The Function of HRM in Business Organizations - Essay Example

Table of Contents Table of Contents 1 Introduction 2 2 Brief introduction of HRM 3 2 Specific HRM practices 5 2 2 Human resource planning 6 2 3 Recruiting and selection 6 2.1.4 Training 7 2.1.5 Performance appraisal 8 2.2 Overview 10 3 Historical Context of Compensation Research 11 3.1 Compensation Systems 14 3.2 Importance of Compensation to Productivity and Innovation 15 4 Organisational Culture and Cultural Change 16 4.1 Non-profit and For-profit Compensation Models. 17 4.2 Relationship between Compensation Strategy and Organisational Culture 18 4.3 Productivity 19 4.4 Innovation 19 5.5 Overview 20 5 Conclusion 20 6 Bibliography 22 1 Introduction The veritable tomes which has been written on HRM testifies to its centrality in organisational life and its status as a determinant of organisational success, not to mention the capacity of corporations to successful attain their strategic objectives. An organisation's human resource, and most definitely its management, plays an integral role in defining a company's potentials and its limitations. Added to that, while the HRM model operative within an organisation is largely determined by the intra- and extra-environmental cultures, HRM tools and strategies can directly influence organisational culture and, indeed, may affect a transformation within it. As this research shall argue, however, contrary to the popular assumption that compensation schemes are the primary method for doing so, it is the collectivity of HR functions which impinge upon, and have the potential to transform the mentioned culture. In other words, while one cannot deny the fundamental role which compensation plays in affecting employee motivation levels, enhancing organisational commitment and, ultimately, transforming the dominant organisational culture, it would be fallacious and, consequently, indefensible to ignore a host of other HRM practices which, taken as a collectivity, effectively modify organisational culture and increase employees' commitment. 2 Brief introduction of HRM This section introduces several perspectives of HRM in both the U.S. society and the Western European society. In the management research literature in the United States of America, scholars are more concerned about the functions and roles played by HRM. The function of HRM has experienced an evolutionary process in business organisations. It used to be reactive, operational, and domestic. It was 'personnel management'. After 1990s, human capital has become more and more important due to the emergence of the new economy. Both researchers and practitioners have realized the strategic role played by HRM. The resource-based theory (Barney, 2001) looks within the firm itself. This suggests human assets are one of the major sources bringing about core competence for the business organisations; HRM thus becomes an important issue. Huselid (1995; 1998) propose High Performance Work Practices (HPWP), Pfeiffer (1994) propose the best practice models. From American literature on HRM, one can see the strong inclination of universalism, the optimism on human potential development. The European scholars, however, are more concerned about the contextual factors shaping the HRM practices of companies. According to Brewster (1996), the societal culture, ownership structures, government attitude to foreign investment, the roles of union are major factors determining HRM policies and practices in context-specific situations. Such perspective helps to understand the unique situations and differences between nations in their HRM practices as well as how MNCs try to adapt to local practices. In international business literature, Evans, Tayeb (2001) argue that human resource management makes contribution to organisational performance by playing three roles. The basic role is building the foundations of attracting, motivating and retaining people in place. The second role is realigning it to the environmental change and reconfiguring the different elements as time evolves. As the competition becomes fierce and customer needs more demanding, HRM supposes to play the leading role in organisational change and innovation. The third role played by HRM is steering, which help to solve the dilemma always faced global companies: building the future into present. Other researchers have argued that effective HRM practices affect the performance not individually but as interrelated elements in an internally consistent HR bundles or system. Employee knowledge about products, process and customers that is embedded in routine and social interaction can create organisational capabilities, which are more difficult to imitate than readily made purchased technological capabilities. The integration of HR practices can expand employee skills and involvement with productive activities (Blackburn and Rosen, 1996; Daley, 2001). The question of convergence versus divergence debate has been an ongoing issue in HRM research for quite some time. This argument stems from strategy management. The convergence or best-practice perspective emphasizes uniformality and stability in HRM practices across organisations. Such a perspective may induce companies to imitate one another (Rowley, 1997). Thus competition may become a series of races down identical paths that no one wins. According to this school of argument, a firm's HRM practice or competence should be seen in terms of resources or capabilities that enable it to exploit imperfect and incomplete factor markets and to generate returns and sustainable competitive advantages. Firm decisions about selecting and accumulating resources are considered economically rational within the constraints of limited information, cognitive biases and causal ambiguity (Rowley, 1997). Such argument is in line with the divergent or contingent theories of HRM. In direction correlation to the stated, Rowley and Bae (2002) argue that HRM practices will induce desired employee behaviors only when applied in the right contexts. 