the impact of human resource management on organisational performance: theory and research

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The Impact of Human Resource Management on Organisational Performance: Theory and Research JEAN-MARIE HILTROP, Senior Partner, InterCultural Consulting, Geneva

This article by Jean-Marie Hiltrop, considers some of the models which have studied the link between HRM and organisational performance. As yet, there is little real evidence, but it is growing and indicates that corporate HRM policies and practices - including 'best' practices - are associated with high

(financial) performance, and can encourage employee behaviour and attitudes towards strengthen- ing the competitive strategy of an organisation. But such 'best' practices can vary widely and even contradict each other. Questions are raised in the article about these 'best' practices.

The first part of the article looks at the relevant theoretical models, and the second part reviews the findings of recent empirical studies which have evaluated the effects of distinctive HR practices on organisational outcomes. Copyright © 1996 Elsevier Science Ltd

Introduction

In recent years, there has been a great deal of debate about the nature of the relationship between personnel practices such as selection, training and development and organisational strategies (Walker, 1980; Fombrun, 1984). This debate has led to the formulation of various

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IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

models and theories of 'strategic' HRM that postulate explanatory links between HRM and organisational performance. For instance, in their book on organizational capability, Ulrich and Lake (1990) argue that 'building better products or services, pricing goods or services lower than the competition, or incorporating technological innovation into research and manu- facturing operations must today be supplemented by organisational capability - the firm's ability to manage people to gain competitive advantage. Merely hiring the best people does not guarantee organisational capability. Hiring competent employees and developing those competencies through effective human resource practices, underpins organisational capability. Developing it does not happen by quick fixes, simple programmes, or managerial speeches. It involves adopting principles and attitudes, which in turn determine and guide behaviour. It is a way of thinking as well as acting, and it begins with the realisation that there is a strong link between competitiveness and effective people management' (p. 77). Like Guest and Hoque (1994), I suspect that many managers would agree with this argument but are unsure about whether such a view stands up to scrutiny.

This article reviews and discusses some of the models and studies that have explored the link between HRM and organisational performance. The overall conclusion is that while there is a growing body of evidence that certain types of HR practices are associated with high (financial) performance, the list of 'effective' practices varies from study to study and the effects are often not very strong. Practices such as teamwork, performance- related pay and decentralised decision-making are highlighted regularly in recent research as the key processes leading to competitive advantage (Pfeffer, 1994; Marchington, 1995). But from there the lists of 'effective' HR practices vary widely and even contradict one another. Devising such a list may, in fact, be impossible. In the second part of the article, the findings of recent studies are reviewed that sought to assess the effects of distinctive HR practices on organisational outcomes. First, however, let us take a look at a number of theoretical models that have made this link explicit.

Contingency Models of HRM

Throughout the 1980s and early 1990s, academics have proposed a number of models and theories that postulate explanatory links between HRM and competitive advantage. One of the most documented models, strongly associated with the Michigan Business School, was outlined by Fombrun et al., (1984) and highlights the importance of what has been called a 'contingency' approach to HRM. Early interest in this approach emphasised the importance of developing 'appropriate' HRM systems that are consistent with broad organisational requirements such as quality enhancement or productivity improvement. The underlying assump- tion is that organisational effectiveness depends on there being a tight 'fit' between human resource practice and

business strategies. As Sparrow and Hiltrop (I994) say: 'Different HRM practices serve to elicit and reinforce the appropriate behaviours in the organisation. These 'role' behaviours cut across the specific skills, knowledge and abilities that are required to perform particular tasks. They are considered as instrumental in the implementation of competitive strategies. HRM strategies are all about making business strategies work'.

The practices that Fombrun et al. (1984) felt to be the most important in achieving this 'fit' are selection, performance, appraisal, rewards and development. To make them work, these four areas of HRM policy have to be both externally consistent, so that HRM practices are linked with the business needs of the organisation, as outlined in the previous section; and internally coherent, in order to emphasise the co-ordination and creation of congruence among various HRM practices. This dual alignment is deemed critical to channel behaviours and create a dominant value or culture in the organisation that enables the effective implementation of strategy (Wright and McMahan, 1992).

