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HRM and Performance: What’s Next? Jaap Paauwe Erasmus University

Paul BoselieTilburg University

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W O R K I N G P A P E R S E R I E S

R M a n d Performance: What’s Next?

Jaap Paauwe

Paul Boselie

Working Paper 05 – 09

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HRM and Performance: Wha t’s Next?

CAHRS WP05-09

HRM and Performance

What’s Next?

Jaap Paauwe

Department of Business Economics, H15-08

Rotterdam School of Economics

Erasmus University, Burg.Oudlaan 50

3062 PA Rotterdam

The Netherlands

Tel.+31-10-4081366, Fax +31-10-4089169

E-mail: [email protected]

Paul B oselie

Tilburg University

Faculty of Social and Be havioural Sciences

Department of HR Studies, Room S152

P.O. Box 90153

5000 LE Ti lburg

The Netherlands

tel.+31-13-4668166, fax +31-13-4663002

e-mail : [email protected]

http://www.ilr.cornell.edu/cahrs

This paper has not undergone form al review or app roval of the faculty of the ILR S cho ol. It is

intended to ma ke results of Center research available to others interested in preliminary form to

encourage discussion and suggestions.

Most (if not all) of the CAHR S W orking Papers are av ailable for reading at the C atherwood

Library. For information on what’s available l ink to the Corne ll Library Catalog:

http://catalog.library.cornell.edu if you wish.

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CAHRS WP05-09

Abstract

The last decade of empirical research on the adde d value of human reso urce

management (H RM ), also known as the HRM and Performance deb ate, demonstrates evidence

that ‘HRM does matter’ (Husel id, 1995 ; Guest, Michie, Conway and S heehan , 2003; Wright,

Gardner a nd Moy nihan, 2003). Unfortunately, the relationships are often (statistically) weak a nd

the results ambiguou s. This paper reviews a nd attempts to extend the theoretical and

methodological issues in the HRM a nd performance deba te. Our aim is to build an agenda for

future research in this area. After a brief overview of achievem ents to da te, we proceed w ith the

theoretical and methodo logical issues related to what constitutes HRM , what is meant by the

concept of performance and what is the nature of the link between these two . In the final

section,

we mak e a plea for resea rch designs starting from a mu ltidimensional concept of

performa nce, including the perceptions of emp loyees, and building on the premise of HR M

systems a s an en abling device for a whole range of strategic op tions. This implies a reversal of

the Strategy-HRM linkage.

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CAHRS WP05-09

HR M and Performance: Wh at’s next?

i

Introduction

Emp irical results on HR M and performance have bee n presented in a range of special

issues of international academic journals like the Academy of Managem ent Journal, the

International Journal of Human Resource Management an d the Human R esource Management

Journal. The em pirical results suggest the add ed value of HR interventions. However, there are

still a number of unresolved issu es.

In 1997 Guest argue d that there was a need for (1) theory on H RM , (2) theory o n

performa nce, and (3) theory on how the two are linked (Gues t, 199 7). Seve n years later we

observe only mode st progress on those three fundame ntal issue s. Bos elie, Dietz and Bo on

(2005) conduc ted an exploratory analysis and overview of the linkages between hum an

resource man agemen t and performance in 104 empirical articles published in prominent

international refereed journals between 1994 an d 2003 . Their f indings demonstrated a

deficiency in the literature regarding alternative theories on the concept of HR M , the concept of

performa nce, and on how the two are linked . Strategic contingency theory , AMO theory

ii

and the

resource-based view appear to be the m ost popular theories applied in the 104 articles, but in

most cases it is not clear how these theories link HR M and perform ance. Hen ce, we need to

turn back to Gu est’s (1997) plea for theoretical foundation of HR M , performance and the link

between the two and ask ourselves three questions:

• What is HRM?

• Wha t is performance?

• Wha t is the nature of the link between HRM and performance?

Base d on these three hea dings/questions we w ill be able to categorize the sti ll

unresolved issues a nd explore possible avenues for research in the future.

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CAHRS WP05-09

What is HRM?

Under the heading of this clear - but apparently diff icult to answer - qu estion we deal

with the following issu es: the lack of consen sus w ith respect to the constituent parts of HR M ; the

best practice versus the best fit approac h; the different fits; coverage of different employee

grou ps; and the need to consider how HR practices are perceived.

Lack of Consensus

There appears to be no consensus on the nature of HR M. Some studies focus on the

effectiveness of the HR department (T eo, 2002) , others focus on the value of hum an resources

in terms of know ledge, skil ls and competencies (Hitt, Bierm an, Shimizu and Kochhar, 200 1),

several studies define HR M in terms of individual practices (B att, 2002) or system s/bundles of

practices (Capelli and Neu mark, 200 1), and yet others acknowledge the impact of these

practices or systems on bo th the human cap ital value – in terms of know ledge, skills and

abilit ies – a nd on em ployee behaviour directly in terms of higher m otivation, increased

satisfaction, less absence an d increases in productivity (W right, McM ahan a nd McW illiams,

199 4). We observe that the majority of the studies define HRM in terms of HR practices or

systems/bundles of p ractices. Boselie et a l. (2005) show the enormou s variety of different

practices being use d in the 104 analysed a rticles. There is not one fixed list of generally

applicable HR practices or systems of practices that define or construct huma n resou rce

man agem ent. In total they are able to l ist 26 ( ) different p ractices, of which the top four- in

order- are training and development, contingent pay an d reward schem es, performance

manage ment (including appraisal) and careful recruitment a nd selection. These four practices

can be see n to reflect the main objectives of the majority of ‘strategic’ HR M programm es

