the effect of human resource management practices on the perceptions of organizational and market...

The Effect of HRM Practices on the Perceptions of Organizational and Market Performance of the Firm • 185

THE EFFECT OF HUMAN RESOURCEMANAGEMENT PRACTICES ON THEPERCEPTIONS OF ORGANIZATIONAL ANDMARKET PERFORMANCE OF THE FIRM

Human Resource Management, Fall 1999, Vol. 38, No. 3, Pp. 185–200© 1999 John Wiley & Sons, Inc. CCC 0090-4848/99/03185-15

Gedaliahu H. Harel and Shay S. Tzafrir

The purpose of our study is to extend the emerging empirical literature on the firm-levelimpact of human resource management practices. Results based on a national sample oforganizations from private and public sectors in Israel indicate that these practices have asignificant impact on both the perceived organizational and market performance of theorganization. The single independent variable found to be statistically significant in affect-ing perceived organizational performance was training practices. In the case of perceivedmarket performance, we found that, in addition to training practices, employee selectionpractices also significantly affected the perceived market performance.1 © 1999 John Wiley& Sons, Inc.

Introduction

In today’s world, organizations are in a constantstate of competition. The intensity of competi-tion increases annually and the need to con-tinuously improve organizational performancehas never been greater. Managers must be on aconstant lookout for ways to maximize theirorganizations’ strategic resources. The resourcebase approach contends that the organizationcan develop a sustained competitive advantageonly if its activities create value in a unique way,one that competitors cannot easily copy (Barney,1986; 1991; 1995). This approach transfers theemphasis from the organization’s competitiveenvironment to the resources it can develop touse in this environment (Miller & Shamsie,1996).

The decreased importance of traditionalsources of competitive success has led to theincreased significance of human resources aspart of the organization’s intangible resources

with the potential for continuous organizationalsuccess. (Lado & Wilson, 1994; Von Glinow,1993). Product technology and process, mar-ket regulation, and access to sources of capitalare no longer as essential for success as theyonce were (Pfeffer, 1994). A human resourcesystem increases organizational performance,develops and maximizes an organization’sabilities (Huselid, 1995; Becker & Gerhart,1996), and contributes to its continuous com-petitive advantage (Lado & Wilson, 1994). Theindividuals working in the company become thesource and basis for utilization of other resources(Maital, 1994). Thus, through an efficienthuman resource system, a company’s employ-ees become, essentially, a strategic asset. Theyform a system of resources and rare abilities thatcannot easily be copied or replaced, and thatprovides the company with its competitive edge(Amit & Shoemaker, 1993).

The prevailing universal assumption main-tains that there are always human resource

The decreasedimportance oftraditionalsources ofcompetitivesuccess has led tothe increasedsignificance ofhuman resourcesas part of theorganization’sintangibleresources withthe potential forcontinuousorganizationalsuccess.

186 • HUMAN RESOURCE MANAGEMENT, Fall 1999

management activities that are better than oth-ers, and therefore, organizations should adoptthese activities (Pfeffer, 1994; Osterman,1994; Huselid, 1995). Human resource man-agement activities such as training, employeeparticipation, compensation, assignment ofworkers through a recruiting and selectionprocess and an internal labor market, have beenfound to have a positive relationship to com-pany performance (Kaufman, 1992; Terpstra &Rozell, 1993; Bartel, 1994). Human resourcemanagement activities can influence theorganization’s performance by direct means,through improvement of employees’ skills andquality (selection and training), and by indi-rect means, through the increase of employeemotivation (a system of incentives and aninternal job market). These studies are focusedat the company level and investigate (1) therelationship between each human resourcemanagement activity and company perfor-mance; and (2) the combined impact of allhuman resource management activities on theperception of the firm’s performance.

Background and Hypotheses

Past conceptual and empirical work generallyagree on the importance of certain HRMpractices in the determination of employee andorganization-level performance irrespective of

sector, industry, and external environment.Identifying and enacting these HR “best prac-tices” will always result in greater organiza-tional effectiveness (Delery & Doty, 1996).Drawing on the empirical and theoreticalstudies on HRM practices (Delaney, Lewin,& Ichniowski, 1989; Cutcher-Gershenfeld,1991; Pfeffer, 1994), we identified six practicesconsistently considered to be strategic anduniversalistic HR practices. They are (1) re-cruitment; (2) selection; (3) compensation; (4)employee participation; (5) internal labormarket; and (6) training. The conceptualframework for the research is presented inFigure 1.

