Paper 2

SHRM Theory in the Post-Huselid Era: Why It
Is Fundamentally Misspecified
BRUCE E. KAUFMAN*
This article critiques the theoretical model that dominates mainstream research in
strategic human resource management. Contributions include: the critique is
developed from an explicit model of the employment relationship; new concepts
of ‘‘weak contingency’’ and ‘‘strong contingency’’ are introduced; the standard
hypothesis of a positive sign on the human resource management variable in firm
performance studies is shown to be incorrect for a competitive economy (it should
be zero); and the analysis is based on ‘‘first principles’’ of institutional economics
and industrial relations.
All else being equal, the use of High Performance Work Practices and
good internal fit should lead to positive outcomes for all types of firms.
Huselid (1995: 644).
I have listened here to what seem to me to be the most marvelous and

keen discussions of what employers could do, of what foremen could
do, of what management could do, and I am firmly convinced that
if these most informing discussions we have heard could be carried
out … that there will be no need of either unionism or revolution.
But we know that will not be done; we know that you are a small
number. Commons (1920: 130)1
Introduction
THE MOST EXCITING AND FASTEST-GROWING AREA OF RESEARCH IN HUMAN RESOURCE
MANAGEMENT (HRM) since the mid-1990s has been on the relationship between
HRM practices and firm performance. Indeed, this subject area has become the
core of a new subfield called strategic HRM (SHRM).
* The author’s affiliation is Department of Economics and W.T. Beebe Institute of Personnel and
Employment Relations, Georgia State University, Atlanta, GA 30303; Centre for Work, Organization and
Wellbeing, Griffith University, Brisbane, Australia. E-mail: bkaufman@gsu.edu.
1
Remarks made to personnel managers at the annual convention of the Industrial Relations Association
of America.
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SHRM Theory / 287
Many dozens of articles and books devoted to SHRM and the HRM–firm
performance relationship have subsequently appeared. Of these, by nearly
every account (e.g., Wright and Boswell 2002) the most influential and pio-
neering is Mark Huselid’s article in The Academy of Management Journal
(1995). Huselid’s central conclusion is displayed in the quotation featured at
the head of this article; that is, the proposition that all firms can boost their
operational and financial performance by adopting a well-configured set of
‘‘high performance’’ human resource (HR) practices. This eye-catching finding
and the study’s innovative empirical methodology led to a wave of follow-up
studies. The influence and staying power of Huselid’s study is revealed in a
meta-analysis published a decade later (Combs et al. 2006). The authors found
92 comparable HRM-performance empirical studies; framed the central
hypothesis as had Huselid—‘‘the use of HPWPs [high performance work
practices] is positively related to organizational performance’’ (p. 504); and
concluded in support of Huselid, ‘‘our results lay to rest any doubt about the
existence of a [positive] relationship’’ (p. 524). Another study (Boselie, Dietz,
and Boon 2005: 67) refers to the positive HRM–performance relationship as
the ‘‘Holy Grail’’ of HRM because it appears to give the field a ‘‘place at the
table’’ in both business organizations and business schools (see Ferris et al.
2004).
The SHRM literature on the HRM fi firm performance relationship has
also attracted a large volume of commentary and criticism. The criticism runs
the gamut of subject and intensity level. On one end, for example, are writers
who accept the basic SHRM paradigm but find problems with some specific
aspect of the theory or empirical model; on the other are writers who reject
the entire package as fatally flawed and ideologically driven. In this spirit,
Thompson and Harley (2007: 157) refer to mainstream SHRM as ‘‘naive
optimism.’’
In this paper, I carve-out a position somewhere in the middle of this spec-
trum. That is, the theory and empirical model utilized in modern SHRM has
partial explanatory power but nonetheless is fundamentally flawed by substan-
tial specification error. Four particular contributions are made: first, a model of
production ⁄ employment systems is used to identify the origin and nature of
the specification error; second, new concepts of ‘‘weak contingency’’ and
‘‘strong contingency’’ are developed; third, it is demonstrated that the perfor-
mance effect of HRM in a competitive economy is better hypothesized as zero
(not positive); and, fourth, these insights are derived from ‘‘first principles’’ of
institutional economics (IE) and industrial relations (IR). Other commentators
(e.g., Guest 2001) have observed that the mainstream SHRM literature appears
rather insulated from alternative perspectives and impervious to deeper
288 / BRUCE E. KAUFMAN
criticism; my belief is that the critique presented here is so fundamental it can-
not be ignored.
SHRM Theory: A Brief Review

SHRM is a large and heterogeneous field and a spectrum of theoretical
opinion exists (Boxall and Purcell 2008). A reading of recent SHRM review
articles and books nonetheless leads to the inescapable conclusion that the
Huselid-inspired branch of the field remains the dominant and indeed para-
digm-setting influence. Fernandez-Alles and Ramos-Rodrı́guez (2009), for
example, conduct a bibliometric analysis of the HRM literature and find (1)
the ‘‘basic core’’ of the SHRM field is ‘‘comprised of studies investigating the
incidence of HR practices on the firm’s performance’’ (p. 170) and (2) the
paper by Huselid is the single most cited work.
So, what is the SHRM model à la Huselid and progeny? Combs et al.
(2006: 502, citations in the quotation omitted) give this concise statement:
Human resource practices that SHRM theorists consider performance enhancing
are known as high-performance work practices (HPWPs). HPWPs include, for
example, incentive compensation, training, employee participation, selectivity, and
flexible work arrangements. SHRM theory asserts that these practices increase
employees’ knowledge, skills, and abilities (KSAs), empower employees to lever-
age their KSAs for organizational benefit, and increase their motivation to do so.
The result is greater job satisfaction, lower employee turnover, higher productiv-
ity, and better decision-making, all of which help improve organizational perfor-
mance.
Let us now unpack this model into its key parts and assumptions. The most
popular organizing framework for distinguishing among alternative theoretical
explanations for the HRM fi firm performance relationship is provided by
Delery and Doty (1996). They differentiate between Universalistic, Contin-
gency, and Configurational perspectives.
Universalistic. The maintained proposition is that if successfully imple-

mented certain HRM practices always and everywhere contribute to higher
organizational performance. The most widely cited study adopting the univer-
salistic hypothesis is Pfeffer (1998). He identifies the following seven HRM
practices as universally good for performance: employment security, selective
hiring of new personnel, self-managed teams ⁄ decentralized decision making,
pay-for-performance, extensive training, reduced status differentials, and
SHRM Theory / 289
extensive information sharing. These practices are often associated with a
well-developed internal labor market (ILM).
Contingency. This perspective maintains that the relationship between HRM

practices and organizational performance is contingent on and moderated by
various contextual factors external and internal to firms. One example is the
proposition that a ‘‘commitment’’ model of HRM has a greater performance
effect in manufacturing than service firms (Combs et al. 2006); another is that
firms pursuing a cost minimization business strategy get higher performance
from a command and control HRM model (Arthur 1992).
