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Internal marketing, employee Employee job

satisfaction
job satisfaction, and perceived
organizational performance
in microfinance institutions 773
Received 3 June 2015
Eddy Balemba Kanyurhi Revised 28 September 2015
Centre for European Research in Microfinance, Accepted 13 October 2015
University of Mons, Mons, Belgium and
Laboratoire D’Economie Appliquée au Développement,
Catholic University of Bukavu, Bukavu, Democratic Republic of Congo, and
Déogratias Bugandwa Mungu Akonkwa
Catholic University of Bukavu, Bukavu, Democratic Republic of Congo

Abstract
Purpose – The purpose of this paper is threefold: first, testing the relationships between internal
marketing and employee satisfaction; second, investigating the links between employee satisfaction
and perceived organizational performance; and finally, testing the relationship between internal
marketing and perceived organizational performance.
Design/methodology/approach – Data were collected from 419 employees working in
53 microfinance institutions (MFIs) in Kivu (DR Congo). Data processing was performed using
structural equations modeling through LISREL 9.1.
Findings – The results revealed that there is a positive and significant relationship between internal
marketing and employee satisfaction. The results also revealed that there is a positive and
significant relationship between internal marketing and perceived organizational performance.
However, no significant relationship between employee satisfaction and perceived organizational
performance was identified.
Research limitations/implications – There is a need to conduct a large qualitative survey aiming
to understand why MFIs apply internal marketing and marketing practices in general. The results
from such a study would serve to prepare a global quantitative study, which integrates in the same
model internal marketing, external market orientation, employee job satisfaction (EJS), and
organizational performance.
Practical implications – Results invite MFIs managers to change their mind and focus more on their
employees. In fact, employees generate the most cost in general but they can also contribute to sustain
growth and profitability. This is possible if they are better rewarded for their efforts.
Originality/value – This study links internal marketing, EJS and perceived performance in a sector
and country which have been less or not studied in the marketing sector.
Keywords Performance measurement, Internal marketing, Employees
Paper type Research paper

1. Introduction
Researchers in marketing and human resource management recognize the strategic
importance of human capital. Many studies (Delaney and Huselid, 1996; Guest, 1997;
Tortosa et al., 2009; Bellou and Andronikidis, 2008; Alencar de Farias, 2010) suggest International Journal of Bank
Marketing
Vol. 34 No. 5, 2016
The author is grateful toward Marc Labie, Ritha Sukadi and Didier Toussaint for helpful pp. 773-796
comments they provided to improve this paper’s quality. This research has received support © Emerald Group Publishing Limited
0265-2323
from the “Commission de la Coopération au Développement” (ARES-CCD). DOI 10.1108/IJBM-06-2015-0083
IJBM that employees have a great influence on the firms’ performance. Indeed, human
34,5 resources are unique resources that competitors simply cannot replicate (Akhtar et al.,
2008; Huselid et al., 1997) and provide competitive advantage to the firm (Papasolomou
and Vrontis, 2006).
In the marketing literature, the focus on employees as internal customers is called
“internal marketing” (IM) (Berry, 1981; George, 1990; Gounaris, 2008). “Internal
774 Marketing consists of an effort by an organization to train and motivate its employees
to provide better service”. It entails the application of the traditional marketing concept
and its associated marketing mix inwards to the organization’s own staff, in which
employees are treated as customers of the organization in order to improve corporate
effectiveness […]” (Varey, 1995).
Several studies suggest that IM, employee job satisfaction (EJS), and organizational
performance are correlated (Alan and Frimpong, 2004; Wieseke et al., 2009). From a
relationship chain perspective, IM is seen to affect employees’ commitment to the firm
(Stoffers and Heijden, 2009), which in turn is a determinant of employees’ job satisfaction
(Abzari et al., 2011). High EJS will reduce the staff turnover and improve organizational
performance (Gounaris, 2008; Pantouvakis, 2011). Thus, implementing IM and human
resources practices can drive profitability and create significant bottom-line results (Drake
et al., 2005; Vazifehdoost et al., 2012; Heskett et al., 1994; Huselid et al., 1997) through a chain
model. In fact, good IM and human resources practices “can improve the knowledge, skills,
and abilities of a firm’s current and potential employees, increase their motivation, reduce
shirking, and enhance retention of quality employees” (Guest, 1997).
Empirical studies linking EJS to organizational performance have grown rapidly.
However, most of them are still fragmented: some studies examine the direct
relationship between IM and EJS (Gounaris, 2008; Peltier et al., 2006; Rae, 2013;
Kameswari and Rajyalakshmi, 2012; Bermúdez-Gonzáleza et al., 2014), others focus on
the relationship between EJS and organizational performance (Schneider et al., 2003;
Bernhardt et al., 2000; Currall et al., 2005; Nebeker et al., 2001; Koys, 2003; Neuert and
Brenninger, 2014), and some others address the relationship between IM and
organizational performance (Panigyrakis and Theodoris, 2008; Ahmed et al., 2003;
Lytle and Timmerman, 2006). However, the correlation between all three concepts has
been rarely studied (Pantouvakis, 2011; Park and Kim, 2009; Gao-Liang, 2011).
Most empirical studies use samples from multiple industries, including
commercial and public banks, hospitality, restaurant and the nursing industries,
among others. We did not find any study investigating the relationship between all
three concepts in the microfinance sector. This study aims at filling this gap using
data from microfinance institutions (MFIs) in the Kivu region from DR Congo. Two
arguments may justify the relevance of this study. First, the success of MFIs depends
largely on the quality of the interactions between employees and customers and
among employees (Zeithaml et al., 1985). For most customers, frontline employees are
the first and unique contact point that they have with the MFIs. Frontline employees
are present for the whole duration of the credit process: they act as credit analysts
and marketers, and are also involved in loan granting and monitoring activities
(Canales, 2010; Beck et al., 2011). This means that employees are the most important
“factor of production” in microfinance (Holtmann and Grammling, 2005). Sarker
(2013) supports that the performance of microfinance highly depends on the success
and failure of loan officers. If they fail, the microfinance also fails with them
especially for group-based lending. Thus, employees have a positive impact on the
performance of organizations. This confirms that in the microfinance sector the
“messenger is often more important than the message” (Gibson, 2000). From the Employee job
customers’ point of view, frontline employees are the “service, the organisation, satisfaction
and the marketers” (Zeithaml and Bitner, 1996). Thus, customers build their
opinions about the MFIs based on the behavior and performance of the MFIs’
frontline employees (Bitner and Zeithaml, 2004; Parasuraman et al., 1985; Dixon et al.,
2007). Therefore, improving frontline employees’ empowerment and satisfaction
(Sasser and Arbeit, 1976; Berry, 1984; Parasuraman et al., 1991; Gounaris, 2006; 775
Gounaris, 2008; Ahmed et al., 2003) will have a positive impact on portfolio quality,
customers’ growth, and MFIs’ financial and social performance (Dixon et al., 2007).
Second, competition is now growing between urban MFIs in the Kivu region of DR
Congo. New MFIs have been sprouting, and commercial banks are targeting
MFIs’ customers (Kalala, 2006; Amuli et al., 2013). In such a context, MFIs are almost
forced to empower and satisfy employees to overcome competition (Akhtar et al.,
2008; Huselid et al., 1997).
This paper purports at testing the relationship between IM and EJS; EJS and
perceived organizational performance; and the IM and perceived organizational
performance. This study’s contribution to the existing literature is twofold. First, it
analyzes the relationship between IM, EJS, and organizational performance in a sector
where marketing issues are still understudied. Although frontline employees play a
central role in such organizations, their satisfaction has been less analyzed. Little is
known about EJS dimensions in that particular sector. Second, most of the studies that
link IM to EJS and organizational performance are focussed on American, European,
and Asian countries, but rarely on African countries. This study aims at filling this
gap by analyzing such relationships in a fragile, specific, post-conflict African region.
In this context, the resilience and performance of MFIs are driven mainly by the ability
of employees and managers to protect their institutions from a hostile environment and
to sustain growth.
We begin with a discussion of the theoretical framework to build our hypotheses.
Then, we provide insights into the methodologies used for data gathering
and processing. The third and fourth sections, respectively, present and analyze the
results. Finally, we conclude and discuss some limitations, implications, and future
research perspectives.

2. Theoretical background and hypotheses

The relationship between IM, EJS, and organizational performance is grounded in both
equity and service-profit chain model. According to the equity theory, “employees
evaluate their jobs by comparing what they put into their work with what they get out
of it” (Lings and Greenly, 2005). Thus, firms that invest more in their employees
through specific practices (e.g. training, internal communication) will have employees
with a higher degree of job satisfaction, who are expected to be more cooperative,
helpful, and considerable to both coworkers and customers (Alan and Frimpong, 2004).
Such positive human behaviors will have a positive indirect impact on the
organizational performance.
The service-profit chain model establishes the relationships between internal
service quality, EJS (employee retention and productivity), and external service
quality through organizational performance (revenue growth and profitability) and
customer satisfaction and loyalty. According to Heskett et al. (2008), customer
satisfaction is largely influenced by the perceived service quality, which, in turn,
IJBM depends on EJS. Some authors suggest that employee satisfaction is mainly driven by
34,5 empowerment and internal norms and practices (resulting from internal service
quality), encouraging employees to provide higher service quality to customers
(Heskett et al., 2008; Gelade and Young, 2005). They found a positive relationship
between internal service quality, EJS, customer satisfaction, firm profitability, and
revenue growth. Based on previous studies, we sketch the relationship between the
776 three concepts through Figure 1.

2.1 IM and EJS

The marketing literature provides several definitions and dimensions for the “internal
marketing” concept. For instance, IM has been defined as “applying the philosophy and
practices of marketing to the people that serve the external customers” (Berry, 1984;
Várnai and Fojtik, 2006), suggesting that investing in IM practices can foster employee
retention and commitment. Berry and Parasuraman (1992) have defined it as
“attracting, developing, motivating, and retaining qualified employees through job
products that satisfy their needs” (cited in Kale, 2006). Building on Berry and
Parasuraman’s definition, Varey and Lewis (2000) highlight that IM “evolved from the
idea that employees constitute an internal market within the organization, which needs
to be informed, educated, trained, rewarded and motivated to meet external customers’
needs and expectations.”
IM has been conceptualized as a multidimensional concept with three dimensions
(Gounaris, 2008; Huang and Rundle-Thiele, 2014), four dimensions (Hogg et al., 1998), or
even five dimensions (George, 1990; Rafiq and Ahmed, 2000; Conduit and Mavondo,
2001). Although there is no consensus on the number of dimensions that would
characterize the IM construct, we can identify common dimensions across
empirical studies: training and development, internal communication, appraisal and
feedback, employee motivation, customer orientation and satisfaction, inter-functional
co-ordination and integration, and management support.
As suggested by the service-profit chain model and the equity theory, the
relationship between IM and EJS should be positive. Thus, the more empowered and
trained the employees are, the more satisfied they might be. Several results have shown
that adopting IM through specific techniques (training and development, autonomy,
motivation, communication, and empowerment) will have positive impact on employees
job satisfaction. For instance, in banking sector (Al-Hawary, et al., 2013; Shahzad and
Naeem, 2013; Ullah et al., 2013), in hospitality, restaurants, and nursing (Gounaris, 2006;
Hwang and Chi, 2005; Huang and Rundle-Thiele, 2014). Combining the results from the
aforementioned studies, we can argue that IM and EJSs are positively related, which
allows us to define our first hypothesis as follows:
H1. IM positively influences EJS in MFIs.

H3
Internal Marketing H1 H2 Perceived
Internal Marketing Employee Job
Figure 1. Organizational
Satisfaction
Conceptual performance
framework
Source: Taken from Hwang and Chi (2005) and Park and Kim (2009)
2.2 EJS and organizational performance Employee job
The relationship between EJS and organizational performance has been studied for satisfaction
decades and yielded mixed results. Some studies found insignificant results
suggesting an insignificant direct relationship (Chi and Gursoy, 2009); while Koys
(2003) established that EJS plays a primary role in helping companies achieve
financial goals, and found a significant direct relationship between EJS and
organizational performance. 777
The same positive link has been demonstrated in hospitality and in banking sector
(Manafi et al., 2011) and was proxied by customer satisfaction (Chi and Gursoy, 2009),
return on assets (Mahmood et al., 2011), and employee commitment (Bhatti et al., 2011).
Roughly, it is clear that EJS positively affects employees’ commitment, which in turn
impacts organizational performance. Although no significant relation was found in
Bernhardt et al. (2000), we build on the aggregated aforementioned results to assume that:
H2. There is a positive relationship between EJS and organizational performance.

2.3 IM and organizational performance

The relationship between IM and organizational performance has been examined in
numerous studies (Guest, 1997) and various sectors, such as banking, hospitality,
nursing, and other service sectors. The aggregated results indicate that organizations
that implement IM or that “link human resources management to strategy report
higher financial performance outcomes” (Huselid, 1995). IM practices prevent staff
turnover, reinforce organizational commitment (Poor et al., 2013), and improve financial
outcomes through the service-profit chain. It has been largely shown that “levels of
organizational service orientation are positively correlated with organizational
profitability (firm ROA) and with the bank’s financial performance measured in
terms of its consumer products performance (loans and deposits)” (Lytle and
Timmerman, 2006; Vazifehdoost et al., 2012).
Also, the adoption of IM practices affects customer loyalty (Ghoneim and El-Tabie,
2014) and improves organizational performance. The studies by Wang Gao-Liang
(2011) and Abzari et al. (2011) suggest that IM directly impacts EJS and loyalty
(Yu-Chuan and Shinyi, 2013), which encourages employees to have positive emotions
toward customers. These results confirm that IM practices are a determinant of
organizational performance, but not that business performance influences HR results
(Koys, 2003). Therefore, it can be concluded that “hotels’ performance is mainly driven
by a strict adoption of human resources management practices (work team, selection
and appointment, and performance appraisal)” (Abou-Moghli and Abo-Rumman, 2012).
Thus, IM plays a great role in firms by aligning employees and managers through the
firms’ objectives by offering good communication channels, establishes good enterprise
culture, etc., hence allowing employees to achieve external marketing objectives”
(Chang and Chang, 2009).
Empirical findings from other service industries confirm that there is a significant
linear relationship between IM mix elements (top management support mix, process
optimization, cross-functional co-coordination mix) which is the application of IM
practices at the firm level should enhance positive interactions between staff which in
turn would improve their relationships with the external customer (Panigyrakis and
Theodoridis, 2009). Thus, valuing employees creates a more motivated workforce that
will have positive consequences for customer satisfaction and profitability (Lings and
Greenley, 2010). Therefore, IM allows firms “to ensure that the frontline employees
IJBM remain committed and provide quality service to satisfy their customers” (Budhwar
34,5 et al., 2009). According to Sanchez-Hernandez and Miranda (2011), firms that
strengthen internal information dissemination and that are more responsive to
employees will enhance their organizational performance (Rodrigues and Pinho, 2012).
Fu (2013) corroborates this argument by proving that when airline companies “adopt
effective educational training or internal marketing with respect to job empowerment,
778 they will succeed in encouraging flight attendants to undertake airline assignments,
and the flight attendants will employ sincere, appropriate emotions in the performance
of their work.” This result is consistent with Harel and Tzafrir (1999), who support that
training is the single independent variable found to be statistically significant in
affecting perceived organizational performance. Building on the aforementioned
arguments, we define our third hypothesis as follows:
H3. IM practices have a positive influence on MFIs’ organizational performance.

3. Methodology
3.1 Sampling and data collection
Data collection began with a pilot survey. The pilot survey allowed us both to assess the
facial validity for our measurement scales, to test our questionnaire, and to determine the
sample size (Gianelloni and Vernette, 2012). We contacted 40 employees from four MFIs
in Bukavu and Uvira. Their feedback allowed us to detect ambiguous items. We
performed a preliminary reliability test (total items correlation) (Spector, 1985; Churchill,
1979) that allowed us to exclude items that were not related to the concepts.
The survey targeted 650 employees from 53 MFIs in Bukavu, Goma, Uvira, Beni,
and Butembo. To have access to employees, we contacted the managers and directors
of the MFIs by telephone and we sent a formal letter. Hence, we obtained permission
from all the biggest MFIs and networks in the North and South Kivu. The survey was
conducted in two ways. First, it was directly performed with employees when they
were not busy. Second, the questionnaires were given to the managers or human
resource managers, who then distributed them to employees. To maximize the
response rate, the field researchers had to rely on one employee in each MFI acting as
a local contact point. Those contact employees were in charge of collecting the
questionnaires from other employees and encouraging them to participate in the
survey. In some MFIs, managers were opposed to the survey and denied the research
team to access to their employees. When such MFIs were too small, the field
researchers decided to exclude them from the respondents’ population. However,
when those MFIs were big, they chose an informal way to obtain by resorting to their
social connections with one or many employees working in these MFIs.
These employees were contacted at home and given questionnaires had to match
the total number of employees working in a particular MFI. Employees were paid a
small amount of money (one dollar per filled questionnaire). So, they circulated the
questionnaires to their colleagues, ensured the questionnaire monitoring, collected
filled questionnaires, and returned them to the field researchers.
The survey targeted managers, loan officers, cashiers, marketers, accountants.
The inclusion of these categories is justified by the fact that “back-office personnel,
although not directly interacting with customers, […] also affect customer experience”
Gounaris, 2008). The respondents were chosen using proportional stratified sampling,
implying that the number of employees depended on the MFI’s size. We considered that
only employees with at least six months of experience are informed enough regarding
to their satisfaction, IM practices and the MFI’s organizational performance. Employee job
The survey was performed by 38 master’s degree students in microfinance, finance, satisfaction
and management. The enumerators received a one-day training with the researcher.
A period of one month has been taken to perform the survey. A total of 650
questionnaires were administered, and 439 were returned after a regular monitoring
from the research team. In total, 20 among these were not usable because of either
incompleteness or being badly filled. This reduced the sample size to 419, representing 779
a 65 percent response rate.

3.2 Measurement
Organizational performance (POP). In line with the previous studies, we measured
organizational performance using perceptual subjective measures (Lawrence and
Lorsch, 1967; Dess and Robinson, 1984; Dess, 1987; Venkatraman and Ramanujam,
1987; Powell, 1992). The reasons for choosing these measures are twofold: first, MFIs
were not willing to provide confidential information from their financial statements as a
matter of policy (Powell, 1992). Second, subjective performance measures have become
popular and are still used in numerous papers published in leading journals, both in
marketing and management (Delaney and Huselid, 1996; Perry-Smith and Blum, 2000;
Sousa, 2004; Hartog et al., 2013). We measured organizational performance using a 20
items scale divided in two dimensions, drawn from Delaney and Huselid (1996). This
scale has been modified to match the specific context of microfinance (Armendariz and
Morduch, 2010; Tchakoute-Tchuigoua, 2010; Hartaska, 2005). Managers and employees
were asked to compare the performance of their MFIs to the performance of their
competitors over the last three years on a Likert scale of seven points ranking from
“worst performance” (1) to “best performance” (7) (Akhtar et al., 2008). We subjected
this theoretical scale to both exploratory and confirmatory factor analysis (Churchill,
1979; Gerbing and Anderson, 1988; Lings and Greenly, 2005) and obtained a purified
scale of 13 items divided into three dimensions, which accounted for 70 percent of the
organizational performance variance. The results from reliability (α ¼ 0.90) and
validity tests confirmed that this scale was reliable and valid. All fit indicators
(CFI ¼ 0.97; IFI ¼ 0.97, TLI ¼ 0.96; RMSEA ¼ 0.08) confirmed that the measurement
model was consistent with the data.
IM. We measured IM using an existing scale: a modified version of the wheel of IM
(Zeithaml and Bitner, 1996). To match the management practices of the microfinance
sector, three professors who specialized in microfinance courses from two universities
were invited to discuss and help us modify this scale (Gao-Liang, 2011). We created a
measurement scale with 33 items divided into four dimensions. For all measures, we
used a seven-point scale, ranking from “I totally disagree” (1) to “I totally agree” (7)
(Gounaris, 2008). We ran an exploratory factor analysis to reduce the number of items
and refine the IM scale (Lings and Greenly, 2005), and obtained a reduced scale of 21
items divided into five dimensions, accounting for 67 percent of the IM variance.
The results from reliability (α ¼ 0.89) and validity tests revealed that this scale
was reliable and valid. A confirmatory factor analysis confirmed the existence
of five factors with consistent fit indicators (CFI ¼ 0.95; IFI ¼ 0.95, TLI ¼ 0.94;
RMSEA ¼ 0.07).
EJS. We measured EJS using a scale developed by authors through literature review
and interviews with employees and managers in Kivu. The initial scale was composed
of 124 items divided into ten dimensions. We ran an exploratory factor analysis to
IJBM reduce the number of items and refine the EJS scale (Lings and Greenly, 2005), and
34,5 obtained a reduced scale of 43 items divided into ten dimensions, accounting for
65 percent of the EJS in MFIs. The reliability (α ¼ 0.93) and validity tests performed on
this scale confirmed that it was reliable and valid. The results from a confirmatory
analysis highlighted the dimensionality of the scale, with good fit indices (CFI ¼ 0.94;
IFI ¼ 0.94, TLI ¼ 0.94; RMSEA ¼ 0.06).
780 We estimated a measurement model taking into account the three constructs to test
and confirm the reliability and validity of the constructs. To reduce the complexity of
the model, we used the dimensions related to each construct as an observable variable.
We summed and averaged the items related to each dimension to obtain an index
(Vieira, 2011; Parauraman et al., 1988; Bahia and Nantel, 2000, Karapete et al., 2005).
Results revealed that the model fits the data well (CFI ¼ 0.92; IFI ¼ 0.92, TLI ¼ 0.91;
RMSEA ¼ 0.08). Results from the measurement model allowed us to obtain reliability
and validity values (Table I).
Information from the table reveals that the three constructs exhibit large Cronbach α
coefficients and all are above 0.7. In fact, Cronbach α is estimated to α ¼ 0.90 for
organizational performance, α ¼ 0.89 for IM, and α ¼ 0.93 for EJS. All construct
reliability values are higher than the standard threshold of 0.7. The construct reliability
is evaluated, respectively, to be 0.81 for organizational performance, 0.77 for IM, and
0.85 for EJS. The values attached to the average variance extracted (AVE) are also
higher than the recommended cut-off of 0.5. These values are estimated, respectively, to
0.58 for organizational performance 0.51 for IM, and 0.57 for EJS. The combined
information from construct reliability and the AVE values indicate that all used
measures exhibit convergent validity (Gerbing and Anderson, 1988). The discriminant
validity has been proven resorting to the correlation matrix between the three principal
constructs (Fornell and Larcker, 1981). Table II provides more details.
The results from Table II show that all the values of squared correlations between
variables are below the attached average extracted variance. Such results prove that

Cronbach α Reliability Extracted variance

Constructs Dimensions Items coefficient (CR) (AVE)

Organizational
Table I. performance 3 13 0.90 0.81 0.58
Synthesized Internal marketing 5 21 0.89 0.77 0.51
information about Employee job
measures of satisfaction 10 43 0.93 0.85 0.57
variables Source: Compilations from LISREL results

Average extracted
Constructs 1 2 3 variance (AVE)

Internal marketing 1 0.51

Organization performance 0.61 (0.37)*** 1 0.58
Table II. Employee job satisfaction 0.73 (0.53)*** 0.45 (0.20)*** 1 0.57
Correlation matrix Notes: ( ) ¼ squared correlation between variables. ***p ⩽ 0.001
between constructs Source: Compilations from correlation results using SPSS 16.0
each construct is totally different from each other, which is an evidence of Employee job
discriminant validity. satisfaction
3.3 Analytical procedures
SEM allowed us to deal with the relationships between the latent variables and to
determine their underlying dimensions through a confirmatory factor analysis.
We used composite reliability (CR) and AVE (Fornell and Larcker, 1981) to prove 781
both convergent and discriminant validity. For these two indicators, we relied
on the values proposed by Bagozzi and Yi (1988): CR should be equal to or greater
than 0.60, and AVE should be equal to or greater than 0.50. This suggests that
the items share more common variance with their respective constructs than with
other constructs. After this assessment of psychometric properties of the constructs,
we examined the structural model in order to assess the model’s explanatory power
and the significance of the hypothesized paths. We estimated a CFA measurement
model including IM, EJS, and organizational performance. We used standard fit
indicators to assess the consistency of this model (TLI ⩾ 90; CFI ⩾ 90; IFI ⩾ 90;
RMSEA ⩽ 0.08). To reduce the structural model’s complexity, we summed and
averaged items related to each dimension to obtain observable indicators (Karapete
et al., 2005). We tested our hypotheses by examining the value of the standardized
coefficients and the t-statistic value ⩾ 2.