Recruitment and Selection

The process of staffing employees in the or-ganization consists of finding, evaluating, andassigning individuals to work (Schneider &Schmitt, 1986). Research has shown thatvalid selection tests are very useful in em-ployee selection (Schuler & Jackson, 1987),and implementing an effective staffing pro-cess is positively correlated with organizationalperformance (Terpstra & Rozell, 1993;Martell & Carroll, 1995). A sophisticatedselection system tests a candidate’s potentialfor a position and decreases the organization’slevel of uncertainty when faced with an

FIGURE 1 . The Relationship between HRM, environmental variables, and organizational performance.

HRM Practices

RecruitmentSelectionILMTrainingParticipationCompensationGrievance Procedure

Business Environment

Firm ageFirm size

Union Density

Sector

Organizational Performance

Market Performance


external candidate (Holzer, 1987). A stringentrecruitment and selection system also givesthose employees who are selected a sense ofelitism, imparts high expectations of perfor-mance, and conveys a message of the impor-tance of people to the organization (Pfeffer,1994). Incompatibility between the individualand the organization can impede the achieve-ment of necessary performance levels (Lado& Wilson, 1994) while an advanced staffingprocess can bring to the organization employ-ees who match the abilities of the presenthuman resources and fit into the existinginterpersonal structure, at lower training costs(Fernandez, 1992). In addition, it has beenfound that the staffing process is positivelycorrelated to organizational performance(Terpstra & Rozell, 1993).

Compensation System

A substantial body of research has been devel-oped that examined the impact of incentivecompensation on firm performance and foundthat an advanced compensation system can bea potential source of achieving competitiveadvantage (Gomez-Mejia & Wellbourne, 1988).One way by which the compensation systemcontributes to the organization’s performanceis by enabling the organization to attract moreand better candidates and to retain essentialemployees for longer periods of time (Mobley,1982; Lawler & Jenkins, 1992). A compensa-tion system based on excellence results inincreased employee performance (Delaney &Huselid, 1996) in the same way that a profit-sharing system increases productivity andcontributes to improved performance by, amongother things, decreasing absenteeism (Kaufman,1992). Finally, a survey of 1,200 experts andpractitioners from 12 different countries has alsopointed out that rewards and compensation willbe of paramount importance for achievingcompetitive advantage in the twenty-firstcentury (Milkovich & Newman, 1996).

Employee Participation

Participation is the degree of influence thatan individual has on the process of organiza-tional decision making and on dimensionsrelated to the variety of subjects discussed and

about which decisions are made (Verma, 1995).This influence is the product of an individual’sactive participation in the process (Vroom &Jago, 1988). Most researchers found that em-ployee participation positively influencesperformance (Wagner, 1994; Verma, 1995) andincreases the satisfaction and productivity ofemployees (Pfeffer, 1994). Results also indicatethat profit-sharing programs are more effectivewhen combined with employee participation inmanagement (Blinder, 1990). Thus, employeeparticipative work systems enhance employeemotivation as well as their ability to influencethe quality and flow of work.

Internal Labor Market

Mobility of employees within the organiza-tion, horizontally and vertically, may improveorganizational performance in two ways: directly,through knowledge, experience, and satisfac-tion; and indirectly, by decreasing recruitment,selection, and training costs (Milkovich &Boudreau, 1994). Opportunities for internalcareers, offered by an organization to its em-ployees, have been found to be positivelycorrelated to organizational performance(Blackwell, Brickley, & Weisbach, 1994; Delery& Doty, 1996; Delaney & Huselid, 1996). Theirfindings suggest that enhanced internal mobil-ity opportunities increase employee motivation.

Training

In general, there are at least two ways throughwhich training activities influence performance.First, they improve skills and abilities relevantto employees’ tasks and development; andsecond, they increase employees’ satisfactionwith their jobs and workplace. Burke and Day(1986) indicate that training positively influ-ences the level of performance of managers.Indeed, Bartel (1994) found that investment intraining increases productivity. Other findingsindicate that training influences organizationalcommitment, participant knowledge, and orga-nizational-based self- esteem (McEvoy, 1997).

While not all the empirical investigationssupport universalistic prediction (MacDuffie,1995; Wright, McCormick, Sherman, &McMahan, 1995), we find more support forthe universalistic or “best practices” approach.

A stringentrecruitment andselection systemalso gives thoseemployees whoare selected asense of elitism,imparts highexpectations ofperformance,and conveys amessage of theimportance ofpeople to theorganization.


Based on the above, we propose that there is apositive relationship between the use of specificHRM practice and the perceived improved per-formance of the organization.