(e.g.,

Batt, 2002 ): nam ely, to identify a nd recruit strong perform ers, provide them w ith the ab ilities a nd

confidence to work effectively, monitor their progress toward the required performance targets,

and reward staff well for meeting or exceeding them . Another issue is that even if we use the

same c once pts, the underlying meaning of the practice can be totally different. This begs the

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question,

how can a field of academic inquiry ever mana ge to m ake progress if it is not able to

come to terms with one if its central concepts? Using content analysis Boselie et al. (2005)

found that among the three most often used theoretical framewo rks, the AMO -framew ork is the

only one u sed in mo re than half of all articles published after 200 0. In contrast, for the papers

using strategic contingency theory an d RB V, more than half of them w ere published before

2000. So we may b e witnessing the birth of at least a certain comm onality a round how HR M

might be constituted in exploring the relationship betwee n HRM and P erforman ce.

Best Practice v s. Best Fit

One of the key discussions w ithin HR M is the distinction between the so -called best

practice and the best-fit approache s. Some say there are universalistic best practices in HRM

(Pfeffer, 19 94), others argue that there are only best-fit practices (W ood , 199 9), stating that the

effect of HR practices depen ds on the specific (internal and external) context. It seem s logical

to believe in a best-fit app roach in contrast to a somew hat simplistic best practice app roach , but

the empirical evidence sti ll supports the best practice approach (Delery an d Doty, 199 6).

Gerhart (2004 ) demo nstrates a crit ical analysis of those w ho claim that some form of internal f it

– the alignment of practices with each other – outperforms the lack of this type of fit. Gerhart’s

(2004) evaluation is very convincing in showing that the systems a pproaches that build on the

notion of internal fit do not outperform the other approache s in wh ich individual HR practices are

not aligned.

Boxa ll and P urcell (2003) argue that both streams – best practice and bes t-fit– m ight be

right each in their own w ay. Some basic principles like employee developm ent, employee

involvement an d high rewards are universally s ucce ssful, but the actual design of the HR

practice depends to some d egree o n unique organ izational contex ts. The internal context - for

exam ple, the nature of the production system

(e.g.,

assembly line) - might create restrictions

with respect to the succe ssful design of some HR practices (e.g., teamwork, performance

related pay) , but also the external context - for ex am ple, the legislation an d trade un ion

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influence - might have a direct impact o n the optimal HRM d esign . So the whole deba te about

universalistic best practices versus best-fit practices actually represents two s ides of the sa me

coin and both are relevant in exploring the linkage between H RM a nd P erformanc e.

Different Fits

W ood (1999) m akes a distinction between four different ‘fits’: internal fit, organizational

fit, strategic fit and environmental f it. Although this is in l ine with what many other resea rchers

consider to be the possible range of fits in HRM re searc h, one of the most important seem s to

be m issing. That is, the fit between how the employee perceives HR practices and whether that

perception aligns with the values and goa ls of the organization. That kind of fit is well know n

under the he ading of Person-O rganization fit (P-O fit), which Kristof (1996 ) defines as the

compatibility between people an d organizations that occurs wh en : (a) at least one entity

provides what the other nee ds, or (b) they share similar funda mental characteristics, or (c) both.

A number of au thors in the field of HRM an d Performance em phasize the importance of

including workers’ perceptions. As Va n den B erg and col leagues note (1999: 302), ‘an

organisation may have a n abundance of written policies concerning [HR M], and top

manage ment m ay eve n believe it is practised, but these policies an d beliefs are m eaningless

until the individual perceives them a s som ething important to her or h is organisational ‘well-

being’.

Wright and B osw ell, (200 2: 263) also note that in me asuring HR M , it is vital to distinguish

between policies a nd pra ctices. The former is the organisation’s stated intentions regarding its

various ‘employee m anageme nt a ctivit ies’, whereas the latter are the ac tual, functioning,

observable ac tivit ies, as experienced by emp loyees. This is yet another plea to pay mo re

attention to worke rs’ perceptions an d the importance of person-organisation fit. This theme w ill

recur in our final section when we d iscuss the importance of the strength of the HR M s ystem

(Bowen and Ostroff, 2004).

Coverage of different employee groups

If we look m ore closely at the conce ptualization and operationalization of HR practices or

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systems of practices w e observe litt le or no a ttention to the degree of coverage of HRM –

differentiation between em ployee groups a nd the percentage of employees cove red by the

practices – and the intensity of H RM in term s of, for exa mp le, daily, weekly, monthly or yearly

interventions. Most prior rese arch either uses simplistic scales focusing on the application (or

lack thereof) of a specific practice (Guest et

a l . ,

2003) or som e kind of scale that is supposed to

capture the ‘degree to w hich the target group has to do with’ a specific practice (Huse lid, 199 5).

The early em pirical studies on HR M mainly use d the input of single payment secu rity, need for

challenging tasks).