Throughout the 1980s there were a number of variations along this theme of 'strategic fit' (Lengnick-Hall and Lengnick-Hall, 1988). One of the clearest expositions and developments of this theme was given by Schuler and Jackson (1987). In their model, HRM is seen as a menu of strategic choices to be made by HR executives intended to promote the most effective role behaviours that are consistent with the organisation strategy and are aligned with each other. The model's starting points are the generic competitive strategies outlined by Porter (1980) - i.e. quality enhancement, innovation and cost leadership or reduction. For each strategy, Schuler and Jackson developed a set of 'needed role behaviours' which vary across a number of dimensions and then stipulated a set of human resource practices that are needed to bring about these behaviours. For example, an organisation that adopts an innovation strategy needs to foster behaviours that are creative, have a long-term focus, a relatively high level of co-operation and interdependence, a moderate concern for quality and quantity, attention to both the process and the results, a high degree of risk taking and a high tolerance of ambiguity and unpredictability. In order to foster these sorts of behaviours, it is argued, the organisation needs job specifications that define close interaction and co- ordination among groups of individuals; performance appraisal systems that reward group-based achieve- ments; compensation systems that emphasise internal equity rather than market-based pay; and broad career paths to reinforce the development of a wider range of skills.

Another perspective of the linkage between business strategy and HRM is Miles and Snow's (1984a) model of organisational adaptation, which deals with alternative ways in which organisations define their product-market domains (strategy) and construct mechanisms (structures and processes) to pursue these strategies. Briefly, Miles and Snow suggest that there are four basic types of

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organisational strategies which they term 'Defender', 'Prospector', 'Analyser' and 'Reactor'. Each strategy has its own unique organisational features and supporting characteristics. For example, Miles and Snow (1984b) suggest that the basic HRM strategy of Defenders will be to 'build' human resources, as opposed to 'acquiring' or 'allocating' them. This means that a defender company typically engages in little recruiting above entry level, with selection based on 'weeding out undesirable employees', while training and development involves extensive, skill-building programmes. In contrast, Prospectors typically seek to buy in talent - a strategy that should involve sophisticated recruiting at all levels of the organisation, limited training, and extensive psychological testing before hiring. By implication, Miles and Snow suggest that analysers should match their HRM strategy to the nature of the product-market, and thus engage in 'make' or 'buy' HRM approaches as appropriate to the different product-market domains.

The contingency-based models of HRM serve to highlight the importance of ensuring that there is some sort of coherence and consistency across a range of human resource policies and practices in order to speed up the implementation of any strategic change. The prescriptions are however highly culture-bound and generally only tested against US organisations. For example, Jackson, et al. (1989) used surveys to investigate the relationship between organisational characteristics and personnel practices in 267 US organisations. Such conceptions of HRM tend not to fit easily with the European situation. Moreover, contingency models of human resource management tend to cast HRM in a reactive mode, seen as only serving the efficient implementation of a pre-conceived and rational strategy. This asks too little of HRM and ignores the contribution that it can make to the formation of strategy. Contingency models also assume that generic typologies of strategy such as those articulated by Porter (1980, 1985) are a valid starting point. They are not. Generic strategies tend not to be as mutually exclusive as asserted and the process of strategy implementation is often one that creates its own learning about HRM. The approach tends to underestimate the importance of incremental processes of strategy-making and strategy-change (Pascale and

Athos, 1982). There is also a problem with the choice of content areas for HRM. For example, the four policy areas of selection, appraisal, rewards and development in Fombrun's (1984) model seem to ignore important areas such as the design and organisation of work and the role of industrial relations. In addition, the whole idea of 'fit' seems inappropriate for a world in which there are high levels of dynamic and unpredictable change. Strategic planning is in reality a multi-stage and multi-level process. At what point and what level is an assessment of fit best made? It is not surprising that in reviewing this first approach Hendry and Pettigrew (1986) conclude: 'the contingency framework readily led to prescriptive theorising, especially when linked to typologies of strategy, 'culture' itself tended to be treated as a manipulable variable, and people tended to get excised from the equation' (p. 23).

