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Chapter 8 The Performance Impact of HR Practices Introduction

The major perspective of this book is that the investment in human resources can provide a sustainable competitive advantage and can increase the likelihood of successful implementation of firm s business strategies. Because of these effects, investment in human capital has the potential to produce attractive rates of return for the firm s shareholders. The investment in human resources can be direct like training for increasing productivity and indirect like using attractive compensation plan to boost productivity and valid selection tests. Though this perspective has been widely accepted, the senior management across the companies demand an empirical proof to accept this.

Individual High-Performance Practices
One of the most prominent advocates of universal best practices is Professor Jeffrey Pfeffer of Stanford University. He has addressed best practices through two books namely Competitive Advantage through People and The Human Equation: Building Profits by Putting People First . The first book has 16 best practices while the second combined these to give seven. These practices are nearly universal in their ability to enhance firm performance. They are 1. Employment security, 2. Selective hiring of new personnel, 3. Self-managed teams and decentralization of decision making as the basic principle of organization design, 4. Comparatively high compensation contingent on organizational performance , 5. Extensive training, 6. Reduced status distinctions and barriers, including dress, language, office arrangements and wage differences across levels and 7. Extensive sharing of financial and performance information throughout the organization.

Firms are giving high importance for compensation as a measure to improve performance but the research pertaining to this is lacking in terms of volume. Further the traditional compensation practices are highly criticised as insufficient. Today employees are expected to work in teams, learn new skills, assume broader roles and take more risks and responsibility for results.Firms feel that they are sending wrong signals to employees by creating artificial expectations of continued advancement and raises no matter how well company performs.One popular belief is that there is only one good study conducted per year on this topic over the past 40 years. One reason could be

The finding disproved assertion that financial incentives act to kill intrinsic motivation.The compensation system based on individual performance is not a good system as it won t support team building. They found that the incentive based compensation was significantly related to organizational performance for the entire sample of companies. Otherwise. Further their pay structure has compensation which is highly related to their collective or team performance by means of profit sharing.difficulty in synthesizing the results of multiple studies in order to arrive at firm conclusions about their collective findings. One meta-analysis explored whether the relationship between financial incentives and performance was stronger for extrinsic tasks or intrinsic tasks. if financial incentives erode intrinsic motivation. Incentive Based Compensation John Delaney and Mark Huselid have addressed the question of performance impact of incentive based compensation system. we would find them to be negatively related to performance for intrinsic tasks. Home Depot has achieved because of its superior workforce. Profit sharing through employee stock options has resulted in employee being involved in decision making activities and showing behaviour and ownership of an owner of the firm. is paying higher than the industrial average while South West Airlines though the monetary benefits are at industrial levels its non-monetary benefits exceed industry averages by a bigger score. Meta-analysis techniques have been developed to overcome this barrier. Team-Based Compensation . This profit sharing works with employees who are not averse to risk taking. John Delery and Harold Doty s have found that the profit sharing plans have positive impact on both return on assets and return on equity. incentives improve performance. They analysed the shareholder returns of companies with profit sharing plans with their unions. Profit Sharing Gary Florkowski and Kuldeep Shastri have researched on the performance impact of profit sharing.Issue based or subjective compensation system works well if it is aligned with the organizational culture.Presumably. Further the impact of compensation is contingent with the organizational culture. High Compensation Linked to Organizational Performance It is folly that companies claim that their employees are their competitive advantage but still pays them at market average. They found that the returns increased post the implementation of such plans.

Culturally related international diversification was expected to have a positive impact on firm performance. There is always a possibility of dysfunctional homogeneity if firm hire people based on just how well a person suit the firm. can increase the possibilityof creativity. culture. Diversity Diversity in geography. This is accompanied by greater satisfaction and better team performance.Firms hiring for affirmative action purposes during economic downturns are showing better financial performance soon after the recovery. Hiring for affirmative actions also increases the firm s reputation among the female and minority job applicants as well as reducing the likelihood of litigation and its associated costs. firms can obtain bargains in key personnel that may be needed to implement a strategy that will produce substantial returns after the recovery. Downsizing . The study also found no impact on performance for either Return on Asset or Market to book value resulting from several measures of cultural diversity.The studies indicate that presence of team based pay results in more helping behaviours among employees. at least where work interdependencies are important. the more the possibility of creative workforce a firm can have. So companies like Google are rewarding employees who show desired behaviour in terms of innovation and out of box thinking. Further it is also noted that if reward is tied only to results then teams showed resistance in trying different options and innovations as they fear that might lead to failure and in turn to less pay. The studies have found that shareholder returns are increasing in two years after the downturn during which the companies has involved in countercyclical hiring. Greater the cultural distances between operations. The increased diversity does not result in immediate performance because time is needed for the benefits of diversity to be manifested in increased performance. Nonetheless. Culturally unrelated global diversification was expected to have a negative result. The results also indicated that greater dispersion in pay within an organization is associated with lower individual and group performance. there is need for more complex control systems and correspondingly higher transaction costs. The more diverse the workforce. etc. Employment Countercyclical Hiring The practice is obviously a limited one because the firm is hiring while there is a downturn.

Those companies which outsourced for the short term factors but over a long term has faced decline. In general. However firms that pursued a combined approach of downsizing along with restructuring of their assets has substantially higher returns on assets two years later than those who only downsized. .The studies have found that downsizing firms did not obtain significantly greater returns than the average for firms in their industries. While on the other hand employee might take employee security for granted and show behaviour that are unfavourable for the organization will lead to decrease in shareholder returns. Sustainable competitive advantage appears to result from outsourcing when it allows human resource departments to focus on value-added activities and when outsourcing helps to support the strategic direction of the firm. companies that do notlay off even during the turbulent times even though they are operating in a volatile market have shown better long term financial performance. Employment Security It is double edged sword where it has both positive and negative impact. Human Resource Outsourcing Strategic outsourcing decision involving outsourcing of non-core jobs while diverting the employees to concentrate on the core deliverable has resulted in companies showing better performance. It further indicates that downsizing resulted in decreased shareholder returns. In other words which downsized when they were performing well because of their foresight to restructure and cut cost has performed well while those which followed abrupt downsizing without any strategic plan faced decrease in shareholder return. The employment security can result in employee showing loyalty and motivation which will have positive impact on the shareholder returns. The results indicate that importance of coordinated approach in which downsizing is complementary with the firm s overall strategies. Early retirement programs Proactive downsizing made when a firm is doing well may signal intend for reorientation of personnel that goes well beyond a mere defensive reaction to decline through cost cutting.