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The Impact of Human Resource Management on Organizational Performance

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International Research Journal of Management
Science & Technology
ISSN 2250 – 1959(0nline)
2348 – 9367 (Print)
A REFEREED JOURNAL OF

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Published by iSaRa
 IRJMST Vol 9 Issue 3 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)

The Impact of Human Resource Management on Organizational Performance

Agniva Saha

Abstract
Human Resource Management (HRM) has mature extremely popular over the past decades, and it's
currently a standard characteristic for nearly all larger firms and plenty of smaller ones. one in every
of the explanations for this quality is that the assumption that HRM could be a supply for
competitive advantage and can influence the organisational results and performance in a positive
direction. The thesis takes a more in-depth consider the probable relationship between HRM and
performance. the most plan behind the time unit M-performance presumption is that HR practices
have an effect on the employees‘ attitudes and behavior, that any affects the operational
performance, like productivity, quality and innovation, that successively have a positive on impact
on the monetary and market performance. an oversized quantity of empirical proof support such a
positive relationship between HRM and organisational performance. However, there also are critics
commenting on the analysis field‘s method limitations. thanks to these method limitations the
empirical proof for a positive link is weakened. These limitations include: range of respondents and
their role within the organisation, analysis style, analysis execution and interpretation, and a scarcity
of attention to influencing variables and also the risk of a reversed relationship.

Introduction
Human resource management (HRM) is a relatively young field, which has undergone a rapid
evolution. From its initial roots as the function involved in the administrative aspects of hiring,
firing, and payroll, it has seen stages where Union relations/avoidance, employee satisfaction, and
legal compliance have served as dominant areas of emphasis and expertise (Noe, Hollenbeck,
Gerhart & Wright, 1997). Most recently a trend has developed toward justifying the expenditures for
and existence of the HR function. HR departments and programs have become an element of the
firm's profit equation to be minimized as a cost and maximized as a value-adding component of firm
strategy. In fact, some in the popular business press have characterized HR departments as
bureaucratic wastelands and suggested doing away with them (Stewart, 1996). Consequently, HR
practitioners have become preoccupied with demonstrating the value of the HR function, particularly
through showing its impact on firm performance (Pfeffer, 1997; Ulrich, 1997).

From Personnel Administration to Human Resource Management.

We can trace the origins of HRM all the way back to Frederick Taylor and Scientific Management.
Taylor‘s (1911) accounts for his experiments and ways of ensuring and increasing effectiveness are
similar to what we now know as job analysis, selection, training, and motivation through
compensation. From the early steps of Frederick Taylor, HRM came to be through influences from
industrial psychology, industrial sociology and labour economics theory (Mahoney & Deckop,
1986). The Hawthorne studies of the 1930s further induced the interest in how to make the jobs and
work place motivational and how to enhance employee commitment. During the era of Industrial
Relations, the organisational activities centred on people and employees were grouped together

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under the name of Personnel Administration (PA). Here, each activity had a clear objective based on
one specific theoretical model tied to a distinct problem; however, the overall objective of PA was
yet to be stated. Further down the line, there was a shift in focus that generated the shift from PA to
HRM. The object of understanding and achievement was no longer individual job performance but
rather the overall organisational effectiveness. In the 1960s, both scholarship and practice shifted
from design and administration of activities to managing a workforce for the accomplishment of
organisational objectives. The shift in terms, from PA to HRM, signified a new way of thinking
about the employees; they were now considered to be resources in an employing organisation which
needed to be managed jointly with other resources in order to achieve organisational effectiveness
(Mahoney & Deckop, 1986). In addition, one began to see a more strategic view of the activities or
practices as a whole, the overall objective of PA/HRM became more noticeable and was guided
towards organisational effectiveness. Previously PA consisted of activities that were considered
solutions to various but specific problems, like turnover, absenteeism, and job satisfaction. However,
developments in the 1980s shifted the focus from problem solving to assessment of organisational
outcomes. There was an increased focus on translating traditional HR measures such as turnover, job
performance, and training effectiveness into organisational relevant measures of cost and profit –
thus relating HRM to organisational results. This new way of thinking about the management of the
organisations‘ employees signifies the birth of a new research field, a research field focused on
uncovering the potential of HRM.