Intended vs . perceived practices

To ma ke life even m ore com plicated W right and Nishii (2004) build a strong argument to

make a clear distinction between intended HR practices (those de signed on a strategic level),

actual – or implemented – HR practices (those implem ented by for exam ple the direct

superv isor), and perceived H R practices (those perceived by the em ployees ). The majority of

prior research on H RM a nd performance appears to focus on intended H R practices, mainly

designed at the strategic level of the o rganization. Litt le is know n about the actual enactment or

implementation of HR practices and employees’ perception of them .

What is Performance?

In this section we p ay attention to the variety of performance indicators us ed in em pirical

researc h, the distinction between shareholder a nd stakeholder appro aches , and the kind of

implication it has for our understanding of the concept of performa nce.

Measuring Performance

The performance outcomes of HRM c an be captured in a variety of way s. W e draw a

distinction,

adapted from Dyer a nd Reeves (1995), between:

1 .

Financial outcomes (e.g., profits; sales ; market sh are; Tobin’s q; GRA TE)

2.

Organisational outcomes (e.g., output measures such as productivity; quality;

efficiencies)

3. HR-related outcomes (e.g., attitudinal and behavioural impacts a mon g

emp loyees, such as satisfaction, comm itment, and intention to quit)

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Base d on the overview by B oselie et al. (2005) we c an conclude that financial measures

are represented in half of all articles (104) included in their analysis. Profit is the most comm on

followed by various m easures for sales. Actually, this is quite problematic a s financial indicators

are being influenced by a whole range of factors (both internal and external), which have

nothing to do with emp loyees an d their related skil ls or hum an ca pital. As already no ted by

Kanfer (1994) an d Guest (1997) the distance be tween some of the performance indicators (e.g.,

profits, market va lue) and H R interventions is simply too large a nd potentially subject to other

business interventions (e.g., research an d development activities, marketing strategies). For

exam ple, having smart policies for managing w orking capital can increase e arnings

substantially, but have nothing to do w ith the proclaimed effect of HR practices (apart from

apparently having selected the right treasury mana ger). The use of these kind of indicators

becom es eve n more serious if we take a closer look at an analysis carried out by W right et al .

(in press) as summ arized by W right and Haggerty (20 05). Their l iterature review identified 67

empirical studies, which analyzed the relationship between HR practices and perform ance. By

far the majority of studies used a design labelled post-predictive becaus e “ … … . it mea sures HR

practices after the performance perio d, resulting in those practices actually predicting past

performance” (W right and Hag gerty, 2005:8). Only a few studies explored the effect of HR

practices on performance in the correct way by as sessing HR practices at one point in time and

relating the m to subsequent pe rformance . This simply mean s that the majority of studies have

ignored a very basic rule for demonstrating causal relationships (W right and Hagge rty, 2005).

Shareholder vs. Stakeholder Approach To Performance

The us e of financial indicators emph asizes a shareh olders’ approach to the concept of

performa nce, emphasizing that HR practices and systems contribute a sustained compe titive

advantage through enhan cing skil ls and hum an capital. This assumes that organizations can

maintain or create sustained competitive adva ntage through un ique/rare, scarce, inimitable, and

valuable internal resources (Ba rney, 1991 ). Hum an resources are a powerful potential internal

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resource that fits this general resource ba sed view idea (Paa uwe , 19 94; Wright et

a l . ,

1994;

Boxa ll and P urce ll, 200 3). The next step in the theory is that employees or hum an resources are

manag eable (manoeu vrable) and develop men tal. In other wo rds, HR practices can (a) increase

the value of the human ca pital pool through development

(e.g.,

skil ls training , general training,

job rotation, coaching) and (b) influence em ployee behaviour in the desired direction. The

search for the H oly Grail in HR M is the sea rch for those ‘best practices’ or ‘best-fit practices’ that

ultimately result in sustained com petitive advan tage of the organization. This can only take

place if employees are w ill ing to stay within the organization. Thus , employee comm itment in

terms of will ingness to stay with the firm and w ill ingness to put in extra effort are ve ry important

in this context. This is probably why rese arch in the area of HRM and performance is beco ming

more interested in creating high commitment work e nvironments through HR practices or high

involvement – high performance work practices (HIWP’s and HPW P’s). The high involvement –

high performance work practices perspective (See also AMO -model) can thus be seen as an

extension of the resource bas ed view .

The aforem entioned also implies that we hav e to look for more p roximal instead of distal

indicators of performanc e. Both organisational outcomes and HR re lated outcomes can be

considered more proximal and thus more suited towards meas uring performance. How ever, in

this shareholders’ approach the organisational and HR related outcom es are sti l l considered to

be a m eans to a n en d, i.e., contributing to bottom-line performance of the f irm. Such a financial

mea ning can be criticized for being “too limited” (Tr uss, 2001 : 1123).

The stakeho lders’ approach offers a different perspe ctive by e mpha sizing the objectives

of other constituencies with an interest in HRM practices and subsequent p erformance of a n

organization. This approach can be trace d back to the seminal writings of Beer et a l. (198 4).