Finally, while strategic integration is necessary in order to provide congruence between business and human resource strategy, integrating the two is easier said than done for the following reasons (Cooke, 1992):

°:° The different levels at which organisational strategies are formulated and the different strategies adopted in diversified companies make it difficult to develop a coherent view of what sort of HR policies and practices will fit the overall business strategy, and what types of contributions are required during the process of business strategy formulation.

°:° The evolutionary nature of business strategy makes it difficult to pin down the appropriate HR policies.

o:* The absence of written business strategies adds to the problems of clarifying the strategic business issues which HR strategies should address.

o:o The qualitative nature of many HR issues such as commitment, motivation and employee relations may hinder the formulation and monitoring of HR policies and practices.

These are serious problems and it may be difficult for the HR strategist to overcome them completely. It must be remembered, however, that integrating HRM into an overall strategic thrust may be highly desirable. For example, when British Airways embarked on a programme

Table 1 Arguments For and Against a Matching or Contingency Approach to HRM

Arguments For Arguments Against

1. Management personalities, skills and styles must be selected to match different situations.

2. As business needs change, so must people. 3. Behaviours need to be channelled through appropriate

pay appraisal systems. 4. A contingency approach facilitates the use of different

approaches to employee relations in different parts of the business.

5. It reduces the importance of questions about culture, style and non-economic issues.

1. It a s s u m e s a rigidity of personality and stereotypes managers.

2. It requires an unrealistic precision in selection systems. 3. It c r e a t e s an unrealistic requirement for mobility and

flexibility. 4. Training, job rotation and rewards can be used to

develop a broad repertoire of behaviours in

managers. 5. The strategy process and business differentiation is

never really based on situational contingencies.

Source: Sparrow and H iltrop (1994).

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of sustained growth and globalisation, it developed an integrated HR strategy aimed at achieving significant cultural change in five main areas - communications, management style, reward management, customer satisfaction, and employee relations. The links between each aspect of this strategy were emphasised in extensive training programmes and new communication channels were developed and used to ensure that every- one knew the new business strategy and requirements.

A 'Multiple-stakeholders' Perspective

A second view of strategic HRM emanates from the Harvard Business School. This model was first articulated by Beer, et al., (1984) and has tended to find greater favour in Europe, particularly in the UK (Hendry and Pettigrew, 1990; Poole, 1990). It concentrates more on the softer issues of strategic management, and given its roots in the human relations tradition, stresses the 'human' aspect of human resource management. In defining HRM as involving all those management decisions and actions that affected the nature of the relationship between the organisation and the employee, the model argues that historical problems of personnel management can only be solved when general managers develop a philosophy or viewpoint about how they wish to see employees involved in and developed by the organisation. This central philosophy can only be provided by general managers to ensure that personnel management activities do not simply become a set of uncoordinated activities, each guided by its own tradition.

The model postulates a range of different stakeholder interests such as shareholders, management, employee groups, government, the unions and the community. Although management are seen as having the upper hand, the importance of 'trade-offs' between the owners, employees and various employee groups is recognised, as are mechanisms for reconciling employee interests with the objectives of management. The model is not solely limited to the American experience as, for example, some attention is given to European models of co-determination (Boxall, 1991). It also builds on the matching model of Fombrun et al. (1984) by describing a much broader range of content for HRM policy co- ordinators. The actual content of HRM is described in relation to four policy areas:

1. Activities involved in managing the flow of people at all levels into, through and then out of the organisation i.e. recruitment, selection, placement, promotion, appraisal and assessment, promotion, termination and various other forms of outflows.