2.1 Specific HRM practices Schuler (2001) proposed the core human resource management activities, which includes human resource planning, recruitment, selection and orientation, training, socialization and assimilation, performance and career management, compensation, employee welfare and communications. Kearns (1995) and Daley (2001) suggests that there are 5 major activities for managers when managing people. They are goal setting, staffing, communicating, training and performance evaluating. 2.1.2 Human resource planning HR planning goes hand in hand with an organisation's strategy. Strategic planning refers to an organisation's decision about what it wants to accomplish (its mission) and how it wants to go about accomplishing it. HR planning involves both strategic and action decisions. Strategically, it includes forecasting demands, job analysis, and analysis of supply of employees. Tactically, it has to analyze the composition of the workforce, estimate of the shortage or surplus of employees. It usually covers four stages: situation analysis or environmental scanning, forecasting demand for human resources, analysis of the supply of human resources and development of plan action. Such a planning logic is a typical western logic. Cardy and Dobbins (1996) suggests that planning includes defining goals, establishing strategy, and developing plans to coordinate activities. This illustrates that the western or capitalistic style of planning tends to be formal, rational and quantitative-oriented. Most western-based firms rely on certain forms of forecast based on assessment of market needs. Planning tends to be empirically based on data from market and consumers' needs. 2.1.3 Recruiting and selection Based on HR planning, the companies often build a pool of candidates for the jobs by recruiting internal and external candidates. Recruiting and selection refer to organisational activities that influence numbers and types of job applicants. The success of companies relies heavily on the fact that whether they can get the right people in the right place at the right time. Terpestra and Rozell (1993) found significant positive relations between five staffing practices with the annual profits and profit growth, namely analyzing recruitment sources, validating selection tests, using structured interviews, using cognitive and aptitude tests and using biographical information for selection. Nowadays, companies utilize various selection techniques like tests, background investigations or assessment centres to identify viable job candidates. Interviews are most commonly used tool when recruiting. Different companies adopt different strategy of recruiting. The external factors like the labour market play a vital role in recruiting and selection too. For job market in the industrialized societies, there exist many agencies providing recruiting service and the level of professionalism is higher. 2.1.4 Training After acquiring the right people into the right position, the companies have to equip employees with right attitude, knowledge and skills required by positions and organisational goals. Employee training and development is always regarded as a key element in HRM practices. The orientation, socialization, the on-the-job training, the rotation system, the enrichment movement are all the ways of training employees with the aim of inducing their skills, behaviors desired by the organisational goals. Two central issues that HRM function supposes to deal with are fostering skills or competence and inducing motivation from employees' part. According to expectancy theory (Vroom, 1964), the relation between efforts and performance is influenced by two major factors: skills needed and role-played. Evans and Barsoux (2002) indicate that the institutional elements have a great impact on employment practices and patterns of work organisation. In cross-cultural management literature, Concerned with the development of self-efficacy through differential training foci, the researchers found that self-focused training (i.e., that which emphasized individual skill development) had a greater impact on individualists than collectivists, and conversely that group-focused training (i.e., that which emphasized group coordination) had a greater impact on collectivists than individualists. Other studies (Earley and Erez, 1997) have found that those from individualist cultures perform in order to gain recognition, whereas those from collectivist cultures perform in order to benefit the larger group. 