Configurational. This perspective maintains that the relationship between

HRM practices and performance is moderated by interactions among the indi-
vidual HRM practice variables. The idea is that some HRM practices have a
complementary relationship with other practices (they ‘‘fit together’’), thus cre-
ating performance-enhancing synergies. If the complementarities are suffi-
ciently widespread, firms are led to mix and match HRM practices in a
manner that create distinct HRM systems—also called ‘‘HRM architectures’’
and ‘‘employment systems.’’2
Delery and Doty’s (1996) three-way typology is popular in part because it
provides a useful classification scheme for thinking about the central variable
in SHRM research—strategy. A core proposition of SHRM is that HRM prac-
tices perform better when (1) they are aligned with the organization’s business
strategy, external environment, and internal resources and capabilities and (2)
are mutually aligned into a complementary and synergistic package. These two
characteristics of HRM strategy are called ‘‘vertical fit’’ and ‘‘horizontal fit.’’
The notion of fit then leads to the distinction between Best Practice (BP)
and Best Fit (BF) (Boxall and Purcell 2008). The key hypothesis of the BP
model is that a set of HRM practices exist that universally lead to superior
organizational performance. Thus, the BP and Universalistic perspectives are
largely equivalent; this implies, in turn, that HPWPs are largely synonymous
with ‘‘advanced’’ or ‘‘transformed’’ practices of the Universalistic model, such
as employee involvement, extensive training, and self-managed teams (per the
quote featured above). In a BP world, the use of HPWPs dominates in all
firms.
The key hypothesis of the BF model, on the other hand, is that the best per-
forming set of HRM practices varies from one situation to another due to
2
Although the Configurational perspective is listed as a separate category, in practice most SHRM writ-
ers integrate it into the other two (Proctor 2008).
important external and internal contingencies (Jackson and Schuler 1995). The
BF model incorporates both the Contingent and Configurational perspectives.
When it comes to contingent factors, the mainline SHRM theory is a case
of what I call weak contingency (WC). That is, the theory posits a universalis-
tic positive BP effect but then introduces contingent factors (e.g., alternative
business strategies) that modify it.3 Thus, the HRM effect in Huselid-type
models remains positive for all firms but varies in size (Becker and Huselid
2006). Contrasted to this is strong contingency (SC); that is, the theoretical
proposition that ‘‘it all depends’’ and in some situations the effect of more
investment in HRM on firm performance may be positive but in others zero or
even negative (Boxall and Purcell 2008; Delaney and Godard 2001; Marching-
ton and Grugulis 2000). A SC view, for example, holds that a ‘‘commitment’’
HRM model is high performing in certain firms but in others (e.g., those fol-
lowing a cost minimization or labor exploitation strategy) is a money-loser and
an alternative ‘‘bare bones’’ HRM model (e.g., a command and control, infor-
mal, or ‘‘low road’’ system) performs better. The strong contingency case is
recognized as a theoretical possibility in certain SHRM studies (e.g., Delery
and Doty 1996; Lepak and Shaw 2008); for the most, however, alternatives to
an advanced HRM system are either given minimal attention or assumed on
a priori grounds to represent an inferior performance option.
The next link in the theory chain is the relationship between BP, BF, and
the concept of a High Performance Work System (HPWS). The HPWS
concept emerged in the 1970s out of new employment practices inspired by
socio-technical design principles in the United Kingdom and Scandinavia, a
unitarist ⁄ mutual gain model inspired by new management and behavioral
science research in the United States, the success of a more team-oriented and
egalitarian system from Japan, and the concomitant decline in perceived
popularity and performance of collective bargaining (Nadler, Gerstein, and
Shaw, 1992).4 Articles and books by a group of Harvard professors (e.g., Beer
et al. 1984; Walton 1985) significantly shaped academic thinking on the place
and characteristics of this new employment model, while books such as Com-
petitive Advantage through People (Pfeffer 1994) popularized these ideas to
practitioners and the public. The claim was that the traditional models of
HRM (personnel management and industrial relations, or PIR) rest on com-
mand and control, a ‘‘Theory X’’ view of human motivation, adversarial (plu-
ralist) employment relations, narrow job tasks, straight-time pay, hierarchical
3
In the spirit of WC, Huselid (1995: 644) states, ‘‘In short, the process of linking environmental contin-
gencies with HRM practices may vary across firms, but the tools firms use to effectively manage such links
are likely to be consistent.’’
4
Most examples of an HPWS come from the auto industry. A detailed case study of the birth, spread,
and implementation of the HPWS outside autos is provided in Kaufman (1997).
SHRM Theory / 291
work relations, and other such characteristics and that this model was generat-
ing lackluster performance for American industry. They promoted an alterna-
tive called a ‘‘high commitment’’ model that was based on largely opposite
premises and practices, typically taken from the twin fields of organizational
behavior (OB) and organizational development (OD). This model achieves
higher organizational performance through practices that stress unity of inter-
est, mutual gain, synergistic integration of employment practices, a human cap-
ital view of labor, a ‘‘Theory Y’’ view of motivation, broader job tasks,
employee participation, gains-sharing forms of pay, egalitarian work culture,
and other such characteristics.
This work, complemented by other writers in both HRM and IR (e.g.,
Fombrun, Tichy, and Devanna 1984; Kochan, Katz, and McKersie 1986), soon
led to new associations. For example, the Harvard group claimed that while
the HRM term covers all employment relationships it nonetheless represents
in practice a new model of people management and is therefore distinct from
and superior to traditional PIR (Beer and Spector 1984). Indeed, they made
the new style of HRM synonymous with the commitment ⁄ high involvement
model (see their Table 1) and hence in this version one may say: HRM =
BP = HPWS. This association was then rapidly picked up in the HRM and IR
literatures and remains prominent (Purcell and Kinnie 2007).
Academics and practitioners in the personnel management (PM) field of the
1970s–1980s saw the ‘‘new HRM’’ as a window of opportunity to change and
upgrade the orientation, approach, and status of what was to this point a mar-
ginalized area in management. In this spirit, Ulrich (1997: 8) declares, ‘‘The
HR of the 1980s is dead. Long live the new HR.’’ They were not alone, as a
number of IR scholars also started to champion the HPWS model—labeled the
‘‘new industrial relations’’ (e.g., Appelbaum et al. 2000; Frost 2008; Kochan
and Osterman 1994). The HRM scholars were better positioned, however, to
take over this new model and they quickly ran with it—leading to a substantial
rejuvenation of the PM ⁄ HRM field. Although some people continued to equate
HRM as largely a re-labeled PM (Strauss 2001), the main current of writing
went the other way and portrayed HRM as at least in part a distinctly new
model or ‘‘recipe’’ for people management (Dulebohn, Ferris, and Stodd
1995). Part of this view is that PIR focuses on cost minimization while HRM
focuses on value creation (Becker and Gerhart 1996).
Soon to follow in the United States was the emergence of the new HRM
subfield called SHRM (Wright and McMahan 1992) and in SHRM the rela-
tionship between ‘‘transformed’’ HRM and firm performance became the cen-
tral research question. For researchers taking a broad view of HRM, the key
hypothesis became ‘‘HPWPs fi higher firm performance’’; for researchers
(numerous but not all) who adopted the narrower HRM commitment ⁄ HPWS
model, the key hypothesis in effect became ‘‘HRM fi higher firm perfor-
mance.’’
As the SHRM literature went forward writers realized they also had to deal
with questions of how and why HRM affects firm performance (the ‘‘transmis-
sion mechanism,’’ aka the ‘‘black box’’). The key construct they adopted is
called the resource based view of the firm (RBV), supplemented with ‘‘AMO
theory’’ (Appelbaum et al. 2000). An important part of SHRM is the fit
between a firm’s competitive strategy and its HRM system. In the 1980s,
SHRM writers mostly focused on ‘‘external’’ strategies; that is, strategies dri-
ven by variation in product market factors and the choices firms make to posi-
tion themselves in these markets to obtain competitive advantage (e.g., Porter
1980). A number of these strategies, however, do not mesh well with the
HRM fi higher performance postulate (e.g., because a cost minimization
strategy suggests de-skilling, low pay, command and control) and hence
proved unsatisfying.
