategic integration, which flows from top managements vision and leadership, and which requires the full commitment of people to it. Guest (1987, 1989a, 1989b, 1991) believes that this is a key policy goal for HRM, which is concerned with the ability of the organization to integrate HRM issues into its strategic plans, to ensure that the various aspects of HRM cohere, and to encourage line managers to incorporate an HRM perspective into their decision-making. Legge (1989) considers that one of the common themes of the typical definitions of HRM is that human resource policies should be integrated with strategic business planning. Sisson (1990) suggests that a feature increasingly associated with HRM is a stress on the integration of HR policies both with one another and with business planning more generally. Storey (1989) suggests that: The concept locates HRM policy formulation firmly at the strategic level and insists that a characteristic of HRM is its internally coherent approach. The commitment-oriented nature of HRM The importance of commitment and mutuality was emphasized by Walton (1985a) as follows: The new HRM model is composed of policies that promote mutuality mutual goals, mutual influence, mutual respect, mutual rewards, and mutual responsibility. The theory is that policies of mutuality will elicit commitment, which in turn will yield both better economic performance and greater human development. Guest (1987) wrote that one of the HRM policy goals was the achievement of high commitment behavioural commitment to pursue agreed goals, and attitudinal commitment reflected in a strong identification with the enterprise. It was noted by Legge (1995) that human resources may be tapped most effectively by mutually consistent policies that promote commitment and which, as a conse- quence, foster a willingness in employees to act flexibly in the interests of the adap- tive organizations pursuit of excellence. But this emphasis on commitment has been criticized from the earliest days of HRM. Guest (1987) asked: commitment to what? and Fowler (1987) has stated: At the heart of the concept is the complete identification of employees with the aims and values of the business employee involvement but on the companys terms. Power in Human resource management 13

38. the HRM system remains very firmly in the hands of the employer. Is it really possible to claim full mutuality when at the end of the day the employer can decide unilaterally to close the company or sell it to someone else? People as human capital The notion that people should be regarded as assets rather than variable costs, in other words, treated as human capital, was originally advanced by Beer et al (1984). HRM philosophy, as mentioned by Karen Legge (1995), holds that human resources are valuable and a source of competitive advantage. Armstrong and Baron (2002) stated that: People and their collective skills, abilities and experience, coupled with their ability to deploy these in the interests of the employing organization, are now recognized as making a significant contribution to organizational success and as constituting a significant source of competitive advantage. Unitary philosophy The HRM approach to employee relations is basically unitary it is believed that employees share the same interests as employers. This contrasts with what could be regarded as the more realistic pluralist view, which says that all organizations contain a number of interest groups and that the interests of employers and employees do not necessarily coincide. Individualistic HRM is individualistic in that it emphasizes the importance of maintaining links between the organization and individual employees in preference to operating through group and representative systems. HRM as a management-driven activity HRM can be described as a central, senior management-driven strategic activity that is developed, owned and delivered by management as a whole to promote the interests of the organization that they serve. Purcell (1993) thinks that the adoption of HRM is both a product of and a cause of a significant concentration of power in the hands of management, while the widespread use of the language of HRM, if not its practice, is a combination of its intuitive appeal to managers and, more importantly, a response to the turbulence of product and financial markets. He asserts that HRM is about the rediscovery of management prerogative. He considers that HRM policies 14 Managing people