2.1.5 Performance appraisal Business organisations in any culture rely on its employee performance. The performance process usually covers three major steps: defining the performance criteria, the process of conducting the appraisal and providing the feedback. Different cultures, however, call for different approaches. For example, the cultural force of individualism/collectivism is closely related to this practice through the means of self, because the feedback is inherently evaluative and related to another person. This is the issue of ego and social relation. Daley (2001) proposed that individualists are more motivated to seek feedback about performance successes, whereas collectivists are more motivated to seek feedback about failures because distinguishing oneself through success is the cornerstone of the independent, self-concept while desire for failure feedback may serve the larger purpose of improving the group's welfare, which is the cornerstone of the interdependent, self-concept. In fact, the collectivists can also behave in an avoiding way when facing feedback due to afraid of failures or losing faces. Besides, the successful information and image is decided by the nature of competition in different societies. Mondy and Noe (2004) and Dessler (2004) argued in collectivist societies competition is more between individuals and standards (e.g. a passing grade on an entrance exam), or between various in-groups, than between individuals, and even then it is moderated by a cooperative interpersonal climate. Thus, failure feedback may be perceived as a critical attack by individualists, but as constructive advice by collectivists while in individualistic societies, the competition is often between individuals. In addition, they further pointed out that seeking successful feedback is consistent with the self serving norm of individualists, whereas seeking failure feedback is consistent with self effacing norm of collectivists. Doing otherwise in either culture could be deviant and risk sanctions (Mondy and Noe, 2004; Dessler, 2004). 2.2 Overview As mentioned above, human resource practices can help to create firm specific competitive advantage by acquiring the skills needed and eliciting motivation. The reality often shows that even highly skilled employees will be less productive if they are not motivated to perform. By using compensating tools properly, it is possible for organisations to link performance tightly with incentive systems. Using internal promotion systems, organisations can develop employees' maximum potential and elicit the discretionary effort from employees. The implication here is, or as the above literature and argument has tried to establish, is that HR practices are fundamental to organisational efficiency and effectiveness. All of the practices outlined in the preceding are integral to organisational success and directly impinge upon the characteristics and defining features of an organisation's culture. Indeed, and as stated in the introductory section, they can affect a transformation to the better in the said culture. Nevertheless, this does not detract from the value and important of compensatory practices. Accordingly, operating under the assumption that an organisation does utilise and exploit the above stated practices, the second part of the research will discuss the function of compensation therein and the manner in which its maximisation of employee motivation levels can enhance organisational efficiency and constructively impact upon organisational culture. 3 Historical Context of Compensation Research The academic literature on compensation and HRM practices indicate that economic and social pressures have forced managers to rethink how people get paid and the extent to which compensation may function as a motivator or de-motivator (Anthes and Cronin, 1996). Traditional approaches to compensation have been increasingly questioned. Some researchers have viewed pay as a measure of justice. For example, a comparison of earnings of women with those of men demonstrated what many have considered inequities in pay decisions. This gender pay gap in the United Kingdom, after adjustment for differences in education, experience, and occupation, narrowed from 36 percent in 1980 to 12 percent in 2000 (Dressler, 2000). To stockholders, executive pay has been of special interest, and research indicates an immediate correlation between executive pay structures and the financial performance of a company (Ernst and Young, 1990). Managers have also voiced a stake in compensation - noting that it directly influenced their success. It was first and foremost considered a major expense. In addition, compensation could be used by a manager to influence employee behaviors and improve organisational performance (Cumming, 1994). The way employees were paid affected the quality of their work; their attitude toward customers; their willingness to be flexible; learn new skills; suggest innovations; and, even their interest in unions or legal action against their employer (Huselid and Huselid, 1998). Pay received in return for work performed was a primary source of financial security for employees and their families. Thus, pay had always played a vital role in the economic and social well being of an individual (Zingheim and Schuster, 2000). Barbeito and Bowman (1998) studied the changing composition of the workforce. They identified the need for nonprofits to attract and retain employees by providing their employees with motivation, self-growth and promotion opportunities. And, the importance of innovation in compensation practices became clear as a way to provide nonprofits with a competitive edge to recruit and retain employees in a diminishing qualified employee pool. The researchers also noted that application to the nonprofit sector of innovative compensation options from the profit-making sector has been questioned. These questions were based on the historical perspective of the culture of nonprofits and the perception that motivational driving forces for performance of non-profit employees were not linked to compensation practices. The authors' conclusion following a cross-sector study (that included diversity in gender, age and experience) comparing profit-making compensation plans with nonprofits, presented a compelling argument for linking compensation to performance. Furthermore, the authors suggested employing compensation practices proven in the profit-making sector to enhance employee motivation and innovation. Ultimately, their study demonstrated that