In the second stage of our analysis we at-tempt to ascertain the combined effect ofprogressive HRM practices on the perceivedimproved performance of the organizationswithin the context of a broad range of indus-tries, organization size, age, union density, andsectors. Our finding results in our secondhypothesis, which state that there is a positivecombined organizational level effect by the HRMpractices on the perceived performance of theorganization.

Sample

The analysis in this study deals with practicesand performance at the organization level. Theorganizations included in this research wereselected from a random sample of 215 orga-nizations from the public and private sectors—each employing 200 or more workers. As inOsterman’s study (1994), the sample wasbased on organizations that were included inIsrael’s Business Directory and Duns Guide–15,000 (1995/96). Also included in the samplewere 15 organizations from Israel’s govern-mental departments. Duns’ Guide includes twolists of the leading companies in Israel bysales and operating revenue in the industrial,service, and trade sectors.

Companies with less than 200 employeeswere not included in the sample because theyusually do not have a formal organizational unitdealing with human resources (Miner & Miner,1985). The sample also did not include kibbutz-owned2 companies since these organizationsemploy two separate and distinct kinds of work-ers: salaried employees and kibbutz members.As a result, human resource managementactivities in these companies are not the samefor all employees. The data regarding theseactivities are not clear, making it difficult toreach significant conclusions.

Questionnaires with an accompanying let-ter were sent to the vice president for HRMor the human resource manager of 215 orga-nizations at the end of the 1996 fiscal year. Inorganizations lacking these positions, thequestionnaire was sent to the president of the

company or the most senior manager dealingwith human resources in the organization.The questionnaires were sent to human re-source managers for two main reasons. Firstand foremost, they have the greatest accessto the data related to HRM activities. Sec-ond, they have the largest storehouse ofknowledge about the overall activities of theorganization at the macro level, as opposedto the narrow departmental level. Neverthe-less there is a fear that respondents who havedirect responsibility for the implementationof human resource management activities willmake a subjective evaluation. In an attemptto minimize the respondents’ subjectivity asmuch as possible (Becker & Gerhart, 1996),most of our questions dealt only with raw dataregarding human resource activities. The re-sults of previous studies indicate that theanswers of senior human resource managersto questions regarding descriptive data are notmuch different from those of senior linemanagers (Guest & Peccei, 1994).

Questionnaires were completed andreturned by 76 of the 215 designated com-panies, resulting in a response rate of 35%.This response rate is similar to that obtainedin previous studies in this field (Youndt,Snell, Dean, & Leapak, 1996; Guest &Peccei, 1994). Ninety-three percent of therespondents (71) were vice presidents orhuman resource managers, and the remain-ing 7% were owners or senior managers ofthe company. Thirty-three percent of therespondents were women, and 67% weremen. The average age of the respondentswas 45, and the average longevity in thepresent position of human resource man-agement was 84 months. It is important tonote that no significant correlation wasfound between the personal characteristicsof the respondents and the dependent vari-able—perception of performance. As in thestudy by Terpstra and Rozell (1993), ananalysis was made of the companies thatresponded to the questionnaire as comparedto those that did not. The analysis did notreveal any significant difference betweenrespondents and non-respondents regardingsector, number of employees, and percentof increase in sales/income (based on thedata in Duns’ Guide 1995/96). An additional

We attempt toascertain thecombined effectof progressiveHRM practiceson the perceivedimprovedperformance ofthe organizationswithin thecontext of abroad range ofindustries,organization size,age, uniondensity, andsectors.


logistic analysis was performed in order todetermine if there were any differences be-tween respondents and nonrespondents inwhich the dependent variable was whether ornot the company returned the questionnaire(0—did not return, 1—returned). The resultsof this analysis also did not reveal any signifi-cant difference between responding andnonresponding companies.

Measurement of Variables

The dependent variables in this research, as inDelaney and Huselid (1996), measured the per-ception of an organization’s performance inrelation to its competitors. Using 11 questionswe developed two variables. The first variable—organizational performance—consisted of sevenquestions in which each respondent was askedto evaluate his/her organization’s performanceas compared to competing organizationsperforming the same work in the past year (α =0.76). This variable covered several aspects, suchas the quality of the product/service, new prod-uct development, ability to attract and retainessential employees, customer satisfaction, andso forth. These aspects are among the most im-portant to organizational performance measuresin addition to traditional accounting perfor-mance (Eccles, 1995). The second dependentvariable—market performance—is only relevantto market organizations and is composed of fourquestions that ask the respondent to evaluatethe performance of his/her organization com-pared to competitors in the past year (α = 0.77).This variable deals with market performance andfocuses on economic performance, such asproduct price, sales increase, profitability, andso forth. Each dependent variable is based onitems that are ranked on a scale ranging from 1,“much worse than others”, to 5, “much betterthan others”. These two variables provide a wideperspective of company performance.