In 1987, Guest introduced HRM as a new approach to personnel management, where it differentiated
itself from more traditional ways of managing employees. This included greater involvement of line-
managers and a strategic alignment with the company as a whole.
Further, Guest emphasised HRM‘s contribution to flexibility, quality and employee commitment,
which in turn would influence employee absence, turnover and work performance in a positive
matter. This presumption was soon acknowledged by both practitioners and academics, contributing
to the explosion of research and the renaming of employment positions and departments that
followed. However, much of the interest in systems of HR practices such as HPWS stems from the
rise of Japanese high-quality production systems in the 1970s and 1980s (Boxall & Purcell, 2003).
Faced with competitors who were simultaneously raising product quality, reducing production costs,
and improving rates of innovation, some elements of western manufacturing simply disappeared,
while others soon learnt that they could not rely solely on their marketing skills (Boxall & Macky,
2007). In order to survive they had to change and seek new ways of achieving competitive
advantage. This included an increased focus on their internal operations, and adopting the Japanese
lean principles. This meant moving away from the low-discretion, control-focused work systems
associated with Fordist operations management towards work systems that increased involvement of
production workers and raised skills and incentives (Boxall & Macky, 2007; MacDuffie, 1995).
Fueled by this practitioner concern, recent academic research has attempted to demonstrate the
impact of HRM on firm performance. Not surprisingly, first attempts at empirical linkage looked in
areas of HRM that were already the most brightly lit by prior research. Early in this stream, research
linked individual HR practices such as training (Russel, Terborg & Powers, 1985) selection (Terpstra
& Rozell, 1993) appraisals (Borman, 1991) and compensation (Milkovich, 1992) to firm financial
performance. Huselid‘s (1995) work linking an index of HR practices to both financial and market
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outcomes and MacDuffie‘s (1995) study linking bundles of HR practices to productivity and quality
exemplified a progression toward examining the link between systems of HR practices and
performance.
Organizational Performance in Strategic HRM
Wright and McMahan (1992) defined strategic HRM as ―the pattern of planned human resource
deployments and activities intended to enable the firm to achieve its goals.‖ (p. 298).
Implicit in this definition is that the ultimate goal of strategic HRM is to contribute to organizational
performance (i.e., the achievement of the firm‘s goals), however that performance is defined.
Considerable research has attempted to test strategic HRM propositions, usually with the ultimate
criterion being how strategic HRM contributes to firm financial performance (Dyer & Reeves, 1995;
Wright & Sherman, in press).
Within the field of strategic HRM, Dyer and Reeves (1995), in their review of research on the
efficacy of ―bundling‖ HR practices, proposed four possible types of measurement for organizational
performance:
1) HR outcomes (turnover, absenteeism, job satisfaction),
2) organizational outcomes (productivity, quality, service),
3) financial accounting outcomes (ROA, profitability), and
4) capital market outcomes, (stock price, growth, returns). They proposed that HR strategies were
most likely to directly impact human resource outcomes, followed by organizational, financial, and
capital market outcomes. This stemmed both from the facts that HR strategies are primarily designed
to impact HR outcomes, and that the increasing complexity of factors which influence higher level
outcomes would diminish the relative contribution of HR factors to those outcomes. They suggested
these facts, coupled with the reality that human resource outcomes are deficient from the standpoint
of most executives might explain why most of the strategic HR research has focused on
organizational outcomes rather than the other three.

Frequency of Use of Different Measures of Firm Performance

To assess the different types of measures of firm performance that have been used in strategic HRM
research, we examined the published literature linking HR practices to organizational-level measures
of performance. Studies were gathered from the three special issues noted above, along with other
studies of a similar calibre that have appeared in top level HR journals. We limited our search to
published studies because we felt it important to examine only those measures used in research
studies which have passed a refereeing process. We recognize that this may skew the results if
studies using certain types of measures are being systematically rejected (i.e., it is the referee
process, and not the research designs which have limited the types of measures). However, if that
were the case, the implication might only be that our suggestions regarding performance measures
might apply more to reviewers than to researchers.

Considering Organizational Purpose and Stakeholders

Related to the issue of efficiency/effectiveness is the issue of purpose. To clarify organizational
performance, it is necessary to consider notions of organizational purpose since outcome evaluation
dictates an articulation of purpose. Steers, for example, analyzed 17 models of organizational