More recently we e ncounter full support for this approac h by, amongst o thers, Boxall and

Purce ll, (2003 : 13 ), who de fine three important goals of HR M , am ong wh ich social legitimacy

aimed at bringing about employment cit izensh ip, and P aauwe (200 4). The latter argues that the

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survival of an organ ization not o nly depends on financial comp etitiveness, but also on its abil ity

to legitimize its existence towards society an d relevant stakeholders of the o rganization (e.g.,

employees, customers, trade unions, local government). Legitimacy is a n important concept for

sustainability o n an organizational level, but also the organization’s role towards the individual

employee a nd his or her moral values are impo rtant: the concept of fairness. If the relationship

between the em ployer an d the individual employee is out of balance - for examp le, in the case

of increased performance p ressures without fair pay - em ployees m ight feel they are be ing

exploited,

resulting in low comm itment levels towards the orga nization (Paauw e, 2004).

Performance As A Multidimensional C oncept

Using a stakeholders’ perspective implies that authors (Truss,

2001 ;

Guest and Pecce i,

1994) are in favour of using multiple mea sures of performance in order to do justice to the

multiple goals of H RM a nd to the different parties involve d, both inside and ou tside the f irm. So,

on the one hand w e have the more strategic aspect of performance (ba sed on econom ic

rationality), which emphasizes outcomes such as labour productivity, innova tion, quality,

efficiency gains and flexibility (Boselie et a l . , 2005) and on the other hand the more s ocietal

aspect of performance (based o n relational or normative rationality) emph asizing legitimacy and

fairness (Paauw e, 200 4). The latter two ca n be operationalized throug h indicators l ike OCB ,

comm itment, trust, perceived security, and perceived fairnes s.

What Is The Nature Of The Relationship Between HR M And Performance?

The m ost crucial part in our overview of issues relating to the HRM a nd performance

debate is of course the linkage between the tw o, here we concentrate on the following topics:

the nature of the linkage, the relevance an d non-relevance of strategy, the importance of the

institutional context an d arising conflicting dem ands , the need for mu lti-level analysis, and how

to cope with reverse ca usality.

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The Nature of the Linkage

Wright and Gardner (2003) question how man y boxes sho uld be taken into account

whe n studying the HR M - performance linkage . Becke r, Huselid, Pickus and Spratt’s (1997)

mod el incorporates 7 bo xes, starting w ith ‘business a nd strategic init iatives’ and finishing with

‘market value ’. In their m odel the design of the HRM system is derived from the overall business

strategy (Se e Figure 1).

Figure 1

Conceptual Mod el of Becker, Huselid, Pickus and Spratt

Business

&

Strategic

Initiatives

Design

of HRM

System

Employee

skills

Employee

motivation

Job design

& work

structures

Pro

ductivity

Creativity

Discretion

-ary effort

Improved

operating

perfor-

mance

Profit

&

Growth

Market

value

Source: Becker et al . (1997)

Guest’s (1997) m odel has 6 box es, starting with a Porter-like strategy typology –

distinguishing differentiation/innovation, focus/quality a nd cost reduction oriented HR M

strategies – a nd ending w ith the financial outcomes return on investment (ROI) an d profits.

Again, the HR practices are de rived from the overall strategy (See Figure 2) .

Appelbau m et al.’s (2000) AMO -mode l links 3 boxe s. The first box covers high

performance wo rk systems and com prises: (1) ability/skills (e.g., formal and informal training,

educa tion), (2) motivation/incentives

(e.g.,

employment security, information sh aring, internal

promo tion opportunities, fair pa yme nt, PRP) a nd (3) o pportunity to participate (e.g., autonomy,

team m emb ership, comm unication). The seco nd box consists of effective discretionary effort

and the final box reflects the plant performance (e.g., quality an d throughput tim e, labour cost

per unit of outpu t, operating profit). See Figure 3 for a visual representation of their m ode l.

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To study the effects of H R interventions, either multiple individual HR practices or

systems/bundles of practices, it is preferable to use outcome variables that are closely l inked to

these interventions, for exa mp le: attitudinal outcomes (e.g., employee satisfaction, mo tivation,

comm itment, trust), behavioural outcome

(e.g.,

employee turnover, absen ce), productivity

(output per unit effort), and quality of se rvices or pro ducts.

As stated be fore, there is l itt le or no convincing emp irical evidence that coherent and

consistent systems or bundles automa tically lead to higher performance (Gerhart, 2004 ). This

theoretical claim is built on the notion of internal or ho rizontal

‘fit’.

But there is another

proposition that affects the H RM - performance relationship, at least in theory: the no tion of

external or vertical/strategic ‘fit’. The unde rlying idea is that matching the ove rall company

strategy with the HR strategy or system will result in increased perform ance. In this respect it is

striking that the framework by A ppelbaum et al. (2000 ), being the most commonly used a nd

depicted abo ve, does not take strategy as a s tarting point, whereas the other two do s o. So it is

worthwhile to take a closer look at the (non)relevance of including strategy in the ch ain of

l inkages

The Non) Relevance Of Strategy

Many a uthors and popular textbooks in HRM m ention the importance of the link between

corporate strategy and H RM . Unfortunately, there is no convincing empirical evidence for this

proposition (Purce ll, 200 4). Huselid (1995), for ex am ple, does not find any empirical evidence

for increased performance w hen aligning the overall company strategy w ith the HR s ystem of a

specific organization. There are se veral plausible explanations for this lack of evidence of the

presum ed necessary strategic fit.