4. Results and discussion

4.1 Sample socio-demographic characteristics
The results revealed that 66 percent of employees were surveyed in Goma and Bukavu,
two big towns in the Kivu region. In total, 70 percent of the sample are men compared
to 30 percent of women. The results indicate that employees are quite young in the
most surveyed MFIs. In fact, employees with age between 20 and 30 years
(representing 43 percent) and between 31 and 40 years (representing 45 percent) are
more representative of the surveyed employees. In total, 40 percent of surveyed
employees have a bachelor degree and 45 percent have a master degree; revealing a
high education level for the sample. The results demonstrated that 59 percent of
employees are married compared to 36 percent of unmarried employees. The results
revealed that 62 percent of employees are working as “frontline employees.” Most of
them are loan officers (32 percent), cashiers (22 percent), or marketing’s agents
(8 percent). As for tenure, 43 percent of employees are working in the same MFI since a
period between one and three years. Employees with the lowest tenure (less than one
year) represent 13 percent of total sample compared to 5 percent of highest tenure (ten
years and more). The largest number of informants (71 percent) has revealed that they
have not any social connections with the directors or managers of the MFIs. Results
demonstrated that 61 percent of informants have got the current job by successfully
meeting all requirements related the selection processes compared to 27 percent who
accessed to the job after performing an internship. Can the above informants’
characteristic influence EJS, IM perception and perceived organizational performance?
We ran a one way ANOVA and t-tests to answer this question. Table III displays the
results of underlined tests.
The results indicate that the perceived organizational performance is relatively high
with a mean of 4.93 indicating that informants believe that their MFIs are performing
well compared to competitors. The employee satisfaction mean score is estimated to
IJBM Organizational performance Employee satisfaction Internal marketing
34,5 Independent Levene’s Levene’s Levene’s
variables statistic F/T p statistic F/T p statistic F/T p

Sex 0.85 0.19 0.85 0.19 0.88 0.38 0.57 0.34 0.72
Age 0.46 0.16 0.96 0.064 0.77 0.54 0.20 0.45 0.78
Education level 0.08 0.78 0.54 0.55 0.34 0.85 0.50 0.92 0.45
782 Marital status 0.004 4.5 0.004 0.28 1.4 0.25 0.20 1.29 0.28
Tenure 0.95 0.56 0.68 0.48 0.45 0.77 0.27 1.02 0.40
Function 0.49 1.72 0.114 0.12 3.4 0.003*** 0.44 2.04 0.06
Parental
Table III. relationship 0.04 1.88 0.11 0.38 0.40 0.80 0.53 0.66 0.61
Linking employees’ Access channel 0.03 4.98 0.002 0.050 2.5 0.06 0.35 0.96 0.41
characteristics, job MFI tenure M ¼ 13 (12)
satisfaction, internal MFI size M ¼ 29 (24)
marketing, and Average M ¼ 4.93 (1.13) M ¼ 4.47 (0.91) M ¼ 4.38 (1.03)
organizational Notes: ( ) referred to standard deviation values. ***p ⩽ 0.001
performance Source: Compilations from SPSS 16.0

4.47 proving that employee are hardly satisfied with their jobs. The IM mean score is
4.38 demonstrating that employees are relatively appreciating efforts deployed by
managers to recruit, to empower and to reward employees in the MFIs. The average
tenure is 13 years. Results show that the MFI tenure varies from 48 years for the oldest
and one year for the youngest. Results related to MFI size revealed that surveyed MFIs
have 29 employees in average. MFIs size varies from 200 employees for the largest
MFIs and three employees for the smallest MFIs.
Results from the ANOVA and t-tests revealed that any socio-demographic variable
does not influence the perceived organizational performance (p W 0.05). So the level of
IM is not related to any socio-demographic characteristics. It appears from the Duncan
tests that employee position influences the employee’s job satisfaction (F ¼ 3.4;
p ¼ 0.003). Indeed, top managers (M ¼ 4) and loan officers (M ¼ 4.01) exhibit average
employee satisfaction scores that are lower than accountants (M ¼ 5) and marketers
(M ¼ 4.6). All other socio-demographic variable does not impact employee satisfaction
(p-values are W 0.05 with t o 1.96, and low Fishers).

4.2 Exploring links between the IM, employee satisfaction, and organizational
performance
The results from the structural model suggested that the specified model fits the data,
as all fit indices are above the standard cut-off (CFI ¼ 0.92; IFI ¼ 0.92, TLI ¼ 0.91;
RMSEA ¼ 0.06) (Brown, 2006). Table III gives more information about the relationship
between constructs (Table IV).
Each variable is statistically linked to its latent variable to which it was supposed to
load. This is the case for the three latent variables. All dimensions related to employee
satisfaction, IM and organizational performance exhibit standardized loadings larger
than 0.5. All dimensions related to each latent variable have t-values larger than 1.96.
The R2 related to each dimensions is high and varies from 0.66 (employee and
customers orientation) for organizational performance to 0.30 for coworkers for EJS
constructs. Such results indicate that the specified model meets convergent and
Parameters Estimators SE t-value R2
Employee job
satisfaction
Financial performance ← performance 0.54 0.08 9.52 0.59
Employees and customers orientation ← performance 0.55 0.07 14.12 0.66
Employee and products development ← performance 0.54 0.07 12.75 0.47
Pay ← employee satisfaction 0.54 0.10 13.62 0.29
Coworkers ← employee satisfaction 0.55 0.07 8.62 0.30
Promotion ← employee satisfaction 0.54 0.09 8.59 0.30 783
Job conditions ← employee satisfaction 0.55 0.09 8.63 0.31
Training and development ← employee satisfaction 0.58 0.09 8.99 0.34
Communication ← employee satisfaction 0.74 0.09 10.36 0.55
Supervision ← employee satisfaction 0.64 0.08 9.46 0.40
Job security ← employee satisfaction 0.71 0.10 10.09 0.50
Nature of work ← employee satisfaction 0.56 0.08 8.76 0.31
Job attitudes ← employee satisfaction 0.56 0.09 8.76 0.31
Internal marketing ← employee rewards 0.56 0.07 11.36 0.31
Internal marketing ← recruitment process 0.56 0.06 16.32 0.56 Table IV.
Internal marketing ← internal communication 0.59 0.07 14.14 0.45 Links between
Internal marketing ← employee empowerment 0.74 0.06 12.17 0.35 internal marketing,
Internal marketing ← employees training 0.67 0.06 12.02 0.35 employee satisfaction,
Internal marketing → employee 0.73 0.07 9.37 0.53 and perceived
Employee satisfaction → performance 0.01 0.09 0.11 *** organizational
Internal marketing → performance 0.61 0.09 6.12 0.37 performance

discriminant validity requirements (Vieira, 2011; Lings and Greenly, 2005; Fornell and
Larcker, 1981; Gerbing and Anderson, 1988). As seen on Figure 2.
IM positively and significantly influences (γ ¼ 0.73; t ¼ 9.37; p ¼ 0.000) employee
satisfaction. Such results suggest that IM captures 53 percent of the total variance in
EJS which confirms the first hypothesis. These finding are consistent with previous
studies (Shahzad and Naeem, 2013; Rae, 2013; Tortosa et al., 2009; Gounaris, 2006;
Huang and Rundle-Thiele, 2014; Pantouvakis, 2011; Bigliardi et al., 2012). According to
Gounaris (2008), firms that do not apply IM practices and policies are unable to satisfy
employees because they are “less successful in shaping the necessary climate that
enhances employee satisfaction.” Thus, MFIs’ managers who communicates effectively
with the employees, listen to their complaints, answering their questions and promote
leadership behavior will encourage them to enhance their work and feel satisfied about
their jobs (Ibraheem et al., 2013; Sattar and Ali, 2014). This argument is more relevant
for MFIs which account mainly to loan officers to perform the objectives of the firms.
In fact, as loan officers work in discretionary way, implementing IM through
empowerment and power delegation will encourage them “to make their own
decisions in loan disbursement and other issues like recovery” (Hussain and Mujtaba,
2013) in more confident way. In fact, loan officers who benefit non-monetary
advantages like recognition, transfers, involvement in decision making find that they
are valued by their MFI and respond with high satisfaction level (Bhargavi and Raja,
2014). It is clear from empirical studies that the level of “employee’s job satisfaction is
directly conditioned by the degree to which the company has adopted the Internal
Market Orientation concept and practices” (Gounaris, 2008). IM influences employee
satisfaction through employee development and empowerment (Ahmad and Al-Borie,
2012). In fact, employees who benefit training from the firm participate in decision
making and are fairly rewarded for the work they are doing, remain satisfied, and are
 34,5

784
IJBM

Figure 2.
Path diagram

organizational
for IM, EJS and

performance links
POPERATI 0.40

PMARCHE 0.34

0.69 RECRUTEM PFINANCE 0.56

REMUN 0.71
0.56 0.54
0.45 EMPOWER EMPLOYE 0.55 COLLEG 0.70
0.74 0.73 0.54
MARKETIN 0.55 PROMO 0.70
0.67 0.01
0.58
0.55 CAPACIT 0.61 0.74 CONDIT 0.69
0.59 0.63
PERFORMA
0.71 FORMA 0.66
0.59 0.56
0.65 COMUNI
0.56 INFORMA 0.45

SUPERV 0.60

0.66 RECOMPA
SECURITE 0.50

NATURE 0.69

AMOUR 0.69

Notes: 2 = 549.81; df = 132; p-value = 0.00000; RMSEA = 0.087

more motivated to stay for a long term with the firm (Papasolomou and Kitchen, 2004). Employee job
Bigliardi et al. (2012) support that implementing IM practices allows firms to satisfaction
understand what employees value through bidirectional communication channels
allowing firms to become more responsive to the needs of its employees and satisfy
them. Thus, by enhancing a regular communication between managers and employees,
IM contributes to the positive reciprocal response of the workforce in the form of
greater satisfaction with their work and an improvement of its quality. Therefore, when 785
employees perceive that they are fairly treated and benefit special attention by
managers (Tortosa et al., 2009), they are “more likely to improve their general
performance and be more cooperative” (Pantouvakis, 2011). Pitt and Foreman (1999) go
further by demonstrating that when employees participate in decision making, they
become more motivated and are likely to understand the nature of the firm’s business
and problems. Brief, IM procedures lead to employees’ satisfaction “by providing a
value to the firm-employee relationship” (Panigyrakis and Theodoridis, 2008). By doing
so, firms expect to shape employee satisfaction and positive behaviors by performing
their job well and remaining committed to the firms.
The results suggest that EJS does not exert any significant influence on
organizational performance (γ ¼ 0.01; t ¼ 0.11; p ¼ 0.000). Such a result does not confirm
the second hypothesis that has expected a positive and significant link between the two
constructs. These results contradict some previous studies (Chi and Gursoy, 2009;
Koys, 2003; Nebeker et al., 2001). In fact, the common beliefs attesting that employees
who are satisfied and motivated perform better (Kaur, 2015; Yavas and Babakus, 2010)
are not confirmed in this study. However, the results of this study are consistent with
others. By investigating the relationship between the customer, employee satisfaction,
and financial performance, Wiley (1991) and Bernhardt et al. (2000) found that there is
no significant relationship between employee satisfaction and financial performance.
Yet, results from Wiley (1991) indicated that satisfaction with coworkers, supervisors,
and physical conditions among some dimensions of job satisfaction had no significant
positive influence on customer satisfaction. Such results are consistent with the MFIs.
A study by Ibok and Etuk (2013) on microfinance in Nigeria confirmed that many MFIs
did not adopt marketing orientation through employees. This implies that although
employees are more satisfied, they are not performing well in order to fulfill MFIs
financial objectives. This finding is consistent with Woller (2002) who supports that
there is a kind of marketing failure in MFIs. In the studied region indeed (Kivu), when
MFIs improve internal employees’ conditions through training and development,
rewards and incentives, they ignore to communicate that those advantages should
result in more positive-oriented behavior toward customers. When MFIs improve the
employees’ work condition, the latter become arrogant and contemptuous vis-à-vis the
clients they are supposed to serve. This lead to poor service quality, customers’ dropout
and poor quality of the portfolio; and their impact on organizational performance.
Megicks et al. (2005) confirm this from a study in Indian microfinance when they state
that “there is essentially a failure in the marketing of MFIs that leads to high default
and low repeat uptake, which can be explained in terms of a lack of a market
orientation amongst RRBs and their staff […].” This means that MFI do not adopt IM
with a strategic perspective (Adrian and Asif, 1998). Indeed, in their endeavor to
enhance financial performance, MFIs have neglected to invest in their employees.
Despite the importance of the loan officers’ work, microfinance invest more in
management information systems to manage and prevent errors and fraud, while
they remain less or not concerned by employee development, participation, and
IJBM empowerment. More often, greater emphasis is put to lowering costs to improve the
34,5 financial sustainability ratios in order to benefit investors’ funds. In such an industry,
employee satisfaction is limited to provide performance incentives targeting loan
officers and other frontline employees. MFIs have not taken the strategic importance of
human resource management seriously and are still managing employees solely as a
cost entity. Such results are contrary to the industry spirit and trend. Microfinance is
786 perceived as a high-contact sector where employees and customers interact regularly.
However, MFIs’ employees are less paid, less rewarded, and less empowered leading to
low satisfaction levels and less employee performance, leading to low motivation and
low commitment to the organization (Abbing, 2011; Canales, 2010).
The results indicate that IM positively and significantly affects (γ ¼ 0.73; t ¼ 9. 37;
p ¼ 0.000) organizational performance. The results suggest that IM captures 37 percent
of the total variance in the organizational performance, confirming the third hypothesis
that IM and perceived organizational performance are positively correlated which is
contradictory to those found by Suleiman et al. (2011) from commercial banks in Jordan.
Authors found that commercial bank have different practices of IM (vision, training,
internal communication, and reward system), but they do not implement those
practices toward the goals of IM philosophy. The results of this study are in the same
line with those which have been performed in banking and microfinance sectors.
Dhakal (nd) found that IM through employees training and empowerment is identified
to be critical for enhancing MFIs’ profitability. The underlying argument is that
training enhances employees motivation, knowledge and skills and encourage them to
do more than ordinary (Chebat et al., 2002). Wright et al. (2005) support that IM through
staff incentive schemes can have positive and powerful effects on the productivity,
efficiency, and quality of MFI operations. Building on the same argument, Woller (2002)
propose that MFIs which adopt internal and external marketing practices can improve
staffs morale and overcome staff turnover. The author argues that if marketing
practices are well implemented it can “elicit the desired behavioural response and can
stymie the achievement of an institution’s financial and social objectives.” Such
argument can justify why MFIs are now more interested in implementing staff
incentives (Pityn and Helmuth, 2007). Authors confirm that well-designed
compensation package can positively affect staff attitudes and productivity. The
same argument is mobilized by Holtmann and Grammling (2005) who stated that some
MFIs managers had confirmed that incentive schemes had a medium to very high
effect on improving financial performance and had a high or very high effect on
increasing the productivity of credit officers (measured by number of clients and size of
portfolio). The underlying argument is that the adoption of the IM philosophy and its
implementation will positively influence financial performance (Ibraheem et al., 2013;
Vazifehdoost et al., 2012). By implementing IM practices and procedures, firms create
an environment and culture that will shape employee work and performance. The
underlying argument is that IM encourages positive interaction between employees
and their firms, heartens sharing vision among them, and “creates more emotionally
attached employees with their bank who want to remain employed” (Awwad and Agti,
2011). Banks and MFIs which do not resort to IM practices would not attend staffs’
commitment which will result in poorer performance arising from inferior service
offerings and higher costs (Caruana and Calleya, 1998). In contrary, MFIs which treat
employees fairly through IM practices implementation “will go a long way to both
foster increased levels of commitment to the organization and reinforce employees
understanding of the organization’s brand” (Ross and Denzer, 2001). Thus, when
employees are empowered and more valorized, they intuitively believe that the output Employee job
they get from the firm is superior to the input they have invested. Consequently, they satisfaction
become happy with their jobs, more socialized with the firm, and “reciprocate such
exchange factors with the higher order affective commitment” (Gong et al., 2009).
Therefore, “organizations that viewed employees as potential partners and important
assets would have high perception of organization performance” (Harel and Tzafrir,
1999; Sanchez-Hernandez and Miranda, 2011). So, by implanting IM practices, MFIs 787
prepare themselves to overcome the challenges and to enhance amicable performance
of microfinance (Selvaraj, 2012). Similarly, Huselid (1995) suggest that “investments in
such practices are associated with lower employee turnover and greater productivity
and corporate financial performance.” IM is also seen as a way to tackle problems such
as turnover, safety, productivity, effectiveness, and product and service quality (Ullah
and Yasmin, 2013). Jha and Singh (2015) confirmed that view by demonstrating that
high attrition rate of MFIs’ employees in India can be tacked by the implementation of
IM strategies which consist in by developing social ties with employees. The
underlying argument is that “significant investments in employees make organizations
more flexible and effective” (Stoffers and Heijden, 2009).

5. Conclusion, implication, limitations, and research venues

The results from this study confirm that IM exerts a positive and significant effect on
employees’ job satisfaction, but the latter does not influence organizational
performance. Furthermore, we confirm a positive and significant link between IM
and the organizational performance.
The influence of IM on EJS means that MFIs have to invest and value employees to
have them satisfied. This implies that MFIs have to select and retain good employees
through well-established policies and procedures of IM. MFIs have to share information
with employees, reward their efforts fairly, and delegate power to them. IM is a great
ingredient for MFIs in which employees are present from the top to the bottom of the
lending encounters. When employees gain more power and autonomy in decision
making, they would feel that they are considered to be important assets of the firm.
This will positively shape their satisfaction level and develop positive behaviors
through customers in the service encounter. In this perspective, IM and its benefits are
a serious alternative to the worst climate environment that most employees are facing
in the MFIs in South Kivu. Although implementing IM will require additional
resources, it makes sense for MFIs to bear those additional costs in order to make
employees happy and committed so that they might not be willing to leave the MFI.
The lack of a significant relationship between employee satisfaction and
organizational performance is strange and an unexpected result. Such results may
suggest that employee satisfaction exerts an ex post impact on organizational
performance. It means that employee satisfaction takes time to be transmitted in real
behaviors such as employee’s performance, commitment, “esprit de corps,” and other
psychological behaviors that might be directly connected to organizational performance.
So, we conclude that the relationship between the two constructs would be mediated by
other psychological and organizational variables. It probably necessitate a special
training in customer-care without which job satisfaction might not impact organizational
performance. This result also means that MFIs have invested less in employee
satisfaction. This makes a true image of the whole industry where employees are present
in all activities but are still less valorized and empowered. Such results invite MFI
managers to change their mind and focus more on their employees. In fact, employees
IJBM generate the most cost in general but they can also contribute to sustain growth and
34,5 profitability. This is possible if they are better rewarded for their efforts.
The positive relationship between IM and organizational performance illustrates a
more strategic role to human resources in the microfinance sector. Thus, MFIs’
managers should “understand that building and maintaining high levels of service-
oriented practices within an organizational unit equals financial and operational
788 success” (Lytle and Timmerman, 2006). This means that managers have to
understand that some aspects of IM such as communication, reward, selection, and
training can lead to higher organizational performance. So, managers have to
understand internal client’s needs and respond to them through fair reward system,
interactive and bidirectional communication. Thus, IM practices connect departments
of the MFIs to ensure that employees are well managed and sensitized to reach
corporate outcome. Therefore, IM is “a way for marketing managers to incorporate
human resources issues into a marketing plan, and for human resource managers to
incorporate marketing practices into a human resources plan” (Sanchez-Hernandez
and Miranda, 2011). The result is that managers will succeed to sell the company
internally and gain employees’ commitment and engagement. IM will allow MFIS to
strengthen enterprise culture and reinforce relationship banks. In this perspective, IM
is acting as “a cultural aspect that will permit the generation of value for the
customers of any organization” (Gounaris, 2006 quoted by Tortosa et al., 2008). In
fact, IM practices “breed high levels of commitment and esprit de corps among
employees” (Lytle and Timmerman, 2006). Thus, IM is viewed as a competitive
resource that will push MFIs to identify opportunities and quickly react to
competitors’ attacks. IM allows MFIs to share knowledge through regular formal and
informal communication information about strategy, objectives, performance, and
financial situation. Thus, by working in an open environment, employees will share
their ideas with the MFIs and be more motivated because they are treated as being
more important actors in attending the MFIs output.
Although this study yields sound results, it suffers from some limitations, which are
opportunities for future research. First, this study uses subjective measures for
measuring the organizational performance. This is an innovative way to measure
performance in microfinance where accounts and financial ratios are more used.
Perceptual measures were used because most of the MFIs have refused to disclose
financial and account information. So, in case of easy access to financial information,
research could be made from a firm level using multiple regressions for testing the
relationships between IM, EJS, and organizational performance. Such a study would
allow one to compare and correlate subjective measures from the present study and
objective measures, which would come from secondary data and help to empirically
verify the anecdotic theory stating that there is high correlation between subjective and
objective measures of organizational performance. Second, the IM and organizational
performance scales have been inspired from previous studies with some adaptations
allowing them to capture the microfinance characteristics. So, there is a need to conduct
a large qualitative survey aiming to understand why MFIs apply IM and marketing
practices in general. The results from such a study would serve to prepare a global
quantitative study, which integrates in the same model IM, external market orientation,
EJS, and organizational performance. This is important for MFIs, which are now
experiencing competition in the industry. In such an environment, MFIs are obliged to
adopt marketing strategies and be oriented through important stakeholders to gain
competitive advantages.
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Corresponding author
Eddy Balemba Kanyurhi can be contacted at: balemba.kanyurhi@ucbukavu.ac.cd

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IJLMA
59,6 The effects of financial and
non-financial performances
towards the managerial
1190 performances with interpersonal
Received 19 August 2016
Revised 30 August 2016
trust as a mediation variable
3 September 2016
Accepted 3 September 2016 Hamid Bone
Department of Accounting, Faculty of Economic and Business Studies,
University of Mulawarman, Indonesia

Abstract
Purpose – This paper aims to analyze the influence of the importance of measures in the performance
measurement systems (non-financial and financial) on managerial performance, with interpersonal trust
acting as a mediating variable.
Design/methodology/approach – The research was conducted at the University of Mulawarman by
using a questionnaire among students who were the object of the research. Partial least squares were
conducted along with Sobel’s test as the mediation test.
Findings – Interpersonal trust is the mediation effect between financial performance on managerial
performance. The positive-marked coefficient indicates that higher financial performance will result in higher
managerial performance if it is mediated by interpersonal trust that is also higher. Thus, interpersonal trust
acts as a mediation variable of the relationship between financial performance and managerial performance.
Practical implications – The government should consider formulating a policy that will improve trust
among managers, stakeholders and the public.
Social implications – The implications for managers include: an increase in interpersonal trust by
improving the competence, integrity, reliability, openness and honesty and satisfaction in work.
Originality/value – Location of this study is University of Mulawarman, Samarinda, with student being
the object of the study. This is the original of location of study means there has been no previous study
research in the same location and of the same model. Originality is also shown in the investigation of
interpersonal trust as the mediation variable in relationship between financial performance and non-financial
performance on managerial performance.
Keywords Managerial performance, Financial performance, Interpersonal trust,
Mediation variable, Non-financial performance
Paper type Research paper

1. Introduction
Development of recent issues about research on the performance measurement system has
increasingly led to the individual perspective as a comparison from an organizational
perspective, one of which is related to the relationship between the performance
International Journal of Law and
Management
measurement system with employees’ behavioral outcomes. Several research studies in
Vol. 59 No. 6, 2017
pp. 1190-1202
multidimensional performance evaluation system (e.g. Balanced Scorecard) have also
© Emerald Publishing Limited
1754-243X
expanded its focus from the individual to the organizational level. It showed that researchers
DOI 10.1108/IJLMA-08-2016-0072 have increased their awareness on not only how the performance measurement system
influences the organizational outcomes but also how the system is able to influence the Interpersonal
outcomes of individuals within an organization. trust
Lau and Sholihin (2005), Lau et al. (2008) and Sholihin et al. (2005) reveal that trust has
been identified as one of the variables that has the most important effect of intervention.
Recent research had provided empirical evidence to support the proposition that trust can be
influenced by the design of the performance measurement system and it is an important
intervention in relation to the performance measurement system with the managerial
performance. Six (2005), for example, argued that interpersonal trust is influenced by the 1191
formality of performance evaluation. The argument is strengthened by the results of Six
(2005) which found that formality of the performance evaluation system used (high-
contractibility) can reduce subordinates’ trust in their superiors. Hall’s (2008) study
presented different results; evidence was found that the use of formal performance
measurement systems has a positive influence on trust between team members in the
organization. Lau and Sholihin (2005) used interpersonal trust as an intervening (mediation)
variable, and found that performance evaluation is based on sizes (non-financial and
financial) and has an indirect relationship (mediation effect) with employees’ satisfaction
levels on the basis of their trust as mediation variable. Lau et al. (2008) state that separating
each measure may allow us to determine whether the effect of the use of a performance
measurement system against individual performance is affected by the use of only the non-
financial, the use of only the financial measure or a combination of both. Therefore, this
study was conducted to respond to the expectations on previous research for any
development on the main issues of research to be related to the influence of the importance
of the measures in the performance measurement systems (non-financial and financial)
toward managerial performance with interpersonal trust as a mediating variable.
Several previous studies have investigated in detail the relationship of financial and non-
financial performance to interpersonal trust and its impact on managerial performance (Hall,
2008; Lau and Sholihin, 2005; Lau et al., 2008; Six, 2005), but few have focused on the
influence of the mediating effect of interpersonal trust with the relationship of financial
performance and non-financial performance to build a high quality of managerial
performance. Herein lied the originality of this study. Based on Zuriekat et al.’s (2011) study,
the mediation effect of performance measures diversity in relationship between employee
participation and satisfaction level. This research uses financial and non-financial systems
as measures for performance. In contrast to the findings of Al-Shubiri et al. (2012), the
relationship of financial and non-financial performance with CSR performance not through a
mediator. The study found a direct influence of financial and non-financial performance to
CSR’s performance. La and Oger (2014) found the mediating effect of non-financial
performance to the performance. These studies use procedural fairness and role ambiguity
as mediating variables. Thus, this study has examined the effect of mediation of
interpersonal trust on the relationship between financial and non-financial performance on
managerial performance, as an originality part of this study.
Based on the background provided above, the purpose of this research is to
determine the effect of financial performance and non-financial performance on
interpersonal trust directly and on managerial performance indirectly.