compensation practices began to shift the culture of the non-profit organisation. Reed (2004) conducted two cross-sector studies. These studies led him to the conclusion that the structure of the reward system in non-profit organisations was more complex than previously thought and those non-profit employees did not place a higher priority on altruism than on monetary rewards. Theuvsen (2004) introduced one model of pay-for performance effectiveness in nonprofits that reflected dominant theories in the fields of psychology, management and economics. His research underscored two important determinants of pay-for-performance effectiveness: relevance of extrinsic rewards and applicability of output control. An analysis of the literature, however, as Barbeito and Bowman, (1998) contend, suggests a need for empirical research to examine the effectiveness of pay-for-performance plans in different types of nonprofits. The models presented did not fully take into account the varied nature and diversity of the non-profit sector. These studies considered only a comparatively rough distinction between different types of non-profit organisations. A more detailed picture seemed warranted. Pay-for-performance plans could be successful in donative nonprofits, however for reasons not explained by the dominant theories (Theuvsen, 2004). As a growing number of nonprofits were forced to generate revenue from their own work rather than from donations and grants, it was increasingly important and legitimate to encourage employees to find ways to generate these revenues (Barbeito and Bowmen, 1998). In some cases, organisational survival could be at stake. In other nonprofits, finding self generating revenues could help to fund other organisational activities. The shift in the focus of donative nonprofits from exclusively relying on charitable giving to generating earned income developed the link joining the creation of innovative compensation systems with the resulting impact on non-profit organisational culture (Rosen and Shah, 2004). 3.1 Compensation Systems Compensation systems can be different and divergent across borders due to the variations in labour market, societal culture preferences, ownership, corporate governance, degree of unionization, ratio of labour-capital and exposures to foreign competitors, etc. The assumption that HRM systems must fit societal cultures is based on the belief that "most of a country's inhabitants share a national character that represents mental programming for processing ideas and information that these people have in common". This belief leads to a search for distinct societal cultures whose influence is critical, if not most important, in understanding international compensation systems (Earley & Erez, 1997; Hofstede, 1980). Cultural norms influence allocation preferences by limiting the number of alternatives or by orienting allocators to favour some rules over others. Cross-cultural research has found that member of collectivistic societies like ethnic Chinese communities prefer equalitarian allocations, whereas individualistic nationals, like the people in the U.S. generally prefer differential allocations that match proportional contributions. The societal norms for uncertainty avoidance, masculinity affect what motivates people in different cultures. Milkovich and Newman (2002) found that the significant correlation exits between societal culture and compensation practices. For example, individualism was positively related to pay for individual performance and stock options for managers. 3.2 Importance of Compensation to Productivity and Innovation Compensation had referred to all forms of financial returns, tangible services and benefits employees received as part of an employment relationship (Dressler, 2000). Forms of pay had included: total compensation, as well as relational returns. Relational returns signified those opportunities, status, sense of belonging, and perception of challenging work. These relational returns had been the psychological returns employees believed are received in the workplace. Total compensation had included pay received directly as cash and indirectly as benefits (Milkovich and Newman, 2002). Milkovich and Newman (2002) delineated pay models with three basic building blocks: the strategic compensation objectives, the strategic policies that formed the foundation of the compensation system and the techniques of compensation. The strategic perspective aligned the compensation system to the business objectives. Different business strategies translated into different compensation approaches. Eisenhart and Brown (1998) demonstrated in their research that a compensation system that rewarded innovation in products and processes would encourage increased innovation and encourage productivity. Although the term productivity was used frequently, Pritchard (1992) suggested that often the definition has been inconsistent. Payne (2000) examined performance effectiveness leading to high productivity. His research suggested that productivity was the ability to obtain the most out of the resources used. 4 Organisational Culture and Cultural Change Organisational culture had been defined as the informal rules, rituals, and value systems that influenced how employees behaved (Lakos and Gray, 2000). It was rooted in the values, beliefs and assumptions shared in common by a group of people and it influenced how information is processed (Schein, 1986). Added to that, Landes (2001) highlighted in his research on innovation and creativity, the interaction between purposeful actions, incentives and organisational change. Pay systems as the implementation of compensation strategy had reflected the values that