First

strategy is often defined in a rather old-fashioned and relatively simplistic Porter

l ike mann er, such as differentiation/innovation, focus/quality and cost redu ction. Organizational

reality is muc h more c omplicated and not e asy to capture in a simple ‘three-piece suit’. The

Porter-like definitions of the 1980s are rather static and do not take into account the possibility

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of hybrid strategies or com binations of strategies that com panies m ight use , serving different

markets at the sam e time . For this reason Pu rcell (2004) a rgues that instead of trying to define a

firm’s strategy in term s of differentiation, focus or cost reduction it is m uch m ore interesting to try

and determ ine “… how the firm w ill deploy its resources within its environment a nd so satisfy its

long-term goa ls, and how to organise itself to implement that strategy (Grant, 200 2: 13)”.

Incidentally, this is a more u p to date definition of what strategic m anagem ent nowad ays

entails/encompasses (see Grant, 2005:19).

Second, both Gerhart (200 4) an d Purcell (2004) underline the complexity of

manage ment res earch in large com panies, in particular multinational companies (MN C’s).

Often,

these large compa nies are con glomerations of strategic bu siness units, each serving its

own m arkets, customers an d products/services. The refore, Gerhart (2004) states that there are

fewer reliability problems with analysis at the plant or unit level.

Third, there is no convincing theory or strong em pirical evidence on the p ossible time-lag

between a cha nge in strategy, any subsequent H R intervention and performance . The few

studies on HRM a nd performance that take a longitudinal perspective (Paau we, 1989 ;

d’Arcimoles, 1997 ; Guest et

al.,

2003 ), suggest that the majority of HR interventions have a long

term effect on performance , sometimes taking up to two or three years before gen erating

effects. Some H RM practices (e.g., individual performance related pay) m ight have a direct,

short-term effect on pe rformance (e.g., productivity), but most other practices (e.g., training an d

developm ent, participation, teamw ork, decentralization) probably have litt le effect in the short-

run or (worst case scenario) fail to have any e ffect. W right, Dyer an d Takla (1999) aske d 70 HR

mana gers to assum e that a major strategic change necessitated a significant overhaul of their

firm’s HR M systems a nd were a sked to estimate the time it would take to design HR system s for

delivery an d implementation (Wright and Hag gerty, 2005 ). Their answers were in the range of

nine to ten months for the design and a n additional ten to twelve mon ths for the delivery, and

then we s ti ll need to add further months be fore the chang ed HR systems start to affect

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subsequent performance.

Fourth, a whole range of factors other than strategy influence subsequent H RM strategy.

Base d on an overview of the strategic m anagem ent l iterature and its relevance for the

HRM /Performance relationship, Paauw e (2004) refers to the following : the role of the

entrepreneur, often also the founder a nd owner w ith his or her preferences for HR M policies a nd

practices; difference in cognitive processes of the participants involved in the strategy mak ing

proce ss, which can give rise to different men tal maps an d different choices (see also P urce ll,

2004); power relationships and the kind of resources be ing controlled by the actors involved,

which can g ive rise to non-strategic choices in HR M policies an d practices; culture and

ideologies of the actors involved , which will also affect the kind of choices in HR M ; an d, finally

environmental and institutional forces , stemm ing from trade un ions an d tripartite or bipartite

consultative bo dies (governm ent, trade un ions, employers’ federations), which ca n have a large

impact upon an organization’s HR M strategy (see below ).

Because of this, questions arise about the supposedly dominant role of corporate

strategy in de fining subsequent HR M strategy. We cannot define strategy with a specific

me aning, the field of strategic manag ement itself has shifted to more internal organisational a nd

implementation issue s, empirical evidence is lacking and other factors also play a significant

role.

So , in the final section of this paper, we down play the influence of corporate or business

strategy o n HRM s trategy, and instead make a stron g plea for regarding HR M policies a nd

practices as an enabler for a whole range of strategic op tions (Pa auw e, 2004: 99).

Institutional Embeddedness and Conflicting Demand s

Paauw e and Bose lie (2003) argue that as organizations are em bedde d in a wider

institutional context this plays a role in s haping H RM practices and policies. Institutional

mechanisms (e.g., legislation with respect to conditions of em ploymen t, collective ba rgaining

agreem ents, employmen t secu rity, trade union influence , employee representation) shape

employment relationships an d HR de cision making in organizations. Paauwe (20 04), for

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exam ple, argues that most of Pfeffer’s (1994) best practices (e.g., high wa ges, employment

security, employee participation) are institutionalized in a country l ike the Netherland s. Most of

these best practices a re formalized and institutionalized through co llective ba rgaining

agreem ents. Som e industries, for example, prescribe a minimum amou nt to be spent on

training by every organization each y ear, defined in terms of a fixed percentage of the total

labour cos ts. This formalization m ight also have an effect on em ployees’ perception of these

institutionalized practices. Pension sc hem es, for exam ple, are collectively arranged in the

Netherland s, mainly on industry lev el. Pension schem es are probably not considered to be

employee benefits and best practices in the Du tch context, as this wou ld be in a country l ike the

US A. Another example is the best practice labelled wage com pression . The typical Dutch

egalitarian culture

(e.g.,

relatively low power d istance, aim for marginal differences between

population groups in terms of prospe rity) is reflected in collective wa ge com pression through a

strong progressive tax system in which em ployees with high incomes pay relatively m ore tax

than those with lower inco me s.