Independent Variables

The following HRM practices were in-vestigated: recruitment, selection, compen-sation, participation, internal labor market,and training. Recruitment was measured bythe number of candidates (logarithm) thatthe company considered in the past year for

any available position in three areas: (1) pro-duction/service/planning; (2) staff positions;and (3) management. Selection was measuredby an instrument composed of 12 items (α =0.79), in which respondents were asked toevaluate the importance attributed by thecompany to selection tools and tests used inthe selection process, on a scale of 1, “notimportant,” to 5, “very important”.

In order to measure incentive compensa-tion, we used an instrument of four items (α =0.91) to investigate the relationship betweenthe income of job holders in the company totheir job performance, as in Delaney andHuselid’s study (1996). The responses referredto the impact level of individual performanceevaluations on the salary levels of seniormanagers, managers, staff employees, andproduction/service/planning employees.Responses ranged on a scale of 1, “not influ-ential,” to 5, “very influential”.

The employee participation variable wasmeasured on two dimensions: the degree ofinfluence of employees on various issues thatwe called “participation impact”, and on theorganizational level at which decisions onHRM are made, which we called “participa-tion in HRM issues”. An instrument of 10items was used (α = 0.81) in which respon-dents were asked to rank at which organiza-tional level final decisions were actually maderegarding issues such as the number of work-ers, advancement, salary level, vacation days,work schedules, and so forth. The scale was1, “the most senior manager”, to 5, “rank andfile employee”. The lowest rank was given tocompanies in which senior managers makemost of the final decisions themselves. Inaddition, five more items (α = 0.85) from aquestionnaire by Lawler, Mohrman, andLedford (1992) were used to ascertain thedegree of influence that the employee rankand file have on issues such as investment innew equipment, workflow, salary determina-tion, and so forth.

Internal labor market was measured in thisstudy by the average of three i tems (α = 0.74)that asked respondents to indicate the impor-tance attributed by the organization to itsemployees as a source of internal recruitmentfor rank and file employees, professionalemployees, and managerial positions. Answers


ranged on a scale of 1 to 5 where 1 was “notimportant” and 5 indicated “very important”.

Finally, training was measured in thisstudy, as in Lawler et al. (1992), using asix-item instrument (α = 0.76) that asked re-spondents to indicate the percentage ofemployees in the organization who receivedsystematic and formal training in the pastyear in a variety of skills: leadership, busi-ness areas, quality, technical aspects of thejob, and so forth.

Control Variables

No organization operates in a vacuum, andtherefore, it is important to investigate internaland external organization characteristics inorder to be able to understand the general rela-tionship between HRM activities and percep-tion of the firm’s performance. This study useda dummy variable to indicate whether theorganization belongs to the public or privatesector. In order to reduce the influence of thesize of the organization and its age, a naturallogarithm was calculated using the number ofthe organization’s employees and its years ofexistence (1997 minus the founding year),respectively. Another control variable that weused was the existence of a grievance procedure.In addition, since there is much evidenceregarding the impact of unions and uniondensity on organizational performance (Freeman& Medoff, 1984), we measured union density.The external environment of an organization,including its competitors, can significantly in-fluence organizational performance. As inLawler et al. (1992), respondents were asked toevaluate the business environment characteris-tics of their company on four items (α = 0.70):the existence of great competition, rapid mar-ket growth, short product life cycle, and declin-ing markets. The scale of responses ranged from1, “not at all,” to 7, “very much so”.

Results

Table I presents the scale reliabilities andsample items.

Table II presents descriptive statistics andcorrelations among all the research variables.In this analysis, we ascertained the directrelationship among all variables. This pair

analysis provides a direct picture of the rela-tionship between each separate HRM practiceand the perceptions of firm performance, as wellas the relationship between various HRM prac-tices. This then gives a better understandingabout the possible fit among those practices.

The correlation between the two dependentvariables (organizational performance andmarket performance) is .67. The results indicatethat organizations that invest more in training(r = .48, p < .01), base compensation on perfor-mance (r = .43, p < .01), encourage employeeparticipation (r = .47, p < .01), and use the in-ternal labor market for the purpose of recruit-ment and employee mob ility (r = .23, p < .05),have significantly higher organizational perfor-mance. The second dependent variable—mar-ket performance—was found to be relatedsignificantly to selection activities (r = .24, p <.05), to training (r = 53, p < .01), and compen-sation (r = .44, p < .01); the sector in which thecompany operates was negatively correlated toorganizational (r = .30, p < .05) and market (r =36, p < .01) performance. The business envi-ronment of the organization was also positivelycorrelated, although not significantly, with mar-ket performance (r = .16).

