This chapter reviews the literature regarding HR effectiveness, job satisfaction and organizational performance.
Measuring HR Effectiveness
For more than two decades, many scholars have conducted countless research studies on measuring or evaluating the effectiveness of HR function from various points of view and how the results relate to the outcome of the firm. In a more general sense, HR effectiveness can be defined as how much HR activities contribute to the outcomes of an organization in terms of both individual level outcomes (job performance, job satisfaction, motivation, etc) and firm level outcomes (scrap rate, sales growth, ROA, ROI. etc).
Importance of Measuring HR Effectiveness
There is a continually increasing demand among the corporate world in how HR practices help organizations gain a competitive advantage, assessing HR effectiveness becomes more important for both non-HR managers and HR professionals. Measures of HR effectiveness justify, assess, and track the performance of personnel/HR departments, assign responsibility and accountability for deployment of human resources, and help focus attention on which HR practices are most critical for an organization (Ulrich, 1989). In other word, without addressing the significance of how to assess HR effectiveness, non-HR managers may not recognize how HR contributes to the outcome of the company and HR professionals may have difficulty becoming full business partners.
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A Typology of Models for Assessing HR Effectiveness
Ulrich (1989) proposed the typology of models based various literature reviews depicting models and methods of assessing HR effectiveness developed by numerous scholars.
Typologies organize diffuse literatures, make explicit what options exist between approaches to solving a problem, and lay the foundation for debates among alternatives (Ulrich & Barney, 1984). According to Ulrich, a typology of models may be developed that distinguishes alternatives and suggest conceptual, practical, and methods differences of each model.
The criteria of a typology of HR assessment models are fourfold: concept (definition of HR effectiveness), assumptions (underlying view of HR), domain (focus of HR activity) and process (how to implement the approach) and with these criteria, three models are identified:
Stakeholder Model: A stakeholder or constituency (Tsui, 1984) approach focuses on the perceived value of the services of an HR/ personnel department by its users.
Utility Model: A utility approach (Cascio, 1987; Cascio & Ramos, 1986; Fitz-Enz, 1980) focuses on the economic utility of HR practices by translating HR practices into financial indices.
Relationship Model: A relationship approach (Tichy, et al., 1982; Ulrich, et al., 1984) focuses on the ways that HR practices impact a business ability to accomplish its strategic goals.
Stakeholder model
In this model, the HR/personnel function is the central domain. HR effectiveness depends on the perceptions of users of the function or department. It assumes that effectiveness comes to HR departments when they are service-oriented, delivering responsive goods or services to customers throughout the organization. The role and effectiveness of a HR department comes from assessment and response to user needs. The stakeholder model usually follows a four step sequence:
11 1. Identify key stakeholders
2. Formulate assessment questions 3. Collect and analyze data
4. Provide feedback.
On the other hand, the stakeholder model certainly has its strengths. It involves a number of key stakeholders in the assessment of HR effectiveness, shifts responsibility for HR effectiveness from its base in the department towards reflecting responsibility with non-HR managers, and encourages a service orientation for the HR department.
Weakness wise, the assessment results are not linked to business performance because stakeholders may want a particular service, but not be aware of the cost of delivery or how the service may impact overall business performance.
Table 2.1. Stakeholder Approach
Dimension Domain HR Department/ Function
Concept In the eye of the beholder; dependent on the views of the users of the function
Assumptions - HR is a service function, designed to provide service to its users - Responsiveness to user needs determines effectiveness
Process 1. Identify key stakeholders 2. Formulate assessment questions 3. Collect/analyze data
4. Provide feedback to all interested parties Strengths - Involves people from diverse groups
- Creates joint responsibility for HR
- Emphasizes services nature of the HR function
Weaknesses - Not linked to performance outcomes - Not linked directly to HR costs
- Require high commitment of time and resources - May focus on doing things right vs. doing right things Source: Ulrich, 1989.