Paauw e (2004) a cknowledges institutional differences at bo th a country leve l, for

examp le the US versus the N etherlands, and at an industry le vel, for examp le traditional

branches of industry su ch as the m etal industry an d the construction building industry versus

eme rging branches of industry such as the ICT industry. Institutional mecha nisms (mimetic,

normative and/or coercive) affect the relationship betwe en HR M and performance and should

therefore be taken into account in future research (Paau we an d Bos elie, 200 3). Moreo ver, they

also draw our attention to the possibility of conflicting dema nds. HR M theorisation is dominated

by a unitarist perspective, but starting from a more institutional perspective our eyes are o pened

to conflicting demands between p rofessionals, manag ers, and different occupational groupings

that are represented by their interest groups ou tside the organisation (e.g., professional

associations, trade union s, etc). Also the practices them selves might g ive rise to co nflicting

outcomes in terms of increased productivity, which managers will apprec iate, and increased

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levels of stress, which workers will probably d islike. Labour intensification through increased

employee participation, decen tralization, and emp hasis on performance m anagem ent (practices

that can be seen as high performance work practices) might create competitive adva ntage in

terms of financial performance, but the individual worker might experience increas ed levels of

stress and anxiety (Leg ge, 1995 ). W e have to take into account conflicting HR-outcomes in

future research on HR M and performance.

Multi-Level Analysis

Prior research on HRM a nd performance has bee n mainly focused on organizational

level analysis. Wright and Bo swell (2002) stress the importance of blending research on the

individual emp loyee level (typical OB studies) w ith research at the organizational level (typical

SH RM studies). Multi-level theories seek to explain simultaneous v ariance at m ultiple levels of

analysis (Bow en an d Ostroff, 2004 ). Multi level analysis is simply inevitable w hen looking at the

sequence of boxes that reflect the HRM a nd performance linkage (G uest, 1997 ; Becker et al,

199 7; Appelbaum et a l, 200 0). The boxes in the existing concep tual models implicit ly reflect

analyses at different levels of the organization. If we w ant to know more a bout, for exam ple,

intended HR practices w e have to look at the job or employee group le vel, according to W right

and Nishii (2004), while if we want to know more abo ut how these prac tices are perce ived by

employees we are in nee d of data at the individual employee le vel. Employee behaviour (e.g.,

employee turno ver, absence) and organizational performance (e.g., productivity, quality) ca n b e

determined at em ployee grou p level in some ca ses an d at plant unit leve l, while financial

performance indicators are probably exclusively a vailable at plant or company leve l.

Reverse causality

Paauw e and Richards on (1997) obse rve the risk of overlooking the possibility of rev erse

causality in l inking HRM a nd performa nce. The most obvious form of reverse causality ca n be

illustrated by the following e xam ples. First, organizations w ith high profits m ight reveal a higher

willingness to invest in HR M (e.g., profit sharing schem es, training and development) tha n those

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that are less succ essful f inancially. Secon d, in times of national or regional econom ic c risis

organizations m ight have a tendency to recruit less - or in some cases no - new em ployees an d

restrict, for exam ple, training and development expen ditures. The cross-sectional nature of the

majority of resea rch on HR M and performan ce m akes it impossible to rule out these types of

reverse ca usality. But there are other po tential forms of reverse causa lity (De n Ha rtog, Boselie

and Pa auwe, 2004). High f i rm performance outcomes (e.g., high profits, market g rowth) m ight

have a pos itive effect on employee sa tisfaction and comm itment. Most people enjoy being part

of ‘a winning team’ and high firm performance also signals orga nizational health and thus

employment security. In a longitudinal study Sch neider, Hang es, Sm ith and Sa lvaggio (2003 ),

for example, find that profitability is more likely to cause job satisfaction than job satisfaction is

to cause profitabil ity. Longitudinal research is important for determ ining the real effects of HR M

interventions on performa nce.

Challenges for future research

A number of con clusions can be drawn from this overview of research issues. Related to

the concept of HRM w e see convergence arising around AMO theory a nd the associated set of

HR practices. The discussion o n best practice versus best fit is an a rtif icial one an d is highly

dependent on our o wn perspec tive at the ‘surface (context specific)’ or at the ‘underpinning

(generic)’ level (Boxall and Purc ell, 2003 :69). The range of fits analysed in HRM -research nee ds

to be supplemen ted by the Person-O rganization fit in order to include perceptions of workers

and to be able to differentiate be tween emp loyee grou ps. In measuring performance there

should be a clearer focus on more proximal outcomes a nd research design shou ld allow for the

analysis of HR-practices and outcom es in the right temp oral order (causes should precede

effects). Just defining performance in its contribution to bottom-line financial performance does

not do justice to the various a ctors (both inside and o utside the organization) involved in either

the shaping of H RM p ractices or affected by it. It is better to opt for a stakeholders’ app roach ,

which also implies opting for a multi-dimens ional concept of performance. Along with corporate

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or business strategy, a w hole range of other factors play a role in shaping the relationship

between HR M an d performanc e, among which the institutional context is critical. Finally, we

have em phasized the ne ed for multi-level analysis and that more attention should be paid to the

possibility of reverse causality.

S o, in the process of discussing a whole range of issues we have m ade a num ber of

choices , which we think are highly releva nt. However, is that enoug h? D oes that justify the tit le

‘HRM:

What’s next’? W ill it take the field forward or is m ore need ed? B elow, we point out two

(highly interrelated) topics that need further exploration.