2. Theoretical review
2.1 Financial performance
Financial performance is the description of the achievement of the company that can be
interpreted as the results achieved on various activities that have been carried out. It can
also be explained that financial performance is an analysis conducted to see the extent to
IJLMA which a company has conducted the rules of financial performance well and correctly.
59,6 Public sector organizations have to consider the financial aspects in their performance, one
of which is by using the concept of value for money which is stated by Mardiasmo (2009)
that the value for money is the concept of the management of public sector organizations
which relies on three main elements, namely, economy, efficiency and effectiveness. Those
three elements are the essential elements of the value for money. The value for money is the
1192 core of performance measurement in government work units. The development of
performance indicators should focus on the questions on economy, efficiency and
effectiveness of the programs and activities. The following will explain the concept of value
for money, known as 3E.

2.2 Non-financial performance

Public services will relate to the quality of services provided by public organizations in the
community as the recipients of services. Quality of services generally focus on the customer,
so that the service products are designed, manufactured and supplied to meet the desire and
satisfaction of the students of the Faculty of Economy of Unmul. In this research, the non-
financial performance was assessed through students’ satisfaction levels. According to
Dwiyanto (2002), the assessment of the performance of public organizations is conducted by
not only simply using an indicator attached to bureaucracy such as efficiency and
effectiveness but also from the indicator attached to the service users, such as users’
satisfaction. In general, companies are more focused on the internal capacity by relying on
product performance and technological innovation without understanding and/or paying
attention to the external aspect, the respondents. It will be used by the competitors to
compete with products and services that better correspond with the wishes of the students.
Poor performance on this aspect will reduce the number of students in the future despite the
current financial performance already looking good. In relation to the university, students’
satisfaction is an illustration of the success of the university in seeking optimal services, so
that in the long term, the welfare of the students can be realized. According to Tjiptono
(2000), respondents’ satisfaction with the services, in general, can be evaluated by using
attributes in determining the quality of services, namely, tangible, reliability,
responsiveness, warranty or certainty and empathy.

2.3 Interpersonal trust

Interpersonal trust in an organization is built for the purpose of improving the performance
of individuals. Interpersonal trust is defined as trust established among workers and
between workers and supervisors. According to some experts, including Six (2005),
interpersonal trust is a psychological state that consists of the intention to accept
vulnerability of the actions of the other party on the basis of the expectation that the other
will perform a particular action, regardless of the ability to monitor or control the other
party. According to Wang (2009), trust built by related parties is called as interpersonal
trust. Furthermore, Deutsch (1960) states that there are two components of interpersonal
trust, namely, confidence in the ability and intention to have a relation. Trust incurred
because of the intention to have a relation is a multi-dimensional concept (Paine, 2008). The
dimensions of the trust include competence, integrity, dependability/reliability, openness
and honesty and satisfaction (Wang, 2009).

2.4 Managerial performance

There are some meanings of the term performance, as the term is derived from the term job
performance (job achievement) or actual performance (real achievement). While the
definition of performance (job achievement) is the result of the quality and quantity of work Interpersonal
achieved by an employee in performing his/her duty in accordance with the responsibility trust
given to him/her (Ruky, 2002). Suprihanto (2000) called performance as the job achievement
that in which the work of an employee during a certain period is compared to the range of
possibilities, such as standards, targets/goals or criteria that have been determined in
advance and have been agreed upon. Hasibuan (2005) explains that the performance is a
result of work achieved in executing the tasks assigned to them based on skills, experiences
and determination, as well as time. Performance is a combination of three important factors,
1193
namely, the advancement and interests of a worker, ability and acceptance on the
explanation of the assigned duties and the role and motivation level of an employee. The
higher the level of the above three factors, the greater the performance of the employees.
According to Mahoney and Barthel (1965) in Hall (2008), managerial performance is a
managerial skill in carrying out managerial activities of planning, investigation,
coordination, supervision, staffing, negotiation and representation.

2.5 Interpersonal trust as mediation of financial and non-financial performance to

managerial performance
The mediating effect of interpersonal trust in a relationship of financial and non-financial
measure managerial performance is described in the theory of performance by Hussain
(2007) and Zuriekat et al. (2011). Prior literature on performance provides information related
to financial and non-financial performance measures. These studies provided motivation for
developing a study theoretical model and hypotheses. The theoretical model of this study
includes interrelated parts, which are participation in decision-making, diversity of
performance measures (i.e. financial and non-financial) and level of trust, related to
managerial performance as the output of the system.
In performance theory, assessment of performance can be measured by the size of
the financial and non-financial systems. Financial measures are used to ascertain the
results of actions taken in the past and are equipped with a financial measure and non-
financial measures of customer satisfaction, productivity and cost effectiveness of
business processes/internal, as well as productivity and trustworthiness of personnel
who will determine the financial and non-financial performance of the future. Financial
measures indicate the result of the various actions that occur outside the non-financial
system. Improved financial returns are the result of a variety of operational
performance such as:

increasing customer confidence in the products produced by the company;

increasing productivity and cost effectiveness of business processes/internal use by
the company to produce products and services; and

increased productivity and commitment of personnel.

So if the top management wishes to double the company’s financial performance, the focus
of attention should be directed to motivate the personnel in doubling of performance in the
non-financial or operational perspective, because that is where lies the real booster (the real
drivers), long-term financial performance (Hussain, 2007).
The arguments and justifications that explain the rationale of constructing the study
theoretical model are primarily forwarded on the basis of previous theoretical and
empirical research in performance measurement systems and through the theoretical
gaps that emerged from the literature review. A growing body of literature in
management accounting concentrates on studying performance of managers or
IJLMA employees. This is supported by the large number of articles that investigate the role
59,6 and importance of measure of performance. In terms of using financial and non-
financial performance measures in performance system and evaluation purposes, the
results indicate that financial and non-financial performance measures are the only
performance categories that have been used by the responding companies in all
performance measurement and evaluation purposes (i.e. managerial performance
1194 evaluation, financial rewards and the identification of improvement opportunities and
development of action plans), setting strategic goals and considering these performance
measures to be of a high quality. Customer and quality performance measures are used
by the responding companies in the following performance measurement and
evaluation purposes (i.e. managerial performance evaluation and identification of
improvement opportunities and development of action plans), setting strategic goals
and considering these performance measures to be of a high quality. Employee and
supplier performance measures are used by the responding companies in the following
performance measurement and evaluation purposes (i.e. identification of improvement
opportunities and development of action plans), setting strategic goals and considering
these performance measurements to be of a high quality. The results also show a clear
indication of the use of all performance measures in all performance measurement and
evaluation purposes, such that the strategic goals and the level of quality of these
performance measures are significantly correlated. Even when there are significant
correlations, these results might give an indication on the measurement gap between
the corresponding use, setting strategic goals and the level of quality of these
performance measures (Zuriekat et al., 2011). This gap indicates that the use of
performance measures for one purpose does not imply that the measures are used for
other managerial purposes. These differences are consistent with the measurement
gaps identified in several empirical studies. Thus, it can be concluded that financial
performance measures continue to be an important aspect of employee or managerial
performance. These measures are supplemented with several financial and non-
financial performance measures. However, the type of non-financial performance
measures used by the companies depends on the perceived usefulness of the
information that may result from using these measures in performance measurements
and evaluation. Consistent with the mediation effect of trust in this study, it implies
that trust or interpersonal trust has a significant impact on the diversity of performance
measures by financial or non-financial performance. It was argued in the literature that
the increasing use of non-financial performance measures is relatively high when
companies consider the trustworthiness of employees (Moriarty, 2010). In other words,
it is expected that employees and managers will select and use a diversity of non-
financial performance measures if they participate in designing their performance
measurement systems. An interpretation of the diversity use of non-financial
performance measures could be that different companies experience different sets of
managers’ decisions to adopt and use non-financial performance measures (Gosselin,
1997). Further, trust as the mediation role in the performance might provide employees
and managers access to relevant information required to complete tasks and make
decisions. Consistent with our hypotheses, the diversity of performance seems to
contribute to a higher level of trust by the measure of financial and non-financial
performance in companies. This indicates that interpersonal trust has a mediation role
in relationship between financial and non-financial performance to build high-quality
managerial performance.
3. Materials and methods Interpersonal
3.1 Materials trust
This study was conducted to respond the expectations on the previous research for any
development on the main issues of research to be related to the influence of the importance
of the measures in the performance measurement systems (non-financial and financial)
toward managerial performance, with interpersonal trust as a mediating variable. The
research was conducted at the University of Mulawarman by using a questionnaire and 1195
with students as the object of the research.

3.2 Methods
Descriptive and inferential statistical analysis: partial least square (PLS) (Basri, 2013) were
used in this study (Figure 1).
The equations for these models are:

Y1 ¼ a1 X1 þ a2 X2 þ e1

Y2 ¼ b 1 X1 þ b 2 X2 þ b 3 Y1 þ e2

All variables in this study are unobservable variables and measured by the indicator (as
observable variable) by uisng a First Order Confirmatiory Factor Analysis. This research
involved 60 question items that represent 20 indicators of 5 variables of the research:
financial performance (X1) and non-financial performance (X2) as exogenous variables,
interpersonal trust (Y1) as intervening/mediating endogenous variable and managerial
performance (Y2) as pure endogenous variable.
Financial performance (X1) is measured by effective, efficient and economic variables.
Non-financial performance (X2) is measured by physical evidence, reliability, responsiveness,
assurance and empathy. Interpersonal trust (Y1) is measured by competence, integrity,
reliability, openness and honesty and satisfaction. Managerial performance (Y2) is measured
by meeting, negotiating and evaluating.
The hypothesis in this research is to investigate the mediating effect of interpersonal
trust on the effect of financial and non-financial performance to managerial performance.

Effective (X1.1)

Efficient (X1.2)
Financial
Performance (X1)
Economic (X1.3)
β1
Meeting (Y2.1)
α1

Interpersonal β3 Managerial
Negotiating (Y2.2)
Phisical Evidence
Trust (Y1) Performance (Y2)
(X2.1)
α2 β2
Evaluating (Y2.3)
Reliability (X2.2)
Non Financial
Responsiveness
Performance (X2)
(X2.3)

Assurance (X2.4)
Figure 1.
Competence Openess &
(Y1.1)
Integrity (Y1.2) Reliable (Y1.3)
Honestly (Y1.4)
Satisfaction (Y1.5)
Conceptual
Empathy (X2.5) framework
IJLMA The hypothesis is accepted if the critical ratio (CR) value is more than 1.96 and p-value is less
59,6 than 0.05 (Basri, 2013).

4. Result and discussion

4.1 Instrument and outer model
Table I presents the results of validity and reliability tests, as well as average and outer
1196 loading of each indicator, in each study variable. Based on Table I, it is known that all
indicators are valid and reliable because of having a correlation coefficient of more than 0.3
and a Cronbach’s alpha value of more than 0.6. In addition, all indicators significantly
measure their own variables.
The analysis also showed that the strongest indicator as a measure of the perception of
financial performance (X1) is the indicator of economy (X1.3) with a loading factor of 0.725
and an average of 3.48. The variable of perception of non-financial performance (X2) is
known that the strongest indicator as a measure of the perception of non-financial
performance is physical evidence (X2.1) with a loading value of 0.680 and an average of 3.44.
The variable of interpersonal trust (Y1) is known that the strongest indicator as a measure is
competence (Y1.1) with a loading value of 0.637 and an average of 3.54. The variable of
managerial performance (Y2) is known that the strongest indicator as a measure is
evaluation (Y2.3) with a loading value of 0.678 and an average of 3.47.

4.2 Linearity assumption and goodness of fit model

In the PLS analysis, there is an assumption that must be met before conducting the analysis,
that is, the assumption of linearity, which requires a relationship among the linear variables.
The assumption of linearity uses the curve fit method in which the relationship among
variables is stated linear if it meets one of the following two possibilities:
(1) a significant linear model (significant linear model < 0.05); and
(2) the non-significant linear model and the possible non-significant model (significant
linear model > 0.05 and significant besides linear models > 0.05).

Cronbach’s Outer
Variables Indicator Correlation alpha Mean loading

Financial performance Effective (X1.1) 0.764 0.694 3.48 0.588

(X1) Efficient (X1.2) 0.804 3.49 0.650
Economic (X1.3) 0.794 3.42 0.725
Non-financial Physical evidence (X2.1) 0.794 0.701 3.44 0.680
performance (X2) Reliability (X2.2) 0.796 3.44 0.663
Responsiveness (X2.3) 0.784 3.48 0.649
Assurance (X2.4) 0.799 3.48 0.666
Empathy (X2.5) 0.768 3.31 0.576
Interpersonal trust (Y1) Competence (Y1.1) 0.659 0.690 3.54 0.637
Integrity (Y1.2) 0.671 3.37 0.620
Reliable (Y1.3) 0.715 3.49 0.625
Openness and Honestly 0.610 3.53 0.580
Table I.
(Y1.4)
Validity and Satisfaction (Y1.5) 0.684 3.46 0.545
reliability Managerial performance Meeting (Y2.1) 0.737 0.695 3.54 0.638
instrument, mean (Y2) Negotiating (Y2.2) 0.742 3.45 0.645
and outer loading Evaluating (Y2.3) 0.679 3.47 0.678
The test results show the value of the linear model to be < 0.05, so that the model is linear Interpersonal
and satisfies the set assumptions. The normality assumption is not needed in this PLS trust
analysis because the tools using resampling (bootstrap) are robust in normality assumption
(Fernandes and Fresly, 2017).
Goodness-of-fit test or adequacy model of the structural model in the inner model used
the predictive-relevance value (Q2). The R2 value of each endogenous variable in this
research is as follows:
1197

for Y1 variable, the R2 value obtained is 0.274; and

for Y2 variable, the R2 value obtained is 0.561.

Predictive-relevance formulation above:

Q2 = 1  (1  R12) (1  R22) [. . .] (1  Rp2)

Q2 = 1  (1  0.274) (1  0.561)

Q2 = 0.7429

The calculation showed the predictive-relevance value of 0.7429 or 74.29 per cent. Relevance-
predictive value of 74.29 per cent also indicated that the diversity of data that can be
explained by the model is equal to 74.29 per cent, or, in other words, the information
contained in the data can be explained by the model as much as 74.29 per cent. While the
remaining 25.71 per cent is explained by other variables (which are not contained in the
model) and the error. From the above phenomenon, the model can be said to have relevant
predictive values.

4.3 Inner model and hypothesis testing

The inner model (structural model) test is essentially testing the hypothesis in the research.
Hypothesis testing was conducted by using t-test (t-statistic) at each direct effect path
partially. The detailed results of the analysis, contained in the PLS analysis results, can be
found in the Appendix. Table II presents the results of hypothesis testing of direct effects.
Based on Table II and Figure 2, results of testing of inner models can be presented as
follows:

Financial performance (X1) has a positive and significant effect on interpersonal
trust (Y1) with p = 0.018 (<0.05) and a coefficient value of 0.226. It means that there
is a significant difference between financial performance (X1) and interpersonal
trust (Y1). The positive-marked coefficient means the higher the effect of financial
performance, the higher will be the value of interpersonal trust variable (Y1) and
vice versa.

Non-financial performance (X2) has a positive and significant effect on interpersonal
trust (Y1) with p = 0.003 (<0.05) and a coefficient value of 0.291. It means that there

Relationship Coefficient p -value Result

Financial performance (X1) ! Interpersonal trust (Y1) 0.226 0.018 Significant

Non-financial performance (X2) ! Interpersonal trust (Y1) 0.291 0.003 Significant
Financial performance (X1) ! Managerial performance (Y2) 0.294 0.008 Significant Table II.
Non-financial performance (X2) ! Managerial performance (Y2) 0.270 0.025 Significant Structural model:
Interpersonal trust (Y1) ! Managerial performance (Y2) 0.480 0.049 Significant direct effect
IJLMA
Financial
59,6 Performance (X1)
0.294

0.226

Interpersonal 0.480 Managerial

Trust (Y1) Performance (Y2)
1198
0.291
0.270
Figure 2. Non Financial
Structural model Performance (X2)

is a significant difference between non-financial performance (X2) and interpersonal

trust (Y1). The positive-marked coefficient means the higher the effect of non-
financial performance, the higher the value of interpersonal trust (Y1) and vice
versa.

Financial performance (X1) has a positive and significant effect on managerial
performance (Y2) with p = 0.008 (<0.05) and a coefficient value of 0.294. It means
that there is a significant difference between financial performance (X1) and
managerial performance (Y2). The positive-marked coefficient means the higher the
effect of financial performance, the higher the value of managerial performance (Y2)
and vice versa.

Non-financial performance (X2) has a positive and significant effect on managerial
performance (Y2) with p = 0.025 (<0.05) and a coefficient value of 0.270. It means
that there is a significant difference between non-financial performance (X2) and
managerial performance (Y2). The positive-marked coefficient means the higher the
effect of non-financial performance, the higher the value of managerial performance
(Y2) and vice versa.

Interpersonal trust (Y1) has a positive and significant effect on managerial
performance (Y2) with p = 0.049 (<0.05) and a coefficient value of 0.470. It means
that there is a significant difference between interpersonal trust (Y1) and
managerial performance variable (Y2). The positive-marked coefficient means the
higher the effect of interpersonal trust, the higher the value of managerial
performance (Y2) and vice versa.

Mediation test was obtained from several studies on the direct effects that form mediation.
The results of the Sobel test in Table III and Figure 3 show that the coefficient of indirect
effect is 0.108 and the p-value of 0.030 < 0.05 indicates that interpersonal trust (Y1) mediates
the effect of financial performance on managerial performance (Y2). The positive-marked
coefficient indicates that the higher financial performance will result in higher managerial
performance (Y2), if it is mediated by interpersonal trust (Y1) that is also higher. Thus,
interpersonal trust (Y1) acts as a mediation variable of the relationship between financial
performance and managerial performance (Y2).
The mediation test was obtained from several studies on direct effects that form
mediation. The results of the Sobel test in Table III and Figure 4 show that the coefficient of
indirect effect is 0.140 and the p-value of 0.027 < 0.05 indicates that interpersonal trust (Y1)
mediates the effect of non-financial performance on managerial performance (Y2). The
positive-marked coefficient indicates that the higher non-financial performance will result in Interpersonal
higher managerial performance (Y2), if it is mediated by interpersonal trust (Y1) that is also trust
higher. Thus, interpersonal trust (Y1) acts as a mediation variable of the relationship
between non-financial performance and managerial performance (Y2).

4.4 Discussion
The main finding of this study is that interpersonal trust is the mediation effect between 1199
financial performance and non-financial performance on managerial performance. The

Table III.
Mediation of
interpersonal trust in
relationship of
financial and non-
financial
Mediation Relationship Coefficient p-value
performance to
Y1 X1 to Y2 0.108 0.030 managerial
Y1 X2 to Y2 0.140 0.027 performance

Interpersonal
Trust (Y1)

0.226 0.480

Figure 3.
Financial 0.294 Managerial Mediation of
Performance (X1) Performance (Y2)
interpersonal trust in
0.108 the relationship of
financial performance
Direct Effect
to managerial
Mediation Effect
performance

Interpersonal
Trust (Y1)

0.291 0.480
Figure 4.
Mediation of
Non-Financial 0.270 Managerial interpersonal trust in
Performance (X1) Performance (Y2) the relationship of
0.140 non-financial
performance to
Direct Effect
managerial
Mediation Effect performance
IJLMA positive-marked coefficient indicates that the higher financial performance will result in
59,6 higher managerial performance, if it is mediated by interpersonal trust that is also higher.
Thus, interpersonal trust acts as a mediation variable of the relationship between financial
performance and managerial performance.
Based on the analysis, financial performance (X1), which is measured by three indicators
of effectiveness (X1.1), efficiency (X1.2) and economy (X1.3), has a significant impact on
1200 interpersonal trust (Y1) as measured by five indicators: competence (Y1.1), integrity (Y1.2),
reliability (Y1.3), honesty and openness (Y1.4) and satisfaction (Y1.5) with a coefficient of
0.226. A direct or indirect effect on managerial performance (Y2), as reflected by the three
indicators of meetings (Y2.1), negotiations (Y2.2) and evaluations (Y2.3), has a coefficient of
direct effect of 0.294 and a coefficient of indirect effect of 0.108. This research is in line with
the results of research by Basri (2013), in which he states that the performance measurement
system of Balanced Scorecard has significant effects on managerial performance.
Non-financial performance (X2), measured by five indicators of physical evidence
(X2.1), reliability (X2.2), responsiveness (X2.3), security (X2.4) and empathy (X2.5), has
a significant effect on interpersonal trust (Y1), which is measured by five indicators of
competence (Y1.1), integrity (Y1.2), reliability (Y1.3), honesty and openness (Y1.4) and
satisfaction (Y1.5), with a coefficient of 0.291. It has a direct or an indirect effect on
managerial performance (Y2), as reflected by three indicators of meetings (Y2.1),
negotiations (Y2.2) and evaluations (Y2.3), with a coefficient of direct effect of 0.270 and
a coefficient of indirect effect of 0.140. The results of this research are supported by Lau
and Sholihin (2005) and Lau et al. (2008) which showed that the presence of justice in the
performance evaluation procedure can enhance job satisfaction of the subordinates.
Therefore, both the theoretical justification and empirical evidence show that the
financial and non-financial performances may affect procedural justice and improve the
performance of individuals within the organization. Therefore, the use of different sizes
in the performance measurement system can improve individual performance when
performance is judged fairly by the employers.
Interpersonal trust (Y1) measured by five indicators of competence (Y1.1), integrity
(Y1.2), reliability (Y1.3), honesty and openness (Y1.4) and satisfaction (Y1.5) directly
affect the managerial performance (Y2) reflected by three indicators of meetings (Y2.1),
negotiations (Y2.2) and evaluations (Y2.3), with a coefficient of direct effect of 0.480 and
found that interpersonal trust (Y1) mediates the effect between financial and non-
financial performances on managerial performance with the coefficient values of
indirect effect of 0.108 and 0.140, respectively.

5. Conclusions and recommendations

Based on the analysis result and discussion, the conclusion of this research are follows:

Interpersonal trust is the mediation effect between financial performance on
managerial performance. The positive-marked coefficient indicates that the higher
financial performance will result in higher managerial performance, if it is mediated
by interpersonal trust that is also higher. Thus, interpersonal trust acts as a
mediation variable of the relationship between financial performance and
managerial performance.

Interpersonal trust is the mediation effect between non-financial performance on
managerial performance. The positive-marked coefficient indicates that the higher
non-financial performance will result in higher managerial performance, if it is
mediated by interpersonal trust that is also higher. Thus, interpersonal trust as a
 mediation variable of the relationship between non-financial performance and Interpersonal
managerial performance. trust
This research recommends:

The government should consider or formulate a policy that can improve trust
among managers, stakeholders and the public.

Further research is needed to explore other mediating variables that bridge the
1201
effects of financial and non-financial performances on managerial performances.

A manager can increase interpersonal trust by improving the competence, integrity,
reliability, openness and honesty and satisfaction in work.