12 Stakeholder groups
Hitt, Ireland, and Hoskisson (2005) suggested that there are three primary groups of stakeholders that are significantly prone to organizational performance. First, companies must cater the needs of capital market stakeholders – shareholders and major suppliers of capital such as bank. Second, companies must take the needs and demands of product market stakeholders – the primary customers, suppliers, and host communities with whom organizations conduct business. Third, companies must attend to the needs of organizational stakeholders – the employees and managers within the organization.
Capital market stakeholders
Capital market stakeholders have been the focus of researchers in the HRM field. Rogers and Wright (1998) reviewed 59 studies that examined the relationship between HR and various organizational outcomes and revealed that only two of the studies used employee outcomes such as turnover as the outcome of interest. On the other hand, 40 of the studies reviewed by Rogers and Wright (1998) used accounting measures and financial market measures of performance such as ROA, ROE, ROI, and Tobin’s Q that directly serve the interests of the capital market stakeholders. Moreover, it’s not rare to see in the strategic HRM publications the discussions on the impact of HR practices on outcomes such as sales per employee or ROA associated with a standard deviation increase or decrease in the level of HR practices used.
Product market stakeholders
One area of research that has specifically considered the impact of HR initiatives on product market stakeholder is climate for service research. In this research stream, customer satisfaction is treated as a mediating variable between HR practices and business performance and it is slightly different from more traditional strategic HRM research by its focus on the
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customer as the main outcome of interest. In general, climate can be defined as the employees’ perceptions of the routines and rewards that characterize a setting and can be understood as the immediate environment surrounding the individuals when they enter an organization. Climate research usually has a strategic focus of interest such as service, justice, or safety, and attempts to identify those elements of the work environment described by employees that correlate to critically important organizational outcomes such as customer satisfaction. In sum, apart from the capital market stakeholder approach, HR professionals can also measure HR effectiveness from the perspective of product market stakeholders centering the level of customer satisfaction.
Organizational stakeholders
Employees as a stakeholder group have been the focus of HRM researchers which examines the impact as of various HR practices and activities on employee outcomes. There have been countless research studies over the years examining the impact of HR practices such as selection, recruitment, training and development, compensation on employee-focused outcomes such as job satisfaction, motivation, socialization, career success and occupational safety. An emphasis on such employee-focused outcomes takes into account the importance of meeting the needs and interests of employees as major stakeholders in the organization.
Additionally, a secondary stream that has focused on employee outcomes is the industrial relations (IR) paradigm. And one of the main differences between IR research and strategic HRM research is that strategic HRM approaches the study of work and employment from the employer’s perspective, IR research approaches the same topic from employee’s viewpoint, explaining why individual workers may be at a power disadvantage against the corporation and advocating collective forms of dealing between employees and employers.
Despite the differences, strategic HRM and IR researchers both emphasize the benefits of employees as the center of their research. Also, they share common interests in a broadly
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conceived notion of HR practices suggests research opportunities of examining the potential for mutual gains initiatives that may benefit both employees as well shareholders or stockholders.
Utility model
In utility model, alternative HR practices are the domain of interest. HR effectiveness depends on the extent to which an alternative practice improves the organization’s economic gain over not using the practice. This model recognizes that people and people-related costs compose about 57% of the total value of goods and services produced. Utility, therefore assumes that reducing these costs through more efficient HR practices results in HR effectiveness. The process of adopting utility model is fourfold:
1. Specify the HR practices
2. List the activities associated with the practice 3. Estimate economic value of each activity 4. Create overall HR performance measures.
The utility model has much strength. For one, it translates HR practices into economic value. This economic value is more accessible as a measure of performance. It also distinguishes more from less successful HR practices. Casio and Ramos (1986) quantified the value of assessment techniques in selection. McKeon (1981) quantified the value if off-site meetings. These empirical assessments help the firm to better allocate resources in a more efficient manner.