39. and practices, when applied within a firm as a break from the past, are often associated with words such as commitment, competence, empowerment, flexibility, culture, performance, assessment, reward, teamwork, involvement, cooperation, harmonization, quality and learning. But the danger of descriptions of HRM as modern best-management practice is that they stereotype the past and idealize the future. Sisson (1990) suggested that: The locus of responsibility for personnel management no longer resides with (or is relegated to) specialist managers. More recently, Purcell et al (2003) underlined the importance of line management commitment and capability as the means by which HR policies are brought to life. Focus on business values The concept of HRM is largely based on a management and business-oriented philosophy. It is concerned with the total interests of the organization the interests of the members of the organization are recognized but subordinated to those of the enterprise. Hence the importance attached to strategic integration and strong cultures, which flow from top managements vision and leadership, and which require people who will be committed to the strategy, who will be adaptable to change, and who will fit the culture. By implication, as Guest (1991) says: HRM is too important to be left to personnel managers. In 1995 Legge noted that HRM policies are adapted to drive business values and are modified in the light of changing business objectives and conditions. She describes this process as thinking pragmatism and suggests that evidence indicates more support for the hard versions of HRM than the soft version. RESERVATIONS ABOUT HRM For some time HRM was a controversial topic, especially in academic circles. The main reservations have been that HRM promises more than it delivers and that its morality is suspect. HRM promises more than it can deliver Noon (1992) has commented that HRM has serious deficiencies as a theory: It is built with concepts and propositions, but the associated variables and hypotheses are not made explicit. It is too comprehensive If HRM is labelled a theory it raises expectations about its ability to describe and predict. Human resource management 15

40. Guest (1991) believes that HRM is an optimistic but ambiguous concept; it is all hype and hope. Mabey et al (1998) follow this up by asserting that the heralded outcomes (of HRM) are almost without exception unrealistically high. To put the concept of HRM into practice involves strategic integration, developing a coherent and consistent set of employment policies, and gaining commitment. This requires high levels of determi- nation and competence at all levels of management and a strong and effective HR function staffed by business-oriented people. It may be difficult to meet these criteria, especially when the proposed HRM culture conflicts with the established corporate culture and traditional managerial attitudes and behaviour. Gratton et al (1999) are convinced on the basis of their research that there is: a disjunction between rhetoric and reality in the area of human resource management between HRM theory and HRM practice, between what the HR function says it is doing and that practice as perceived by employers, and between what senior management believes to be the role of the HR function, and the role it actually plays. In their conclusions they refer to the hyperbole and rhetoric of human resource management. Caldwell (2004) believes that HRM is an unfinished project informed by a self- fulfilling vision of what it should be. In response to the above comments it is agreed that many organizations that think they are practising HRM are doing nothing of the kind. It is difficult, and it is best not to expect too much. Most of the managements who hurriedly adopted performance- related pay as an HRM device that would act as a lever for change have been sorely disappointed. But the research conducted by Guest and Conway (1997) covering a stratified random sample of 1,000 workers established that a notably high level of HRM was found to be in place. This contradicts the view that management has tended to talk up the adoption of HRM practices. The HRM characteristics covered by the survey included the opportunity to express grievances and raise personal concerns on such matters as opportunities for training and development, communications about business issues, single status, effective systems for dealing with bullying and harassment at work, making jobs interesting and varied, promotion from within, involvement programmes, no compulsory redundancies, performance-related pay, profit sharing and the use of attitude surveys. The morality of HRM HRM is accused by many academics of being manipulative if not positively immoral. 16 Managing people

41. Willmott (1993) remarks that HRM operates as a form of insidious control by compli- ance when it emphasizes the need for employees to be committed to do what the organization wants them to do. It preaches mutuality but the reality is that behind the rhetoric it exploits workers. It is, they say, a wolf in sheeps clothing (Keenoy, 1990a). As Legge (1998) pointed out: Sadly, in a world of intensified competition and scarce resources, it seems inevitable that, as employees are used as means to an end, there will be some who will lose out. They may even be in the majority. For these people, the soft version of HRM may be an irrelevancy, while the hard version is likely to be an uncomfortable experience. The accusation that HRM treats employees as means to an end is often made. However, it could be argued that if organizations exist to achieve ends, which they obviously do, and if those ends can only be achieved through people, which is clearly the case, the concern of managements for commitment and performance from those people is not unnatural and is not attributable to the concept of HRM it existed in the good old days of personnel management before HRM was invented. What matters is how managements treat people as ends and what managements provide in return. Much of the hostility to HRM expressed by a number of academics is based on the belief that it is hostile to the interests of workers, ie that it is managerialist. However, the Guest and Conway (1997) research established that the reports of workers on outcomes showed that a higher number of HR practices were associated with higher ratings of fairness, trust and managements delivery of their promises. Those experi- encing more HR activities also felt more secure in and more satisfied with their jobs. Motivation was significantly higher for those working in organizations where more HR practices were in place. In summary, as commented by Guest (1999b), it appears that workers like their experience of HRM. These findings appear to contradict the radical critique view produced by academics such as Mabey et al (1998) that HRM has been ineffectual, pernicious (ie managerialist) or both. Some of those who adopt this stance tend to dismiss favourable reports from workers about HRM on the grounds that they have been brainwashed by management. But there is no evidence to support this view. Moreover, as Armstrong (2000a) pointed out: HRM cannot be blamed or given credit for changes that were taking place anyway. For example, it is often alleged to have inspired a move from pluralism to unitarism in industrial relations. But newspaper production was moved from Fleet Street to Wapping by Murdoch, not because he had read a book about HRM but as a means of breaking the print unions control. Human resource management 17