Table III examines the combined influenceof the independent variables upon perceptionsof organizational performance variables. Inthis analysis, we moved from the reciprocalrelationship among the variable to a higherlevel of understanding by analyzing the im-pact of the fusion among the independentvariables on the perceptions of organizationalperformance.

In the first part of Table III, we looked attwo models. In Model 1 we looked at the com-bined influence of all the HRM activities onperceived organizational performance. Theresults were statistically significant and ex-plained 37% of the variability in perceivedorganizational performance. The single inde-pendent variable found to be statisticallysignificant was training (r = .39, p < .001). InModel 2 we first entered the control variablesinto the regression equation, and then theHRM variables, thereby raising the explainedvariability in the dependent variable to 51%.Again, the single significant independentvariable was training (r = .53, p < .001).

In the second part of Table III, we ascer-

No organizationoperates in avacuum, andtherefore, it isimportant toinvestigateinternal andexternalorganizationcharacteristics inorder to be ableto understandthe generalrelationshipbetween HRMactivities andperception of thefirm’sperformance.


tained the impact of the same independentvariables on perceived market performance.In Model 1 we looked at the combined influ-ence of all the HRM activities on perceivedmarket performance. The results, statisticallysignificant, were able to explain 30% of thevariability in the dependent variable. Thesingle independent variable found to bestatistically significant was training (r = .41, p< .01). In Model 2 we first entered the con-trol variables into the regression equation, andthen the HRM variables, thus raising the ex-

plained variability in the dependent variableto 51%. The latter analysis indicated that, inaddition to the significant impact of training(r = .50, p < .001), the selection of employeepractices were statistically significant (r = .43,p < .075) in impacting on perceived marketperformance.

To summarize the difference in the analy-sis in Table II versus the analysis in Table III,we can say that we first measured the recipro-cal relationship among the variables in TableII, and then in the second stage of the analy-

Scale Reliabilities and Sample Items.

# ofScale Names Items Alpha Sample Items

Perceived organizational 7 .76 How would you compare the organization’sperformance performance over the past year to that of

other organizations that do the same kind ofwork? What about quality of products,services, or programs?

Perceived market 4 .77 Compared to other organizations that do theperformance same kind of work, how would you compare

the organization’s performance over the pastyear in terms of profitability?

Recruitment 3 .63 How many applicants have you consideredfor each CORE opening in the past year?

Selection 12 .79 How important is the manager interview?

Internal Labor Market 3 .74 How much consideration do you give to yourown employees as a source for recruitingmanagers?

HR decisions 10 .81 Who actually makes the final decision aboutemployee’s promotions?

Participation 5 .85 How much influence, if any, do youremployees have on quality?

Compensation 4 .91 How important is job performance indetermining the earnings of employees?

Training 6 .76 Within the past year, how many employeeshave received systematic, formal trainingon quality?

TABLE I


Mea

ns, S

tand

ard

Dev

iati

ons,

and

Cor

rela

tion

for

All

Var

iabl

es.

Vari

able

Mea

n s

.d.

1 2

3 4

5 6

7 8

9 1

0 1

1 1

2 1

3 1

4

1.Pe

rcei

ved

orga

niza

tion

al

perf

orm

ance

3.55

0.59

1

2.Pe

rcei

ved

mar

ket

perf

orm

ance

3.37

0.77

.67*

*1

3.N

atur

al lo

g of

recr

uitm

ent

0.91

0.27

.03

(.11

)1

4.Se

lect

ion

3.66

0.71

.10

.24*

.08

1

5.In

cent

ive

com

pens

atio

n3.

171.

16.4

3**

.44*

*(.

12)

(.03

)1

6.In

tern

al la

bor

mar

ket

3.79

1.09

.23*

.14

(.05

).1

0.3

3**

1

7.Pa

rtic

ipat

ion

in

HR

M is

sue

2.26

0.47

(.06

).0

2(.

04)

.15

(.02

)(.

05)

1

8.Pa

rtic

ipat

ion

impa

ct3.

561.

26.4

7**

.32*

*.2

0.1

2.3

9**

.35*

*.0

71

9.Tr

aini

ng2.

890.