2. Activities necessary to ensure that reward systems are designed and operate in a way that attracts, motivates and retains employees at all levels in the organisation. It includes pay systems, motivation, and benefits.

3. Management of levels of authority, responsibility and power that are voluntarily delegated or

4. involved in decision-making within the organisation. Definition and design of work and the way in which people, information, technology and activities are arranged in order to provide the most appropriate outcomes.

Each policy area represents a series of major tasks that managers must attend to. The attraction of this model lies in both the breadth of content covered by these policy areas and the emphasis it gives to developing broad patterns of activity.

In considering whether an HRM policy enhances the performance of the organisation, the well-being of employees, or the well-being of society, Beer et al. suggest the following four generic questions:

1. To what extent do HRM policies enhance the commitment of people to their work and organisation?

2. To what extent do HRM policies attract, keep, and/ or develop people with skills and knowledge needed by the organisation and society, now and in the future?

3. What is the cost effectiveness of a given policy in terms of wages, benefits, turnover, absenteeism, strikes, and so on/

4. What levels of congruence do HRM policies and practices generate or sustain between management and employees, different employee groups, the organisation and community, employees and their families, and within the individual?

While these all sound sensible enough, this specification of desired outcomes makes the model highly prescriptive. Not all organisations may use this language or wish to achieve these particular outcomes. However, the model allows for analysis of these outcomes at both the organisational and societal level. It also acknowledges a broad range of contextual influences on management's choice of HRM activities. The employment relationship is seen as a blending of business and societal expectations. Although business strategy has a major role to play, a number of other factors such as socio-cultural considerations - including patterns of unionisation, labour market regulations, workforce characteristics, and community values are included in the equation. Unlike the 'contingency' models which point to a strong determination of HRM action by the situation and the environment, the multiple stakeholders model argues that managers are major actors, capable of making unique contributions and altering the organisational and environmental parameters that influence HRM activities.

Contextual Approaches

The approaches and models discussed so far were developed by North American scholars and may reflect the US value system. Guest (1990), for instance, has

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argued that the concept of HRM is as American as apple pie. Consequently, in the 1980s there was a vigorous debate about the relevance and adaptability of such models to the European situation. In addition, academics from the 'industrial relations' tradition have debated the concept of HRM in the context of political change, a shift in power from unions towards management, and the threat of a mere re-labelling (with little substantive change) of the role of the personnel function. They argue that the concept of HRM is directed solely at management needs and driven by their interests. As personnel management adapt to the new circumstances it will again rise in importance as a mediating discipline that balances management demand with issues of supply and the employee interest. Finally, the contingency and stakeholder approaches have been criticised on the grounds that:

°,'° Strategy should not really be seen as a ready-formed output to which HRM can be easily moulded. It is quite possible that changes in structure, culture or other areas of HRM can precede strategy change and therefore shape the way that the organisation thinks about strategy.

°~° Changes in strategy and HRM tend to occur over a long time scale. This makes the process of change of as much interest as the content of change. HRM systems should not be designed in an overly rational way when the processes that raise the need for them are anything but rational.

o,'o It is not appropriate to label HRM as a single form of activity. Organisations may follow a number of different pathways in order to achieve the same end result.

o~o Any analysis of HRM requires a sensitivity to management of change processes, as well as an understanding of the history (often over a 15 to 20 year time period) of how the organisation has developed.

Building on the human resource policy framework provided by the Harvard group, researchers at the Centre for Corporate Strategy at Warwick Business School therefore developed an understanding of strategy-making in complex organisations and related it to the ability to transform HRM practices. Their model adopts the Harvard researcher's description of HRM content (see the four policy areas outlined previously), includes the need to consider the external business environment and strategy, and builds in a requirement to understand the culturally-unique role of the HRM function in terms of:

°~° the definition of its responsibilities, o~- its perceived competence across a range of activities, °~- the way the function is organised.