42. Contradictions in the reservations about HRM Guest (1999a) has suggested that there are two contradictory concerns about HRM. The first as formulated by Legge (1995, 1998) is that while management rhetoric may express concern for workers, the reality is harsher. Keenoy (1997) complains that: The real puzzle about HRMism is how, in the face of such apparently overwhelming critical refutation, it has secured such influence and institutional presence. Other writers, however, simply claim that HRM does not work. Scott (1994) for example, finds that both management and workers are captives of their history and find it very difficult to let go of their traditional adversarial orientations. But these contentions are contradictory. Guest (1999b) remarks that, It is difficult to treat HRM as a major threat (though what it is a threat to is not always made explicit) deserving of serious critical analysis while at the same time claiming that it is not practiced or is ineffective. HRM AND PERSONNEL MANAGEMENT A debate about the differences, if any, between HRM and personnel management went on for some time. It has died down recently, especially as the terms HRM and HR are now in general use both in their own right and as synonyms for personnel management. But understanding of the concept of HRM is enhanced by analysing what the differences are and how traditional approaches to personnel management have evolved to become the present day practices of HRM. Some commentators (Hope-Hailey et al, 1998; Keenoy, 1990b; Legge, 1989, 1995; Sisson, 1990; Storey, 1993) have highlighted the revolutionary nature of HRM. Others have denied that there is any significant difference in the concepts of personnel management and HRM. Torrington (1989) suggested that: Personnel management has grown through assimilating a number of additional emphases to produce an even richer combination of experience HRM is no revolution but a further dimension to a multi-faceted role. The conclusion based on interviews with HR and personnel directors reached by Gennard and Kelly (1994) on this issue was that it is six of one and half a dozen of the other and it is a sterile debate. An earlier answer to this question was made by Armstrong (1987): HRM is regarded by some personnel managers as just a set of initials or old wine in new bottles. It could indeed be no more and no less than another name for personnel management, but as usually perceived, at least it has the virtue of emphasizing the virtue of treating people as a key resource, the management of which is the direct concern of 18 Managing people

43. top management as part of the strategic planning processes of the enterprise. Although there is nothing new in the idea, insufficient attention has been paid to it in many organizations. The similarities and differences between HRM and personnel management are summarized in Table 1.1. Human resource management 19 Similarities Differences 1. Personnel management strategies, like 1. HRM places more emphasis on strategic HRM strategies, flow from the business fit and integration. strategy. 2. HRM is based on a management and 2. Personnel management, like HRM, business orientated philosophy. recognizes that line managers are 3. HRM attaches more importance to the responsible for managing people. The management of culture and the personnel function provides the necessary achievement of commitment (mutuality). advice and support services to enable 4. HRM places greater emphasis on the managers to carry out their responsibilities. role of line managers as the implementers 3. The values of personnel management and of HR policies. at least the soft version of HRM are 5. HRM is a holistic approach concerned identical with regard to respect for the with the total interests of the business individual, balancing organizational and the interests of the members of the individual needs, and developing people organization are recognized but to achieve their maximum level of subordinated to those of the enterprise. competence both for their own satisfaction 6. HR specialists are expected to be business and to facilitate the achievement of partners rather than personnel organizational objectives. administrators. 4. Both personnel management and HRM 7. HRM treats employees as assets not costs. recognize that one of their most essential functions is that of matching people to ever-changing organizational requirements placing and developing the right people in and for the right jobs. 5. The same range of selection, competence analysis, performance management, training, management development and reward management techniques are used both in HRM and personnel management. 6. Personnel management, like the soft version of HRM, attaches importance to the processes of communication and participation within an employee relations system. Table 1.1 Similarities and differences between HRM and personnel management