1 .

HRM As An Enabling Device For A Whole Range Of Strategic Options

Critical Goa ls): The Balanced HR Perspective

Boxa ll and Pu rcell (200 3: 7) build a framework for goal-setting and evaluation in HR M

and start by “p ositing two b road goa ls for business firms ”: (1) viability with adequate returns to

shareholders a nd (2) sustained com petitive advantage or consistent a nd superior profitabil ity,

the latter representing a n ultimate g oal beyon d the (first) survival goal. In their m odel these

ultimate business goals can be ach ieved by m eeting critical HR g oals (increased labour

productivity, organisational flexibility, and social legitimacy) and crit ical non-HR goals (e.g .

sales, market share). In previous analysis of HR M and performance most attention has been

paid to the cost-effectiveness element as the ultimate HR goal, specifically ‘finan cial

performance ou tcomes’ (Boselie et a l . , 2005 ). W e are in need for a more balanc ed pe rspective

(e.g. Deeph ouse, 199 9), taking into account bo th the cost-effectiveness H R go al (represented

by labour productivity and p roduct/service quality), the organ isational flexibil ity u rgency , and the

social legitimacy dime nsion. In a longitudinal study of comme rcial banks Deephous e (1 999)

finds emp irical support for strategic balance

theory

, which states that mo derately differentiated

firms – with a balance b etween a n institutional/legitimate focus and a market focus – have

higher performance than either highly conforming (emphasis on the institutional/legitimate

dimension) or highly differentiated firms (emphasis o n the market/economic dimension).

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Strategic b alance theory acknowledges the relevance of both market com petition, represented

by labour produ ctivity and flexibil ity in the framew ork of B oxall and P urcell (2003 ), and social

legitimacy for firms se eking com petitive adv antage . Until now litt le attention has be en paid to the

two critical HR goa ls of flexibility and legitimac y. The se two might turn out to be importan t for a

more realist perspective in future HR rese arch.

First, based on the increased dynam ics of the market place an d the occurrence of

organizational change within compa nies as the new status quo , the goals of strategic HR M

systems (shou ld) also encomp ass flexibil ity (Box all and Purce ll, 2003) a nd agil ity (Dyer and

Shafer, 1999 ). Dom inated by both resource bas ed and knowledge bas ed views of the firm,

researchers in the field of strategic managem ent increasingly emp hasize topics l ike absorptive

capac ity, knowledge m anageme nt an d the need for organisations being able at the same time

to respon d to issues of exploitation a nd ex ploration. In fact, the latest trend in the rang e of

popular work systems (after ‘ lean and m ean ’, and ‘high performance - high involvement’) se ems

to be the cre ation of the ‘agile’ organ ization. Agility is described a s focussing o n customer rather

than market nee ds, mass customization rather than mass or lean production (Sharp et al.,

199 9). Agility en tails m ore than just the production syste m. It is a holistic approa ch incorporating

technical (the operational system as emph asized by Bo xall, 2004) information and hu man

resource con siderations. In essenc e, an agile organisation (see Dyer an d Shafer, 1999) imp lies

a ve ry fast and efficient adaptive learning orga nisation, encouraging multi-skil ling,

empowerment an d reconfigurable teams and work designs. Under such a system, HR M

practices focus particularly on employee developm ent, the encouragem ent of learning and

knowledge m anagem ent. So, if we have m anage d to create a workforce which is eager to lear n,

displays a willingness to ch ang e, is adaptive, flexible, etc., then we h ave dev eloped through our

HR M systems the kind of knowledg e, skil ls and abil ities upon wh ich we can realize a wh ole

range of strategic o ptions (Paau we, 200 4). Cost effectiveness (or labour productivity) an d

organisational flexibility (or agility) mainly represent the employer’s perspective and do not fully

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take into account the employee’s perspective an d the societal dime nsion. There fore, the third

crit ical HR g oal in Boxall and P urcell’s (2003) basic framework is equally important for this

propose d ‘balanced HR p erspective’: social legitimacy . This brings us to the second issue.

Second,

creating a cost-effective an d agile organisation is possible once w e recognise

that employees sho uld be treated fairly. The overal l HRM system should be ba sed upon added

value (cost effectiveness and flexibility) a nd m oral values (social legitimacy and fairness

towards individuals), both economic and relational rationality (De epho use, 199 9). The latter

refers to establishing sustainable an d trustworthy relationships w ith both internal and external

stakeholders , base d on criteria of fairness and legitimacy (Paa uwe , 200 4). Failing to meet

objectives of legitimacy and fairness can lea d to perceived injustice by those involved (e .g.

emp loyees, mana gers, works coun cil representatives, trade union officers) and affect both

employee b ehaviour an d social relations within an orga nisation. “People care deep ly about

being treated fairly…the e vidence sugge sts that people can and do distinguish their o wn

absolute outcomes for two key dimensions of jus tice: distributive, or how they did relative to

others; and procedural, the process by w hich the outcome was achieved (Baron an d Kreps ,

199 9: 106).” The meta-analytical review of organizational justice by Colquitt, Conlon , W ess on,

Porter and N g (2001) shows unique positive effects of perceived justice (both procedural a nd

distributive) o n job satisfaction, organizational comm itment, employee trust and OCB

underlining the relevance of fairness and legitimacy in organizations. Meeting the criteria of

relational rationality in essence implies that m anagers need to ‘treat their p eople we ll’.