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Corresponding author
Hamid Bone can be contacted at: hamidbone.unmul.jp@gmail.com

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International Review of Public Administration, 2015
Vol. 20, No. 2, 177–193, http://dx.doi.org/10.1080/12294659.2015.1007597

Assessing the effects of learning organization characteristics in

Korean non-profit organizations: Focusing on the association with
perceived financial performance and employee satisfaction
Yoonjeong Kim and Sang-Il Han*

Department of Global Public Administration, Yonsei University, Wonju, South Korea

(Received 8 July 2014; revised 17 September 2014; accepted 24 October 2014)

During the last decade in Korea, non-profit organizations (NPO) have shown incred-
ible growth in both their number and size due to the development of civil society
and government-subsidizing policies. Most registered NPOs are subsidized by the
government but their learning capacities and financial performance in meeting new
social needs in an innovative manner is somewhat limited and even less sustainable.
In this article, the authors assume that the learning organization characteristics of
NPOs influence their levels of performance and employee satisfaction. An analytical
framework that enables a better understanding of the relationship between learning
organization and perceived financial performance is proposed. On the basis of the
proposed framework, the hypothesis that the learning organization characteristics
improve the financial performance of NPOs is empirically tested. The analysis
results confirmed that the learning organization characteristics enhance financial
performance and employee satisfaction.
Keywords: learning organization; perceived financial performance; employee
satisfaction; non-profit organization

Introduction
The need for research about learning and innovation in the non-profit sector is often
substantiated by the growing body of evidence that non-profit organizations (NPOs)
must increase their performance to face uncertain and changing environments. Not only
do NPOs have to react to more competition and deregulation, but there is also
increased demand for innovative services, which is compounded by less governmental
and private financial support. Furthermore, to receive the revenue essential to conduct
their work, NPOs need to enhance their legitimacy in the eyes of various stakeholders,
such as governments, donors, clients and organizational members. These examples
highlight arguments that NPOs are facing demands to become more effective and effi-
cient by learning environmental trends and adopting better management practices.
According to research about organizational development, learning organization is con-
sidered to play an important role in adapting to changing environments and developing
better management, as new strategies have to be brought in, knowledge about manage-
ment practices has to be procured and implemented and skill development has to be
supported.

*Corresponding author. Email: hans@yonsei.kr

© 2015 The Korean Association for Public Administration

178 Y. Kim and S.-I. Han

During the last decade in Korea, NPOs have shown incredible growth in their num-
ber and size thanks to the development of civil society and government-subsidizing
policies. In the 2003 Bibliography of Korean Non-profit Civil Society Organizations
published by the Ministry of General Affairs and Safety, 300 NPOs were registered.
According to the 2010 Bibliography of Korean Non-profit Civil Society Organization,
1100 NPOs were listed. This evidence shows that more than 100 NPOs have been
newly created annually. Most registered NPOs are subsidized by the government but
their learning capacities and financial performance in meeting new social needs in an
innovative manner is somewhat limited and even less sustainable. Nevertheless, it is
yet unclear precisely which learning characteristics are best suited for increasing the
financial performance of Korean NPOs. At the heart of this question is how the charac-
teristics affect NPOs’ relationships with their customers, governments, and the
non-profit community as well as internal functions and culture. Some suggest that an
integrative model of learning organization must be brought in to look at the internal
structure and external relationships (Yang, Watkins, & Marsick, 2004).
In this article, the author assumes that the learning organization characteristics of
NPOs influence their financial performance. After reviewing the theoretical approaches
to learning organization, we discuss how learning organization increases the financial
performance of NPOs. As a result, we propose an analytical framework that enables a
better understanding of the relationship between learning organization and perceived
financial performance. On the basis of this framework, the hypothesis that learning
organization characteristics improve financial performance of the NPOs will be empiri-
cally tested.

Literature review
Learning organization in non-profit settings
NPOs are defined as ‘formal, private, independent, not distributing profit to owners or
stakeholders and involving some degree of voluntary contribution of time and/or money
and in the form of free participation to the organization’ (Salamon & Anheier, 1997,
p. 323). NPOs are important in the global era today, when significant competition
among businesses and the high mobility of capital, production and labor are prevalent.
These changes have caused local businesses to be less competitive, hollowing out local
economies and leaving small towns with less employment and insufficient basic public
and social services. Also, population changes, low birth rates and extended life expec-
tancies have increased the needs for healthcare and social services for the elderly. The
providers of such services, however, are not growing at a sufficient pace. To make mat-
ters worse, the role of the state in central and local governments in providing social
protection from various social risks has become increasingly limited in terms of being
able to meet the increasing demands due to budget expansion constraints. Periodic eco-
nomic recesses have shrunk the size of governments, leaving them without the funds to
finance the increasing demand for social services while profit-sector providers have no
incentive to invest in local communities.
Facing this impasse, the mode of public service delivery has changed radically over
the last two decades. The first change is that a wide range of NPOs which participate in
public service delivery have been created, as they were considered to be more effective
in social services, environment protection, and other unmet needs in society than the
government would be (Verdier, 2002). As a variety of social demands have emerged,
 International Review of Public Administration 179

governments cannot respond to all. According to niche market theory (Hansmann,

1987), organizations focusing on the specific demands can survive better and NPOs can
become more appropriate service providers in modern society. The second change is that
more market-type mechanisms through the separation of the financer from the provider
role have been adopted. According to contract failure theory (Young, 2001), the expecta-
tion of contract failure is the most important factor which makes certain tasks more suit-
able for non-profit than for for-profit organizations. Due to their nondistribution
constraint, NPOs are expected not to sacrifice quality for private profit, whereas
for-profit firms have both the incentive and opportunity to exploit their customers’
ignorance and weaknesses (Park & Word, 2012). Governments have thus turned to the
voluntary sector in the belief that NPOs may be able to accomplish social objectives
more effectively than their public agency and private firm counterparts.
In contrast, a number of theories attempt to draw attention to the fact that NPOs
may experience failure (Salamon, 1987). These theories of non-profit failure indicate
two major reasons why NPOs fail: poor management and insufficient capital. First,
NPOs frequently lack relevant management expertise in areas such as finance, market-
ing, and the hiring and managing of employees. Also, investments in organizational
management in the non-profit sector are usually lower than in the government or the
for-profit sector. This limitation reduces financial rewards for employee performance
improvements or for skill development. Furthermore, highly skilled staff can be diffi-
cult to hire and retain in this environment. In such a situation, individual and organiza-
tional learning should be facilitated to enhance the capacity of management. Second,
NPOs tend to be unable to generate sufficient reliable financial resources adequate to
meet service needs. When beneficiaries’ needs are greater than the funds and resources
a NPO is able to procure, it may change its mission to generate more funds from a
broader range of public donors. In particular, these fund-generation strategies may
impose a change of mission or divert energy away from the beneficiaries that were
initially targeted by the NPOs.
Recent theories provide insights into how to minimize or at least ameliorate the
degree of non-profit failure. Webster and Harding (2001) identify that financial insuffi-
ciency appears to be relatively easily remedied, as agencies measure financial perfor-
mance and are paid in accordance with their performance levels. Further, Buckmaster
(1999) found associations between learning and financial accountability.

Theoretical approaches to learning organization

The concept of learning organization has its roots in management literature, where it is
defined as ‘one that is characterized by continuous learning for continuous improve-
ment, and by the capacity to transform itself’ (Marsick & Watkins, 1999, p. 10). As a
vital characteristic of organizational effectiveness, manifested when organizations strive
to develop improved capacities and to understand changing environments, the presence
of learning organization characteristics generates a number of benefits. For instance,
individuals who care about learning will respond better to their clients, easily imple-
menting suggestions and increasing their skills at NPOs (McHargue, 2003). Numerous
studies have emphasized the importance of learning organizations.
The global economy changed organizational environments in the 1990s (Bahlman,
1990; Jones & Hendry, 1992). Increasing competition among governments and busi-
nesses and the high mobility of capital, production, and labor caused organizational
strategies and adaptations to pivot. In this environment, an organization’s ability to
180 Y. Kim and S.-I. Han

learn faster than its competitors may be the only sustainable competitive advantage
(Stata, 1989). In the 1990s, many studies argued that organizations could not survive to
do business in the new millennium unless they can become learning organizations
(DiBella & Nevis, 1998; Senge, 1990; Walker, 1992). They started to construct
measurement scales of learning organization characteristics and prescriptions to increase
their learning capacities based on survey results.
Watkins and Marsick (1996) proposed the dimensions of the learning organization
questionnaire (DLOQ) integrating two main organizational constituents: people and
structure. These two constituents are also viewed as interactive components of organi-
zational change and development. Watkins and Marsick (1996) identified seven distinct
but interrelated dimensions of a learning organization at individual, team and organiza-
tional levels: (1) creating continuous learning opportunities, (2) promoting inquiry and
dialogue, (3) encouraging collaboration and team learning, (4) creating systems to cap-
ture and share learning, (5) empowering people toward a collective vision, (6) connect-
ing the organization to its environment and (7) providing strategic leadership for
learning. Using these dimensions, they viewed a learning organization as one that has
the capacity to integrate people and structures in order to move toward continuous
learning and change.
DLOQ makes a significant contribution to the development of learning organization
theory, but its seven dimensions have weaknesses when used to analyze the sociopoliti-
cal structure of an organization. In general, organizational learning is affected by poli-
tics, conflicts, the administrative system in use, and by culture. DLOQ measures those
structural factors, whereas the seven dimensions do not encompass them appropriately.
Thus, this study reframes the dimensions of DLOQ based on the structural dynamics of
the organization.
Fombrun (1986) classifies organizational structure into three substructures: the
infrastructure, the sociostructure and the superstructure. They interact with each
other independently and bring in convergence and contrast. He defines the infra-
structure as ‘the feasible set of technological solutions to the production problem
that constrains the workflow and delimits the various configurations of tasks that
specific organizations draw upon at will’ (Fombrun, 1986, p. 405). Infrastructure
refers to the underlying map of the interdependence to operate technology and
resources. The sociostructure is ‘the administrative structure of the organization and
its social architecture of exchange relationships’ (Fombrun, 1986, p. 406). It is a
formal control systems designed to coordinate social activity. The superstructure
refers to ‘symbolic representations and interpretations of collective life that come to
be widely shared by participants’ (Fombrun, 1986, p. 406). For a better explanation
of the context of learning organizations, the three substructures can be reframed as
the learning infrastructure, system and culture. The learning infrastructure refers to
organizations’ new technologies and incentives and their interconnected structure to
encourage learning. For instance, financial incentives and rewards for learning are a
part of the learning infrastructure. The learning system is the mechanism and pro-
cess which integrates and coordinates learning activities such as communication,
discussion, and collaboration for reprocessing and reengineering. The learning cul-
ture is the implicitly shared values, norms, and trust towards learning. For example,
mutual respect, holistic perspectives and the learning climate are aspects of the
learning culture.
 International Review of Public Administration 181

Research framework
The literature on the learning organization includes many empirical studies on the
dimensions of learning organizations and their impact on perceived financial perfor-
mance. Based on the literature on learning (Nevis, DiBella, & Gould, 1995; Sorensen
& Stuart, 2000), a learning organization will gain accurate internal and external infor-
mation and use it in an effective way and thus outperform other organizations. Accord-
ing to Wetherington and Daniels (2013), members of organizations with higher
dimensions of learning are more likely to implement indicators of financial performance
such as efficiency, contributions, productivity and volunteer support. Their empirical
evidence shows that organizations with relatively high learning organization dimensions
have an increased likelihood of improved their public support from donations and vol-
unteers. Thus, funders may be drawn to organizations with efficient operations and pro-
ductive staff and seek to leverage their program funds through financial support of
learning activities at the organizations being funded. McHargue (1999) found that the
organization’s debt ratio had a significant negative association with learning organiza-
tion characteristics, indicating that organizations with higher levels of learning organiza-
tion dimensions may generate additional resources and require less debt to finance their
operations. Supporting these findings, Marsick and Watkins (2003) argued that learning
organization characteristics are positively related to financial performances. Yang
(2003) and Hernandez (2003) reported that the dimensions of the learning culture
explain much of the variance in the financial performance variable, although there are
certainly other important variables that explain financial outcomes. Evidence of the
relationship between the characteristics of a learning organization and performance
shows that the other characteristics influence system variables, which in turn are most
likely to influence changes in performance (Ellinger, Ellinger, Yang, & Howton, 2003).
Drucker (1999) stated that knowledge employees are self-motivated more by the
natural challenges of their work and that organizations must continually provide their
employees with learning opportunities to create tasks that challenge, motivate and sat-
isfy them. Egan, Yang, and Bartlett (2004) found that the organizational learning char-
acteristics are associated with employee satisfaction, further noting that employees who
are cooperative, helpful, respectful and considerate deliver an excellent job and tend to
be satisfied with their jobs and with the organization. At the group level, Senge (1990)
reported that learning organization characteristics such as the team-learning program,
two-way communication, and the sharing of a global perspective counteract employee
alienation, and that learning environments in which employees perform their everyday
activities enhance intrinsic motivation. Ellickson (2002) suggested that a learning group
is part of a larger psychological climate that includes an atmosphere of cooperation and
friendliness among work group members, which resulted in more satisfaction among
employees. In Korean public organizations, the seven dimensions of learning organiza-
tion systematically increase perceived financial performance. Chung and Han (2008)
found that the learning infrastructure, system and culture increased organizational mem-
bers’ levels of satisfaction and efficacy in Korean central government. They noted that
the learning infrastructure and culture enhanced satisfaction and perceived financial per-
formance through the moderation of the learning system. According to this statement,
organizations that can effectively manage their learning infrastructure, system and cul-
ture may experience greater employee satisfaction and financial performance. This argu-
ment leads to the hypothesis in this study, and the research model can be drawn, as
shown in Figure 1, on the basis of the preceding arguments.
182 Y. Kim and S.-I. Han

Learning
Infrastructure
Perceived financial
Learning performance/
System Employee Satisfaction

Learning
Culture

Control Variables

Figure 1. Research framework.

Hypothesis: The learning infrastructure and culture have a positive effect on per-
ceived financial performance and employee satisfaction through the moderation of the
learning system.

Methods
Sample
In order to collect data for this study, 240 organizations were sampled from the 2008
Bibliography of Korean Non-profit Civil Organizations. In October of 2008, directors
and managers including executive and financial directors of all sampled NPOs received
a phone call in which they were asked to participate in the survey. An email with the
survey questionnaire attached was sent to those who agreed to participate. A deadline
of seven days after the distribution of the questionnaires was specified as the return
date. Emphasis was placed on the voluntary completion of the questionnaires. A total
of 149 responses were returned, yielding a response rate of 62.1%. Of these, nine ques-
tionnaires had missing values and were excluded from the sample, leaving 140 ques-
tionnaires that were utilized in this study. The main characteristics of the samples
utilized in this study are presented in Table 1.

Measurement
Dependent and independent variables were adopted from the DLOQ developed by
Marsick and Watkins (2003). The measurement items utilized in this study and their
descriptive statistics are listed in Table 2. These were translated by the authors and
pretested with 76 students in a master of public administration course. A six-point
Likert-type scale ranging from ‘Strongly Disagree’ (1) to ‘Strongly Agree’(6) was used
to measure all items of the learning organization characteristics, perceived financial
performance and employee satisfaction in the consolidated questionnaire. As control
variables including the size, length of service, field of activity and region, the scales
devised by Cho (2007) and Bates and Khasawneh (2005) were adopted.

Reliability and validity

The reliability of the instrument was examined for internal consistency using
Cronbach’s alpha (α). Construct validity was determined using a confirmatory factor
 International Review of Public Administration 183

Table 1. Survey respondents’ individual and organizational characteristics.

Type Contents Dimension Frequency Rate

Individual Gender Male 38 27.5%
Female 100 72.5%
Age 20–29 51 38.9%
30–39 38 29.0%
40 or older 42 32.1%
Rank Higher 28 22.2%
Middle 64 50.8%
Lower 34 27.0%
Organizational Field of Activity Administration 16 12.0%
Society 54 40.6%
Economics 16 12.0%
Environment 12 9.0%
Science 4 3.0%
Other 31 23.3%
Length of Service 5 year or shorter 82 63.1%
6–10 12 9.2%
11–15 12 9.2%
16–20 18 13.8%
21 or longer 6 4.6%
Location Seoul 98 73.7%
Other 35 26.3%

analysis (CFA) and data fit indices to determine that the factor structure and factor
loadings developed in the USA are valid in Korean non-profit settings. Table 2 shows
that all of the subscales have satisfactory reliability estimates that are well within the
range of acceptable criteria. The scale of the learning infrastructure, system and culture
showed high reliability with α values of .679, .861 and .823, respectively well within
accepted thresholds. A CFA involves the use of factor analysis to test whether the con-
structs posited by a theory actually exist and can be distinguished from each other. In
this study, the 16 items of the DLOQ were grouped according to similar characteristics
to form three factors. By grouping the 16 items of the DLOQ into three factors, it was
possible to reduce the complexity of the study without compromising the validity of
the results and to present the results of the study in a more easily understood format.
The factor loadings of all items loaded on their respective subscales were above the
generally accepted minimum of .40.

Analysis
The objective of the data analysis is to examine the construct validity of the theory-
based three-dimensional measures of a learning organization and the causal relation-
ships between learning organization characteristics and perceived financial performance.
A CFA was used to examine the construct validity for the measure of the dimensions
of the learning organization. This analysis is appropriate because it verifies the ade-
quacy of the item-to-factor associations and the number of dimensions underlying the
construct.
According to MacKinnon (2008), the significance of the individual regression coef-
ficients and any interaction effect in the model should be examined to best implement
the analysis of the moderator effect. Interactions can be further proved with a simple
184 Y. Kim and S.-I. Han

Table 2. Measurement items of independent and dependent variables.

Dimension
Variable (Cronbach’s α) Measurement Items Mean SD
Independent Infrastructure In my organization, people can get money and 2.62 .902
(.679) other resources to support their learning.
In my organization, teams/groups are rewarded 3.08 .996
for their achievements as a team/group.
My organization creates systems to measure 2.92 .974
gaps between current and expected performance
levels.
In my organization, leaders generally support 2.84 1.054
requests for learning opportunities and training.
System (.861) In my organization, people identify the skills 3.04 1.133
they need for future work tasks.
In my organization, people listen to others’ 2.81 .955
views before speaking.
In my organization, people are encouraged to 3.81 1.133
ask “‘why”’ regardless of rank.
My organization uses two-way communication 3.18 1.271
on a regular basis, such as suggestion systems,
electronic bulletin boards or town hall/open
meetings.
My organization gives people control over the 3.32 1.104
resources they need to accomplish their work.
My organization considers the impact of 3.51 1.156
decisions on employee morale.
In my organization, leaders mentor and coach 3.58 1.159
those they lead.
Culture (.823) In my organization, people view problems in 2.93 .931
their work as an opportunity to learn
In my organization, teams/groups focus both on 3.62 1.228
the group’s task and on how well the group is
working.
My organization gives people choices in their 3.18 .957
work assignments.
My organization builds an alignment of visions 3.07 1.118
across different levels and work groups.
My organization works together with the 3.08 1.302
outside community to meet mutual needs.
Dependent Perceived In my organization, the return on investment is 2.40 .782
Financial greater than it was last year.
Performance In my organization, the average productivity per 2.58 .930
employee is greater than it was last year.
In my organization, the market share is greater 2.25 .801
than it was last year.
In my organization, the cost per business 2.63 .752
transaction is less than it was last year.
Satisfaction Overall, I am satisfied as an employee of my 2.45 .992
organization.
My organization cares about its employees. 3.10 1.010
I have the ability to meet or exceed the needs of 2.36 .802
my organization.
I intend to continue working for this 2.22 .893
organization.
 International Review of Public Administration 185

slope analysis to examine variable relationships across all levels of the moderator vari-
able. After these regression analyses are complete, the structural equation models are
estimated to investigate the moderation effect simultaneously (MacKinnon, 2008).
Adopting these approaches, the two stages of verification of the moderating effect of
learning system were conducted: an ordinary least-square regression analyses with inter-
action terms and structural equation estimation (Aiken & West, 1991).
The structural equation model (SEM) was used to examine the relationships among
the control variables, the learning organization characteristics and perceived financial
performance. If there is a SEM which represents the model postulated in Figure 1 and
if the hypothesized relationships among the constructs are found to be significant in the
desirable directions, then there are significant relationships between the learning charac-
teristics and perceived financial performance. After reviewing existing studies on learn-
ing organization (Bates & Khasawneh, 2005; Cho, 2007), potentially relevant control
variables such as the region of operation, the length of service, the field of activities
and the size are included as covariates in the models. It then can be concluded that
learning characteristics measured on the instrument are significantly related to financial
performance in a way implied by the research framework. This study elected the four
criterion indices of a goodness-of-fit index (GFI), a comparative fit index (CFI), a non-
normed fit index (NFI), and the root mean-square error of approximation (RMSEA).
All analyses were conducted with the AMOS 18.0 program.

Results
Verification of the moderating effect of the learning system on the dependent
variables
Table 3 verifies the moderating effect of the learning system on perceived financial per-
formance. In order to avoid multicollinearity, standardized variables in conjunction with
mean-centering were used. Among the control variables, the size of the NPO is nega-
tively associated with perceived financial performance in all three models. The learning
infrastructure, culture and system are positively related to financial performance in
Model 2. Model 3 includes control, independent, moderating and interaction variables
and shows a statistically significant increase of its R2 value (.024). These results reveal
that the moderating effect of the learning system is statistically significant, which means
that the learning system changes the influence of the independent variables.
Table 4 verifies the moderating effect of the learning system on employee satisfac-
tion. Control variables are not associated with employee satisfaction in all three models.
The learning infrastructure, culture and system are positively related to financial perfor-
mance in Model 2. Model 3 shows a statistically significant increase in its R2 value
(.034). These results reveal that the moderating effect of the learning system is statisti-
cally significant, indicating that the learning system changes the influence of the inde-
pendent variables.
Plotting interaction effects aids in the interpretation of moderation to show how the
slope of a dependent variable on an independent variable is dependent on the value of
the moderator variable. Referring to Aiken and West (1991) and Cohen and Cohen
(1983), separate regression lines are computed and plotted after calculating the actual
values of the dependent variables by replacing them with the values of the independent
variables. Commonly, values are computed for independent variables at one standard
deviation above the mean and one standard deviation below the mean. As shown in
186 Y. Kim and S.-I. Han

Table 3. Moderating effects of the learning system on perceived financial performance.

Model1 Model2 Model3

Variables B(SE) β B(SE) β B(SE) β
Control Seoul .266 (.224) .120 .318 (.221) .144 .333 (.224) .151
Variables Length .024 (.018) .183 .020 (.018) .152 .021 (.018) .160
of
service
Size −.038 (.017) −.327* −.034 (.017) −.293* −.035 (.017) −.304*
Social .214 (.199) .108 .201 (.196) .101 .201 (.197) .101
sector
Independent Infra .265 (.076) .277** .190 (.083) .181* .171 (.087) .163**
Variables (A)
Culture .264 (.080) .276** .261 (.075) .273** .283 (081) .297**
(B)
Moderating System .265 (.079) .277** .255(.082) .267**
Variables (C)
A×C .038 (.083) .037*
B×C .046 (.067) .059*
Constant .848 .720 .743
(.458) (.461)
R2 .260 .291 .315
Adj R2 .223 .249 .240
F 6.975 6.932 5.395
ΔR2 .031 .024

Table 4. Verification of the moderating effect of the learning system on employee satisfaction.

Model4 Model5 Model6

Variables B(SE) β B(SE) β B(SE) Β
Control Variables Seoul .069 .030 −.002 −.001 −.054 −.024
(.235) (.230) (.226)
Length of −.012 −.088 −.016 −.114 −.019 −.143
service (.019) (.019) (.018)
Size .012 .103 .012 .104 .017 .139
(.018) (.017) (.017)
Social sector .165 .080 .066 .032 .068 .033
(.206) (.204) (.199)
Independent Infra (A) .281 .259** .385 .390*** .349 .321***
Variables (.089) (.078) (.088)
Culture (B) .397 .402*** .230 .233*** .305 .309***
(.080) (.082) (.082)
Moderating System (C) .282 .260** .266 .269**
Variables (.087) (.083)
A×C .133 .128*
(.054)
B×C .164 .202*
(.068)
Constant −.463 −.346 −.426
(.488) (.476) (.467)
R2 .232 .280 .323
Adj R2 .194 .237 .271
F 6.000*** 6.555*** 6.162***
ΔR2 .048 .034
 International Review of Public Administration 187

Financial performance Financial performance

High system High system

Low system Low system

Low infra High infra Low culture High culture

Employee satisfaction Employee satisfaction

High system High system

Low system Low system

Low infra High infra Low culture High culture

Figure 2. Moderating effect of the learning system on the infrastructure and culture.

Figure 2, the simple slopes in learning systems show statistically significant differences
and the patterns of the slopes reveal that the moderator increases the effects of the
learning infrastructure and culture on the dependent variables of perceived financial per-
formance and employee satisfaction.