underlined treatment of employees (Landes, 2001). In many organisations, core values building employee business behavior, had been reflected in the pay system. Although Payne (2001) concluded that a relationship between culture and performance was not indicated, Landes (2001) argued that compensation strategy could be a catalyst to enhance performance and change organisational culture. Similarly, Barbeito and Bowman (1998) argued that compensation was linked to performance (productivity and innovation). In addition, Cooper (2004) argued that private sector compensation structures could be used to impact the culture of non-profit organisations. Culture was manifested in behavioural norms, hidden assumptions, and human nature, each occurring at a different level of depth (Schein, 1986). Kilmann et al. (1991) suggested that a feasible approach to cultural change was to conduct an intervention at the norm level, using a top-down approach, if necessary, to encourage employees to begin behaving in new ways. 4.1 Non-profit and For-profit Compensation Models. Non-profit institutions were central to American society and were one of its most distinguishing features (Drucker, 1997). The product of non-profit institutions was a changed human being. Non-profit institutions needed leadership and management systems especially designed for them to enable a concentration on the non-profit mission (Acampora and Boisssoneau, 1994). Much was available for for-profit organisations. However, little thus far was available to non-profit organisations. In particular, systems that paid attention to the distinct characteristics of different types of nonprofits should include a specific and central need, including compensation models (Barbeito and Bowman, 1998). Drucker (1990) emphasized the need among nonprofits for materials and strategies developed out of their own experience and focused on sector-specific realities and concerns. (Drucker, 1990) 4.2 Relationship between Compensation Strategy and Organisational Culture Compensation strategy had been shown to impact organisational culture and could be used as an intervention for changing organisational culture (Cooper, 2004). Underlying the psychological focus on individuals in organisational settings had been the implicit assumption that both the organisation and the individual were best served when there was a good fit between the goals, expectations and conditions of an organisation with the characteristics of the people in them. There were many ways to obtain a good fit and recent research had been devoted to developing this person-organisation (P-O) fit or model (Kristof, 1996). Studies by Reed (2004) found that there was a relationship between individuals' work values, reward preferences and the availability of rewards in non-profit organisations. His research demonstrated that non-profit employees equally value both monetary and nonmonetary rewards. Cooper (2004) in his case study of organisational change found that adopting a private sector structure of performance-related and flexible pay conditions in a public sector organisation created an evolution in the public organisation's culture. 4.3 Productivity Organisational productivity had been defined as how well an organisation used its resources to achieve its goals. Individual productivity was defined as how well an individual used available resources to contribute to organisational goals (Payne 2000). Compensation strategy had been shown to enhance motivation, enhance team performance and reduce productivity loss (Sheppard, 1993). 4.4 Innovation The professional literature had demonstrated how individual creativity combined with environmental characteristics to generate organisational change. Glynn (1996) suggested that individual intelligence combined with organisational intelligence to generate innovation. Innovation had been shown to occur provided that certain enabling conditions were present. These conditions included: adequate resources and support, incentives and inducements. This process had presented a model of organisational change that was driven by multilevel influences including those of compensation strategy impacting organisational innovation - all being driven by individual creative action (Oldham and Cummings, 1996). 5.5 Overview Bearing the above stated in mind, it is apparent that the literature on compensation not only highlights the extent to which its judicious use can constructively contribute to the maximisation of organisational efficiency but, significantly, the degree to which it can influence positive developments in organisational culture. Compensation leads to the maximisation of employee motivation levels and, accordingly, to the enhancement of both productivity and innovation. When compensation schemes are institutionalised they become an integral part of the organisation's culture and accordingly, create a motivational, productive and committed organisational culture which, in turn, enhances efficiency. It is, thus, that within the matrix of HR tools, practices and strategies, compensation assumes a singular importance. 5 Conclusion The argument presented in the above and which was supported throughout with academic literature and empirical evidence on compensation and other HR practices, has established one incontrovertible fact: HR practices positively contribute to organisational efficiency and induce such transformations in organisational culture as which ensure the maintenance of efficiency and effectiveness through a motivated and committed workforce. Within the context of the stated, compensation is important but it cannot attain the desired-for changes alone. 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