87.4

8**

.53*

*.0

7.1

7.3

1**

.21

(.02

).4

1**

1

10. S

ecto

r0.

330.

47(.

30)*

(.36

)**

.20

.02

(.61

)**

(.20

).0

8(.

26)*

(.20

)1

11. F

irm

age

33.9

23.6

(.34

)*(.

19)

(.10

).0

2(.

44)*

*(.

04)

.00

(.32

)**

(.25

)*.3

1**

1

12. N

atur

al lo

g of

tota

l em

ploy

men

t6.

691.

17(.

12)

.04

.18

.09

(.17

)(.

06)

.07

(.06

).0

0.2

7*.4

9**

1

13. E

nvir

onm

ent

4.35

1.16

.35*

*.1

6.0

6(.

05)

.50*

*.2

2*.0

7.4

2**

.31*

*(.

47)*

*(.

35)*

*(.

14)

1

14. G

riev

ance

pro

cedu

re0.

550.

50(.

10)

(.05

).1

8.2

9*(.

12)

(.11

)(.

03)

(.02

).0

5.2

9**

.03

.12

(.26

)*1

15. U

nion

izat

ion

57.5

42.2

(.20

)(.

21)

(.03

).2

0(.

42)*

*(.

21)

.07

(.31

)**

(.12

).5

4**

.53*

*.5

6**

(.27

)*.2

3*

* P

< 0

.05

**

P <

0.0

1

TABL

E II


sis we looked at the interplay among theindependent variables and their impact on thedependent variables. The results in this analy-sis show that when all the various HRMpractices and environmental conditions arecombined, training and employee selection aresignificant factors impacting on the percep-tions of organizational performance.

Implications forHuman Resource Management

Managers can foster organizational perfor-mance by using HRM practices that matchemployee’s ability and skill to organizationalstrategy and increase employee motivation.The implications may differ from organizationto organization; however, several practices

can be seen across organizations. Table IVsummarizes the implications for humanresource management.

Training

Training is the universal managerial tool forcoping with market demands and changingcustomer needs. Moreover, a major skills gapthreatens organizations of all types and sizes.The most immediate skills gap has been iden-tified at entry-level positions (Mirvis, 1997).

Training for Quality

Successful companies understand the con-tinuously rising standards of quality demandedby today’s customers. Thus, training for qual-

Results of Standardized Regression Model for Perceived Organizational andMarket Performance by HRM Practices.

Variables Organizational Performance Market Performance

Model 1 Model 2 Model 1 Model 2

Recruitment -.04 .09 -.10 -.04Employee selection .04 .30 -.01 .43+Manager selection .03 -.10 .07 -.19Internal labor market—employee -.01 -.01 -.02 -.21Internal labor market—manager -.06 -.16 -.03 -.13Participation in HR decisions .04 .02 -.01 .02Employee participation .22 .16 .07 .15Compensation .16 .17 .19 .27Training .39** .50*** .41** .50***Environment No -.08 No -.34Sector No -.01 No -.14Organization size No -.18 No .02Union density No .05 No -.27Grievance procedure No -.17 No -.19Number of hierarchy level No .10 No .27Organization age No -.08 No .17Constant 2.12*** 2.35*** 1.82* 2.05*R2 .37 .51 .30 .51Adjusted R2 .26 .29 .17 .29F 3.40** 2.28** 2.31* 2.25*

+ p < 0.075; * p < 0.05; ** p < 0.01; *** p < 0.001

TABLE III

The results inthis analysisshow that whenall the variousHRM practicesandenvironmentalconditions arecombined,training andemployeeselection aresignificantfactors impactingon theperceptions oforganizationalperformance.


ity and implementing various programs suchas ISO 9000 is a must for selling productsand services today and tomorrow. In the late1980s and early 1990s, the European Com-munity (EC) adopted the unified ISO 9000standards to replace their varied nationalfactory certification standards. To sell safety-sensitive products in Europe, a seller mustregularly submit samples for testing or elsereceive certification that its plants conformto the ISO 9000 standards (Uzumeri, 1997).One international pharmaceutical companythat attempted to penetrate the Europeanmarket was forced to train its entire labor forcein these stringent and demanding standardsof quality requirements. Only after receivingthe ISO certification was the company ableto accomplish its strategic objectives.