For these and other reasons, SHRM researchers shifted ground in the early
1990s and focused attention on internal-driven business strategies (Wright,
Dunford, and Snell 2001). The key one soon came to be the RBV. The RBV
makes a twofold proposition (Barney 1991). The first is that firms can capture
competitive advantage by developing and exploiting valuable, rare, inimitable,
and non-substitutable resources within the organization; the second is that tradi-
tional sources of competitive advantage (economies of scale, new technology,
differentiated products, etc.) are rapidly losing long-term effectiveness and
firms’ human capital now represents one of the last and best sources of sus-
tained competitive advantage. The RBV thus provides a more universalistic
grounding for the HRM fi firm performance hypothesis—that is, knowledge
and its application are the foundation of firm value creation and all firms, there-
fore, can improve performance by upgrading the capabilities and motivation of
their employees—and suggests that the HRM function in firms (and HRM
departments in business schools) are perhaps one of the most important drivers
of business success in the years ahead. It is therefore not surprising to learn
that, ‘‘the resource-based view has become the guiding paradigm on which vir-
tually all strategic HRM research is based’’ (Allen and Wright 2007: 90).5
The RBV helps flesh out the causal pathway from HRM to firm perfor-
mance; AMO theory then adds to it (Boxall and Purcell 2008). This theory
5
Reflective of SHRM theory’s substantial roots in psychology ⁄ OB, a principal pathway in RBV
between HRM and performance is energizing employee commitment through HPWPs such as employee
involvement and autonomous jobs. Although appealingly humanistic, the optimal HRM bundle may none-
theless be badly predicted in many employment situations given the conclusion of Rynes, Gerhart, and
Minette (2004: 383) that ‘‘on average, employees respond more effectively to monetary incentives than to
any other motivational HR intervention.’’
SHRM Theory / 293
argues that best practice HRM leads to higher firm performance because it
augments and enables the abilities, motivation, and opportunities (‘‘AMO’’) of
the firm’s human capital. These attributes, also often referred to as ‘‘knowl-
edge, skills, and abilities’’ (KSAs) or more generically as ‘‘capabilities,’’ trans-
late into desired intermediate outcomes, such as higher productivity, product
quality, and customer service, and then into higher final outcomes, such as
profit and shareholder returns.
All of these strands were brought together by Huselid; the HRM fi firm
performance hypothesis was tested with regression analysis and data for over
three thousand firms, and the results strongly confirmed the BP part of the the-
ory and only weakly supported the BF part.
Huselid called the regression coefficient on the HRM independent variable
the ‘‘main effect’’ and it measures the BP component; other moderator vari-
ables represent the BF contingent factors. This distinction has been carried for-
ward by other studies; the major research effort has been to validate the
significant and positive main effect and to quantify the extent to which contin-
gent and configurational factors modify the main effect. In a major review of
the SHRM literature, Becker and Huselid (2006) note that the contingency
(BF) perspective has so far gained modest-to-little empirical support and serves
mostly to modify the positive main effect ‘‘on the margin.’’ They thus put for-
ward this conclusion: ‘‘The cross-sectional variation here [in observed HRM
practices across firms] is not a question of high-performance versus low-per-
formance HR systems but rather a question of which high-performance system
is appropriate’’ (p. 904, emphasis added). Again, not all SHRM researchers
accept this proposition and, further, a modest but discernible shift in opin-
ion has occurred in SHRM away from a BP and toward a BP + WC view.6
Nonetheless, belief in a positive ‘‘main effect’’ is practically preordained as
long as RBV ⁄AMO provides the foundation stone for theorizing.7
In the remainder of this article I endeavor to demonstrate that the main-
stream SHRM model, as represented above, is fundamentally misspecified. In
6
Illustratively, Becker and Huselid (2006: 905) qualify the BP conclusion of Huselid (1995) but only
modestly, stating: ‘‘Despite our call here for increasing levels of focus and differentiation in workforce
investments, we continue to believe that many firms will benefit from the adoption of high-performance
work system ‘best practices’.’’ In effect, they propose a synthesis of BP and WC: BP applies at the architec-
ture level but WC applies with respect to choice of particular tools ⁄ practices within this architecture. Also
see Becker and Gerhart (1996:786).
7
A positive main effect also fits well with SHRM researchers’ normative desire to upgrade the marginal
status and influence of the HRM field in universities and industry. Wright, Dunford, and Snell (2001) note
that ‘‘the human resource function has consistently faced a battle in justifying its position in organizations’’
(701) and go on to observe that ‘‘growing acceptance of internal resources as sources of competitive advan-
tage brought legitimacy to HR’s assertion that people are strategically important to firm success’’ (702).
Similarly, Ferris et al. (2004: 100) observe ‘‘HRM researchers and professionals have the potential to under-
score the importance of HRM by highlighting its importance to organizational performance.’’
particular, I claim theory suggests that no universalistic ‘‘main effect’’ exists
and strong contingency is the rule.
Empirical Critique
The core part of the argument is theoretical; nonetheless, it is useful to first
ground it in an empirical context. An ‘‘empirical context’’ in this literature typ-
ically means a dissection and critique of the specification and estimation of
HRM-performance regression equations. These discussions, however, are sel-
dom definitive and often clouded by non-comparable data sets, variable speci-
fications, and estimating techniques (see Purcell and Kinnie 2007; Wall and
Wood 2005).
An alternative and more transparent approach, not utilized as far as I am
aware, is to look at frequency distributions of firm-level HRM practices. Two
representative distributions are shown in Figure 1.
Panel (a) comes from a nationally representative survey of over two thou-
sand workers and managers conducted by Freeman and Rogers (1999). The
respondents were asked whether their organization currently uses each of ten
different HRM practices, including several items usually considered an HPWP
(e.g., an employee involvement program, a formal dispute resolution system).
Freeman and Rogers combine the ten items into a composite index number
and call it a measure of ‘‘advanced human-resource practices.’’ Graphing the
data yields the distribution shown in panel (a).
Panel (b) comes from data collected by the Bureau of National Affairs
(2006) (BNA) in two surveys of several hundred American firms (or divisions
thereof) in the years 2005 and 2006, respectively. The diagram uses data com-
bined from both surveys, but with duplicates dropped to avoid double-count-
ing. Rather than a count of practices, the BNA data gives a measure of each
FIGURE 1
FREQUENCY DISTRIBUTION OF HRM PRACTICES AND HRM EXPENDITURES PER CAPITA
SOURCES: (a) Freeman and Rogers (1999: 124) and (b) Bureau of National Affairs (2006).
SHRM Theory / 295
organization’s HRM expenditure per employee (‘‘per capita’’). A per capita
measure gives a more reliable indicator of cross-firm variation in HRM inten-
sity than total HRM expenditure because the latter is highly correlated with
firm size. Both the BNA and Freeman-Rogers surveys include firms as small
as 25 employees.