Structural equation analysis

Table 5 reports the goodness of fit indices of the SEM with regard to the learning orga-
nization characteristics and perceived financial performance. The CMIN/DF, CFI,
RMSEA, and GFI meet the requirements of acceptable fit indices. The NFI of .882 falls
slightly below the threshold of .9. When the samples are small, the NFI is often under-
estimated. Overall, this model is considered to be statistically significant, as the other
fit indices meet the commonly accepted thresholds. Figure 3 shows the standard esti-
mate of the SEM of the relationship between the learning organization characteristics
and perceived financial performance. All independent variables are positively and sig-
nificantly related to financial performance and the hypotheses are supported. The learn-
ing infrastructure and culture have a significant and positive association with perceived
financial performance. The learning system has a significant and positive mediating
effect on perceived financial performance. Among the control variables, only the size
of the organization is negatively associated with the dependent variables. Therefore, the
hypothesis is confirmed. The results show that employees in the Korean non-profits

Table 5. Goodness of fit of the model for the relationship between learning and perceived finan-
cial performance.

Fit Indices GFI NFI CFI CMIN/DF RMSEA RMR

Default Model .915 .882 .943 1.325 .044 .042
Commonly acceptable threshold >.9 >.9 >.9 <2 <.05 <.05
188 Y. Kim and S.-I. Han

Table 6. Goodness of fit Indices of the model for the relationship between learning and
employee satisfaction.

Fit Indices GFI NFI CFI CMIN/DF RMSEA RMR

Default Model .932 .842 .924 1.927 .018 .010
Commonly acceptable threshold >.9 >.9 >.9 <2 <.05 <.05

Learning
Infrastructure .618 ***

Learning .537 *** Perceived financial

System performance

Learning .546***
Culture
**
-.021
Length of Size Field Region
Service (Social) (Seoul)

Figure 3. SEM estimation results of the model concerning the relationship between learning
and perceived financial performance.

Length of Size
Service

Learning Perceived financial

-.008*** performance
Infrastructure .553***
.586***
Learning
System
.553*** .431***
Learning
Employee Satisfaction
Culture

Field Region
(Social) (Seoul)

Figure 4. SEM estimation results of the model for the relationship between learning and
employee satisfaction.
Note. The dotted lines indicate statistically insignificant paths.

tend to place equal emphasis on the learning system, the infrastructure and the culture.
However, it is interesting to note that Korean non-profit sector employees perceive the
learning system to be a mediator of the other variables. What this finding implies is
 International Review of Public Administration 189

that the learning infrastructure and culture are not significant without the learning sys-
tem. Thus, top management should think about how to establish a learning system, as
doing so facilitates both the learning organization characteristics and performance.
The second SEM includes the learning system’s double effects on perceived finan-
cial performance and employee satisfaction. All goodness of fit indices except for NFI
satisfy commonly acceptable thresholds. Again, Korean non-profits tend to place equal
emphasis on the learning system, infrastructure and culture, and the employees consider
the learning system to be a mediator of the other variables. Among the control vari-
ables, the size of the organization is negatively associated with the learning system.
Consistent with the idea of the hypothesis, the learning organization characteristics tend
to increase perceived financial performance and employee satisfaction levels.

Discussion
The first research question posed in the introduction to this paper can be answered in a
fairly straightforward manner. The learning organization construct as measured by the
DLOQ questionnaire can be reframed into three structural dimensions. The results point
to a three-factor solution being acceptable and worthwhile for prescriptions for better
learning. The second question regarding the causal relationship between the learning
organization and perceived financial performance can be answered in the light of the
results of the structural equation estimation. All of the proposed relationships in the
modified causal model were statistically significant. Therefore, the construct and rela-
tionships should be regarded as entirely acceptable and applicable to Korean NPOs.
Three key lessons for organizational performance and satisfaction emerge. First,
learning is the key to the increase of performance in Korean NPOs. The analysis results
confirmed that the learning organization characteristics are perceived to enhance finan-
cial performance, which is one of the pivotal components of the overall performance of
NPOs. The global financial crisis of the late 1990s caused businesses to be less com-
petitive and hollowed out national and local economies. Consequently, donations from
businesses and subsidies from governments for NPOs have been significantly reduced
such that financial performance became very important with regard to their performance
overall. Ironically, NPOs tend to seek new ways such as devising new business models
and adopting innovative management techniques, to increase their financial sustainabil-
ity and to achieve their goals. In this sense, the findings of this study support the find-
ings of Simonin (1997) who found that learning provides an opportunity for employees
and organizations to adopt a strategic vision for overcoming socioeconomic challenges
and to insist on the use of management standards, essential organizational practices,
and indicators to measure the organization’s innovation and development (Huber, 1991;
Lei, Slocum, & Pitts, 1999). As an NPO engages in a learning process, it acquires new
knowledge about stakeholders’ needs and organizational results and outcomes, what it
is doing well and in which areas it needs to improve. As a result of this process, posi-
tive associations between learning organization variables and performance variables are
observed, in line with the findings of Dimovski and Skerlavaj (2005) and Goh and
Ryan (2002) with regard to the effect that organizational learning relates most strongly
to organizational performance.
Second, the development of learning systems is pivotal to increase the levels of
financial performance and employee satisfaction. Therefore, formal and informal learn-
ing systems should be reformulated in innovative ways. In non-profit settings, learning
through interactions such as knowledge sharing through communication, mentoring and
190 Y. Kim and S.-I. Han

coaching, and collaboration with local communities by members of the organization is

emphasized (Inkpen & Tsang, 2005; OECD, 2003) because the developmental learning
system is completed through intra-organizational and inter-sector innovation systems.
Third, the learning organization characteristics of Korean non-profits are positively
associated with employee satisfaction in spite of the insignificant covariance between
performance and satisfaction. These results support the findings of Egan et al. (2004),
who found that learning is used as a primary factor to increase satisfaction and decrease
turnover intention. As a result, a learning organization can enhance sustainability and
long-term goal attainment, consistent with findings in the literature which show that sat-
isfaction is significant when used to predict or explain employees’ levels of commit-
ment to the organization and their intention to remain with an organization (Lumley,
Coetzzee, Tladinyane, & Ferreira, 2011; Westlund & Hannon, 2008). When considering
that learning organization characteristics appear to have a significant effect on individ-
ual satisfaction and organizational performance levels, these findings may be useful for
guiding managers in making effective work assignment decisions, improving job
designs and creating learning opportunities. According to Klaus, LeRouge, and Blanton
(2003), through better job assignment, work design and learning opportunities,
organizational members may show greater commitment, leading to better job
performance.

Conclusion
Modifying the DLOQ framework developed by Marsick and Watkins (2003), the impor-
tance of structural dynamics in the areas of learning and innovation was examined in the
context of NPOs. The learning system was highlighted as a key factor for enhancing
organizational performance and employee satisfaction. The findings of this study reveal
that the learning infrastructure and culture have indirect but significant effects on organi-
zational performance and employee satisfaction. The learning system serves as a media-
tor of the relationships between the independent variables (e.g., learning infrastructure
and culture) and the dependent variables. The results also suggest that although the
learning infrastructure and culture are important with regard to learning activities, they
only indirectly affect the outcomes. The more effort that is devoted to empowering peo-
ple and giving them autonomy, the more performance and satisfaction levels increase.
Among the limitations to be noted and considered when interpreting the research
results, the first and the most important is that the survey data was based on same-
respondent replies. A self-report questionnaire was used to measure all independent,
moderating and dependent variables without variables that were measured indepen-
dently of the questionnaire. The potential validity problems associated with
same-respondent replies (Campbell, 1982) should be considered in interpretations and
applications of the results of this study. The second limitation comes from the general-
ization of the results. Given that the present study was limited to participants employed
in NPOs in South Korea, the results cannot be generalized to other job settings and
countries. Future research efforts should focus on obtaining more comprehensive and
representative samples of employees in non-profit settings. Furthermore, comparative
studies of diverse sectors and national contexts should be conducted. Learning organi-
zation characteristics tend to develop in different ways across nations; thus, different
measurement and analysis methods should be developed through comparative research.
The third limitation is that this study only focuses on financial performance and satis-
faction as dependent variables. Future work can concentrate on the relationships
 International Review of Public Administration 191

between the learning organization characteristics and multiple features of performance,

i.e., not only financial and emotional performance but also knowledge and public per-
formance. In non-profit settings, researchers should consider public values and social
relevance and whether or not they lead to public performance. Notwithstanding these
limitations, the present study should be seen as making a positive contribution to the
development of organizational performance in South Korean NPOs.

Notes on contributors
Yoonjeong Kim is a lecturer at Yonsei University’s Wonju Campus. She received her PhD in
Business Administration at Ewha Womans University and has published several articles on finan-
cial risk management and investment. Yonsei University, Wonju, South Korea. Email:
yj606kim@gmail.com.

Sang-Il Han is a professor of Global Public Administration at Yonsei University’s Wonju Cam-
pus. He received his PhD in Public Administration at the University of Southern California and
has published many articles on learning organizations, social economy, and community develop-
ment. Department of Global Public Administration, Yonsei University, Wonju, South Korea.
Email: hans@yonsei.kr.

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Reproduced with permission of the copyright owner. Further reproduction prohibited without
permission.

MF
42,12
1208
Received 19 October 2015
Revised 11 March 2016
Accepted 10 July 2016
Managerial Finance
Vol. 42 No. 12, 2016
pp. 1208-1225
© Emerald Group Publishing Limited
0307-4358
DOI 10.1108/MF-10-2015-0288
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0307-4358.htm
Value of employee satisfaction
during the financial crisis
Cathy Xuying Cao
Seattle University, Seattle, Washington, USA, and
Chongyang Chen
Pacific Lutheran University, Parkland, Washington, USA
Abstract
Purpose – The purpose of this paper is to examine how employee satisfaction affects firm value
around the financial crisis.
Design/methodology/approach – The authors use the 2008 financial crisis as exogenous shocks to
firms to mitigate endogenous concern that employee satisfaction and firm value can be jointly
determined. The authors compare firm value of two groups of firms: the firms on the Fortune
magazine’s list of “100 Best Companies to Work For” and matched firms that are not on the list.
The authors employ difference-in-difference approaches in the tests.
Findings – The authors find that when the crisis happens, the best companies experience larger
decreases in firm value than comparable firms. In addition, such decreases in firm value only exist
among the best companies with high financial flexibility. The authors also show that job satisfaction
alone does not create firm value during the financial crisis; only when interacted with high financial
flexibility, employee satisfaction leads to high firm value. Finally, the authors document that best
companies do not have any advantage in the recovery of firm value after the crisis, regardless of their
level of financial flexibility.
Research limitations/implications – There is considerable debate on whether job satisfaction
leads to performance or performance leads to satisfaction (Luthans, 1998). The authors show that
the impact of employee satisfaction on firm value changes over time. The authors also identify a
crucial factor that impacts the value-creation of employee satisfaction: financial flexibility.
The findings suggest that the ambiguous results documented in prior literature can be due
to the different sample periods and the failure to identify the impact of financial flexibility in
previous studies.
Practical implications – The findings provide helpful implications to the business community.
The evidence suggests that to reap the benefits of employee satisfaction, companies need to
manage their financial flexibility to buffer against potential negative shocks while having
strong corporate governance mechanism to mitigate agency concerns. Moreover, the study
provides an investment recommendation to socially responsible investment (SRI) and suggests
that it is better off implementing dynamic SRI investment strategies according to economic
condition.
Social implications – The evidence suggests that the economic value of employee satisfaction is
related to firms’ financial flexibility and economic conditions.
Originality/value – The authors contribute to the literature by showing that the impact of employee
satisfaction on firm value changes over time. The test design not only allows the authors to study the
effect of employee satisfaction on firm value at a particular point in time, but also helps the authors
examine the variation in the effect over economic cycles. This paper also contributes to the literature on
SRI. The authors identify a crucial factor that impacts the value-creation of employee satisfaction:
financial flexibility.
Keywords Corporate social responsibility, Firm value, Employee satisfaction, Financial flexibility
Paper type Research paper
Support from a Seattle University Summer Faculty Fellowship is gratefully acknowledged. The
authors also wish to thank Yan Zhao for her assistance in data collection.
 There is one key to profitability and stability during either a boom or bust economy: employee Value of
morale (Herb Kelleher, Founder of Southwest Airlines).
employee
Does employee satisfaction add values to a firm? Existing theories suggest both satisfaction
positive and negative effects of employee satisfaction on firm value. Several studies
argue that employee satisfaction helps increase firm value through several channels.
First, job satisfaction can improve employee commitment and thus increase firm 1209
competitive advantage (Whitener, 2001; Bridges and Harrison, 2003); second, it can
promote organizational citizenship behavior and lead to high operational efficiency
(Organ, 1988). Third, job satisfaction can attract talents and engage employees as
passionate and creative contributors, which helps increase firm value (Becker and
Gerhart, 1996; Pfeffer, 1994; Mitchell et al., 2001). Despite these potential benefits, some
labor-friendly practices are costly and can indicate agency problems, which reduce firm
value. Employee satisfaction can be improved by over-invest in labor-friendly
programs. In addition, managers tend to pay employees more to seek private benefits
such as reduced effort in wage bargaining and improved social relations with
employees (Cronqvist et al., 2009). Pagano and Volpin (2005) also suggest that
incumbent managers have an interest in generous employment policy precisely to
defend against hostile takeovers at the cost of firm value.
Existing empirical studies on the relationships between job satisfaction and
subsequent firm value also reach inconsistent conclusions. For example, Anginer and
Statman (2010) show that stocks of admired companies have lower returns, on average,
than stocks of spurned companies. In contrast, Anderson and Smith (2006) and Edmans
(2011) show that a portfolio of the “100 Best Companies to Work For in America”
outperforms the market portfolio and earns abnormal returns. Jiao (2010) finds that an
increase in stakeholder welfare, in particular employee welfare, leads to an increase in
firms’ Tobin’s Q. Different from the above findings, Filbeck and Preece (2003)
document that the buy-and-hold returns of the stocks of the best companies are not
statistically different from those of matched firms.
A major obstacle limiting empirical progress on the topic is the difficulty in
dealing with the endogenous nature of firm performance and employee satisfaction.
It is possible that employee satisfaction simply reflects the company’s financial
health. Specifically, a profitable firm is more likely to have resources to increase
employee job satisfaction; meanwhile, high employee satisfaction level can help retain
and motivate workers, which in turn improves firm productivities and profitability.
Hammond et al. (1996) find that a firm’s prior financial performance, such as its return
on sales and stock performance, can significantly explain whether the firm is
included in the subsequent best companies list. Hong et al. (2012) show that firms tend
to implement employee-friendly programs, such as cash profit-sharing programs,
only when firms are financially strong. Therefore, it is challenging to disentangle the
confounding interactions between job satisfaction and firm performance and to
clearly identify the causality.
In this paper, we examine the impact of employee satisfaction on firm value around
the financial crisis to avoid some of the potential shortcomings of prior research[1].
We use the 2008 financial crisis as a source of unexpected exogenous shock to an
individual firm. We follow the methodology in Duchin et al. (2010) and measure firm’s
employee satisfaction one year prior to the crisis. We compare the changes in firm
value between two groups of firms around the crisis: the firms on the Fortune
magazine’s list of the “100 Best Companies to Work For”; and comparable firms that
MF are not on the list. We employ difference-in-difference approaches and ask the following
42,12 questions: whether firms with high job satisfaction experience more or less loss in firm
value at the onset of the crisis, whether these firms have higher firm value than other
comparable firms during the crisis, and whether they can recover their firm value more
quickly from the crisis than other non-best companies.
The recent financial crisis in 2008 is an ideal event to investigate the effect of
1210 employee satisfaction on firm value. From both investors and firms’ perspectives, the
financial crisis is a potentially unexpected exogenous event, whose duration is unknown
at the beginning of the crisis. During the crisis, there is a great deal of uncertainty about
firm future performance and the availability of financial resources, which magnifies both
the benefits and costs of maintaining high employee satisfaction. Job satisfaction can add
firm value by improving work efficiency and employee motivation. However, satisfaction
arising from over-compensation can reduce firm value at the expense of shareholder
value and raise the concern about agency problem. In addition, such agency problem can
become severer during crisis than during business boom (Bernanke and Gertler, 1989;
Rajan and Zingales, 1998; Johnson et al., 2000). Therefore, investors can severely discount
firm value of the best companies during the financial crisis.
We find that although employee satisfaction is positively related to firm value
before the financial crisis, firm value of the best companies decrease more than those of
other comparable firms when the crisis takes place. In addition, the best companies
with high financial flexibility or easy availability of internal finance have larger
decrease in firm value than other comparable firms with the same financial flexibility.
This is consistent with the notion that high job satisfaction combined with high
financial flexibility can magnify investors’ concern about severe agency problems
following the onset of financial crisis, which leads to a large decrease in firm value.
We also examine the effect of employee satisfaction on firm value during the peak of
the financial crisis in year 2008. We document a cross-sectional positive association
between employee satisfaction and the level of firm value. Further analysis shows that
such positive effect of employee satisfaction only exists in firms with great financial
flexibility. These findings cast doubt on the value-creation of employee satisfaction by
itself during the crisis. Combined with our previous findings, the evidence suggests
that although best companies with high financial flexibility experience large decreases
in firm value over the period from 2006 and 2008, they still have higher firm value than
other firms in 2008.
Finally, we find that all firms experience improvement in firm value after the
financial crisis. However, our evidence suggests that the best companies do not have
any advantage in recovery of firm value from the crisis in comparison with other firms,
regardless of their level of financial flexibility.
Our paper complements prior literature on impact of employee satisfaction and on
firm stock returns (Anginer and Statman, 2010; Anderson and Smith, 2006; Edmans,
2011), on firm performance (Christen et al., 2006), and on firm value (Edmans, 2012).
However, there is considerable debate on whether job satisfaction leads to performance
or performance leads to satisfaction (Luthans, 1998). The ambiguous results
documented in prior literature can be due to the different sample periods used in the
tests. The key contribution of our paper is to show that the impact of employee
satisfaction on firm value changes over time. Our test design not only allows us to
study the effect of employee satisfaction on firm value at a particular point in time, but
also helps us examine the variation in the effect over economic cycles. We find that
firms with high job satisfaction experience larger decrease in their firm value than
other comparable firms following the onset of the crisis. Moreover, we show that Value of
employee satisfaction does not have significant impact on the recovery of firm value employee
right after the financial crisis.
This paper also contributes to the growing literature on socially responsible
satisfaction
investment (SRI) (Servaes and Tamayo, 2013; Deng et al., 2013). Prior studies document
mixed empirical evidence on investment performance of SRI (see Renneboog et al., 2008
for literature review). Our findings show that high employee satisfaction alone does not 1211
create firm value during the financial crisis; only by combining high employee
satisfaction with high financial flexibility can these labor-friendly firms have higher
firm value than otherwise similar firms.
In addition, our findings provide useful implications to the business community.
We document a significant effect of the interaction between firm financial flexibility
and job satisfaction on either the level of or the change in firm value. Our results
suggest that to reap the benefits from employee satisfaction, companies need to
manage their financial flexibility to buffer against any negative shocks while having
strong corporate governance mechanism to mitigate agency concerns. Moreover, this
paper provides investment implications to an SRI investor by showing how firm value
of best companies changes around economic downturn. Our findings on time-varying
impact of employee satisfaction suggest that investors would better off implementing
dynamic SRI investment strategies according to economic condition and incorporate
firm financial flexibility into investment consideration.
The rest of the paper is organized as follows. Section 1 discusses data sources
and sample characteristics. Section 2 reports the results from the empirical tests.
Section 3 concludes.

1. Data and variable definition

1.1 Data
Our study focuses on the impact of employee satisfaction on firm value before, during,
and after the 2008 financial crisis. The data on employee satisfaction is collected from
the Fortune magazine’s list of the “100 Best Companies to Work for in America” from
2006 to 2008. Since 1998, Fortune magazine published the list in its January issue each
year based on previous year’s survey results. The list is compiled by the Great Place to
Work® Institute in San Francisco based on survey questions. The companies are
scored in four areas: credibility (communication to employees), respect (opportunities
and benefits), fairness (compensation and diversity), and pride/camaraderie (teamwork,
philanthropy, and celebrations).
Following the methodology in Duchin et al. (2010), we measure firm’s employee
satisfaction and define the best companies prior to the start of the crisis. We require the
sample of best company to meet the following requirements. The firm should be on the
list of the “100 Best Companies to Work for in America” for year 2005, 2006, 2007, or
2008[2] which reflects the survey result of previous year. The firm should have data
available in Compustat Annual Industrial file (COMPUSTAT). And the final sample
excludes financial and utility firms. In our final sample, there are 63 unique firms on the
best companies list.
To compare the firm value of best companies with other firms, we apply propensity
match approach to find comparable firms for each best company in three different
dimensions: firm size, book-to-market ratio, and industry. We also require matching
firms not to appear on the Fortune list during any of the sample years of our study
(from 2005 to 2010).
MF 1.2 Key variables definition
42,12 Our measure of firm value is Tobin’s Q (Q). We define Q as the ratio of market value to
book value of assets, both computed at the end of each fiscal year. Our control variables
are motivated by Laeven and Levine (2008). These include firm size defined as the log of
book asset. Sales growth rate is calculated as the ratio of previous year’s sales to current
year’s sales minus one. Capital expenditures to book asset ratio is measured as the ratio
1212 of capital expenditures to the book value of total assets. Fixed asset to book asset is
defined as the ratio of book value of property, plant, and equipment to the book value of
total assets. Book leverage is defined as the ratio of total debt to total assets. R&D to book
value of assets is the ratio of research and development expense to total book asset, with
R&D set equal to zero when research and development expense is missing. Finally, we
include profitability measure to capture firm performance. We define profitability as the
ratio of operating income before depreciation to the book value of total assets.
We further examine the differential effects of job satisfaction on firm value among
firms with different financial flexibility. Motivated by literature on financial flexibility,
we use three measures to proxy for financial flexibility: cash flow, cash holdings, and
financial deficit. Following Titman et al. (2004), we define cash flow as operating income
before depreciation minus interest expenses, taxes, preferred dividends, and common
dividends, scaled by total assets. Cash holdings are calculated as the ratio of cash plus
marketable securities to net assets (i.e. book value of total assets minus cash plus
marketable securities). Following John and Litov (2010), we define financial deficit as
the sum of cash dividends, investment, and change of working capital minus internally
generated cash flow.
Table I presents the descriptive statistics for the best companies and their
corresponding matching firms in 2007. Table I show that the best companies exhibit
somewhat similar characteristics from those of their matching firms. For example,
there is no significant difference between best companies and their matched firms in
terms of size, sales growth rate, capital expenditure, and R&D activity. However, we
also notice differences between these two types of firms in several aspects.
For example, the best companies typically have higher profitability, higher financial
flexibility, lower book leverage, and low asset tangibility. Thus it is important to
control for the heterogeneity in firm fundamentals in order to cleanly identify the
causality between employee satisfaction and firm value.

2. Empirical analysis
We now turn to our multivariate regressions. We define crisis as an indicator variable
denoting the 2008 financial crisis. The best companies refer to firms on the Fortune
magazine’s list of the “100 Best Companies to Work for in America” from 2005 to 2008[3].
We assume that firms on the best companies list continue to provide similar
employee-friendly environment for at least two years.
We examine how firm value changes around the financial crisis by comparing the
firm value of two groups of firms over the period from 2006 and 2008: the “Best
Companies”; and their comparable firms.