Training Personnel to Work in Teams

Ettington (1997) stresses the need for effectivegroup process training. Teams outperform indi-viduals, especially when performance requiresmultiple skills, judgment, and experience. Team-work improves problem-solving processes andpromotes creativity and originality. The experi-ence of working and solving problems togetheras a team is becoming more important thandirect functional experience with the problemcontent (Cianni & Wnuck, 1997). In an attemptto improve the learning environment andabsorption of difficult science topics in highschool, a major experiment was conducted in

an Israeli vocational school. The traditionalclassroom was transformed into teams of stu-dents working in “actual” industrial projects. Itwas found that the consultants were able toachieve significantly better results in the learn-ing process as well as better interpersonal rela-tions among the students and staff (Barak,Maymon, & Harel, 1999) as a result.

Incentive Compensation

Money is one of the most powerful motiva-tors available to organizations. Attempts tostrengthen the ties between pay and perfor-mance are on the rise. From 1988 to 1995,the number of U.S. companies offering payfor performance jumped from 47% to 77%(Gomez-Mejia, Balkin, & Cardy, 1998).Strengthening the ties between pay andemployee performance provides an excellentopportunity to align employee efforts andorganizational goals. A variety of studies re-port that pay for performance plans arerelated to subsequent financial success ofthe firms studied (Ettington, 1997).Milkovich and Boudreau (1998) report thatin one large study a 10% increase in a bo-nus was associated with a 1.5% increase inreturn on assets in the subsequent year. Inorder for pay for performance plans to suc-ceed, they must be integrated with the over-all HRM system and be consistent with thecompany’s strategic approach to managinghuman resources.

HRM Practices That Foster Organizational Performance.

Training• Train for quality.• Train everyone to work in teams.

Compensation• Tie incentive compensation with employee’s performance.

Internal Labor Market• Look at your own employees before you go outside to search for new candidates.

Participation• Provide employees with opportunities to identify quality and cost problems and

influence decisions related to production.

TABLE IV


Internal Labor Market

Look at your own employees as a source forfilling vacancies in the organization before yougo outside to search for candidates. This kindof policy sends a strong message to yourworkforce that the organization values itspeople and is providing opportunities for ad-vancement to existing employees. Such a mes-sage strengthens the psychological contractand encourages employees to direct theirefforts to acquiring new skills, motivates themto improve their performance, and helpsensure their continued commitment to thefirm. Some of the more successful companieshave established career services that providecareer information, career growth workshops,individual counseling, supervisory develop-ment programs, and career development li-braries—all available to their employeesduring working hours. Such efforts can pro-duce excellent pools of candidates that willincrease the efficiency of company operations,as reported, for instance, by AT&T (Brush &Nardoni, 1992).

Participation

In his book, High Involvement Management,Edward Lawler III suggests that "high-involvement" management is the competitiveadvantage available to countries with an edu-cated, achievement-oriented workforce able toperform effectively, and whose core valuessupport participation decision making (Lawler,1991). Moving power, rewards, knowledge,information, and decision making to lower rel-evant levels of the organization is a way toachieve and sustain a competitive advantage.Examples of empowered workforces, showingactual performance results, are numerous. Forinstance, when the Steiner/Bressler Advertisingcompany moved from being an autocratic to aparticipative organization, the result was a 25%drop in expenses while new business doubledbilling to $18 million (Sellers, 1994). Majorcompanies such as Xerox, Motorola, GeneralElectric, and AT&T believe that participationefforts are crucial in determining organizationaleffectiveness and survival. They have, therefore,worked hard to implement such participativeprograms.

Discussion

The primary purpose of this study was toexplore the relationship between HRM activi-ties and the perception of organizational per-formance. We hypothesized that organizationsthat viewed employees as potential partnersand important assets would have a higherperception of organizational performance.The results of the correlation analysis (TableII) support this hypothesis. The results indi-cate a positive correlation among severalHRM activities that stress the ability of theindividual (training), that allow employees toparticipate in the organizational effort (em-ployee participation), that provide them withopportunities for advancement within the or-ganization (internal labor market), and theperception of higher organizational perfor-mance. The positive correlations found amongselection, training, compensation, employeeparticipation, and internal labor marketactivities provide only preliminary evidenceof the influence of these activities on theeffectiveness of the organization.

In the second stage of our analysis, weinvestigated the combined effect of the vari-ous independent variables on the perceivedorganizational performance and perceivedmarket performance through a number ofstandardized regression models. The mostconspicuous result of this analysis was thattraining activities were the only variable thathad a positive and significant impact on theperceived organizational performance. Whenwe examined the variables that impact on theperceived market performance, we found that,in addition to the training activities, employeeselection activities played a significant role inthe regression model.

Organizations that place greater empha-sis on employee training increase the humancapital of individual employees and their jobsatisfaction, which then augments the overallability of the organization. An increase inhuman capital generates a higher perceptionof performance on the internal organizationaldimension as well as on the market perfor-mance dimension.