44. The differences between personnel management and human resource management appear to be substantial but they can be seen as a matter of emphasis and approach rather than one of substance. Or, as Hendry and Pettigrew (1990) put it, HRM can be perceived as a perspective on personnel management and not personnel management itself. HOW HR IMPACTS ON ORGANIZATIONAL PERFORMANCE The assumption underpinning the practice of HRM is that people are the organizations key resource and organizational performance largely depends on them. If, therefore, an appropriate range of HR policies and processes are developed and implemented effectively, then HR will make a substantial impact on firm performance. The Holy Grail sought by many commentators on human resource management is to establish that a clear positive link between HRM practices and organizational performance exists. There has been much research, as summarized in Table 1.2, over the last decade or so that has attempted to answer two basic questions: Do HR practices make a positive impact on organizational performance? If so, how is the impact achieved? The second question is the most important one. It is not enough to justify HRM by proving that it is a good thing. What counts is what can be done to ensure that it is a good thing. This is the black box mentioned by Purcell et al (2003) that lies between intentions and outcomes. Ulrich (1997a) has pointed out that: HR practices seem to matter; logic says it is so; survey findings confirm it. Direct relationships between investment and attention to HR practices are often fuzzy, however, and vary according to the population sampled and the measures used. Purcell et al (2003) have cast doubts on the validity of some of the attempts through research to make the connection: Our study has demonstrated convincingly that research which only asks about the number and extent of HR practices can never be sufficient to understand the link between HR practices and business performance. As we have discussed it is misleading to assume that simply because HR policies are present that they will be implemented as intended. Further comments about attempts to trace the link have been made by Truss (2001) who, following research in Hewlett-Packard, remarked that: 20 Managing people

45. Our findings did lend strong support to the argument put forward by Mueller (1996) that the informal organization has a key role to play in the HRM process such that informal practice and norms of behaviour interact with formal HR policies... We cannot consider how HRM and performance are linked without analysing, in some detail, how policy is turned into practice through the lens of the informal organization. Research outcomes A considerable amount of research has been carried out to establish the link between HRM and firm performance. The outcomes of some of the main projects are summarized in Table 1.2. Human resource management 21 Researcher(s) Methodology Outcomes Arthur (1990, Data from 30 US strip mills used to Firms with a high commitment 1992, 1994) assess impact on labour efficiency strategy had significantly higher and scrap rate by reference to the levels of both productivity and existence of either a high quality than those with a commitment strategy* or a control strategy. control strategy*. Huselid (1995) Analysis of the responses of 968 US Productivity is influenced by firms to a questionnaire exploring employee motivation; financial the use of high performance work performance is influenced by practices*, the development of employee skills, motivation and synergies between them and the organizational structures. alignment of these practices with the competitive strategy. Huselid and An index of HR systems in 740 Firms with high values on the Becker (1996) firms was created to indicate the index had economically and degree to which each firm adopted statistically higher levels of a high performance work system. performance. Becker et al Outcomes of a number of research High performance systems make (1997) projects were analysed to assess the an impact as long as they are strategic impact on shareholder embedded in the management value of high performance work infrastructure. systems. Table 1.2 Outcomes of research on the link between HR and organizational performance