To examine the link between strategic change and transformations in the way in which people were managed, the researchers conducted empirical investigations of over twenty leading UK organisations. (Hendry and Pettigrew, 1986, I990; and Hen&y,

Pettigrew and Sparrow, 1989). Their results showed that:

I. A number of leading UK organisations were indeed undergoing a transformation in the way they managed people.

2. Business change was the 'necessary condition' and primary driving force behind new patterns of HRM. However, there were also a number of important political and process considerations to bear in mind.

3. Business changes brought about by acquisitions, mergers, internationalisation, new technology, new products or customer requirements for quality and service acted as 'triggers' for new HRM activities, as did large scale reductions in headcount to achieve productivity improvements, labour market shortages, high levels of employee turnover, the need to upgrade recruitment or a requirement to meet rising career aspirations.

4. The contours of the strategic changes in HRM experienced by organisations in the 1980s were generally unclear at the outset. For many organisations there was a strong element of 'learning by doing'.

5. The role of corporate leadership and 'HRM champions' in bringing about successful change was also significant.

6. Responsibility for the new HRM activities was devolved increasingly to line management. However, in order for the changes to 'take root' in the organisation and become 'stabilised', organisations had to have already established a number of activities such as: appraisal systems to identify development needs; human resource planning systems; integrated recruitment and training; graduate intakes to accelerate development in the organisation; open and continuous career paths; and HRM budget relief mechanisms.

With regard to the effect of HR practices on performance, the research revealed a range of conceptual and process skills that were necessary in order to be able to both understand the importance of HRM and manage the changes it implied, such as:

°,'° A perception and understanding of the connections between business and HRM needs.

o~o Diagnostic skills to audit and take stock of existing skill bases in organisations in the light of anticipated business and technological changes.

o~o Sensitivity to the changing internal situation during major periods of change.

°~° Political skills to mobilise the internal and external forces of change, creating increasingly self- reinforcing patterns of HRM.

These characteristics helped managers change the patterns of HRM within their own organisations. Whipp (1991) later extended the analysis to organisations such as Chrysler UK/Peugeot Talbot, Kleinwort Benson, Longman Publishing, Prudential Corporation and Jaguar Cars.

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A Resource-based Perspective of the Link between HRM and Organisational Performance

The notion that the human resource policies and practices of the firm have implications for the creation of competitive advantage by providing the organisation with a unique source of talent that is difficult to replicate has been prevalent for many years. Recently, however, interest in this notion has intensified as academics and practitioners have explored ways to put this notion into practice. For example, Bailey (1993) argued that human talent is often 'under-utilised' and that organisational efforts to elicit discretionary effort from employees are likely to provide a source of competitive advantage that cannot be easily replicated by competitors. Bailey argued that certain HRM practices such as basic skill training, coaching, mentoring and incentive compensation can affect such discretionary effort through their influence on employee skills and provide employees with the competencies that are needed to yield returns in excess of any relevant costs.

The effectiveness of even highly-trained people will be limited, however, if they are not motivated to perform. Consequently, effective HRM practices should affect employee motivation through organisational systems and cultures that encourage them to improve how their roles are performed. Examples of firms' efforts to enhance employee motivation include the use of 360 degree performance appraisals, performance related compensation, the use of non-financial reward schemes that recognise employees' high performance, and other forms of incentives intended to align the interests of employees with those of the organisation.

Finally, it is clear the contribution of even highly skilled and motivated employees will be limited if jobs are programmed or structured in such a way that employees do not get the opportunity to use their skills and abilities to improve their performance. Consequently, HRM practices can also create competitive advantage through provision of organisational structures, leadership and work conditions that encourage initiative and creativity among employees and allows them to find ways to improve how their jobs are performed. Delegation, cross-functional teamwork and participative management are examples of such conditions.

Thus, the theoretical literature clearly suggests that the HRM practices of the organisation have important implications for the firm's competitive advantage through their influence on employees' skills, motivation and opportunity to improve their performance. The presumption in both this literature and the emerging conventional wisdom is that more effective HRM systems and practices, which simultaneously increase the skills, motivation and freedom of employees are sources of sustained competitive advantage that provide a significant contribution to the firm's financial performance. Unfortunately, very little empirical

evidence supports such a belief. What empirical work exists has largely focused on individual 'best' practices to the exclusion of overall HRM systems or approaches (Huselid, 1995).