S o, the signals commun icated through HR practices by line manag ers must be clear

/distinct, consistent, and uniformly app lied. Employees must not d iscern a lack of clarity, a lack

of consistency and a lack of conse nsus. This brings us to the importance of the strength of the

HRM system (Bowen an d Ostroff , 2004).

2 . The Strength of The HRM System

Bow en and Ostroff (2004 ) are extremely interested in the relationship betwee n HR M an d

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performa nce, and while accepting the evidence that HRM can indeed ma ke a difference they

still wonder through w hich process this occurs. In order to answer that question they develop ‘a

framework for understanding how HR M practices as a system can contribute to firm

performance by motivating employees to adopt de sired attitudes and behaviours tha t, in the

collective, help achieve the organization’s strategic goals’ (Bow en an d Ostroff, 200 4: 204). A

crucial linkage in the relationship between H RM a nd performance is their focus on

organisational clima te, which they define as ‘a shared percep tion of what the organization is l ike

in terms of practices, policies and pro cedures , routines and re ward s, what is important an d what

behaviours are expected and rewa rded (Bowe n and Ostroff, 200 4: 20 5; referring to Jones an d

Jam es, 1979 and Schn eider, 2000). The concept helps them to develop a higher order s ocial

structure perspective o n the HR M –firm performance relationship, which Ferris et a l. (1998) c all

social context theory views of the relationship between HR M and P erformanc e. They apply this

kind of theorizing to HRM b y emph asizing the importance of processes as w ell as content of

HRM.

By proces s, Bow en and Ostroff refer to ‘how the HRM system can be designed and

administered effectively by defining metafeatures of an ov erall HRM sy stem that can create

strong situations in the form of sh ared mea ning about the content that might ultimately lead to

organisational performance’ (2004 :206). These m etafeatures ensure that unambiguous

messag es are sent to emp loyees that result in a shared construction of the meaning of the

situation. So they concentrate on understanding what features of the HRM proces s can lead

employees to appropriately interpret and respond to the information conveyed in HR M prac tices.

In this way they apply the concept of strong situations to the so-called strength of the HR M

system , which is a l inking mecha nism that builds sha red, collective perceptions, attitudes a nd

behaviours am ong em ployees. Characteristics l ike distinctiveness, consistency and co nsensus

are key process feature s. Distinctiveness is built by HR p ractices, mes sage s, signals that

display a large deg ree of visibil ity, understandability, legitimacy and releva nce. Here w e se e the

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connection with the importance of values alignment and Pe rson-Organisation fit. Individual

employees must perceive the situation as relevant to their ow n goals, which should be fostered

in such a way that they can be aligned to those of the organ ization. Of course , a strong climate

or strong HR M system m ight run the risk of being rigid. However, as Bow en and Ostroff

(2004:215) correctly remark , if the process of HR M em phasises a strong climate including

elements that focus o n flexibil ity, innovation a nd will ingness to cha nge, then emp loyees will

sense a nd share the idea that adaptabil ity a nd agil ity is expected of the m.

Final remarks

W e are convinced that progress in understanding the relationship between H RM a nd

performance can be ach ieved by taking into account all the points made so far. How ever, that

kind of progress will be piece -me al. Conse quently, real progress can only be m ade by looking at

the broader picture of developments in the field of strategic ma nagem ent, the speed of chan ge

within companies and what this implies for managing people and stake holders. How can we

achieve flexibil ity, agility a nd wha t is nee ded in terms of va lue alignment at the various levels of

analysis? We nee d to look beyond practices such as staffing and the managem ent of hum an

resource flow s. These are the kinds of hygiene factors, which if not delivered cost-effectively will

lead to underperformance of the organisation. A real contribution to performance (in its

multidimensional me aning) will only happen once we appro ach HR M from a more holistic and

balanced p erspec tive, including part of the organizational climate an d culture, aimed at bringing

about the alignment betwe en individual values, corporate values and s ocietal values. This will

be a unique blending for each org anization, which is diff icult to grasp by outsiders (including

competitors) and thus contributes to sustained com petitive advan tage

iii

.

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HRM and Performance: What’s Next? CAHR S WP05-09

Endnotes

i

The a uthors wou ld like to thank Patrick W right, Shad Morris (bo th at Cornell University), the editor of this

journal and the anonym ous review ers for their helpful com ments in drafting the final version of this pap er.

ii

AM O theory focuses on high performance work system s, in which the central elements are Ability,

Motivation and Opp ortunity to participate, cf. Appelbaum e t al., 2000.

iii

In this respect it is interesting to refer to some rece nt emp irical data , as collected amo ng MN C’s in the

so-called Global Human Resource Alliance project. A research project carried out jointly by researchers

from Cornell University, Cambridge University, Erasmus University and INSE AD: A whole range of

internationally operating companies apply at a surface level more or less the same HR principles and

practices (being : talent manag ement, leadership development, performance managem ent, among w hich

appraisal and rewards, but the real secret amo ng the most successful ones is the alignment of these

practices with the dominant value system in the organisation and the way it is being applied in a highly

consistent way, with a high degree of consensus am ong the different hierarchica l levels and being

perceived as distinct and relevant by the emp loyees at various levels in the organisation (being the

criteria of the B/O framework).

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