46. 22 Managing people Patterson et al The research examined the link HR practices explained significant (1997) between business performance and variations in profitability and organization culture and the use of productivity (19% and 18% a number of HR practices. respectively). Two HR practices were particularly significant: (1) the acquisition and development of employee skills and (2) job design including flexibility, responsibility, variety and the use of formal teams. Thompson (1998) A study of the impact of high The number of HR practices and performance work practices such as the proportion of the workforce teamworking, appraisal, job rotation, covered appeared to be the key broad-banded grade structures and differentiating factor between more sharing of business information in and less successful firms. 623 UK aerospace establishments. The 1998 An analysis of the survey which A strong assocation exists between Workplace sampled some 2,000 workplaces HRM and both employee Employee and obtained the views of about attitudes and workplace Relations Survey 28,000 employees. performance. (as analysed by Guest et al 2000a) The Future of 835 private sector organizations A greater use of HR practices is Work Survey, were surveyed and interviews were associated with higher levels of Guest et al carried out with 610 HR employee commitment and (2000b) professionals and 462 chief contribution and is in turn linked executives. to higher levels of productivity and quality of services. Purcell et al A University of Bath longitudinal The most successful companies had (2003) study of 12 companies to establish what the researchers called the big how people management impacts on idea. The companies had a clear organizational performance. vision and a set of integrated values which were embedded, enduring, collective, measured and managed. They were concerned with sustaining performance and flexibility. Clear evidence existed between positive attitudes towards HR policies and practices, levels of satisfaction, motivation and Table 1.2 continued continued

47. How HR makes an impact In Guest et al (2000b) the relationship between HRM and performance was modelled as shown in Figure 1.4. Human resource management 23 commitment, and operational performance. Policy and practice implementation (not the number of HR practices adopted) is the vital ingredient in linking people management to business performance and this is primarily the task of line managers. * In the US research projects set out in Table 1.2 reference is made to the impact made by the following strategies: A commitment strategy a strategy, as described by Walton (1985b) which promotes mutuality between employers and employees. A control strategy as described by Walton (1985b), one in which the aim is to establish order, exercise control and achieve efficiency in the application of the workforce but where employees did not have a voice except through their unions. High performance work systems these aim to impact on performance through its people by the use of such practices as rigorous recruitment and selection procedures, extensive and relevant training and management development activities, incentive pay systems and performance management processes. Table 1.2 continued Business strategy HR strategy Quality of goods and services Productivity HR effectiveness Financial performance HR practices HR outcomes Employee: competence commitment flexibility Figure 1.4 Model of the link between HRM and performance (Source: Guest et al, 2000b)

48. The messages from research, especially that carried out by Purcell et al (2003), are that HR can make an impact by leading or contributing to: the development and successful implementation of high performance work practices, particularly those concerned with job and work design, flexible working, resourcing (recruitment and selection and talent management), employee development (increasing skills and extending the skills base), reward, and giving employees a voice; the formulation and embedding of a clear vision and set of values (the big idea); the development of a positive psychological contract and means of increasing the motivation and commitment of employees; the formulation and implementation of policies which, in the words of Purcell et al (2003) meet the needs of individuals and create a great place to work; the provision of support and advice to line managers on their role in implementing HR policies and practices; the effective management of change. HRM IN CONTEXT HRM processes take place within the context of the internal and external environment of the organization. They will be largely contingent on the environmental factors that affect them. Contingency theory Contingency theory tells us that definitions of aims, policies and strategies, lists of activities, and analyses of the role of the HR department are valid only if they are related to the circumstances of the organization. Descriptions in books such as this can only be generalizations that suggest approaches and provide guidelines for action; they cannot be prescriptive in the sense of laying down what should be done. Contingency theory is essentially about the need to achieve fit between what the organization is and wants to become (its strategy, culture, goals, technology, the people it employs and its external environment) and what the organization does (how it is structured, and the processes, procedures and practices it puts into effect). Contextual factors There are three main contextual factors that influence HR policies and practices. 24 Managing people