Best Practice Models of HRM

A fifth set of HRM models suggests that, although there is 'no one best way' to manage people, organisations which are adapting most successfully to the new social and economic environment tend to be characterised by a similar set of HR policies and practices. The major, individual items typically mentioned in these 'best- practice' models are:

°~° relatively well-developed internal labour market arrangements (in matters of promotion, training and individual career development);

°,'° flexible work organisation systems; o~° performance-based and/or skill-based compensation

practices; o~'o high levels of teamwork and employee participation

in task-related decisions; o'~° extensive internal communication arrangements.

The particular organisations which are typically held to come closest to this profile are Japanese plants or greenfield site operations. It is, however, widely conceded that very few organisations are doing all these things or do them all equally well. This may be inevitable because of the inherent contradictions in HRM. For example, Legge (1989) in querying the concept of HRM, identified multiple and often competing meanings in such desired values as commitment to organisational objectives, career goals, work group and family concerns. As she points out, 'if we assume that HRM emphasises high standards of performance and quality of product/service, individuals' job commitment would seem important, along with their desire to develop their skills and competencies. But the higher the level of commitment to a particular set of skills, arguably, there may occur a decrease in an employee's preparedness to be flexible as between jobs, or willing to accept a redefinition of a job that might diminish elements to which a commitment has been made' (p. 35).

This said, a number of US studies have concluded that specific HR practices seem to characterise companies that are especially effective in achieving competitive advantage. For example, in a recent study of 'what effective firms do with people', Pfeffer (1994) enumerates sixteen distinctive management practices. They are security of employment, coupled with the list of activities listed in Table 2.

Many of these practices seem like fads because they are often implemented without much understanding of the underlying principles of human behaviour as well as a tendency to do whatever is popular at the moment,

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Table 2 What Effective Firms do with People

1. Financial incentives for excellent performance. 2. Work organisation practices that motivate employee

effort and capture the benefits of know-how and skill. 3. Rigorous selection and selectivity in recruiting. 4. Higher than average wages. 5. Employee share ownership plans. 6. Extensive information sharing. 7. Decentralisation of decision-making and empower-

ment. 8. Work organisation based on self-managed teams. 9. High investment in training and skill development.

10. Having people do multiple job and job rotation. 11. Elimination of status symbols. 12. A more compressed distribution of salaries across

and within levels. 13. Promotion from within. 14. Along-term perspective. 15. Measurement of HR practices and policy

implementation. 16. A coherent view of the employment relation.

Source: J. Pfeffer (1994).

regardless of whether it makes sense in the specific setting or organisation. However, as Pfeffer (1994) points out, this trendiness does not necessarily mean that the practices or the principles on which they are based are false or useless. Indeed, what is so striking is how stable basic ideas of how to manage people have been over time.

The Research Evidence

The theoretical literature clearly suggests that there is a strong relationship between an organisation's HRM practices and performance. But is this supported by empirical studies? And if this is so, which practices are associated with what aspects of performance?

Although there are several methodological problems with the studies that have tested the link between HRM and organisational performance, the results are encouraging. And although we are a long way from proving that specific HR policies and practices are causing better outcomes, the evidence is beginning to accumulate that employers who use HR management practices creatively and strategically are able to attract and retain more talented people, thereby contributing to organisational performance (Guest and Hoque, 1994).