2.1 Change in firm value when the financial crisis takes place
We first test how firm value of the best companies changes relative to that of other firms
following the onset of the financial crisis. Previous literature does not provide consensus
prediction on the relation between employee satisfaction and firm value. On the one hand, job
satisfaction brings benefits to the best companies. High employee satisfaction can stimulate
 Best companies Matching firms
Value of
Variables Mean n Mean n p-value of difference in means employee
satisfaction
Tobin’s Q 2.41 63 1.91 947 0.056
Ln(book asset) 8.14 63 7.94 947 0.107
Sales growth rate 0.12 63 0.12 947 0.963
Capital expenditure/book asset 0.06 63 0.05 947 0.315
Fixed asset/book asset 0.23 63 0.27 947 0.071 1213
Book leverage 0.12 63 0.25 947 0.000
R&D/sales 0.08 63 0.05 947 0.555
Profitability 0.13 63 0.08 947 0.000
Cash flow 0.16 55 0.09 895 0.000
Cash holdings 0.28 63 0.19 946 0.027
Financial deficit −0.09 63 -0.01 947 0.100
Notes: This table presents summary statistics for our sample in 2007, right before 2008 financial crisis.
To be included in our sample of the best companies, a firm has to meet the following requirements.
The firm should be on the list of the “100 Best Companies to Work for in America” for year 2005, 2006,
2007, or 2008, which reflects the survey results of previous year; the firm should have data available in
the Compustat Annual Industrial file (COMPUSTAT); to have a fair comparison of firm value, we require
the firm have fiscal end month of December. Then we apply propensity match approach to find
comparable firms for each the best companies in three different dimensions: firm size, book-to-market
ratio, and industry. Industry is defined according to French’s 17 industry definitions. The details are
available at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. We also require
matched firms not to appear on the Fortune list during any of the sample years of our study (from 2005 to
2010). Tobin’s Q is measured as the ratio of the market value of assets divided by the book value of
assets, both computed at the end of each fiscal year. Book asset is the book value of asset at the end of
fiscal year. Sales growth rate is the ratio of previous year’s sales to current year’s sales minus one.
Capital expenditures/book asset is the ratio of capital expenditures to the book value of total assets.
Fixed asset/book asset is the ratio of book value of property, plant, and equipment to the book value of
total assets. Book leverage is defined as the ratio of total debt to total assets. R&D/book asset is the ratio
of research and development expense to total book asset, with R&D set equal to zero when research and
development expense is missing. Profitability is measured as the ratio of operating income before
depreciation to the book value of total assets. Cash flow is the ratio of cash flow to net asset (i.e. book
asset value minus cash holdings). Cash/net book asset is the ratio of cash flow to net asset (i.e. book asset
value minus cash holdings). Following John and Litov (2010), we define financial deficit as the sum of
cash dividends, investment, and change of working capital minus internally generated cash flow.
All variables are winsorized at the 0.5 percent level. The difference between two categories of firms in Table I.
means is tested by a two-tailed test Summary statistics

workforce loyalty, foster lower absenteeism, reduce turnover, increase productivity, and
ultimately improve profitability (Eisenberger et al., 1986; Whitener, 2001; Reichheld, 1996;
Davis and Landa, 2004; Faleye and Trahan, 2011). Following the argument, higher employee
satisfaction can contribute to higher firm value. On the other hand, high job satisfaction
comes with costs. For example, managers can over-invest labor-friendly programs to seek
private benefits (Cronqvist et al., 2009) and to defend against hostile takeovers at the cost of
firm value (Pagano and Volpin, 2005). Moreover, it is particularly costly for the firms to
implement labor-friendly programs, especially when facing an unexpected financial
uncertainty. It is ultimately an empirical question whether high job satisfaction is beneficial
to firms when the financial crisis happens.
To address this question, we employ a difference-in-difference test procedure.
Specifically, we investigate the change in firm value, measured as Tobin’s Q, for the best
companies before and during the financial crisis, controlling for the change in firm value of
MF other comparable firms over the same period of time. We use firms not on the “best
42,12 companies” list as a control group to help “difference out” any confounding factors possibly
affecting firm value and thus isolate the effect of job satisfaction on firm value.
Specifically, we employ the following estimation model:

Tobin’s Qi ¼ a þ b1 ðBest Companiesi Þþ b2 ðCrisisi Þ

1214
þ b3 ðBest Companiesi  Crisisi Þþ b4 Controls þ ei
where the dummy for crisis equals one for the year of financial crisis in 2008, and zero
for the year before the onset of the financial crisis in 2006.
In the regression models, the coefficient of the best companies dummy reflects the
difference in the firm value between the best companies and comparable firms. The
coefficient of the dummy variable crisis reflects the change in firm value between year
2006 and 2008.
To capture the difference-in-difference of the best companies’ firm value, our main
variable of interest is the interaction between the best companies and crisis dummies.
The idea here is to examine how the change in firm value is affected by the employee
satisfaction following the onset of the crisis.
We use a variety of control variables suggested by the Tobin’s Q literature (see e.g.
Laeven and Levine, 2008). In particular, the control variables used in the first model
include variables identified by literature on Tobin’s Q, such as firm size, sales growth
rate, capital expenditure, and leverage. In the second model, we add R&D and
profitability as additional controls to mitigate concerns of omitted variables. In
addition, in the last model, we include industry dummy to control for the industry
effects to address concerns about industry effects.
Table II presents the estimation results over the period of year 2006 and 2008.
Results in Table II suggest that the best companies, on average, have higher firm value
than other comparable firms before the financial crisis. The coefficient estimates on the
indicator of the best companies is positive and statistically significant regardless of the
various model specifications. For example, the slope estimate for the best companies
dummy in model 3 (as shown in column 3) is 0.938 with t-value of 4.61. In addition, the
coefficients on the dummy variable of the crisis are negative and significant. The result
suggests that compared with the case in 2006, all firms’ values decreased dramatically
in 2008 when the financial crisis is at its peak.
Interestingly, results in Table II show that the best companies suffer more loss in their
firm value than other firms when the financial crisis takes place. The coefficient estimates
of the interaction term between the dummies for the best companies and the crisis are all
negative and statistically significant across three regression models. For example, in the
third estimation model (as shown in column 3), the coefficient estimate of the interaction
term is −0.558 with t-value of −2.37. The evidence indicates that the job satisfaction
created before the crisis does not insure the labor-friendly firms against negative
financial shocks; instead, these best companies have bigger discount in their firm value
than other comparable firms when the unexpected financial crisis takes place.
The signs of the coefficients of the control variables in the regressions of Table II are
consistent with existing empirical evidence on Tobin’s Q. In particular, note that firm’s
Tobin’s Q is negatively related to book asset value, asset tangibility, and leverage while
it is positively related to the sales growth rate, capital expenditure, R&D activities, and
firm profitability.
Independent variables Model 1 Model 2 Model 3
Value of
employee
DummyBest Companies 1.048 (5.82)*** 0.958 (5.48)*** 0.924 (5.26)*** satisfaction
Dummy Crisis −0.462 (−11.44)*** −0.439 (−11.52)*** −0.436 (−11.53)***
DummyBest Companies × DummyCrisis −0.476 (−2.18)** −0.500 (−2.42)** −0.494 (−2.46)**
Ln(book asset) −0.001 (−0.08) −0.004 (−0.33) −0.009 (−0.53)
Sales growth rate 0.319 (3.07)*** 0.196 (1.93)* 0.201 (1.94)*
Capital expenditure/book asset 1.917 (3.71)*** 1.235 (2.24)** 0.950 (1.80)* 1215
Fixed asset/book asset −0.600 (−4.62)*** −0.662 (−5.23)*** −0.544 (−3.40)***
Book leverage −0.814 (−6.28)*** −0.362 (−2.62)*** −0.433 (−2.93)***
R&D/sales 0.266 (3.09)*** 0.225 (3.04)***
Profitability 4.079 (6.70)*** 3.873 (6.41)***
Industry dummy No No Yes
R2 0.172 0.253 0.277
n 1,960 1,960 1,960
Notes: The table reports the regression results of Tobin’s Q on the indicator of the best companies in
year 2006 and 2008. The dependent variable, Tobin’s Q, is measured as the ratio of the market value of
assets divided by the book value of assets, both computed at the end of each fiscal year. Dummy
variable of Best Companies equals to one if the firm is on any lists of the “100 Best Companies to Work Table II.
for in America” from 2005 to 2008 and zero otherwise. Dummy variable of the Crisis equals to one if the The impact of
time period is in 2008 and equals to zero if the time period is in 2006. The detailed definitions for other employee satisfaction
variables are provided in Table I notes. All variables are winsorized at the 0.5 percent level. The on firm value
t-values in parenthesis are computed using robust standard errors. *,**,***Significant at 10, 5, and when financial
1 percent levels, respectively crisis happens

In sum, the evidence in Table II suggests that although the best companies have
higher firm value than other firms before the financial crisis, they suffer more
loss in firm value when the unexpected crisis takes place. The results suggest that
employee-friendly policies do not always improve firm value, especially during the
financial crisis.

2.2 The impact of financial flexibility on the relation between employee satisfaction
and firm value when the financial crisis takes place
In this section, we examine the differential impacts of job satisfaction on firm value
across firms with various degrees of financial flexibility when the unexpected
financial crisis takes place. The effect of financial flexibility on firm value can be
mixed for the best companies. One the one hand, firms with large financial flexibility
can support value-enhancing employee-friendly programs even during the crisis.
On the other hand, firms can forgo valuable investment opportunities at the cost of
firm value by diverting finance resources to maintain or even over-invest in
labor-friendly projects during the crisis. In addition, large internal financial
resources tend to raise investors’ concerns about firms’ agency problems.
The agency cost is higher during crisis than during business boom (Bernanke and
Gertler, 1989; Rajan and Zingales, 1998; Johnson et al., 2000). Therefore, investors
can severely discount firm value of the best companies with great financial
flexibility during the financial crisis.
Motivated by existing theoretical and empirical studies (Ang and Smedema, 2011;
Denis, 2011), we use three measures to proxy for financial flexibility: cash flow, cash
holdings, and financial deficit[4]. We sort our sample into two financial flexibility
groups in 2006 and keep the composition of groups unchanged from 2006 to 2010.
MF High- (low-) financial flexibility firms are firms with values of cash flow and cash
42,12 holdings above (below-) the sample median and the values of financial deficit
below (above-) the sample median, respectively. We re-estimate the same regression
models as in Section 2.1 for the high- and low-financial flexibility groups,
respectively.
Table III presents the estimation results on the change in firm value between year
1216 2006 and 2008 for high- and low-flexibility groups. Consistent with the results in Table II,
Table III suggests that before the financial crisis, the best companies earn higher firm
value than other comparable firms regardless of the states of their financial flexibility.
In addition, the coefficients on the dummy variable of crisis are negative and significant
across all high- and low-financial flexibility groups, suggesting a negative impact of the
crisis on firm value.
More importantly, results in Table III show differential impact of job satisfaction on
the change in firm value across different financial flexibility groups when the
unexpected financial crisis emerges. The interaction term between the dummies for the
best companies and the crisis reflects the change in firm value over the period from
2006 and 2008. As shown in Table III, the coefficient estimates of the interaction term
are consistently negative and significant for all high financial flexibility groups. In
contrast, the coefficient estimates of the interaction term are insignificant for low
financial flexibility groups.
The evidence suggests that when the crisis takes place, the firm value of the best
companies with high financial flexibility decreases more than other non-best companies
with similar level of financial flexibility. More interestingly, the results do not hold for
firms with low financial flexibility. The results are consistent with the notion that high
job satisfaction combined with high financial flexibility can magnify investors’ concern
about severe agency problems following the onset of the financial crisis, which leads to
a large decrease in firm value.

2.3 Do the best companies have high firm value during the financial crisis?
We next examine the level of firm value for the best companies and comparable firms
during the crisis in 2008. We are interested in gauging whether high employee job
satisfaction contributes to high or low firm value during the crisis.
In Table IV, we run regression of firm value (proxied by Tobin’s Q) on an indicator
of the best companies for the sample period of year 2008. We use the same control
variables as in Table II. We document a significant and positive impact of employee job
satisfaction on firm value during the financial crisis. As shown in Table IV, the
coefficient estimates on the indicator of the best companies are positive and statistically
significant for all model specifications, even after we control for firm R&D activity,
profitability, and industry effects.
There are potentially two possible explanations for the above results. One
possibility is that the benefits of providing labor-friendly environment outweigh the
costs of doing so during the crisis. An alternative explanation is that the above findings
may be driven by high value of firms’ financial flexibility when firms face greater
profitability uncertainty, more investment opportunities, and higher external financing
constraints (Denis and Sibilkov, 2010; Gamba and Triantis, 2008; Faulkender and
Wang, 2006) during the crisis. It is likely that the best companies, on average, have
better financial strength. Thus, it is the firm’s financial flexibility, rather than job
satisfaction, that contributes to higher firm value during the crisis. We then try to
distinguish these two possibilities in next section.
 Cash flow Cash holdings Financial deficit
Independent variables Low High Low High High Low

DummyBest Companies 0.427 (1.97)** 0.801 (3.65)*** 0.688 (1.77)* 1.058 (4.85)*** 0.875 (2.81)*** 0.875 (4.21)***
Dummy Crisis −0.294 (−8.09)*** −0.430 (−6.73)*** −0.333 (−9.22)*** −0.547 (−8.02)*** −0.333 (−6.05)*** −0.507 (−9.42)***
DummyBest Companies × Dummy Crisis −0.203 (−0.89) −0.575 (−2.33)** −0.034 (−0.18) −0.642 (−2.55)** −0.439 (−1.22) −0.522 (−2.25)**
Ln(book asset) −0.011 (−0.68) 0.011 (0.33) 0.003 (0.22) 0.004 (0.15) −0.028 (−1.57) 0.021 (1.00)
Sales growth rate 0.096 (0.96) 0.495 (2.16)** −0.121 (−1.64) 0.676 (3.35)*** 0.285 (1.66) 0.345 (2.10)**
Capital expenditure/book asset 1.199 (1..63) −1.209 (−1.29) 0.587 (1.06) 1.566 (1.48) 1.064 (1.61) 1.452 (1.20)
Fixed asset/book asset −0.489 (−3.32)*** −0.851 (−2.39)** −0.333 (−2.14)** −0.778 (−2.06)** −0.555 (−2.44)** −0.511 (−2.16)**
Book leverage −0.087 (−0.79) −0.589 (−2.20)** −0.033 (−0.19) −0.564(−1.97)** −0.302 (−1.45) −0.562 (−2.53)**
R&D/sales 0.940 (1.96)** 0.946 (1.99)** 2.417 (2.06)** 0.208 (3.32)*** 0.198 (2.85)*** 1.397 (2.88)***
Profitability 2.102 (1.60) 7.563 (5.95)*** 3.423 (5.26)*** 3.930 (4.49)*** 3.490 (4.80)*** 3.963 (4.00)***
Industry dummy Yes Yes Yes Yes Yes Yes
R2 0.187 0.325 0.237 0.280 0.238 0.313
n 886 914 958 959 951 966
Notes: The table reports the regression results of Tobin’s Q on the indicator of best companies in year 2006 and 2008. The dependent variable, Tobin’s Q, is
measured as the ratio of the market value of assets divided by the book value of assets, both computed at the end of each fiscal year. High- (low-) financial
flexibility firms are those with values of cash flow and cash holdings above (below-) the sample median and the values of financial deficit below (above-) the
sample median in 2006, respectively. Dummy variable of best companies equals to one if the firm is on any lists of the “100 Best Companies to Work for in
America” from 2005 to 2008 and zero otherwise. Dummy variable of the crisis equals to one if the time period is in 2008 and equals to zero if the time period is in
2006. The detailed definitions for other variables are provided in Table I notes. All variables are winsorized at the 0.5 percent level. The t-values in parenthesis
are computed using robust standard errors. *,**,***Significant at 10, 5, and 1 percent levels, respectively
satisfaction
employee

happens
different financial
Table III.
1217

financial crisis
employee satisfaction
The impact of
Value of

flexibility when
groups of firms with
on firm value for
MF Independent variables Model 1 Model 2 Model 3
42,12
DummyBest Companies 0.593 (4.68)*** 0.517 (4.40)*** 0.498 (4.20)***
Ln(book asset) 0.029 (1.56) 0.025 (1.38) 0.019 (0.85)
Sales growth rate 0.136 (1.08)* 0.076 (0.60) 0.043 (0.33)
Capital expenditure/book asset 0.361 (0.52) −0.412 (−0.63) −0.005 (−0.01)
Fixed asset/book asset −0.289 (−1.46) −0.316 (−1.63) −0.296 (−1.14)
1218 Book leverage −0.590 (−3.81)*** −0.295 (−1.73)* −0.328 (−2.00)**
R&D/sales 0.156 (3.64)*** 0.132(3.68)***
Profitability 2.918 (5.40)*** 2.823 (5.26)***
Industry dummy No No Yes
R2 0.081 0.151 0.182
n 933 933 933
Notes: The table reports the regression results of Tobin’s Q on the indicator of the best companies in
year 2008. The dependent variable, Tobin’s Q, is measured as the ratio of the market value of assets
divided by the book value of assets, both computed at the end of each fiscal year. Dummy variable of
Table IV. best companies equals to one if the firm is on any lists of the “100 Best Companies to Work for in
The impact of America” from 2005 to 2008 and zero otherwise. The detailed definitions for other variables are
employee satisfaction provided in Table I notes. All variables are winsorized at the 0.5 percent level. The t-values in
on firm value during parenthesis are computed using robust standard errors. *,**,***Significant at 10, 5, and 1 percent
financial crisis levels, respectively

2.4 Financial flexibility and firm value during the crisis

To further identify plausible causes for the best companies to have higher firm value
during the 2008 crisis, we now study how firm financial flexibility affects the value of
the best companies during the financial crunch. As in Table III, we use three measures
to proxy for financial flexibility: cash flow, cash holdings, and financial deficit.
We run cross-sectional regressions of firm value on an indicator for the best
companies, a dummy of financial flexibility, and an interaction term of the two. Table V
presents the results. The coefficient estimates of control variables, such as book
leverage, R&D intensity, and profitability, are consistent with those in Table IV.
Different from the results in Table IV, the coefficients on the dummy variable of the
best companies are statistically insignificant. The results suggest that on average
employee satisfaction alone does not contribute to higher firm value, after controlling
for firms’ financial flexibility.
In addition, our results show that financial flexibility by itself is positively associated
with firm value during the crisis, suggesting that financial flexibility by itself is highly
valuable for all firms, which is consistent with previous findings on financial flexiblity[5].
More importantly, we find that only when interacted with high financial flexibility, high
employee satisfaction leads to high firm value. The coefficient estimates for the
interaction term between the dummies for the best companies and high financial
flexibility are positive and significant for all three regression models. Our results show
that the best companies with more cash flows, more cash holdings, and lower financial
deficit generate higher firm value than other best companies in year 2008. The evidence
suggests that during the financial crisis, the benefits to firm value from having high
employee satisfaction and high financial flexibility overweigh the costs, such as the
potential agency costs, of doing so.
Evidence in Tables III and V suggest that although the best companies with high
financial flexibility experience large decrease in firm value over the period from 2006
and 2008, they still have higher firm value than other firms in 2008 during the crisis.
 Financial flexibility defined according to […]
Value of
Independent variables Cash flow Cash holdings Financial deficit employee
satisfaction
DummyBest Companies 0.043 (0.43) 0.098 (1.58) 0.044 (0.52)
Financial flexibility 0.313 (5.06)*** 0.183 (3.46)*** 0.114 (1.77)*
DummyBest Companies × financial flexibility 0.493 (2.92)*** 0.485 (2.36)** 0.731 (3.92)***
Ln(book asset) 0.019 (0.87) 0.016 (0.73) 0.011 (0.52)
Sales growth rate 0.072 (0.58) 0.061 (0.47) 0.057 (0.44) 1219
Capital expenditure/book asset −0.282 (−0.37) −0.062 (−0.09) 0.142 (0.20)
Fixed asset/book asset −0.367 (−1.38) −0.268 (−1.04) −0.302 (−1.16)
Book leverage −0.229 (−1.88)* −0.162 (−1.94)* −0.321 (−1.83)*
R&D/sales 0.095 (2.99)*** 0.116 (3.67)*** 0.127 (3.67)***
Profitability 1.297 (2.54)** 2.732 (5.19)*** 2.712 (5.10)***
Industry dummy Yes Yes Yes
2
R 0.193 0.199 0.194
n 884 932 933
Notes: The table reports the regression results of Tobin’s Q on the indicator of best companies in year
2008. The dependent variable, Tobin’s Q, is measured as the ratio of the market value of assets divided
by the book value of assets, both computed at the end of each fiscal year. Dummy variable of financial
flexibility equals to one if a firm has a high financial flexibility and zero otherwise. High- (low-)
financial flexibility firms are those with values of cash flow and cash holdings above (below-) the Table V.
sample median and the values of financial deficit below (above-) the sample median in 2006, respec- The interaction of
tively. Dummy variable of best companies equals to one if the firm is on any lists of the “100 Best employee satisfaction
Companies to Work for in America” from 2005 to 2008 and zero otherwise. The detailed definitions for and firm financial
other variables are provided in Table I notes. All variables are winsorized at the 0.5 percent level. flexibility on firm
The t-values in parenthesis are computed using robust standard errors. *,**,***Significant at 10, 5, and value during
1 percent levels, respectively financial crisis

2.5 Recovery of firm value after the financial crisis

In this section, we examine the recovery of firm value right after the financial crisis.
The effects of employee-friendly programs on the recovery of firm value are mixed.
On the one hand, these programs help firms retain key employees, motivate employees,
and improve work efficiency, which leads to quick firm recovery after the crisis. On the
other hand, it is costly to maintain high level of job satisfaction. Firms with high costs
of job satisfaction programs bear high financial burden, which can negatively affect
firm performance. In addition, cutting down employee benefits or forgoing profitable
investment opportunity to maintain labor-friendly programs during the crisis can both
negatively affect firm’s future performance.
We run regressions of firm value on an indicator of the best companies for year 2008
and 2010 to compare the changes in firm value cross-sectionally. We include the
dummy variable after crisis to indicate the year 2010. Thus the coefficient of after crisis
dummy reflects the change in firm value between year 2010 and 2008. To capture the
interaction between the best companies and the after crisis period, we include an
interaction term between the indicators of these two.
Table VI presents the estimation results. The coefficient estimates for the best
companies dummy are positive and significant across all model specifications,
suggesting that there is strong positive relation between high job satisfaction and firm
value during the crisis. The result is consistent with the findings in Table IV.
Moreover, the coefficient estimates for the indicator of the period after the crisis
(i.e. year 2010) are statistically positive and significant. For example, in model 3 (as shown
MF Independent variables Model 1 Model 2 Model 3
42,12
DummyBest Companies 0.592 (4.72)*** 0.508 (4.38)*** 0.501 (4.43)***
DummyAfter Crisis 0.307 (6.49)*** 0.271 (5.94)*** 0.266 (5.94)***
DummyBest Companies × DummyAfter Crisis −0.240 (−1.43) −0.212 (−1.36) −0.209 (−1.36)
Ln(book asset) 0.016 (1.20) 0.010 (0.77) −0.008 (−0.49)
Sales growth rate 0.359 (3.44)*** 0.217 (2.11)** 0.144 (1.72)*
1220 Capital expenditure/book asset 1.249 (1.40) 0.309 (0.38) 0.711 (0.87)
Fixed asset/book asset −0.411 (−2.45)** −0.422 (−2.60)*** −0.368 (−1.84)*
Book leverage −0.578 (−5.24)*** −0.322 (−2.85)*** −0.391 (−3.50)***
R&D/sales 0.211 (3.11)*** 0.172 (3.03)***
Profitability 3.077 (7.28)*** 2.889 (6.94)***
Industry dummy No No Yes
R2 0.092 0.160 0.192
n 1,762 1,762 1,762
Notes: The table reports the regression results of Tobin’s Q on the indicator of best companies in year
2008 and 2010. The dependent variable, Tobin’s Q, is measured as the ratio of the market value of
assets divided by the book value of assets, both computed at the end of each fiscal year. Dummy
Table VI. variable of best companies equals to one if the firm is on any lists of the “100 Best Companies to Work
The impact of for in America” from 2005 to 2008 and zero otherwise. Dummy variable of after crisis equals to one if
employee satisfaction the time period is in 2010 and equals to zero if the time period is in 2008. The detailed definitions for
on the recovery of other variables are provided in Table I notes. All variables are winsorized at the 0.5 percent level.
firm value right after The t-values in parenthesis are computed using robust standard errors. *,**,***Significant at 10, 5, and
financial crisis 1 percent levels, respectively

in column 3), the slope estimate is 0.266 with a t-value of 5.94. The result suggests that on
average firm value increases after the financial crisis.
Interestingly, the interaction term between the best companies and the after crisis
dummies are insignificant for all model specifications. The result suggests that firm
value of the best companies is not different from that of the other firms after the
financial crisis. In other words, the best companies do not show quicker improvements
in their firm value than comparable firms.