49. 1. Technology The technology of the business exerts a major influence on the internal environment how work is organized, managed and carried out. The introduction of new technology may result in considerable changes to systems and processes. Different skills are required and new methods of working are developed. The result may be an exten- sion of the skills base of the organization and its employees, including multiskilling (ensuring that people have a range of skills that enable them to work flexibly on a variety of tasks, often within a teamworking environment). But it could result in de- skilling and a reduction in the number of jobs (downsizing). New technology can therefore present a considerable threat to employees. The world of work has changed in many ways. Knowledge workers are employed in largely computerized offices and laboratories, and technicians work in computer integrated manufacturing systems. They may have to be managed differently from the clerks or machine operators they displace. The service industries have become predominant and manufacturing is in decline. New work environments such as call centres have become common and tele-working (working from home with a net- worked computer) is increasing. 2. Competitive pressures Global competition in mature production and service sectors is increasing. This is assisted by easily transferable technology and reductions in international trade barriers. Customers are demanding more as new standards are reached through international competition. Organizations are reacting to this competition by becom- ing customer-focused, speeding up response times, emphasizing quality and continuous improvement, accelerating the introduction of new technology, operating more flexibly and losing cost. The pressure has been for businesses to become lean organizations, downsizing and cutting out layers of management and supervision. They are reducing permanent staff to a core of essential workers, increasing the use of peripheral workers (sub- contractors, temporary staff) and outsourcing work to external service providers. The aim is to reduce employment costs and enable the enterprise easily to increase or reduce the numbers available for work in response to fluctuations in the level of business activity. They become the so-called flexible firms. The ultimate development of this process is the virtual firm or corporation, where through the extensive use of information technology a high proportion of marketing and professional staff mainly work from home, only coming into the office on special occasions to occupy their hot desks, and spending more time with their customers or clients. Human resource management 25

50. Another response to competitive pressures is business process re-engineering (BPR), which examines the process that contains and links those functions together from initiation to completion. It looks at processes in organizations horizontally to establish how they can be integrated more effectively as well as streamlined. It can therefore form the basis for an organizational redesign exercise. From an HR point of view, the outcome of a BPR exercise may well be the need to attract or develop people with new skills as well as pressure for the improvement of team working. It also emphasizes the importance of an integrated a coherent approach to the development and implementation of HR policies and employment practices. Re-engineering often promises more than it achieves and is not regarded as highly as it once was, not least because it often neglected the human aspects, giving insufficient attention to the management of change and retraining staff. 3. Responses affecting people The responses to the increased use of technology and to economic and competitive pressures have changed the nature of people management in a number of ways. These include slimmer and flatter organization structures in which cross-functional operations and teamworking have become more important, more flexible working patterns, total quality and lean production initiatives, and the decentralization and devolvement of decision-making. The challenge to HRM Ulrich (1998) suggests that environmental and contextual changes present a number of competitive challenges to organizations that mean that HR has to be involved in helping to build new capabilities. These comprise: Globalization, which requires organizations to move people, ideas, products and information around the world to meet local needs. New and important ingredi- ents must be added to the mix when making strategy: volatile political situations, contentious global trade issues, fluctuating exchange rates and unfamiliar cultures. Profitability through growth the drive for revenue growth means that companies must be creative and innovative and this means encouraging the free flow of information and shared learning among employees. Technology the challenge is to make technology a viable, productive part of the work setting. Intellectual capital this is the source of competitive advantage for organizations. The challenge is to ensure that firms have the capability to find, assimilate, 26 Managing people

51. compensate and retain human capital in the shape of the talented individuals they need who can drive a global organization that is both responsive to its customers and the burgeoning opportunities of technology. They have also to consider how the social capital of the organization the ways in which people interact can be developed. Importantly, organizations have to focus on organizational capital the knowledge they own and how it should be managed. Change, change and more change the greatest challenge companies face is adjusting to indeed, embracing non-stop change. They must be able to learn rapidly and continuously, and take on new strategic imperatives faster and more comfortably. Human resource management 27

52. Human capital management Human capital management (HCM) has been described as a paradigm shift from the traditional approach to human resource management (Kearns, 2005b) a large claim. It is considered in this chapter initially by defining the concept of human capital management and its relationship to the concept of human resource management. To understand HCM it is necessary to know about the concept of human capital, which is the next section heading. The chapter is completed with an analysis of the processes involved in HCM including a discussion of human capital measurement and reporting. HUMAN CAPITAL MANAGEMENT DEFINED Human capital management (HCM) is concerned with obtaining, analysing and reporting on data that informs the direction of value-adding people management, strategic investment and operational decisions at corporate level and at the level of front line management. The defining characteristic of HCM is this use of metrics to guide an approach to managing people that regards them as assets and emphasizes that competitive advantage is achieved by strategic investments in those assets through employee engagement and retention, talent management and learning and development programmes. 2