For example, Kravetz (1988) conducted a survey of 150 Forbes 500 companies to examine the relationship between 'Human Resource Progressiveness' (HRP) and a variety of financial measures drawn from Standard & Poor's Compustat Services, such as five-year growth in sales, five-year growth in profits, and P-E ratio for the latest twelve months. HRP was measured by asking the vice presidents of human resources of each company in the survey to complete a fifty-one item questionnaire on human resource policies and practices in the areas of

communication, management style, career development, performance management, working hours and employee participation. For each area, respondents were asked to indicate, on a five point Likert scale, to what extent they agreed with a number of statements, such as 'A job candidate's creativity is an important part of the selection process at our company' and 'Salary increases are definitely based on job performance at our company'. As predicted, a strong positive correlation was found between HRP and nearly every financial indicator. For instance, the correlation coefficient between HRP and profit margins was 0.37. This was illustrated by the fact that highly progressive companies had an annual profit growth of 10.8 per cent, compared to only 2.6 per cent in the less progressive companies. After analysing the financial data, Kravetz (1988) concluded that 'companies that are low in HR progressiveness could add an extra $56 billion to their profits each year by increasing their profit to the levels of the highly progressive ones. That is a tremendous potential, and the evidence strongly suggests that human resource progressiveness is the way to achieve it' (p. 43).

Another startling conclusion comes from a study by Schuster (1986). After researching the management structures and practices of 592 Fortune 1000 companies in the US, Schuster identified six 'innovative' HRM practices which were he thought to be related to the general organisational philosophy which Peters and Waterman (1982) termed 'attention to people'. These six practices were:

I. the assessment centre approach to personnel selection;

2. flexible or 'cafeteria' approach in reward systems; 3. productivity bonus plans; 4. goal-oriented performance appraisal; 5. alternative work schedules; and 6. organisational development.

Senior human resource executives in each of the 592 companies were asked to indicate whether or not each practice had been put into use, reasons for use (or nonuse), and an evaluation of how successful each practice had been in accomplishing the objectives for which it was implemented. The general hypothesis was that the greater the number of 'innovative' practices, the more 'people-oriented' the management philosophy, and the more effective the organisation. The results supported this hypothesis. For instance, the average return on equity of those firms using one or more of the practices was 11 per cent higher than the return of those firms not using any of the practices. The total utility of the six practices for the average Fortune 1000 company was estimated at $7.5 million per year (Schuster, I986).

Table 3 summarises the main conclusions of eight other studies that have examined the influence of HR practices on organisational performance. Although the findings are promising, there are several problems with this type of research. One obvious criticism is that these results do not prove that innovative or progressive HRM practices



Table 3 Exploring the Effects of HRM Practices on Organisational Performance

• Ichniowski, Shaw and Prennushi (1993), using longitudinal data from 30 steel plants, found a positive link between the use of 'cooperative and innovative' HRM practices and productivity.

• Terpstra and Rozell (1993) found a significant and positive link between the extensiveness of recruiting, selection test validation, and the use of formal selection procedures and firm profits.

• Russell, Terborg and Powers (1985) found a significant link between the adoption of employee training programmes and financial performance.

• In a British study of new workplaces, Guest and Hoque (1994) found that those establishments which have a coherent and clearly articulated HRM strategy and have a large number of practices in place that are likely to promote commitment, also have superior quality and productivity than those that either have no strategy or an absence of such practices.

• Huselid (1995) used data from a sample of nearly one thousand US firms to examine the impact of HRM practices on turnover, productivity and corporate financial performance. He concluded that the use of 'High Performance Work practices' (including comprehensive employee recruitment and selection procedures, incentive compensation and extensive employee involvement and training) have a statistically significant impact on both intermediate employee outcomes (turnover and productivity) and short- and long-term measures of corporate financial performance.

• Cook and Ferris (1986) compared the nature of human resource management practices in high- and low- performing firms within their industries that were experiencing decline. They found that the human resource practices of high-performing firms reflected a longer-term focus, consistent with the firm's strategy, and more horizontal integration among the different activities within the human resource function. The high performers also tended to do systematic planning during good times to prepare for future fluctuations in the internal and external environment.