2.6 Recovery of firm value after the financial crisis for groups of firms with different
financial flexibility
In this section, we further examine whether financial flexibility affects the recovery of
firm value for the best companies after the financial crisis.
Table VII presents the regression results over the period from year 2008 to 2010 for
high- and low-financial flexibility groups. The coefficients on the dummy variable of
after crisis are all positive and significant across all financial flexibility groups,
suggesting that firm value increases after the financial crisis for all firms.
Consistent with the results in Table V, we find that during the financial crisis, job
satisfaction has positive effect on firm value only when firms have high financial
flexibility. The coefficients on the best companies dummy are positive and significant
for all high financial flexibility groups but insignificant for low financial flexibility
groups. The evidence suggests that the effect of job satisfaction on firm value is
associated with financial flexibility.
In addition, the results suggest that financial flexibility does not influence the recovery
of the best companies’ value after the financial crisis. The interaction term between the
best companies and after crisis dummies reflects the change in firm value over the period
 Cash flow Cash holdings Financial deficit
Independent variables Low High Low High High Low

DummyBest Companies 0.140 (1.39) 0.287 (2.04)** 0.179 (1.64) 0.668 (4.09)*** 0.129 (1.51) 0.681 (4.20)***
DummyAfter Crisis 0.210 (5.00)*** 0.308 (3.86)*** 0.196 (4.39)*** 0.275 (3.97)*** 0.211 (3.72)*** 0.284 (4.39)***
DummyBest Companies × DummyAfter Crisis 0.115 (0.82) −0.211 (−1.56) −0.072 (−0.56) −0.294 (−1.36) −0.109 (−0.89) −0.286 (−1.34)
Ln(book asset) −0.020 (−1.39) 0.020 (0.68) 0.015 (0.91) −0.024 (−0.95) 0.023 (1.12) −0.029 (−1.26)
Sales growth rate 0.053 (0.50) −0.321 (−1.76)* −0.098 (−0.77) 0.017 (0.11) 0.188 (1.50) −0.258 (−1.73)*
Capital expenditure/book asset −0.311 (−0.66) 1.135 (0.91) −0.422 (−0.92) 1.422 (0.97) −0.731 (−1.07) 2.960 (1.63)
Fixed asset/book asset −0.252 (−1.62) −0.961 (−3.28)*** 0.051 (0.31) −0.650 (−1.75)* 0.010 (0.04) −0.726 (−2.51)**
Book leverage −0.141 (−1.27) −0.489 (−2.02)** −0.164 (−1.36) −0.366 (−1.72)* −0.230 (−1.20) −0.499 (−3.48)***
R&D/sales 0.051 (1.73)* 1.123 (2.14)** 1.928 (1.71)* 0.169 (2.97)*** 0.071 (2.09)** 1.534 (2.66)***
Profitability 1.222 (1.70)* 4.651 (6.36)*** 2.087 (4.73)*** 3.220 (4.99)*** 0.901 (2.34)** 4.726 (6.24)***
Industry dummy Yes Yes Yes Yes Yes Yes
R2 0.110 0.204 0.185 0.198 0.114 0.276
n 813 850 869 884 860 895
Notes: The table reports the regression results of Tobin’s Q on the indicator of best companies in year 2008 and 2010. The dependent variable, Tobin’s Q, is
measured as the ratio of the market value of assets to the book value of assets, both computed at the end of each fiscal year. High- (low-) financial flexibility
firms are those with values of cash flow and cash holdings above (below-) the sample median and the values of financial deficit below (above-) the sample
median in 2006, respectively. Dummy variable of best companies equals to one if the firm is on any lists of the “100 Best Companies to Work for in America”
from 2005 to 2008 and zero otherwise. Dummy variable of after crisis equals to one if the time period is in 2010 and equals to zero if the time period is in 2008.
The detailed definitions for other variables are provided in Table I notes. All variables are winsorized at the 0.5 percent level. The t-values in parenthesis are
computed using robust standard errors. *,**,***Significant at 10, 5, and 1 percent levels, respectively
satisfaction
employee

flexibility
different financial
employee satisfaction
Table VII.
1221
Value of

firm value right after

on the recovery of
The impact of

groups of firms with

financial crisis for
MF from 2008 to 2010. As shown in Table VII, the coefficient estimates of the interaction term
42,12 are insignificant for both high- and low-financial flexibility groups. In other words, firms
with labor-friendly environment do not have an advantage in increasing firm value after
the financial crisis, regardless of the strength of their financial flexibility.

3. Conclusion
1222 We provide fresh insights into the debate on whether employee satisfaction benefits
firms by assessing how employee satisfaction affects firm value around the financial
crisis. We employ the 2008 financial crisis as an unexpected shock to firms to
disentangle the confounding interactions between job satisfaction and firm value.
Specifically, we investigate the change in firm value before, during, and after the
crisis for two groups of firms: firms with high levels of job satisfaction, included in
the lists of the “Best Companies to Work For in America” in any year between 2005
and 2008; and firms matched with the best companies by size, book-to-market ratio,
and industry.
We find that although employee satisfaction is positively related to firm value
before the crisis, the firm value of the best companies decreases more than that of other
comparable firms when financial crisis happens. Further analysis shows that the effect
only exists in the best companies with high financial flexibility. The results suggest
that high job satisfaction combined with high financial flexibility can magnify
investors’ concern about severe agency problems following the onset of financial crisis,
which leads to a large decrease in firm value.
We also examine the effect of employee satisfaction on firm value during the peak of
the financial crisis. We document a cross-sectional positive association between
employee satisfaction and the level of firm value in 2008. Further analysis shows
that such positive effect of employee satisfaction only exists in firms with great
financial flexibility. The evidence suggests that although the best companies with
high financial flexibility experience large decreases in firm value over the period from
2006 to 2008, they still have higher firm value than other firms in 2008.
Finally, we find that all firms experience improvements in their firm value after the
financial crisis. However, employee satisfaction does not lead to a large increase in firm
value after the crisis, regardless of firm’s financial flexibility.
Our findings provide helpful implications to the business community.
Our results suggest that to receive benefits of employee satisfaction on firm value,
companies can manage their financial flexibility to buffer against potential negative
shocks while having strong corporate governance mechanism to mitigate agency
concerns.
In addition, our study has investment implications to SRIs. Our findings on time-
varying impact of employee satisfaction suggest that investors would be better
off implementing dynamic SRI investment strategies according to economic
condition. In addition, we highlight an important investment consideration:
financial flexibility.

Notes
1. Our test design is similar to the existing studies that use the crisis to disentangle the potential
endogeneity issues that arise because the variable of interests and firm value may be jointly
determined (among others, see Lemmon and Lins, 2003; Bharath et al., 2013; Lins et al., 2013;
Duchin et al., 2010).
 2. Note that the composition of the best companies list of 2004 is very different from that Value of
of 2008.
employee
3. Note that the best companies list is published at the beginning of each year, the results of satisfaction
which is based on the survey done in previous year. For example, the list published in 2008
reflects the survey results collected in 2007.
4. Our sample of the best companies and their matched firms are not financially constrained
based on the definition in Dai et al. (2013). We construct the financial constraint index 1223
following Hadlock and Pierce (2010). All of our sample firms are in the least financially
constrained group.
5. Please refer to Denis (2011) for literature review.

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Corporate Finance, Vol. 17 No. 3, pp. 774-787.
Anginer, D. and Statman, M. (2010), “Stocks of admired and spurned companies”, The Journal of
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Effects of
Effects of employees’ perceptions employees’
on the relationship between HR perceptions
practices and firm performance
573
for Korean firms
Received 5 December 2011
Jang-Ho Choi and Khan-Pyo Lee Revised 10 July 2012
Sogang Business School, Sogang University, Seoul, Republic of Korea 6 November 2012
Accepted 18 January 2013

Abstract
Purpose – The purpose of this paper is to examine the internal process by which high performance
work systems (HPWSs) affect firm performance. It attempts to show the mediating effect of employee
job satisfaction in the human resource (HR)-performance link and also to show the moderating effect of
employees’ perception on the effectiveness of HPWSs.
Design/methodology/approach – Using a nationally representative data set from Korea
(firm-level samples: 245 firms, employee-level samples: 6,709), this study analyses the mediating
effect of job satisfaction in the relationship between HPWSs and firm performance with ordinary least
squares (OLS) analysis and examines the moderating effect of employee perceptions with OLS and
hierarchical linear modeling (HLM).
Findings – Results show that: there are positive associations between HPWSs and firm performance
and between HPWSs and job satisfaction; job satisfaction has a mediating effect in the HR-Performance
link; and employees’ perceptions of the effectiveness of HR practices moderate these relationships.
Research limitations/implications – Limitations of the study are the measurement of HR practices,
omitted variable problem, and generalizability of the results in this study. Scholars argue for the positive
effect of HPWSs on firm performance and managers attempt to introduce HPWSs in their firms, but most
of them do not fully understand what happens in the HR-performance link. This study demonstrates that
job satisfaction is a “black box” in the linkage between HPWSs and firm performance and may inform
managers of appropriate policy levers that, if manipulated appropriately so that employees feel the
effectiveness of HPWSs, can help the firm achieve more desirable organizational outcomes.
Originality/value – Many scholars argue that research to examine the internal process in the
HR-performance link is essential for rigorous elaborations of SHRM-related theories, but few studies
have investigated this issue. This study reveals the mediating and moderating mechanisms through
which the HR-performance link exerts its influence.
Keywords Republic of Korea, Human resource management, Job satisfaction, Employees behaviour,
High performance work systems, Employee perception, Financial performance, Mediation, Moderation,
Multi-level analysis
Paper type Research paper

Introduction
Examining the relationship between high performance work systems (HPWSs) and
business performance is one of the current research trends in SHRM (Boxall and
Purcell, 2003). Many studies have reported a statistically significant HR-performance Personnel Review
Vol. 42 No. 5, 2013
relationship (Appelbaum et al., 2000; Batt, 2002; Delery and Doty, 1996; Guthrie, 2000; pp. 573-594
q Emerald Group Publishing Limited
0048-3486
This work was supported by a Sogang University Research Grant of 2012 (201210047.01). DOI 10.1108/PR-12-2011-0176
PR Huselid, 1995; MacDuffie, 1995). HPWSs are defined as structured workplace practices
42,5 that incorporate worker involvement in front-line decisions and that range from
participation in production and quality management teams to employee incentives and
reward schemes (Appelbaum et al., 2000). The basic objective of HPWSs is to foster
employees’ skills and involvement. One recent review of more than 30 studies carried
out since the early 1990 s focusing on the relationship between HPWSs and
574 organisational performance revealed a positive correlation between HPWSs and
organisational performance and the cumulative effect of HPWSs, that is, the larger the
number and the greater the effectiveness of HR practices, the better the outcome
(Chartered Institute of Personnel and Development, 2001). In their meta-analysis using
studies conducted both in the advanced countries, such as the US and European
countries, as well as in the developing countries, such as China, Singapore, Russia, and
South Korea, Combs et al. (2006) found an overall correlation between HPWSs and
organisational performance of 0.20 after correcting for measurement errors.
In addition, many studies have looked beyond advanced countries such as the US and
those in Europe and produced results consistent with those for advanced countries. For
example, Ichniowski and Shaw (1999) provided a comparative analysis and demonstrated
no significant difference in productivity between US and Japanese firms with the same
innovative work practices. Many Korean firms have attempted to adopt HPWSs derived
from Western contexts, and Bae and Lawler (2002) found a positive relationship between
HPWSs and organisational effectiveness for Korean firms. These findings provide
support for the assertion that HPWSs are effective regardless of the cultural context.
However, few studies have focused on the mediating and moderating mechanisms
underlying this relationship. Many scholars (e.g. Becker and Gerhart, 1996; Dyer and
Reeves, 1995) have argued that uncovering the mediating relationship between HPWSs
and organisational performance is crucial for a rigorous elaboration of SHRM-related
theories. Takeuchi et al. (2009) also argue that the assumption of HR systems, which
impact both attitudes of employees and financial performance through social processes,
has remained largely untested. Testing the mediating effect should provide a better
understanding of the causal relationship between HR practices and firm performance. In
addition, Collins and Smith (2006) argued that commitment-based HR practices have
considerable influence on employee knowledge exchanges and combinations and thus on
firm performance (sales growth and revenues from new products) through an
organisational social climate reflecting trust and co-operation. López-Cabrales et al. (2009)
suggested that the relationship between collaborative HR practices and innovative
activities is mediated by the uniqueness of knowledge, and Takeuchi et al. (2009) showed
that concern for employees’ workplace climate mediates the relationship between their
attitudes and HPWSs. Collins and Clark (2003) argued that sets of HR practices have an
effect on firm performance through TMT social networks.
The present study examines the mediating effect of job satisfaction in the
relationship between HPWSs and firm performance and the moderating effect of
employees’ perception of the effectiveness of HR practices in the HR-Performance
relationship. The study opens the “black box,” illuminating the relationship between
HPWSs and financial performance and informing managers of appropriate policy
levers that, if manipulated appropriately, can help their firms achieve more desirable
organisational outcomes.
Previous research and study hypotheses Effects of
Unlike the micro HRM, whose focus is to examine the effects of HR practices on an
individual level performance, Strategic HRM emphasises the relationship between HR
employees’
activities and other organisational functions or strategies and examines the perceptions
relationship between HR practices and organisational effectiveness at the facility
and firm levels (Boxall et al., 2007). At these aggregated levels, this effectiveness
includes outcomes such as cost reductions, productivity, total shareholder returns, 575
profitability, and survival. Because firm performance is a major organisational goal,
many researchers have investigated its relationship with HR practices. A growing
body of evidence indicates a positive relationship between these two variables (see,
e.g. Appelbaum et al., 2000; Arthur, 1994; Batt, 2002; Becker and Gerhart, 1996; Becker
and Huselid, 1998; Dyer and Reeves, 1995; Huselid, 1995).
The basic presupposition underlying SHRM is based on the universalistic
perspective, the contingent perspective, and the configurational perspective. According
to the universalistic perspective to build SHRM foundations, there are “best practices”,
which will improve performance of a firm and which is universal across different
organisations (Delery and Doty, 1996; Pfeffer, 1994). Many studies have found that
systems (bundles) of “best practices” have a higher level of influence on financial
performance of a firm as well as positive attitudes of employees than individual HR
practices working in isolation (e.g. Huselid, 1995). The logic behind the universalistic
approach, which argues a set of “best HR practices”, such as training, incentive system,
participation, flexible job assignment, and on-the-job training, has an impact on the
performance of a firm has been appealing to many researchers.
According to the contingency perspective (Arthur, 1994; Schuler and Jackson, 1987), a
firm’s HR practices can be effective when they are consistent with other aspects of the
organisation. For example, firms adopting a particular business strategy may require HR
practices that are different from those required by firms adopting alternative strategies.
This means that HR management should fit the development of the organisation’s
primary initiatives (Gerhart, 2007). The underlying premise of the contingency approach
is that firm performance can increase to the extent that there is a fit between a firm’s
approach to the market and its approach to HR practices (Youndt et al., 1996).
According to the configurational perspective, firm performance is influenced by the
congruence among a firm’s HR practices (Becker and Gerhart, 1996; Delery and Doty,
1996; Huselid et al., 1997; Wright and McMahan, 1992). In this line of research, many
studies have focused on HR systems that are expected to positively interact with one
another. The reason for focusing on the congruence among HR practices is that some
combinations of HR practices, to the extent that they are consistent with one another, are
more likely to have positive effects on organisational performance than the application of
a single HR practice, such as pay for performance, employee participation, or training.
The present study is based on the universalistic approach and attempts to show
positive effects of HR bundles on the financial performance of a firm (return on asset)
as well as on the attitude of the employees (job satisfaction).

Relationship between HPWSs and firm performance

A number of researchers have reviewed previous empirical research (Becker and
Gerhart, 1996; Dyer and Reeves, 1995; Paauwe and Richardson, 1997; Youndt et al.,
1996) and concluded that previous studies have demonstrated varying degrees of
positive relationships between a firm’s HR practices and financial performance.
PR The theoretical literature contends that many firms underutilize HR because
employees often perform below their maximum potential and because organisational
42,5 efforts to elicit discretionary efforts from employees are likely to provide returns in
excess of any relevant costs. Bailey (1993) argued that HR practices can influence such
discretionary efforts through their influence on employees’ skills and motivation and
through organisational structures that provide employees with the ability to control
576 how they perform their roles. Batt (2002) suggested that the behaviour of employees in
the workplace has important implications for organisational performance and that HR
practices can influence individual employees’ performance through their influence on
employees’ skills and motivation and through organisational structures that allow
employees to improve how they perform their jobs. Delaney and Huselid (1996) found a
positive relationship between progressive HR practices such as training and staffing
selectivity and perceived organisational performance and argued that such
relationships are found in both for-profit and nonprofit organisations.
The universalistic approach of SHRM argues that some HR practices always show
better results than others and that firms have to introduce these HR practices (best
practices) to increase their performance. For example, Pfeffer (1994) recommended
16 HR practices such as promotion from within, participation, incentive pay, employee
security, and skill development. Huselid (1995) found that HPWSs have economically
and statistically significant effects on both intermediate employee outcomes (turnover)
and short- and long-term measures of financial performance. This finding rests on a
national sample of nearly one thousand firms. A significant proportion of the HPWSs
effect on financial performance is attributable to low turnover or high employee
productivity. MacDuffie (1995) employed a unique international data set from a
1989-1990 survey of 62 automotive assembly plants and found that a bundle of
innovative work practices can have a positive effect on productivity. Batt (2002)
examined the relationships between HR practices, employee quit rates, and
organisational performance by using a nationally representative sample of call
centres and multivariate analyses and showed that quit rates were lower and sales
growth was higher for firms emphasising a high level of skill, employee participation
in decision making, and employee teamwork.
Some different advantages may be accrued when HPWSs create the working
situation in which workers have adequate skills, incentives, and opportunities to take
part in the decision making process (Appelbaum et al., 2000). HPWSs may reduce the
total number of employees required for producing a given amount of output, increasing
labor productivity and reducing the plant’s unit labor cost. In this regard, we propose
the following hypothesis:
H1. There is a positive relationship between HPWSs and financial performance.

Mediating effect of job satisfaction in the HR-performance relationship

Job satisfaction is defined as the feelings and the appraisal employees have toward the
job which are assigned to them (Locke, 1976). If employees experience positive work
situation, which is caused by HR practices such as well-designed compensation
programs and chances for participation in the decision making processes, they will
have higher job satisfaction.
Many studies have examined the relationship between HR practices and job
satisfaction at the organisational level and aggregated the measures of job satisfaction.
For example, Freeman et al. (2000) showed that HR practices have a positive effect on Effects of
employee satisfaction at the organisational level. Guest (1999) found that employees employees’
respond positively to HR practices, defining this phenomenon as a “positive
psychological contract.” The present study adapts these concepts to a multilevel perceptions
analysis, and therefore, HPWSs at the organisational level may influence job
satisfaction at the individual level.
HR practices are essentially the levers by which a pool of human capital can be 577
developed (Wright et al., 1999). By using training, flexible job design and appraisal
feedback to employees, firms can create a workforce possessing all the competencies
necessary for making effective use of new technologies and work methods. By
acquiring sufficient levels of job skill and knowledge, employees can get self-efficacy,
which will lead to job satisfaction ( Judge et al., 2001). HPWSs involving
performance-based or incentive pay are designed to increase employee motivation.
Participation practices, such as quality circles, project teams, and suggestion systems,
are designed to satisfy employees’ high-order needs. This increased motivation and a
sense of responsibility among employees are expected to strengthen their job
satisfaction. In this regard, we propose the following hypothesis:
H2. There is a positive relationship between HPWSs and job satisfaction.
Because the relationship between job satisfaction and job performance is one of the
most popular research topics in industrial and organizational psychology, many
empirical studies have examined this relationship. At the individual level, Judge et al.
(2001) provided a meta-analysis and estimated that the mean true correlation between
the overall job satisfaction and job performance is 0.30. At the organizational level,
recent studies have suggested a positive relationship between collective job
satisfaction and organizational performance (e.g. Ostroff, 1992). Through a lagged
analysis, Schneider et al. (2003) compared data on employee attitudes at the
organizational level, with data on financial performance (return on assets) and market
performance (earnings per share), and revealed significant and stable relationships
across various time lags. Harter et al. (2002) examined the attitude-performance
relationship through a meta-analysis at the business unit level by considering the
relationship between employee satisfaction and business outcomes and identified the
generalizable relationships that are strong enough to have substantial practical value,
which operate between employee satisfaction and business outcomes at the business
unit level (r ¼ 0:37). In this regard, we propose the following hypothesis:
H3. There is a positive relationship between job satisfaction and financial
performance.
Wood et al. (2012) argued that HPWSs represent a “mutual gain” strategy that can
enhance financial performance and job satisfaction. Guest (1997) suggested that
“systems such as teamwork are established; they influence workplace practice;
employee attitudes change, with increased satisfaction or commitment; there is a
consequent effect on behaviour; and this in turn feeds through to the performance of
the work unit and eventually the company” (Edwards and Wright, 2001). One
implication from the previous research is that changes in HR practices that increase
employee satisfaction of a firm may increase business-unit or firm-unit outcomes. In
this regard, we propose the following hypothesis:
PR H4. Job satisfaction mediates the relationship between HPWSs and financial
performance.
42,5
Moderating effect of employees’ perceptions on the HR-performance relationship
By using items that objectively assess the presence or absence of HR practices or
policies, Ichniowski et al. (1997) showed that a firm’s adoption of HPWSs has a positive
578 effect on its performance. A newly adopted HPWSs can make the workplace more
favourable to employees by enhancing their ability, motivation, and opportunity to
participate in management. However, it is reasonable to expect that a firm’s simple
adoption of HPWSs does not, by itself, maximize its positive effects. Bowen and Ostroff
(2004) distinguished two interrelated features of an HRM system: its content and
process and they emphasised the interaction between these features. HRM content
refers to the HR practices that are introduced in order to achieve organisational goals,
whereas the HRM process refers to how HR systems are devised and executed
effectively in a way that employees can perceive the HR practices as intended by the
organisation. Firms introducing the same HR practices may exhibit different levels of
organisational effectiveness because of differences in their implementation in the firms
as well as in their match with other organisational conditions in terms of the vertical
fit. Even when firms adopt desirable HR systems, they may not achieve their ultimate
goals if they do not effectively administer those systems. The logic behind HPWSs is
that they increase employees’ job satisfaction, organisational commitment, and
discretionary behaviour, which in turn improve organisational effectiveness. However,
a firm’s inappropriate administration of the system may not induce employees’
voluntary behaviours.
An employee’s perception of the effectiveness of given HR practices can be defined
as how the employee evaluates the effects of those HR practices on his or her job
accomplishment. How an employee perceives this effectiveness can be an important
factor in determining his or her job satisfaction. Employees’ attitudinal responses to
HR practices depend on how they perceive those practices in the context of their work
(Bowen and Ostroff, 2004). Because an employee’s perception of HR practices
necessarily follows their implementation (Lao et al., 2009; Nishii and Wright, 2008), the
employee’s perception of their effectiveness may influence his or her attitudes as well
as the firm’s financial performance. That is, if an employee believes that the HPWSs
have a positive effect on his or her job-related capacity, then he or she is more likely to
show high level of job satisfaction.
Social exchange theory explains the maintenance of relationships between
individuals. Einsenberger et al. (1986) extended this theory and argued that reciprocity
can occur between an organisation and its employees. They showed that employees
shape their perception of their firms’ intentions toward themselves from the firms’
policies and practices enacted by their firms. Social exchange theory posits that
employees may feel obligation to repay their firms through appropriate behaviours if
they perceive support from their firms (Coyle-Shapiro and Conway, 2004). Employees
consistently attempt to determine the meaning of HR practices that impact their
professional lives and thus may adjust their behaviours in the workplace. If employees
believe that their job-related skills can be enhanced because of their firms’ efforts to
introduce HPWSs, then they may work harder to successfully complete their
assignments, thereby increasing firm performance. In this regard, we propose the
following hypotheses:
 H5. Employees’ perception of the effectiveness of HPWSs has a positive Effects of
moderating effect on the relationship between HPWSs and financial
performance.
employees’
perceptions
H6. Employees’ perception of the effectiveness of HPWSs has a positive
moderating effect on the relationship between HPWSs and job satisfaction.
579
Methods
Sample and data collection
The data for this study were collected in the first wave of the Human Capital Corporate
Panel Survey, a long-term study of HR practices, employees’ attitudes, and
organisational performance for Korean firms. The purpose of this survey is to
identify the effects of human capital and HRM on firm performance.
The first two-part survey (firm and employee levels) was conducted in June 2005 by
the Korea Research Institute of Vocational Education and Training (KRIVET). The
sample comprised firms located in the Republic of Korea (South Korea). The survey
employed face-to-face interviews with HR managers and multiple employees from each
firm.
The sample of firms in this study included 245 firms in ten manufacturing
industries, including automakers, electronics firms, chemical firms, and metal
producers, and so on. All firms had at least 100 employees. In addition, all were
publicly traded firms and registered with the Financial Supervisory Service of Korea.
The sample of employees included 6,709 employees. These employees ranged from
team managers to team members from several randomly chosen teams for a given firm.
The response rate for firms was over 81 per cent, far exceeding that in better than that
of most US studies, which have typically shown a response rate of approximately
25 per cent (Becker and Huselid, 1998). This high response rate can be attributed to the
assistance provided by the Korean government (the Ministry of Labor) in the
administration of the survey. For example, in the Korean Labor and Income Panel
Survey, which was also conducted with the Korean government’s assistance, the
response rates ranged from 76.0 per cent to 87.6 per cent. The response rate for
employees was 89.5 per cent. Because of missing variables, we employed 245 firms and
their 6,709 employees for the firm-level analysis and the cross-level analysis.