Both panels (a) and (b) tell roughly the same story.8 That is, both HRM
frequency distributions resemble a bell-shaped curve but with considerable
skewness in the right-hand tail. Looking at panel (a), a significant minority
of firms, located in the left-hand tail, used very few or even none of the
ten formal HRM practices. Perhaps most revealing, nearly one-third of
respondents said their firm did not even have a formally organized person-
nel ⁄ HR department. The majority of firms in this sample used an intermedi-
ate number of HRM practices, while a relatively small proportion of firms
utilized many advanced HPWS-type practices and therefore located in the
extended right-hand tail. Based on this evidence, Freeman and Rogers
(1999: 97) remark, ‘‘What is important is that firms do not appear to cluster
into ‘high-performance firms’ and ‘all others’ in the way the popular under-
standing suggests.’’
The BNA data set also shows a wide and continuous dispersion of firms
based on their HRM expenditure per employee. In this sample, HRM expendi-
ture ranged from a low of $152 per capita (left-hand tail) to a high of $8709
(right-hand tail), with approximately one-half of the organizations spending
between $615 and $2,069. The mean is $1,321; the median is $932; and only
4.5 percent of firms (the ‘‘HRM intensive’’ firms) spent more than $4000 per
capita.
The task of SHRM theory is to predict what set of HRM practices firms
choose and why; in terms of Figure 1 this means the theory has to explain (1)
the location of firms in the HRM distribution and (2) the shape of the distribu-
tion itself. Viewed in this manner, mainstream SHRM theory appears seriously
challenged on two counts. First, these data clearly suggest that only a distinct
minority of firms adopt an HRM intensive package of employment practices,
such as associated with an HPWS. Some firms are ‘‘advanced’’ and ‘‘high
involvement’’ but a much greater proportion appear to be traditional ‘‘com-
mand and control,’’ ‘‘bureaucratic,’’ or ‘‘low involvement.’’ One could try to
reconcile the SHRM story with the shape of the HRM frequency distributions
in Figure 1 by going to a weak contingency model, but to do so the quantita-
tive effect of these (presumed) second-order variables for many of the
low-HRM firms would have to quantitatively swamp the direct positive effect
8
Bryson, Gomez, and Kretchmer (2005) find the same bell-shaped distribution for Britain but with con-
siderably less skewness.
coming from the advanced HRM practices. It appears, therefore, that Figure 1
provides prima facie evidence of a very large gap between SHRM predictions
and HRM reality.
A reasonable inference from Figure 1, therefore, is that the BP ⁄ weak con-
tingency SHRM model is not nearly as generalizable to the population of firms
as its proponents claim, suggesting it suffers from limited domain and poten-
tially serious misspecification. An expanded view of the matter suggests that
the restricted domain problem is actually worse than Figure 1 suggests,
because these frequency distributions are based only on recently collected data
and only for American firms. For example, historical research (Kaufman 2008,
2010b) shows that the entire distribution collapses to near-zero in earlier
historical periods (e.g., pre–World War I America when most firms used no
formal HRM practices or even written records), while in the current time per-
iod HPWS-type employment systems are rare-to-non-existent in many other
countries at different stages of economic development or with different
cultural, economic, and legal environments (Boxall and Macky 2009). So, the
mainstream SHRM model also appears to be both time-bound and location-
bound, further strengthening the suspicion that this is a theoretical over-gener-
alization of a special case.
A response to these criticisms is that Figure 1 may be misleading because
the frequency distributions do not depict a long-run equilibrium outcome but
rather a short-to-medium-run disequilibrium where many firms have yet to sig-
nificantly refigure their HRM systems using "advanced" HRM practices. In
fact, this is exactly the line of argument advanced by Pfeffer (1998). He
explains the large gap between theoretical prediction and observed practice
with the ‘‘one-eighth rule’’ (p. 29). That is, despite the theory and evidence in
support of HRM-firm performance principles, only one-half of employers
believe in the people-profit connection; only one-half of this group go beyond
incremental, piecemeal change and put in place an entire HPWS system; and
only one-half of these maintain commitment to an HPWS over the long run.
Hence, although all firms would make more profit by being in the right-hand
tail (in effect, collapsing the HRM frequency distribution around the HPWS
model), due to problems of ignorance, lethargy, incremental implementation,
and lack of long-run commitment seven-eighths of firms fail to move there.9
9
Becker and Huselid (2006: 905) also adopt a variant of this argument, citing ‘‘variance in workforce
management quality’’ as the reason for lack of widespread adoption of HPWPs. This factor easily subsumes
Pfeffer’s trio of management impediments; it also suggests the source of rents is not HRM practices but het-
erogeneity in general management skills (akin to rents generated by differential land fertility; Chadwick and
Dabu 2009). If so, one can equally well expect to find a positive performance coefficient on a ‘‘marketing,’’
‘‘accounting,’’ and ‘‘public relations’’ intensity variable, as well as HRM, because higher quality manage-
ment makes all inputs more productive and thus a source of extra profit.
SHRM Theory / 297
But here we come to the second challenge. One can easily accept the
proposition that some firms are poorly managed and greatly lag behind best
practice while others move toward best practice HRM only slowly and incre-
mentally. Nonetheless, if the ‘‘main effect’’ of the theory has real world
quantitative importance then surely firms in the left-hand and middle part of
the HRM frequency distribution should migrate toward the right-hand part.
Indeed, this movement should be relatively widespread and fast if Becker
and Huselid (2006) are correct that a one standard deviation increase in
HRM practices yields a 10–20 percent increase in market valuation. A firm
that ignores this kind of money on the table—particularly with the global
increase in competition (a mantra in SHRM studies)—is not ignorant but
stupid and suicidal.
Consistent longitudinal data for a large sample of American firms on organi-
zation-level HRM practices does not exist, thus making testing of this proposi-
tion difficult. The evidence available, however, does not give much support to
the SHRM ‘‘convergence’’ hypothesis.
One notes, for example, that the idea that a high involvement ⁄ commitment
approach to HRM could yield competitive advantage was already articulated
in the early-mid-1920s, as was the RBV concept, so these ideas were familiar
to employers of this period (see Kaufman 2001, 2008). Despite the publicity
given to these ideas in management publications of this period, Commons
(1921: 263) estimated that in the early 1920s 10–25 percent of American
employers were doing advanced HRM work while the others lagged behind—
and often far behind. Jacoby (1997) looks at the same situation and divides
the HRM practices of these firms into three groups: vanguard, traditionalists,
and laggards. If we fast-forward eight decades, one could justifiably think the
highly dispersed nature of the modern-day HRM frequency distributions
depicted in Figure 1 are not much different than the dispersed frequency
distributions of the 1920s. Further suggestive that the HPWS model is indeed
a distinctly small and non-expanding part of the HRM universe is this
conclusion of Blasi and Kruse (2006: 572): ‘‘the diffusion of work innovations
at the end of the 1990s presents a far more sobering picture than some previ-
ous research studies, mass media coverage, and popular enthusiasm might
otherwise indicate.…The combination of many HPW practices is clearly a neg-
ligible phenomenon affecting about 1 percent of establishments nationwide
and not rising significantly from 1994 to 1997.’’
Simply put, therefore, the empirical record casts considerable doubt on
the intellectual robustness and explanatory power of the mainstream
SHRM model—despite the fact that in SHRM circles the existence of a
positive HRM effect is widely ‘‘taken for granted’’ (Wood and Bryson
2009: 4).
Theoretical Critique
The BP ⁄ WC model in SHRM is equally vulnerable to challenge on theoreti-
cal grounds. For this purpose, I utilize Figure 2 and some basic ideas from
conventional economics and, more particularly, IE—the ‘‘mother’’ paradigm of
early American IR (Kaufman 2004).