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effectiveness and found that the field was not very effective at measuring effectiveness because
researchers for the most part ignored organizational goals.
He concluded that "…attempts to measure effectiveness should be made with reference to the
operative goals that an organization is pursuing; that is, criterion specification should be flexible
enough to account for diversity in goal preferences." (Steers, 1975): 555.
Purpose is necessary for performance measurement because it is not the simple possession of an
attribute (say a high sales volume or low turnover) but the utilization of that attribute toward some
end that reflects on performance. A specific utilization implies a purpose or goal toward which the
resource can either be used efficiently (and achieve the goal) or used poorly, not used or used for
alternatives). For example, a high sales volume could be used to pay high wages or it could be used
to increase stockholder returns or even to pay for toxic waste cleanup. Thus having a high sales
volume in itself does not necessarily indicate organizational performance.
The discussion of purpose necessarily causes a reconsideration of stakeholder models of
organizations because purpose implies a beneficiary. Stakeholder theory is by no means new to HR
but was in fact one of the historical arguments for supporting the HR function. HR Measuring
Organizational Performance was supposed to address a different group of stakeholders (employees)
than the investor relations group or the public relations department. A stakeholder model claims
many individuals and groups have an interest in the existence, processes, outcomes and reputation of
an organization beyond the recognized interest of capital owners. The stakeholder discussion focuses
the attention of organizational research on the dependent variable because the choice of
organizational performance indicator implies a chosen relative importance of different stakeholders.
For profit firms are assumed by many researchers to have a goal of wealth maximization for their
shareholders. This is clearly the position of Becker, Huselid, and Welbourne (Becker & Huselid, in
press; Huselid & Becker, 1997; Welbourne & Andrews, 1996). However, other researchers focus on
labor productivity, safety or equality in compensation (Cowherd & Levine, 1992; MacDuffie, 1995).
In addition, as previously noted, researchers within the strategy literature have called for expanding
measures of organizational performance to include the concept of purpose and to account for the
desires of multiple stakeholders (Venkatraman & Ramanujam, 1986). The selection of performance
criteria implies a set of assumptions about the relative importance of possible measures of
performance in relation to organizational goals and the interests of different stakeholders
Recognizing the limitations of single indicator measures of performance has led to multi-dimensional
systems of performance measurement. The correlation of accounting data and non-accounting
measures is an old question in organizational research. Johnson and Kaplan (1987) argue that
accounting data is not really objective at all in the sense of it being constructed for accounting and
management purposes (Johnson & Kaplan, 1987). Johnson (1992) proposed that firms adopt more
quality measures in performance evaluations to better align organizational incentives with output
oriented to the long term success of the enterprise (Johnson, 1992).
Kaplan and Norton (1996) have established the practice of designing performance indicators around
the various stakeholders at the individual level as a means to align managerial incentive systems with
broader organizational goals. This ―balanced scorecard‖ approach entails identifying the 3-4 major
stakeholder groups (usually including shareholders, employees, and customers), and then developing
objective indicators of performance with regard to each group (e.g., ROE, turnover, and market
share, respectively). This balanced Measuring Organizational Performance scorecard approach has
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similarly been advocated as a way for HR to demonstrate its impact on firm performance (Ulrich,
1997; Yeung & Berman, 1997).
Another approach has been to combine a variety of seemingly disparate measures into a composite
score for performance. Martell and Carroll's (1995) study of SBU performance is an example of this
multi-dimensional weighted performance measurement system (MDWP).
The items on a MDWP type of measure do not necessarily correlate with each other. In fact, they are
theoretically selected specifically because they do not load onto a single factor.
Maximizing product quality may not maximize profits or minimize costs. It is the Platonic approach
to performance measurement, "moderation in all things," as the key to a long and satisfied
organizational life. The questions remains of how to build a meaningful performance construct from
multi-item factors that must be optimized together.

Resource Based View of the firm

The Resource Based View of the firm (RBV) has also been applied to the HRM-performance link.
RBV is a general way of theorising about how competitive advantage can be achieved through the
possession of valuable and rare resources that are hard to imitate by other competitors (Takeuchi et
al., 2007). When applied to the HRM-performance link, one is to consider the employees as a
resource similar to other organisational resources, where the main goal for the HR practices is to
build up the human capital and stimulate the kind of behaviour that creates advantages for the
organisation (Boxall og Steeneveld, 1999).

AMO theory and KSA theory

Another theory that has gained much support lately is AMO theory. The idea is that HR practices
influencing the employees Abilities, Motivation and Opportunity to participate are the practices that
will have an impact on organisational performance. This is very similar to what some researchers call
KSA theory (e.g. Huselid, 1995). It is advocated that the use of HR practices that 1) increase the
employees‘ knowledge, skills, and abilities (KSAs), 2) motivate employees to leverage their KSAs,
and, 3) empowering the employees to do so, will consistently create growth and prosper for its
organisations.

Other theories on an individual level

In addition to perspectives and theories concerning the HR practices and how to view the HRM
potential, there also exist theories that are more specific. These are located at an individual level and
have been applied to the HRM-performance link often related to attempts at explaining the potential
link. Examples of such theories are social exchange theory (Takeuchi et al., 2007), psychological
contracts (Guest, 1999) and job characteristics theory (Snape & Redman, 2010). When applying
social exchange theory to the link between HRM and performance, the proposed idea is that
organisations that invest in their employees, will experience employees reciprocating these
investment with efforts directed towards the organisations‘ benefit and interest. This is somewhat
similar to the way of theorising about psychological contracts and HRM-performance. Here, HRM is
believed to contribute to a strong psychological contract between the employer and the employee,
with reciprocating characteristics and expectations. According to job characteristics theory the core
characteristic of autonomy/discretion produces a ―critical psychological state‖ of experienced
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responsibility for the work, which in turn leads to improved work effectiveness (Hackman and
Oldham,1980; in Snape and Redman, 2010 p. 1221). For example, many HR practices, such as those
focused on building employee skills and abilities, empowering the employees, and involving the
employees, may contribute to increase the level of discretion employees have in their role.

Conclusion
We have seen that there area unit variety of various hour practices that area unit of continual
throughout the HRM-performance analysis. However, what varieties of performance that these hour
practices, or systems of them, area unit measured against varies. within the following section, i'll
concisely define the kinds of performance that area unit normally used at intervals the analysis field.
the assorted varieties of performance are divided into 3 main categories: 1) money and Market
performance, 2) Operational Performance, and 3) worker perspective and behavior.

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