53. The Accounting for People Task Force Report (2003) stated that HCM involves the systematic analysis, measurement and evaluation of how people policies and practices create value. The report defined HCM as an approach to people management that treats it as a high level strategic issue rather than an operational matter to be left to the HR people . The Task Force expressed the view that HCM has been under-exploited as a way of gaining competitive edge. As John Sunderland, Task Force member and Executive Chairman of Cadbury Schweppes plc commented: An organizations success is the product of its peoples competence. That link between people and performance should be made visible and available to all stakeholders. Nalbantian et al (2004) emphasize the measurement aspect of HCM. They define human capital as, The stock of accumulated knowledge, skills, experience, creativity and other relevant workforce attributes and suggest that human capital management involves putting into place the metrics to measure the value of these attributes and using that knowledge to effectively manage the organization. HCM is defined by Kearns (2005b) as The total development of human potential expressed as organizational value. He believes that HCM is about creating value through people and that it is a people development philosophy, but the only development that means anything is that which is translated into value. HUMAN CAPITAL MANAGEMENT AND HUMAN RESOURCE MANAGEMENT In the opinion of Mayo (2001) the essential difference between HCM and HRM is that the former treats people as assets while the latter treats them as costs. Kearns (2005b) believes that in HCM people are value adders, not overheads while in HRM people are (treated as) a significant cost and should be managed accordingly. According to Kearns, in HRM the HR team is seen as a support service to the line HR is based around the function and the HR team performs a distinct and separate role from other functions. Conversely, HCM is clearly seen and respected as an equal business partner at senior levels and is holistic, organization-wide and systems-based as well as being strategic and concerned with adding value. The claim that in HRM employees are treated as costs is not supported by the descriptions of the concept of HRM produced by American writers such as Beer et al (1984). In one of the seminal texts on human resource management, they emphasized the need for: a longer-term perspective in managing people and consideration of people as potential assets rather than merely a variable cost. Fombrun et al (1984), in the other seminal text, quite explicitly presented workers as a key resource that 30 Managing people

54. managers use to achieve competitive advantage for their companies. Grant (1991) lists the main characteristics of human resources in his general classification of a firms potential resources as follows: The training and expertise of employees determines the skills available to the firm. The adaptability of employees determines the strategic flexibility of the firm. The commitment and loyalty of employees determine the firms ability to main- tain competitive advantage. Cappelli and Singh (1992) propose that competitive advantage arises from firm- specific, valuable resources that are difficult to imitate, and stress the role of human resource policies in the creation of valuable, firm-specific skills. Other writers confirmed this view. For example: HRM is an approach to labour management which treats labour as a valued asset rather than a variable cost and which consequently counsels investment in the labour resource through training and development and through measures designed to attract and retain a committed workforce. (Storey, 1989) Human resource management is a distinctive approach to employment management that seeks to obtain competitive advantage through the strategic deployment of a highly committed and capable workforce, using an integrated array of cultural, structural and personnel techniques. (Storey, 1995) The HRM argument is that people are not to be seen as a cost, but as an asset in which to invest, so adding to their inherent value. (Torrington, 1989, emphasis in the original) Of course, all these commentators are writing about HRM as a belief system, not about how it works in practice. The almost universal replacement of the term personnel management with HR or HRM does not mean that everyone with the job title of HR director or manager is basing their approach on the HRM philosophy. Guest commented in 1991 that HRM was all hype and hope. A survey conducted by Caldwell (2004) provided some support to this view by establishing that the five most important HR policy areas identified by respondents were also the five in which the least progress had been made. For example, while 89 per cent of respondents said the most important HR policy was managing people as assets which are fundamental to the competitive advantage of the organization, only 37 per cent stated that they had made any progress in implementing it. Human capital management 31

55. However, research conducted by Hoque and Moon (2001) found that there were significant differences between the activities of those described as HR specialists and those described as personnel specialists. For example, workplace-level strategic plans are more likely to emphasize

handbook of human resource management practic

Recruiting & HR