Figure 2 depicts in panel (a) a competitive labor market in which demand
(D) and supply (S) determine the equilibrium wage (W) and employment level
of labor (L) and in panel (b) a hierarchically organized firm (or other kind of
producing organization). The firm is the location of production, depicted by
the production function situated within it. The production function contains the
usual factor inputs capital (K) and labor (L), but also a third factor input
HRM. The variable HRM represents all types of formal ⁄ tangible HRM
practices (‘‘tools’’) used by firms, such as selection interviews and tests, train-
ing classes, employee involvement programs, benefits administration, and
employee handbooks. These practices almost always form the independent var-
iable(s) in HRM-firm performance regression models. They are considered
inputs into production since more HRM practices, per SHRM theory, increase
the effective utilization of labor and thus production. These HRM practices are
themselves produced by some process involving capital and labor, implying
they entail additional cost to the firm.
Maximum profit requires that firms allocate and coordinate their labor input
efficiently; it also requires that they invest funds in additional HRM practices
only as long as doing so generates enough extra revenue to offset the greater
FIGURE 2
TWO MODES OF COORDINATING HRM
SHRM Theory / 299
cost. As there are different ways to allocate, coordinate, and manage labor
(i.e., different employment systems), the challenge is to choose the employ-
ment system that is most efficient and therefore profitable.10 Mainstream
SHRM theory predicts that some variant of a commitment ⁄ human capital
HPWS is typically the higher performing option. An IE perspective, on the
other hand, suggests that the ‘‘best practice’’ choice of an HRM system is
always and everywhere a case of SC, implying in turn that the sign on the
HRM variable can be positive, negative, or zero in different situations.
A basic premise of IE is societies have more than one mode to coordinate
economic activity (Kaufman 2003; Williamson 1985). In modern countries, the
two most important coordinating mechanisms are demand and supply in mar-
kets and management command and administration in organizations. These
two modes correspond to panels (a) and (b) in Figure 2. A central idea of
SHRM is that the HRM system should fit the characteristics of the larger pro-
duction system. Production systems overlap in the real world but in the world
of theory we can distinguish ideal types that anchor the opposite ends of possi-
bility. The critical variable for doing so in IE is transaction cost. Institutional
economist John Commons (1934) invented the concept of a transaction, which
he defines as ‘‘the legal transfer of property rights’’ (p. 55); several years later
institutional economist Ronald Coase (1937) developed the concept of transac-
tion cost—the real resource cost involved in defining, transferring, and enforc-
ing property rights. Armed with the transaction cost (TC) idea, Coase worked
out the implications regarding choice of coordination mode: if transaction cost
is zero then markets are the most efficient coordinating mode while the
efficiency advantage progressively shifts toward organizational coordination as
transaction cost increases. Further elaborating these ideas recently won Oliver
Williamson a Nobel prize.
This insight makes it possible to identify the two endpoints in economic
organization and production systems. Thinking in a macro context, one end-
point is an economy that always and everywhere uses the market mode of
coordination. This is panel (a) in Figure 2. Commons calls this type of eco-
nomic organization ‘‘extreme individualism’’; more recently, Demsetz (1991)
labels it perfect decentralization. Perfect decentralization is characterized by a
production system that has the maximum amount of vertical disintegration (or
dis agglomeration), which means an economy composed entirely of N single-
person firms and in which demand and supply via an omniscient auctioneer
10
Profit maximization is a simplified assumption and organizations admittedly choose HRM practices
with other goals in mind (Boxall and Purcell 2008). The presumption of economic theory is that these other
goals are second-order in importance (profit determines survival—the ultimate goal) and therefore do not
materially alter the conclusions of a uni-goal (profit) model, particularly when applied across a large group
of organizations.
entirely coordinate the division of labor in production. This economy is essen-
tially the one embedded in an Arrow-Debreu general equilibrium model of per-
fect competition. In terms of Figure 2, the pyramid representing the firm
shrinks to the size of a single-person firm (Coase 1988: 14) and all labor coor-
dination takes place through the external labor market (ELM), thus leaving no
room for HRM of any type (Kaufman 2010c).
The other endpoint is an economy that always and everywhere uses the
organization mode of coordination. This is panel (b) in Figure 2. Commons
calls this ‘‘extreme collectivism’’ and Kaufman (2003) labels it perfect central-
ization to maintain symmetry with Demsetz’ terminology. Perfect centralization
is a production system that has the maximum amount of vertical integration,
which means an economy organized as a single giant firm (N = 1) and in
which management command via an omniscient central planner entirely coor-
dinates the division of labor. Here, the market in panel (a) disappears and all
labor coordination takes place within an ILM. This economy is essentially a
model of perfect central planning or, as Lenin (1932: 84; Scoville 2001)
envisioned it, one giant factory coordinated through a version of Taylor’s
scientific management.
No real economy operates as either perfect decentralization or perfect
centralization; even those that are closest to these endpoints have some mix
of markets and organizations; i.e., both panels (a) and (b) are present in some
form. Nonetheless, these ideal types are useful because they illustrate two
polar opposite ways of organizing the division of labor. One is a multitude
of small firms continually doing buy ⁄ sell transactions in both product and
external labor markets (called the ‘‘buy’’ mode in IE), the second is a small
number of very large firms that make a few buy ⁄ sell transactions at the
beginning of production to get certain materials and labor inputs but then rely
on in-house production and labor force development in ILMs for all the other
stages moving up the chain to the finished product (the ‘‘make’’ mode). This
is of course a macro-level perspective, but it has many applications at the
micro (firm) level. An example is the study by Klaas, McClendon, and
Gainey (1999) that examines how variation in TC across firms influences
their decision to out-source the HRM function (buy) versus produce it
in-house (make).
The next question is: what HRM system best fits a ‘‘buy’’ type production
system and which best fits a ‘‘make’’ system? The most direct and readily
applicable answer is given by Delery and Doty (1996). They distinguish two
polar opposite employment systems—what they call a ‘‘market’’ HRM system
and an ‘‘internal’’ HRM system (also see Lepak and Snell 1999). These quite
closely fit with and map into the market and organization production systems
distinguished in IE.
SHRM Theory / 301
Firms using a market-type employment system follow what Delery and Doty
(z91996) call an ‘‘externalization’’ HRM strategy in that they rely on the exter-
nal labor market as much as possible to coordinate and allocate labor for pro-
duction. To illustrate, Delery and Doty (Table 1) list seven HRM practices
that go with a market-type (buy) system. Their list includes items such as:
‘‘Hiring done almost exclusively from outside the organization,’’ ‘‘No formal
training provided,’’ ‘‘Very little employment security given,’’ and ‘‘Employees
given little voice in the organization.’’ Firms following an ‘‘internalization’’
HRM strategy, on the other hand, rely on management coordination and
administration to a substantial degree and minimize the overt influence of the
external labor market. Delery and Doty also identify seven kinds of HRM
practices that fit an internal (make) employment system; for example: ‘‘Hiring
mainly from within the organization,’’ ‘‘Extensive formal training,’’ ‘‘Great
deal of employment security,’’ and ‘‘Employees more likely to participate in
decision-making.’’