Weakness wise, the utility model is somehow difficult to apply. Assumptions that every HR activity has its economic value can be very subjective and unacceptable to some people in the organization. Indirect costs may be estimates rather than hard facts. Moreover, this model assumes that HR practices can be translated into economic value. Some HR practices may have long term economic value (e.g., quality improvement programs, succession planning,
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career development, etc) that may be difficult to quantify. Finally, outcomes other than costs may at times be important to an organization. New organizations, concerned with rapid growth and delivery of new products, may be less concerned about economic utility of programs than about the program’s ability to deliver new products.
Table 2.2. Utility Approach
Dimension Domain HR practices
Concept Tied to business results and linked to assessing, managing, and reducing HR costs
Assumptions - People and HR practices are and generate costs that can and should be managed
- Managing HR costs leads to better organizational performance and determines HR effectiveness
Process 1. Specify the HR practices
2. List activities associated with the practice 3. Estimate costs and/or benefits of each activity 4. Create overall HR indices
Strengths - Translates HR practices to financial results
- Likely to be accepted and understood by business executives - Focuses attention on positive or negative HR practices Weaknesses - Difficult to create accurate measures
- Potentially measure only one aspect of HR effectiveness Source: Ulrich, 1989.
16 Jac Fitz-enz’s approach
Dr. Jac Fitz-enz is a renowned pioneer in the measurement of human capital and performance management in HR field, who has been advocating the importance of translating the efforts of HR practices into actual numbers and figures, showing CEOs that HR function is becoming more of a business partner than a support function in the organization. Fitz-enz has led the fight to make HR a powerful position within the organizational structure. Fitz-enz believes that HR must measure the effectiveness of what it does and his focus is to help the HR professionals add value to the organization, plan strategically, and measure program effectiveness. Hard data, in Fitz-enz’s opinion, will give HR professionals the proof of program worth or, conversely, ammunition to illustrate what programs are not working and should be dropped or changed.
The Saratoga Institute, a performance measurement and consulting company founded by Fitz-enz in the late 70’s, initiated a research project under the sponsorship of SHRM (Society for Human Resource Management) for the purpose of developing the first set of formulas to measure the work of HR functions. Fitz-enz had been advocating this since 1980 without support. In the end, they were able to identify a set of approximately thirty measures. Over the years there have been minor changes and some additions. These measures are the human asset management benchmarks that form basis of the annual Human Resources Effectiveness Report, and the 1994 version of formulas is shown in Table 2.3.
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Table 2.3. Formulas to Measure HR Effectiveness Developed by Saratoga Institute
Number Formulas Number Formulas
1 Revenue per employee 14 HR department expense as a
percentage of company expense
2 Expense per employee 15 HR headcount ratio
HR employees: company employees
3 Compensation as a percentage of revenue
16 HR department expense per company employee
4 Compensation as a percentage of expense
17 Supervisory compensation percentage
5 Benefit cost as a percentage of revenue
18 Worker’s compensation cost as a percentage of expense 6 Benefit cost as a percentage of
expense
19 Workers’ compensation cost per employee
7 Benefit cost as a percentage of compensation
20 Workers’ compensation cost per claim
8 Retiree benefit cost per retiree 21 Absence rate 9 Retiree benefit cost as percentage of
expense
22 Involuntary separation
10 Hires as a percentage of total employees easier to cooperate and communicate more accurately, we can make life better. That’s the sort of chain we like to think about.” The establishment of Saratoga Institute serves the purpose of providing the grammar, syntax or semantics in this chain.