• Roberts (1995) studied how HR strategy affects profits in 3000 businesses throughout the world. The study suggests that businesses can increase their profitability by up to 15 per cent by ensuring that managers are satisfied with their level of participation in decision- making, sharing information and involvement with developing ideas for the business. The research also shows that a well-run, professional appraisal system can significantly improve the performance of individuals, and therefore the profitability of the business.

• Since 1992, the Leading Edge Research Team based at the London Business School and the Judge Institute of Cambridge Institute has examined how eight large companies link business strategy to individual and team performance (Gratton, 1995). The findings suggest that the closer or stronger the linkage between business strategy and human resource processes, the greater competitiveness and organisational effectiveness. Key processes identified in the research include: reflecting business goals in individual and team objectives, and in performance measures, identifying people with high potential; and creating development tracks that take them through significant work experience.

cause better financial performance, but only that the two may be related. Having a highly profitable company may allow managers to be more progressive in their approach to people rather than the other way around. Second, it is possible for an organisation to do all of the things 'progressive' companies are doing and be unprofitable and unsuccessful. IBM, for example, has implemented most of the innovative and progressive HRM activities listed above. That in itself, however, could not overcome the weakness of an inappropriate organisational structure, product strategy and culture. Third, as Pfeffer (1994) points out, innovative HR practices have potential downsides as well as benefits and they are not necessarily easy to put in place, particularly in a large, long-established organisation. For example, many people and organisations resist the introduction of merit pay, bonus payment and/or gain sharing, believing it actually harms performance.

Conclusion

Contrary to popular belief, there is little real evidence that HRM policies and practices are improving organisational performance. Nevertheless, the evidence is growing. And although it will take time before the longitudinal data exists to fully test the theories and models described above, the evidence is consistent with the view that the HRM policies and practices of an organisation have a powerful influence in motivating employees to exhibit the kinds of attitudes and behaviour that are needed to support and implement the competitive strategy of an organisation. This research raises a number of questions about the nature of these practices - including what would be widely recognised as 'best' practices. Four questions appear to be especially significant:

°:° Is there a significant difference between the HRM policies and practices of high-performance versus low-performance organisations?

• :- If so, what are the key internal and extemal contextual factors that affect the design and implementation of these HRM practices?

• :" To what extent, and how, can the HRM practices that support the success of high-performance organisations be introduced into a low- performance company?

°;, What does all this mean for the way organisations attract and motivate people?

The answers to these questions clearly have profound implications for the management of human resources. Ideally, they should give personnel managers a clear sense of how they can adapt their existing HRM policies and practices to create a skilled and motivated workforce and thereby enhance the competitiveness of their organisation.

On the other hand, it would be wrong to assume that the link between best practices and high performance is

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universal or automatic. The arguments put forward by Marchington (1995) in a recent article entitled 'Fairy tales and magic wands: new employment practices in perspective' are compelling. He warns against the danger of adopting a diet of simple solutions that are based on unrepresentative samples of case studies and tell stories of happiness and peace where conflict and organisational conflicts are aberrations instead of being the norm. As Guest and Hoque (1994) say: 'The key is strategic integration. What this means is that personnel strategy must fit the business strategy, the personnel policies must be fully integrated with each other and the values of the line managers must be sufficiently integrated or aligned with the personnel philosophy to ensure that they will implement the personnel policy and practice. This is a tall order which will often require reinforcement through leadership and through the organisational culture. Where this can be achieved, then there is growing evidence that a distinctive set of human resource practices result in superior performance' (p. 44).

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JEAN-MARIE HILTROP, Gerstraat 4Z 8400 Oostende, Belgium

lean-Marie Hiltrop is a specialist in the area of human resource management. Previously a Professor at the University of Leuven, Belgium, and IMD, Lausanne, he has been involved in executive

education for many years. His recent publications include The Essence of Negotiation (I995) and The Accidental Manager: Surviving the Transition from Manager to Professional (1996). He also works as Senior Partner for InterCultural Consulting, Geneva, and undertakes workshops worldwide for corporate clients.

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the impact of human resource management on organisational performance: theory and research

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