Now let us reconsider the standard SHRM model. It is evident that the kinds
of HRM practices envisioned in this theory and used as the independent
variable(s) in firm performance regressions (e.g., Huselid 1995; Table 1) are
highly similar to those Delery and Doty (1996) predict are used in a highly
developed internal employment system (Purcell and Kinnie 2007). That is,
both contain HPWS-type practices, such as hiring from within, internal train-
ing, and employee participation. On the other hand, the implication of IE is
that variation in transaction cost across firms and industries—a function, in
turn, of differences in size of organization, firm-specific nature of skills, com-
plexity of job tasks, interdependencies in production, organizational cultures,
and other such factors11—give rise to a similar variation in employment
systems, ranging in low TC cases to a largely externalized commodity ⁄ low
involvement system (Lewin 2001) to a largely internalized human resource ⁄ -
high involvement system.
We are now in a position to make several observations. These are better
understood and appreciated with the help of panels (a) and (b) in Figure 3 and
Table 1. Figure 3 has firm performance (e.g., profitability) on the four vertical
axes and level of HRM practice on the two horizontal axes, starting on the left
at 0 (e.g., perfect externalization) and ending at the right at a maximum
amount, assumed coterminous with a ‘‘full HPWS’’ (e.g., perfect internaliza-
tion). The lines show the hypothesized relationships between HRM and firm
performance with panel (a) corresponding to the BP and WC cases and panel
11
Kaufman (2003, Figure 1) derives from Commons’s institutional theory the five elemental variables
that create variation in TC and make versus buy; these in turn create differences in firm size, production
interdependencies, etc.
FIGURE 3
PREDICTED EFFECT OF HRM ON FIRM PERFORMANCE
TABLE 1
ALTERNATIVE MODEL SPECIFICATIONS: BP, WC, SC CASES
Case Equation Predicted sign(s)

Best practice (BP) Performance = a + bHRM b>0
Weak contingency (WC) Performance = a + bHRM b > 0, d < or > 0
+ dContingency
Strong contingency (SC) Performance = a + bHRM + cHRM2 b < or > 0 or = 0;
then c < 0 and 0 < )b ⁄ 2c < HPWS
(interior solution)
(b) to the SC case (explained more below). The BP, WC, and SC relationships
are then represented as regression equations in Table 1, in each case in their
simplest version. All lines in Figure 3 but one are drawn linear because most
regression models specify a constant slope coefficient on the composite HRM
variable. The intercept terms may differ, however, and multiplicative versions
of the WC model may make the slope nonlinear (not shown).
To start, note that we have identified two quite different explanations for the
shape of the HRM frequency distributions in Figure 1. The BP ⁄ WC ⁄ HPWS
theory implies the observed highly dispersed nature of the HRM frequency
distributions represents a situation of fundamental and large-scale disequilib-
rium in that over time the firms in the left-hand tail should migrate toward the
right-hand tail to capture extra profit. In terms of panel (a) of Figure 3, about
one-eighth of firms (via Pfeffer’s one-eight rule) are currently maximizing
SHRM Theory / 303
performance with a level of HRM at HPWS (point A on the BP line), while
seven-eighths for various reasons invest in a lower level of HRM, such as
HRM1, and therefore under perform on profitability (e.g., a profit level at point
B when point A is attainable). The distance from HRM1 to HPWS represents
the size of the disequilibrium; this gap should, in turn, close over time as firms
move toward point A (the arrow along BP).
An economics perspective, on the other hand, implies that the observed
shape of these distributions is an equilibrium outcome that reflects firms’ profit
maximizing adaptations to the underlying distribution of TC and other bene-
fit ⁄ cost factors (Williamson 1985). This equilibrium HRM level is, of course, a
theoretical prediction and is expected to correspond to real world HRM
choices only as a first approximation, taking into account short-run frictions
and lags. More so than standard economic theory, IE also recognizes that
adjustment can be slowed due to internal principal-agent ⁄ political factors and
imitative follow-the-leader behavior among firms (Loasby 1999). Assuming,
however, that competitive pressures are relatively strong (the presumption in
SHRM) and market failures are negligible, the maintained hypothesis is that
the observed HRM choice for the average firm is reasonably close to the per-
formance maximizing configuration. Given this, one firm (Firm 1) maximizes
profit with a completely externalized HRM system, represented by point A in
panel (b) where HRM = 0, while a second firm (Firm 2) maximizes profit with
a full-blown HPWS system, represented by point B.12 A movement away from
either position lowers performance for both firms, so neither has an incentive
to change; further, the coefficient on the HRM variable is positive for one
(Firm 2) but is negative (more HRM fi lower performance) for the other
(Firm 1). Thus, one theory predicts substantial change over time in the shape
of these distributions, the other predicts relatively modest change (ceteris pari-
bus); likewise, one theory predicts relatively little variation in HRM architec-
tures and the other predicts substantial variation.13
A second insight concerns the definitions of ‘‘best practice’’ and ‘‘high per-
formance’’ HRM. In a capitalist economy profit is the fundamental long-run
selection criterion that determines whether (private sector) firms survive or die.
The researcher or consultant may believe that an HPWS system is ‘‘best prac-
tice’’ for many reasons but in the real world of competitive business the only
metric of ‘‘best practice’’ and ‘‘high performance’’ that has long-run survival
12
Both perfect decentralization and perfect centralization put the economy on its production possibility
frontier and, hence, the systems of HRM at Points A and B are equally high performing.
13
On this matter Becker and Huselid (2006: 904) state: ‘‘The current approach to theorizing [in SHRM]
about and measuring fit implies very little variation or differentiation of the HR architecture, either between
firms or within firms.’’ They argue SHRM theory should give greater scope for differentiation, but presump-
tively not to the point of going beyond BP + WC (also see Becker, Huselid, and Beatty 2009).
value is ‘‘most profits.’’ Viewed this way, best practice HRM for Firm 1 is no
formal HRM at all while the SHRM-identified ‘‘best practice’’ bundle of
HPWPs at point B might well bankrupt the firm (e.g., a full HPWS at a fast-
food restaurant) (Marchington and Grugulis 2000).14
A third observation concerns the weak contingency model of HRM. This
model asserts that all (or most) firms gain from additional investment in HRM
practices, but that the ‘‘main effect’’ (the positive HRM coefficient) is altered
in either an additive or multiplicative way by other moderating variables. In
the additive case (assumed in Table 1), a moderating variable with a negative
coefficient shifts the HRM ⁄ performance function in panel (a) to the right from
BP to WC1 (a shift in the intercept term) but preserves the original slope; in
the multiplicative case a moderating variable with a negative coefficient
reduces the slope of the HRM ⁄ performance function, as depicted by WC2. As
noted earlier, the slope may remain linear but may also be nonlinear in certain
interactive cases. Nonetheless, the ‘‘main effect’’ is typically preserved and
firms remain in disequilibrium until they increase their HRM expenditure to
some approximate HPWS.
Fourth, this theoretical perspective reveals that the conventional HRM-firm
performance regression model is substantially misspecified in several respects:
the choice of dependent and independent variables; the hypothesized sign on
the HRM independent variable(s); and the specification of the HRM indepen-
dent variable(s).
The presumption of economic theory is that the goal of firms is to operate
efficiently and they therefore choose the level of HRM that achieves this, with
due allowance for short-run but modest-sized internal and external constraints
on change. Earlier I suggested HRM could be considered a factor input in the
firm’s production function, such as represented in panel (b) of Figure 1, with
an associated acquisition cost. To determine the optimal amount of HRM
expenditure, the standard procedure in economics is to write out the firm’s
profit maximization equation, derive the first-order condition, and choose the
optimal level of HRM such that DProfit ⁄ DHRM ) V = 0, where V is the per
unit cost of additional HRM practices (Kaufman 2010a).