The fact that training activities have posi-tive and significant impact on the perceivedorganizational performance, while other HRM

Look at your ownemployees as asource for fillingvacancies in theorganizationbefore you gooutside to searchfor candidates.


activities do not, might be a consequenceof the size of the sample. It may also be anindication, however, that training activitiesare a form of “best practices” according tothe suggestions made by Pfeffer (1994) andthe empirical findings of Delaney andHuselid (1996). In other words, trainingactivities have a positive impact on per-ceived organizational performance, over andabove the other independent variables. Thisfinding also suggests that training activitiescan be considered an element in the firststage of attaining competitive advantage asproposed by Barney (1986; 1991; 1995) inhis resource base theory.

Our sample included organizations fromdifferent industries as well as from the privateand public sectors. As a result, we believe thatwe were able to identify HRM “universal bestpractices”, as were suggested by Pfeffer (1994).It is entirely possible that earlier studies, whichused samples that represent part of theeconomy’s different organizations, reported re-sults that are different from ours due to the “par-tial”3 nature of their sample. Our sampletranscends industrial and sectorial analysis andthus provides a truly “global” picture. It makesa unique contribution, in our opinion, to theemerging empirical literature exploring thecombined impact of HRM practices on organi-zational performance.

The validity of our results might be ham-pered by the fact that our regression modelsrely on the assumption that HRM activitiesaffect the perceived organizational andmarket performance. The possibility of a si-multaneous relationship between HRMactivities and the perceived organizational and

market performance cannot be excluded.Thus, one alternative explanation for our find-ings is that retrospective attributions biasrespondents’ perception. We believe that thisis an unlikely explanation for the results shownin Table III. Future research should attemptto collect data with time lags betweenpredictor and outcome measures, to enablelongitudinal analysis.

The Israeli environment provides re-searchers and practitioners with a convenientlaboratory for studying and analyzing advancedmanagement practices, in as much as it is a“maduradam” (microcosms) of the developedcountries in Western Europe and NorthAmerica.4

In summary, our results have severalimplications. First, they point to the strongand significant relationship between trainingand firm performance. Thus, managers shouldgive special attention to the training of em-ployees. Second, employee selection that canproperly identify those candidates who fit theneeds of the job, the work-team, and theorganization can enhance firm performance.Lastly, in order to achieve improved organi-zational performance, the above HRM activi-ties should be implemented in an atmosphereof employee participation. Baird andMeshoulam (1988) proposed that HRM prac-tices “must fit with and support each other”(p. 122). Thus, organizations simultaneouslyuse many HRM practices that may enhance“operational effectiveness”, but in order toachieve “strategic positioning” as Porter(1996) suggested, they have to combineHRM practices in a way that produces asynergistic effect.

Managers shouldgive specialattention to thetraining ofemployees.


GEDALIAHU H. HAREL, Ph.D., is an Associate Professor of Human Resource Manage-ment and Industrial Relations at the Technion–Israel Institute of Technology. He re-ceived his Ph.D. in Industrial Relations and Human Resource Management at MichiganState University. He is the author or co-author of over 60 articles and presentations.His articles have appeared in journals such as the Academy of Management, IndustrialRelations, and others. His current research interests include strategic HRM, unionmembership, and negotiation. He is also a widely experienced business consultant.

SHAY S. TZAFRIR is a Ph.D. candidate studying Human Resource Management in thefaculty of Industrial Engineering and Management at the Technion–Israel Institute ofTechnology, having also received his M.Sc in behavioral sciences from Technion. Heearned a B.A. and M.A. in Political Science from Haifa University, graduating withhonors. His articles have been accepted in journals such as Industrial Relations andothers. His current research interests include strategic human resource management,human resource and trust, and union membership.

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1. Authors’ names appear in random order, bothcontributed equally to the writing of this article.Special thanks go to Craig Schneier, Gerry Lake,and two anonymous reviewers for their helpfulcomments and suggestions during the develop-ment of this article.

2. The kibbutz or kevutza (plural: kibbutzim,kevutzot) is a voluntary collective communityunique to Israel, based on the principles of com-

ENDNOTES

munal ownership of the means of production,communal responsibilities for all the needs of thecommunity’s members and their families, andequal distribution of wealth.

3. Delaney and Huselid (1996), for instance, reporton for-profit and non-profit organizations, but noton governmental organizations.

4. Most multi-national firms from Europe andNorth America also operate subsidiaries in Israel.

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