Measures
Dependent variable: financial performance and job satisfaction. Performance outcomes
of HRM can be captured in various ways. Dyer and Reeves (1995) drew a three-fold
distinction regarding performance outcomes: financial (e.g. return on assets, return on
equity, profits, Tobin’s Q, and GRATE), organisational (e.g. productivity and quality),
and HR-related (e.g. attitudinal and behavioural effects among employees such as
satisfaction, commitment, and turnover intentions) outcomes.
Based on previous research, we measured firm performance by using return on
assets (ROA) and job satisfaction. Following previous studies (e.g. Wright et al., 2005),
we examined the lagged effects of HP practices by measuring ROA for 2006 and HR
practices for 2005. ROA indicates a firm’s profitability relative to its total assets (net
income/total assets). The advantage of using ROA is its ability to clarify how
effectively a firm is converting its investment-available assets into net income, which is
valuable information for shareholders.
PR To measure job satisfaction, we employed a five-point Likert-type scale ranging
42,5 from “absolutely do not agree” (1) to “absolutely agree” (5). We adapted the following
three items from Cammann et al. (1979) and Schneider et al. (2003) for overall job
satisfaction: “I’m satisfied with the work I’m doing,” “I am satisfied with the company I
work for,” and “My job gives me a sense of accomplishment.” The internal consistency
reliability for job satisfaction was 0.85, and the intraclass correlation coefficient was
580 0.15.
Independent variable: high performance work systems. According to a review of HR
practices measured in previous studies, there are several streams of thought regarding
the best way to measure HR practices. Chadwick (2010) argued that one of the
commonly used ways of measuring HR practices is additive indices, which imply that
more of any other component, the HR practice is better for the whole system. The
assumption of using additive indexes is that HR practices have additive effects on firm
performance and different practices can be substituted for one another (Batt, 2002).
There are many HR practices which are considered as components of HPWSs. In
this study, we used eight HR practices to measure HPWSs, including off-the-job
training, on-the-job training, mentoring, flexible job assignment, career development
plans, quality circles, project teams, and suggestion systems. These HR practices have
been used in previous studies (e.g. Appelbaum et al., 2000; Arthur, 1994; Delery and
Doty, 1996; Huselid, 1995; Ichniowski et al., 1997). The focus of these practices is to
make employees acquire appropriate skill levels to conduct their assigned jobs and
take part in the decision-making process.
For the existence of HR practices, HR managers indicated “1” if they had such HR
practices and “0” otherwise.
Moderating variable: employees’ perception of the effectiveness of HR practices. The
survey asked employees to rate their perceived effectiveness of eight HR practices
(average number of employee respondents per firm: 27.4). We used these eight items to
measure the effects of these HR practices on the completion of employees’ assigned
jobs (e.g. “The on-the-job training system is effective in increasing my job-related
capacity”). For this, we used a five-point Likert-type scale ranging from “absolutely do
not agree” (1) to “absolutely agree” (5).
Because the job satisfaction and perception of the effectiveness of HPWSs were
measured from employees, we checked for possible common method variance by using
Harman’s single-factor test (Podsakoff and Organ, 1986). According to this approach,
there is common method variance when a single factor accounts for the majority of the
covariance of variables. According to the test results, the most covariance explained by
any single factor was 34.21 per cent, indicating that common method bias was not a
major problem.
Control variables. We controlled for the respondents’ age, sex, marital status,
education level, and monthly income at the individual level for the hierarchical linear
modelling (HLM) analysis. We controlled for ROA, industries, the union presence, firm
size (logarithm of the number of employees) and firm age (logarithm) for the firm-level
analysis. The industry dummy variables included 10 sub-industries in the
manufacturing sector.
Results Effects of
Descriptive statistics employees’
Table I reports the descriptive statistics and correlations between the variables at the
firm level, and Table II shows the means, standard deviations, and bivariate perceptions
correlations between the variables at the individual level. The results indicate no
systemic missing patterns across the variables. We generated the correlation matrix
based on a pairwise deletion procedure. 581
Relationship between HR practices and firm performance and the mediating effect of job
satisfaction
Table III reports the results of the OLS regression analysis for the effects of HR
practices on financial performance and the mediating effect of job satisfaction.
According to Baron and Kenny (1986), to test for mediation, one should estimate the
following three regression equations: regressing the dependent variable on the
independent variable; regressing the mediator on the independent variable; and
regressing the dependent variable on both the independent variable and the mediator.
Consistent with this approach, Table III shows the estimates for the following three
regression models: the regression of ROA on HPWSs (model 1); the regression of job
satisfaction on HPWSs (model 2); and the regression of ROA on both HPWSs and job
satisfaction (model 3).
In model 1, the estimated coefficient for HPWSs was positive (b ¼ 0:008) and
significant at p , 0:01, providing support for H1, which predicted a positive
relationship between HPWSs and financial performance. In model 2, HPWSs had a
significant positive effect on job satisfaction (b ¼ :037; p , 0:01), providing support
for H2. In model 3, job satisfaction also had a significant positive effect on the financial
performance of a firm (b ¼ 0:051; p , 0:05), providing support for H3.
In model 3, the estimated coefficients for HPWSs and job satisfaction were both
positive (b ¼ 0.007 for HPWSs; b ¼ 0.051 for job satisfaction) and significant at
p , 0:05. However, the coefficient for HPWSs was higher in model 1 than in model 3,
which included job satisfaction as a predictor of ROA. These results, together with
those for models 1 and 2, satisfy the following four conditions suggested by Baron and
Kenny (1986) as necessary in demonstrating a mediating effect: the independent
variable must have a significant effect on the dependent variable (model 1); the
independent variable must have a significant effect on the mediator (model 2);
the mediator must have a significant effect on the dependent variable (model 3); and the
effect of the independent variable on the dependent variable must be smaller in
the regression equation including both the independent variable and the mediator as
predictors of the dependent variable than in the equation including only the
independent variable as the predictor (models 1 and 3). In addition, the results of a
significance test employing the method suggested in Sobel (1982) indicate a significant
mediating effect (Z ¼ 1:92; p , 0:05). In this regard, these results provide support for
H4, which predicted a mediating effect of job satisfaction on the relationship between
HPWSs and financial performance.

Mediated moderation of perceived effectiveness

H5 and H6 together form a mediated moderation model. According to Muller et al.
(2005), the following three regression equations should be estimated to test mediated
moderation: the regression of the dependent variable on the independent variable, the
 PR
42,5

582

Table I.

firm level
study variables at the
a correlation matrix for
Descriptive statistics and
Mean SD 1 2 3 4 5 6 7

1. ROA_yr. 2006 0.037 0.104 1

2. ROA_yr. 2005 0.039 0.107 0.685 * * 1
3. Job satisfaction 3.546 0.306 0.219 * * 0.160 * 1
4. Firm age (logarithm) 3.260 0.640 0.102 2 0.029 0.053 1
5. Size (logarithm) 6.060 1.047 2 0.014 2 0.014 0.226 * * 0.130 * 1
6. Union presence 0.563 0.497 0.066 0.064 0.144 * 0.383 * * 0.294 * * 1
7. HR practices (HPWSs) 5.094 1.830 0.139 * 2 0.001 0.260 * 0.059 0.281 * * 0.162 * 1
8. Perceived effectiveness 3.255 0.271 0.247 * * 0.075 0.326 * * 0.096 0.204 * * 0.063 0.244 * *
Notes: N=245. *p , 0.05. * *p , 0.01
 Mean SD 1 2 3 4 5 6 7 8 9

1. Job satisfaction 3.546 0.749 1

2. Age 35.462 8.288 0.192 * * 1
3. Wage 254.624 140.173 0.259 * * 0.380 * * 1
4. Marriage 0.287 0.452 2 0.170 * * 20.611 * * 20.354 * * 1
5. Sex 0.826 0.379 0.053 * * 0.276 * * 0.313 * * 2 0.249 * * 1
6. Middle school 0.037 0.188 0.017 0.269 * * 20.093 * * 2 0.095 * * 2 0.054 * * 1
7. High School 0.390 0.487 2 0.072 * * 0.046 * * 20.290 * * 0.002 2 0.129 * * 20.157 * * 1
8. Junior College 0.145 0.352 2 0.042 * * 20.181 * * 20.126 * * 0.120 * * 2 0.046 * * 20.081 * * 20.329 * * 1
9. University 0.360 0.480 0.061 * * 20.035 * * 0.312 * * 2 0.036 * * 0.154 * * 20.147 * * 20.600 * * 20.309 * * 1
10. Graduate school 0.068 0.251 0.070 * * 0.029 * * 0.213 * * 2 0.033 * * 0.060 * * 20.053 * * 20.216 * * 20.111 * * 2 0.203 * *
Notes: N=6,709. *p , 0.05; * *p , 0.01
perceptions
employees’

Descriptive statistics and

study variables at the

individual level
a correlation matrix for
583

Table II.
Effects of
PR
Model no.
42,5 1 2 3
ROA_yr.2006 Job satisfaction ROA_yr.2006
Dependent variables b s.e. b s.e. b s.e.

Constant 2 0.032 * * 20.032 3.007 * * 0.158 2 0.112 * * 0.073

584 ROA_2005 0.615 * * 0.053 0.554 * * 0.182 0.600 * * 0.054
Firm age 0.008 * * 0.009 2 0.018 * * 0.032 0.008 * * 0.009
Firm size 2 0.005 * * 0.006 0.047 * 0.019 2 0.007 * * 0.006
Union presence 0.011 * * 0.013 0.054 * * 0.046 0.010 * * 0.013
HPWSs 0.008 * * 0.003 0.037 * * 0.011 0.007 * 0.003
Job satisfaction 0.051 * 0.022
R2 0.406 0.183 0.411
Adjusted R 2 0.370 0.134 0.373
Table III. F 10.241 * * 3.69 * * 11.062 * *
Results of ordinary least df 14,230 14,230 15,229
squares regression
analysis for mediation of Notes: a N=245; coefficient estimates for industry dummies are not reported for presentation
job satisfaction purposes. *p , 0.05; * *p , 0.01

moderator, and the interaction between the independent variable and the moderator;
the regression of the mediator on the independent variable, the moderator, and the
interaction between the independent variable and the moderator; and the regression of
the dependent variable on the independent variable, the moderator, the interaction
between the independent variable and the moderator, and the mediator.
Table IV shows the results for the regression models testing for the mediated
moderation of the perceived effectiveness of HR practices. Consistent with Muller et al.’s
(2005) approach, model 1 shows the coefficient estimates for regressing ROA on HPWSs,
perceived effectiveness, and the interaction between HPWSs and perceived effectiveness;
model 2 reports the estimates for regressing job satisfaction on HPWSs, perceived
effectiveness, and the interaction between HPWSs and perceived effectiveness; and model
3 reports the estimates for regressing ROA on HPWSs, perceived effectiveness, the
interaction between HPWSs and perceived effectiveness, and job satisfaction. We
included the same set of control variables in all regression models.
In model 1, the coefficient estimates for the interaction between HPWSs and
perceived effectiveness were positive (b ¼ 0:018) and significant (p , 0:05), providing
support for H5, which predicted a positive moderating effect of perceived effectiveness
on the relationship between HPWSs and financial performance. Figure 1 shows an
interaction plot demonstrating that the effect of HPWSs on financial performance was
indeed stronger for a high level of perceived effectiveness than for a low level. The
results of a simple slope analysis indicate that the simple slope for the regression of
ROA on HPWSs at one standard deviation above the mean for perceived effectiveness
was 0.011 and significant at p , 0:01 (t ¼ 2:98). On the other hand, the simple slope at
one standard deviation below the mean was 0.001 and not significantly different from
zero (t ¼ 0:35).
In model 2, the coefficient estimate for the interaction between HPWSs and
perceived effectiveness was positive (b ¼ 0:065) and significant (p , 0:05), indicating
that the strength of the relationship between HPWSs and job satisfaction varied
according to perceived effectiveness.
 Model no.
1 2 3
ROA_yr.2006 Job satisfaction ROA_yr.2006
Dependent variables b s.e. b s.e. b s.e.

Constant 0.027 0.047 3.352 * * * 0.153 2 0.107 * * * 0.082

ROA_2005 0.609 * * * 0.055 0.439 * * 0.178 0.592 * * * 0.055
Firm age 0.008 0.009 20.013 0.030 0.009 0.009
Firm size 20.009 0.006 0.027 0.019 2 0.010 0.006
Union presence 0.010 0.013 0.057 0.043 0.007 0.013
HPWSsb 0.006 * * 0.003 0.019 * 0.010 0.006 * 0.003
Perceived effectivenessb 0.052 * * 0.023 0.472 * * * 0.074 0.033 0.024
HPWSs X perceived effectivenessc 0.018 * * 0.009 0.065 * * 0.030 0.016 * 0.009
Job satisfaction 0.040 * * 0.020
R2 0.421 0.300 0.431
Adjusted R 2 0.383 0.254 0.391
F 11.113 * * * 6.532 * * * 10.80 * * *
df 15, 229 15, 229 16, 228
Notes: aN=245; coefficient estimates for industry dummies are not reported for presentation purposes. bmean-centered. ccross-product of centered
variables. *p , 0.10; * *p , 0.05; * * *p , 0.01
perceptions

moderation of perceived
employees’

effectivenessa
squares regression
analysis for mediated
Results of ordinary least
585

Table IV.
Effects of
PR
42,5

586

Figure 1.
Interaction effect of
HPWSs and perceived
effectiveness on ROA

In model 3, the coefficient estimate for the effect of job satisfaction on ROA was
positive (b ¼ 0:040) and significant (p , 0:05), and that for the interaction between
HPWSs and perceived effectiveness was positive (b ¼ 0:016) but marginally
significant at p , 0:10. The results for model 3, together with those for models 1
and 2, thus provide support for H5 (which predicted positive moderating effect of
perceived effectiveness) based on the mediated moderation model. These results
satisfy the conditions specified in Muller et al. (2005) for demonstrating mediated
moderation. That is, the results indicate that the overall moderating effect (interaction
between HPWSs and perceived effectiveness in model 1) was significant and its effect
size decreased when the mediator was included in the regression equation (0.018 in
model 1 and 0.016 in model 3); the effect of the independent variable on the mediator
depended on the moderator (model 2); and the effect of the mediator on the dependent
variable was significant (model 3).
In addition, we conducted a significance test for mediated moderation for different
values of the moderator by following Preacher et al. (2007). The estimate for the
indirect effect at one standard deviation above the mean for perceived effectiveness
was 0.004 and significant at p , 0:01 (Z ¼ 2:56). On the other hand, the estimate at one
standard deviation below the mean was not significantly different from zero
(Z ¼ 0:34).

Results of the hierarchical linear modeling analysis

With multilevel data, misestimated standard errors can occur when the researcher
treats individual cases as though they are independent (a standard assumption of the
OLS regression method) when they are not. Previous studies of the effects of firm
practices on employees’ attitudes have generally been hierarchical because employees
are nested in firms (i.e. employees experience their work life in the same firm). In the
present study, we conducted an HLM analysis to estimate the effects of HR practices on
job satisfaction more accurately.
In the null model, with respect to employee job satisfaction, its firm-level variance
was .08, which is significantly different from zero (x2 ¼ 988:32; df ¼ 244; p , 0:001).
The within-firm variance was .44, thus the intraclass correlation coefficient (ICC) is .15.
The ICC shows that 15 per cent of the variance in employee job satisfaction exists Effects of
between firms and 85 per cent of the variance resides in firms.
Table V presents the HLM fixed effects results for employee job satisfaction. It
employees’
shows that HPWSs had a significant positive effect on the model fit in comparison with perceptions
the model containing only control variables. In model 2, HR practices had a significant
positive effect on job satisfaction (g ¼ 0:023; p , 0:01). Therefore, these results
provide empirical support for H2, which predicted a positive relationship between 587
HPWSs and job satisfaction.
Finally, HPWSs and perceived effectiveness had a significant interaction effect on
job satisfaction (g ¼ 0:049; p , 0:05), providing support for H6, which predicted a
positive moderating effect of perceived effectiveness.
As shown in the interaction plot in Figure 2, the slope of job satisfaction on HPWSs
was positive at one standard deviation above the mean for perceived effectiveness but
was flat at one standard deviation below the mean. Indeed, the results of a simple slope
test indicate that the slope at one standard deviation above the mean was positive and
significant (t ¼ 2:92; p , 0:01), whereas that at one standard deviation below the mean
did not differ significantly from zero (t ¼ 0:09).

Conclusion
The results indicate a relationship between HWPSs (measured by the presence of eight
HR practices) and financial performance. For financial performance in 2006, the results
provide general support for the hypothesis that HPWSs would be related to ROA in the
following year. We examined the relationship between HPWSs and job satisfaction and
found significant effects through both ordinary least squares and HLM analyses.
The results indicate that job satisfaction had a partial mediating effect on the
relationship between HPWSs and financial performance. This suggests that the
implementation of HPWSs may allow employees to be more satisfied with their jobs
and organisations, inducing them to make more effort in their jobs and thus enhancing
firm performance.
Employees evaluate their workplace environments based on their perception of
their firms’ administration of HR practices. Accordingly, we examined the moderating
effect of employees’ perceived effectiveness based on the assumption that the effect of
HR practices on firm performance and job satisfaction would be greater for effective
than for ineffective firm administration. The results indicate that the relationship
between HPWSs and financial performance was stronger when employees perceived
the effectiveness of their HR practices.
Most studies of SHRM have focused on testing the relationship between HR
practices and firm performance, and the meta-analyses found an overall correlation
between HR practices and organisational performance (e.g. Combs et al., 2006).
This study has demonstrated the importance of employees’ attitudes in the
relationship between HPWSs and financial performance. Some scholars (e.g. Becker
and Gerhart, 1996; Wright and Boswell, 2002) have argued that examining the internal
process of this relationship is critical to developing the theory further and emphasised
the importance of testing the multilevel effects of HR practices on employees’ attitudes.
Such research should also be useful for identifying a more convincing explanation of
the causal relationship between HR practices and firm performance. Some studies have
examined the mediating effect of employees’ attitudes or behaviours in the
HR-performance relationship (e.g. Batt, 2002; Ramsey et al., 2000). Employees’ job
 PR
42,5

588

Table V.

function of HPWSs
job satisfaction as a
Results of hierarchical
linear modeling analysis:
Model no.
1 2 3 4 5
b s.e. b s.e. b s.e. b s.e. b s.e.

Level 1
Age 0.010 * * 0.001 0.011 * * 0.002 0.010 * * 0.001 0.010 * * 0.001 0.010 * * 0.001
Wage 0.010 * * 0.001 0.001 * * 0.001 0.001 * * 0.001 0.001 * * 0.001 0.001 * * 0.001
Marriage 2 0.091 * * 0.028 2 0.091 * * 0.028 20.090 * * 0.028 20.091 * * 0.026 20.090 * * 0.027
Sex 2 0.072 * 0.028 2 0.072 * 0.028 20.078 * 0.036 20.077 * 0.035 20.077 * 0.036
Level 2
ROA_2005 0.048 * * 0.008 0.046 * * 0.007 0.036 * * 0.010 0.035 * * 0.011 0.036 * * 0.010
Firm age 0.010 0.024 0.010 0.023 0.005 0.020 0.005 0.019 0.010 0.019
Size 0.041 0.017 0.032 0.016 0.019 0.013 0.016 0.014 0.011 0.014
Union presence 2 0.044 0.041 2 0.049 0.040 20.031 0.035 20.034 0.035 20.039 0.035
HPWSs 0.023 * * 0.008 0.010 0.009 20.151 0.078
Perceived effectiveness 0.394 * * 0.061 0.376 * * 0.065 0.156 0.116
HPWSs £ Perceived effectiveness 0.049 * 0.023
df 231 230 230 229 228
x2 698.274 676.101 563.130 571.092 580.945
p-value 0.000 0.000 0.000 0.000 0.000
Notes: N=245 (firm level) and 6,709 (individual level); coefficient estimates for industry dummies are not reported for presentation purposes. Mean
centered *p , 0.05; * *p , 0.01
 Effects of
employees’
perceptions

589

Figure 2.
Interaction effect of
HPWSs and perceived
effectiveness on job
satisfaction

satisfaction has been one of the most researched concepts in the literature. Many
studies have investigated various dimensions of job satisfaction and the relationship
between job satisfaction and other important variables. The popularity of research on
job satisfaction is basically attributable to the crucial assumption that satisfied
workers are important contributors to organisational effectiveness and that
dissatisfied ones are implicitly thought to contribute less.
Recognising the multilevel nature of organisations, we used the HLM to develop
and test the models. Many previous studies of the relationship between HR
practices and organisational effectiveness have ignored multilevel issues.
Hierarchical data structures are common throughout many areas of research
because people tend to exist within organisational structures such as families,
schools, firms, states, and countries. Similarly, employees exist within production
units, firms, geographic regions, and countries. Although researchers require
multilevel data to reveal the strength attributable to the “message” that HR
practices transmit to employees (Bowen and Ostroff, 2004), such data remain
largely absent in the field of SHRM.
We examined the importance of employees’ perception of the effectiveness of
HR practices. Although a firm implements new practices, this implementation by
itself is not likely to change employees’ attitudes sufficiently enough to change
their behaviours if they do not experience the effectiveness of those practices.
Guest (1999) argued for the need to determine how employees perceive HR
practices and systems to better understand the full potential of HRM. This study’s
results suggest that the strength of the relationship between HPWSs and firm
performance can be differentiated by employees’ positive perception of the
effectiveness of those practices. As suggested by a number of scholars (e.g. Bowen
and Ostroff, 2004; Wright and Nishii, n.d., in press), the results suggest that
employees’ perception of the effectiveness of HR practices is likely to play an
important role in influencing the ultimate outcomes of HR practices. In this way,
the results inform managers of appropriate policy levers that, if manipulated
appropriately, can help their firms achieve desirable organisational outcomes.
Employees’ perceptions are vital in HRM. For example, if job applicants have a
negative perception of a firm, then they are not likely to work for that firm. In
PR addition, firms should retain workers, particularly high performers, by facilitating
42,5 and maintaining their favourable perceptions. This can be achieved by HR
practices that consider and reflect employees’ needs and expectations. Many
previous studies have suggested a positive relationship between HPWSs and firm
performance. However, HR managers have to see how employees perceive newly
introduced HR practices, and they sometime have to adjust their HR practices to
590 reflect their employees’ needs and expectations to strengthen the relationship
between HR practices and firm performance.
This study has several limitations. The first limitation pertains to the
demonstration of causality. Wright et al. (2005) suggested that the related causal
order can be reversed if a given study measures the independent variable (e.g. HR
practices) and the dependent variable (e.g. financial performance) as they occur at the
same point in time. To overcome the weakness of the cross-sectional nature of the data,
we used data on HR practices for 2005 and data on firm performance for 2006 (i.e. time
precedence). Although we examined the lagged effect of HR practices on firm
performance to determine the conceptual causal relationships between the variables by
controlling for the effect of previous performance, it cannot necessarily be inferred that
firms introducing HPWSs necessarily exhibit improved performance. In this regard,
future research should use longitudinal data to test the relationship between HPWSs
and firm performance. A longitudinal analysis may show whether firms change their
HR practices, whether employees change their attitudes, and whether there is a causal
relationship between variables of interest.
The second limitation pertains to the issue of what should be measured. In terms of
measuring HR practices, researchers have reached no consensus on what constitutes
HPWSs (Becker and Gerhart, 1996; Gerhart, 2007; Guest, 1997). For example,
Ichniowski et al. (1997) considered “skill training,” “recruiting and selection,”
“teamwork,” “flexible job assignment,” “incentive pay,” “employee security,”
“communication,” and “labor relations” as parts of HPWSs. To establish two
categories of HR practices, Huselid (1995) used “information-sharing program,”
“formal job analysis,” “hiring from within,” “attitudes survey,” “selectivity in hiring,”
“performance appraisals,” and “promotion based on performance” for HPWSs. In the
present study, we considered eight HR practices from the literature. However, there is
no gold standard on the best representative practices of HPWSs.
The third limitation pertains to the problem of omitted variables. The firms
considered in this study were geographically distinct and thus differed from one
another in terms of economic conditions and local labor markets. Such differences, if
significant, can constitute a serious problem for researchers attempting to examine the
relationship between HR practices and financial performance. For example, this
study’s results may be weakened considerably if local economic conditions, not firm
practices, have significant effects on financial performance.
The final limitation concerns the generalizability of the findings. This study’s data
were limited to Korean firms, and therefore future research should test the model by
considering a wider range of cultures or countries. Here it would be interesting to
examine whether the effect of employees’ perception of HR practices in this study is
applicable to other countries and to compare any differences in findings based on
national backgrounds or cultural differences.
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Further reading
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research”, Human Resource Management Review, Vol. 8 No. 3, pp. 289-309.
Morgan-Lopez, A. and Mackinnon, D. (2006), “Demonstration and evaluation of a method for
assessing mediated moderation”, Behavior Research Methods, Vol. 38 No. 1, pp. 77-87.

Corresponding author
Jang-Ho Choi can be contacted at: jangchoi@sogang.ac.kr

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