One can appreciate that a Huselid-type regression model, from the per-
spective of economic theory, is fundamentally misspecified because it gets the
causal chain backwards. That is, the HRM practices should be considered the
14
SHRM academics counsel HR people in industry to become ‘‘business partners’’ and think in terms
of HRM’s contribution to performance yet they do not themselves always theorize this way, per the notable
lack of attention to the (marginal) revenue and cost implications of alternative HRM practices (Cappelli and
Neumark 2001). For example, Combs et al. (2006: 504) assert that HPWPs ‘‘reduce employee turnover and
improve organizational performance,’’ an assertion that is a money loser for the firm if the extra cost of
reducing turnover exceeds the revenue gain.
SHRM Theory / 305
dependent variable because HRM is the choice variable that managers in panel
(a) of Figure 3 adjust up and down to reach maximum performance and not
the independent variable as presumed in Huselid-type regressions (Table 1).
Essentially, SHRM researchers doing an HRM-performance regression are esti-
mating a version of the firm’s first-order condition (written above) when eco-
nomic theory suggests the correct version is to put the HRM variable on the
left-hand side of the regression model and then estimate the firm’s HRM input
demand function (Kaufman 2010a). When mapped against the cost of HRM
(V), this function yields the firm’s ‘‘HRM demand curve’’ (a downward slop-
ing line in price ⁄ quantity space); shifts in the demand curve rightward and left-
ward generate different observed choices in HRM practice levels (from zero to
full HPWS); and all of these observations then form the points that trace out
the HRM frequency distributions in Figure 1. The challenge for SHRM theory
is to do the same; my claim is it (certainly the RBV ⁄AMO-based part) cannot
and instead it mostly explains or rationalizes the portion of firms located in the
right-hand part of the distribution.
Next, the standard hypothesis advanced by SHRM researchers using either
the BP ⁄ HPWS model or BP + WC model is that the predicted sign on the
HRM variable is positive. This also is most likely misspecified, in part because
it ignores the possibility of SC (e.g., Firm 1 in panel b of Figure 3) and also
because it violates elementary economic reasoning. The regression coefficient
on the HRM independent variable in a Huselid-type regression model mea-
sures DProfit ⁄ DHRM (selecting profit as the bottom line performance goal of
the firm). As dollars of profit vary with firm size, the better performance index
is some standardized measure, such as rate of return on capital. The firm,
using its first-order condition, keeps adding more HRM as long as this ratio is
positive and then stops when DProfitability ⁄ DHRM = 0. Thus, the HRM prac-
tice level will vary across a sample of firms but in competitive equilibrium
the rate of return on additional HRM investment is driven to equality (e.g.,
10 percent), implying in a cross-section DProfitability ⁄ DHRM = 0 ⁄ DHRM =
zero.15
Most studies nonetheless report a positive sign on the HRM variable
(Combs et al. 2006; Becker, Huselid, and Beatty 2009; an exception is Capp-
elli and Neumark 2001). Several interpretations are possible. One is that the
disequilibrium RBV ⁄AMO story is indeed the correct model and some type of
HRM-specific barrier, market failure, or source of inertia impedes adoption of
15
Among SHRM researchers, Huselid (1995) and Becker and Huselid (2006) are among the very few
who recognize this implication of economic theory. Huselid (1995: 668, emphasis added), however, mini-
mizes its importance for BP theory on the disequilibrium ⁄ BP grounds that ‘‘the substantial variation in
HRM practices adopted by domestic firms…suggests that, at least in the near term, such [above competitive]
returns are available for the taking.’’
HPWPs. This would imply markets are far less competitive or have deeper
market failures than standard economic theory presumes.
A second is that the situation is really an equilibrium but nonetheless some
firms earn a positive rent (higher profit) due to a scarce and heterogeneous fac-
tor input called ‘‘superior management’’ that leads to a more productive utili-
zation (and thus higher return) from a given level of inputs, including but not
limited to HRM. Getting a higher return on HRM, these firms invest in more
of it (e.g., HPWPs) until the return is driven to zero on the marginal unit;
nonetheless, the total profit from HRM (the sum of the marginal increments)
is larger. This explanation for a positive coefficient (i.e., more HRM fi higher
performance) superficially resembles the standard RBV story except that the
‘‘valuable, rare, inimitable, and non-substitutable’’ factor that creates these
extra profits is not the employees per se (which HRM is presumed to better
motivate and skill) but general management.
A third possible explanation is that the positive sign comes from a
nonrepresentative sample of firms. To the degree researchers estimate a HRM-
firm performance regression using samples composed disproportionately of
larger-sized firms (e.g., omitting Firm 1 in panel (b) and including only Firm
2) one may well obtain a positive sign on the HRM variable.16 Larger firms,
for example, may have a dominant market position, benefit from economies of
scale, or have some other factor that generates product market rents.
A fourth source of potential misspecification concerns the independent
HRM variable(s). Two separate problems can be distinguished (others are
discussed in Wall and Wood 2005; Purcell and Kinnie 2007).
The convention is to use various measures of HRM activities, practices, and
programs, such as an employee participation program or dispute resolution pro-
cedure, where absence = 0 and presence = 1. These measures, however, typi-
cally capture only the formal approach to doing HRM found in often large-sized
modern firms using an internalized employment strategy; other often smaller-
sized firms (or large firms a century ago) using an externalized approach may uti-
lize many of the same practices but in a completely informal ⁄ intangible manner
(Kaufman 2008, 2010b; Mayson and Barrett 2006: 449, describing HRM prac-
tices in small firms as ‘‘ad hoc and informal’’). Thus, both large and small firms
may use employee involvement but the large firm has a formal program and the
HRM variable = 1 while the small firm has an informal program and HRM = 0.
If profitability positively varies with firm size, the result is the sign and size of
the HRM independent variable are biased upward.
16
Huselid’s sample consists of publicly traded companies with an average employment size of
4,413. Meta-analysis studies, such as Combs et al. (2006), typically do not test for employment size as a
moderator.
SHRM Theory / 307
A final specification problem arises in those studies that include only a linear
version of the HRM variable(s). This procedure gives rise to the straight line rela-
tionships between HRM and firm performance, such as depicted in panels (a)
and (b) of Figure 3. This also violates standard microeconomic production the-
ory. Production in the short run usually has a region of increasing and then
diminishing returns with respect to any factor input. With respect to HRM, for
example, more employee involvement initially increases productivity but at some
point diminishes it (e.g., think about faculty committees ⁄ meetings). As a result,
the relationship between HRM usage and performance is most likely to be curvi-
linear, as illustrated by the SC equation in Table 1 and parabolic line for Firm 3
in panel (b). In particular, starting from HRM = 0 profitability increases with
extra HRM investment, reaches a peak at point C (HRM*), and then declines.17
For some firms the peak performance point occurs near HRM = 0, for others
near HPWS, but for most somewhere broadly in the middle, just as portrayed in
the HRM frequency distributions in Figure 1.
IE ⁄ IR theory generates all three HRM-performance lines in panel b of
Figure 3. As the coefficient on the HRM variable is alternatively negative,
positive, and parabolic, this represents a SC (strong contingency) world. From
an IE ⁄ IR perspective, the Firm 3 parabolic line is likely to be the most
common and representative in a modern US-type economy; it is also likely to
represent the performance effect of, respectively, individual HRM practices
and the HRM–performance relationship across nation states.18 That is, the lines
for Firm 1 and Firm 2 represent extreme cases (perfect decentralization and
centralization) and in the real world only firms clustered to one end or the
other of the HRM frequency distribution may approximate these models
(‘‘corner solutions’’). IE ⁄ IR theory, however, posits that imperfect markets and
organizations (in the economist’s sense) are the norm—due to positive
TC—and, hence, most firms are likely positioned somewhere in the middle
(‘‘interior solutions’’) of these two polar opposite cases (Kaufman 2010c). For
Firm 3-type organizations, HRM does have a positive effect on performance,
as SHRM theory predicts, but it typically stops well short of an HPWS or
some other BP version. From the perspective of SHRM (e.g., Rynes, Giluk,
and Brown 2007), managers are neglecting the findings of modern research
17
Point C is at a lower performance level than points A and B because of positive TC and market ⁄ orga-
nizational failures not present in perfect centralization and decentralization. Table 1 indicates for simplicity
all firms in the SC case locate at an interior solution; actually, SC can include some firms at an HPWS cor-
ner solution.
18
According to the ‘‘Eurosclerosis’’ hypothesis, social democratic European economies have slower
GDP growth rates then more lightly regulated Anglo-Saxon neoliberal economies in part because of strong
(‘‘advanced’’) job security guarantees. Job security is widely considered an HPWP (Pfeffer 1998), hence if
the Eurosclerosis hypothesis is true then the HRM-performance line would be curvilinear and the coefficient
on the HRM2 term would be negative.
and myopically stop short of high performance (point B); from an IE ⁄ IR per-
spective SHRM theory is biased toward over-optimism and managers wisely
(if perhaps unfortunately from a normative perspective) maximize performance
with less HRM (point C).
Conclusion
An economics and IR perspective suggests mainstream SHRM theory is
fraught with misspecification. Broadly viewed, it is a management-centric and
normatively driven theory oriented toward a commitment ⁄ ILM type of
employment model that gives over-emphasis to psychological factors and
intrinsic ⁄ humanistic forms of motivation popular in the OB field and under-
emphasis to external environmental contingencies, extrinsic ⁄ coercive forms of
motivation, and profit considerations of revenues and costs.19 If SHRM theory
is no more than a proposition that ‘‘better people management pays’’ then it is
undoubtedly true but also largely vacuous as a guide to choice of HRM prac-
tices ⁄ systems; if on the other hand its central claim—per the Huselid quote at
the beginning of the paper—is that most or all firms can increase profitability
by adopting a ‘‘transformed’’ HPWS system (even broadly defined) then it is
surely a biased and often incorrect ⁄ infeasible proposition for many organiza-
tions. Not only does SHRM theory apply to only one part of the employment
world (typically the brightest part) and one portion of the determinants of firm
performance (employee motivation, capability, and participation), it is further
biased because the theory mostly neglects or obfuscates the potential for fun-
damental conflicts of interest and harm to employees in moving to an HPWS
(e.g., ‘‘greater motivation’’ = work intensification?; ‘‘more flexibility’’ = less
job security?). If this critique is correct, the implication is that SHRM very
much needs to take a broader perspective and, in particular, integrate greater
content from economics and IR into its theoretical and empirical models.
Although not the focus of this paper, it is worthwhile pointing out that
SHRM contains not only substantial theoretical and empirical specification
19
Normally the most important external contingency is the state of the economy (Commons 1934), as
boom and bust renders unprofitable substantial fixed investment in HPWPs (e.g., job security) and extensive
unemployment makes coercive (‘‘stick’’) forms of motivation (e.g., threat of termination) cheaper and more
powerful than commitment forms (‘‘carrots’’). From an IE perspective, full employment is the single most
powerful moderator variable promoting adoption of HPWPs; what SHRM primarily counsels, on the other
hand, is educating employers to grasp their missed opportunities; i.e., the low-hanging fruit (profit)
‘‘available for the taking’’ Huselid (1995: 668, emphasis added). This dichotomy in external ⁄ internal per-
spectives and assessment of how far the typical firm will actually go (per the Commons quote at the head of
this article) toward win–win progressive HRM extends back to the earliest days of the IR ⁄ HRM fields
(Kaufman 1993, Ch. 2).
SHRM Theory / 309
error but also significant historical misspecification. It is not uncommon, for
example, for SHRM researchers (e.g., Allen and Wright 2007) to assert that
the topic of ‘‘choice among employment systems’’ was only brought to light
twenty or so years ago when the newly invented SHRM field brought a strate-
gic perspective to the topic that PIR had long ignored. Similarly, one also finds
the opinion that IR has little to offer to HRM researchers because IR is only
about unions (Ferris et al. 2004).
A more accurate and historically informed view notes that the IR field has
theorized about strategy, choice of employment systems, and HRM practices
since its founding in the early 1920s (Kaufman 2001, 2008). Indeed, earlier gen-
erations of IR scholars put forward the main points I am advancing here.
For example, if we go back to the 1980s IR scholars were investigating
HRM practices, strategy, and firm performance before the SHRM field was
formed (Kleiner et al. 1987) and, in particular, noted that HRM strategy can
equally well take a ‘‘low road’’ or ‘‘high road’’ option (Lewin 1987). Going
back to the 1950s, IR scholars Brown and Myers (1956: 84–85, emphasis
added) described the highly dispersed nature of the HRM frequency distribu-
tion with these words: ‘‘Both now and at earlier periods, it would undoubtedly
be possible to find particular managements lying at every point on the spec-
trum of each aspect of industrial relations.’’ In turn, we can go back to 1919
when the IR field was born and read Commons’s book Industrial Goodwill
and find his description of five alternative HRM systems with a commod-
ity ⁄ autocracy model at the low end of the HRM spectrum and a goodwill ⁄ citi-
zenship model at the high end.
Which is the best model? From a humanistic, OB, or ‘‘HRM matters’’ per-
spective, one is naturally led to focus on the high end HRM model—just as
do modern SHRM theorists. Commons, however, asserts the employment
world is inherently a mix of progressive and traditional employers, unitarist
and pluralist employment relationships, commitment and coercive forms of
motivation, and simple and advanced HRM programs and all of these forms
arise from profoundly divergent variation in external environmental conditions
(e.g., boom versus bust economies) and internal organizational characteristics
of firms (e.g., assembly line versus craft production). In other words, Com-
mons (1919: 166–67) and IE ⁄ IR assert the case for strong contingency, per his
statement:
If the employment manager looks upon labor as a commodity, then he weighs the
facts according to the theory of demand and supply…If he entertains the goodwill
theory then the facts that promote goodwill are looked for and get a proper
emphasis…Only the foolish, the ignorant, the biased, or the arbitrary man ties
himself up to a single theory.
This is exactly the point I am endeavoring to re-establish nine decades later
and that modern SHRM theory has unduly lost sight of.
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SHRM Theory in the Post-Huselid Era: Why It

I have listened here to what seem to me to be the most marvelous and

SHRM Theory: A Brief Review

Universalistic. The maintained proposition is that if successfully imple-

Contingency. This perspective maintains that the relationship between HRM

Conﬁgurational. This perspective maintains that the relationship between

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