18 Relationship model
In the relationship model, HR practices are the primary domain of interest and the HR department is the secondary domain of interest. HR effectiveness occurs when strategies match or have positive relationships with HR practices, when HR practices become useful for implementing strategies plans, or when HR practices help firms generate and sustain a competitive advantage. This approach assumes that HR practices may help organizations implement strategic plan. HR practices are not created in isolation, and should link up with business strategic plan. The relationship model generally follows a five step sequence:
1. Prepare a framework to guide the assessment of relationship studies 2. Define the organizational unit of analysis
3. Collect information about organization strategy, HR practices, and performance 4. Analyze relationship data
5. Monitor results over time.
Relationships models have been less common than stakeholder or utility analysis. The assessment results tie together strategy and HR practice, assess complex models of organizations (including strategy, HR, and performance), and justify the value of HR practices as a means of implementing strategies.
Weakness wise, relationship model consumes extensive resources to establish and monitor, necessitate cooperation in sharing information between organization units and possibly between corporations, and require that a breadth of information to be collected from diverse business units. These difficulties imply that initial efforts will probably be more exploratory than definitive.
19 Table 2.4. Relationship Approach
Dimension Domain HR practices
Concept Found in the relationship between organization strategies and HR practices
Assumptions - HR practices help organizations implement their strategies - HR effectiveness comes as HR practices match strategies - HR effectiveness is measured in more dynamic and interactive
terms rather than single time or single index measures Process 1. Prepare framework for assessment of relationships
2. Define the organizational unit of analysis
3. Collect information about organization strategy, HR practice, and performance
4. Analyze relationships between strategy, practice, and performance
5. Monitor results over time
Strengths - Integrates strategy, HR practices, and performance data - Shows relationships of HR practices to financial results - Examines relationships over time
Weaknesses - Requires large amount of resources to establish and monitor - Requires collection of sensitive data
- Requires a breadth of information to be collected Source: Ulrich, 1989.
Strategic human resource management
In the light of the aggravation of the competition in the corporate world, HR function is now in the spotlight as managers begin to regard manpower as strategic assets in line with the implementation of strategic plans in the firm. In order to engage in Strategic Human Resource Management (SHRM), managers should view the interactions between HRM, management functions (planning, organizing, leading, controlling) and organizational strategy from a macro-organizational perspective.
As Figure 2.1 shown, externally, business operation is susceptible to factors such as politics, economics, society and technology; internally, it is susceptible to factors such as
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strategy, objectives and organizational structure. If managers intend to obtain competitive advantages in response to business needs through proper allocation and utilization of human resources, they need to think at a strategic level, to figure out what is the best for the company (Tichy et al., 1982).
Figure 2.1. Strategic Human Resource Management Source: Tichy et al., 1982.
Economics Politics
Objectives Structure
Strategy
SHRM Society
Technology
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Measuring by the Level of Outcome Proximity
Dyer and Reeves (1995) suggested that the assessment of HR effectiveness may be viewed from a different perspective, the level of outcome proximity to the HR practices. The first and the most proximal category centers on employee outcomes such as turnover, absenteeism, job satisfaction, commitment, and motivation which HR practices have the most immediate impact on, are in a closer line of sight to HR practices. They also have the strongest effect on such employee outcomes, to some extent, they are the initial goal for designing HR practices. The secondary category focuses on a more macro level performance associated with aggregates of individual efforts such as productivity, quality of products and customer service. These aggregate level outcomes can further be differentiated by department level, plant level, business unit level, and firm level performance measures (Rogers & Wright, 1998). The third category accounts for financial and accounting outcomes in terms of ROA, ROI and profitability. This category has been the focal point of many strategic HR studies and is quite illuminating for researchers and convincing managers to acknowledge the significance of HR practices in terms of financial or market performance. Finally, the fourth and the least proximal category is the capital market outcome in terms of stock price, growth and return.
Although corporate or firm performance metrics i.e. the third and fourth categories are important, it cannot be drawn that certain outcomes are definitely better than others.
Corporate performance metrics may be viewed as quite distal from HR practices and likely to be influenced by more proximal level of outcomes related to HR initiatives. Rogers and Wright pointed out that more proximal outcomes serve as a means for achieving those higher-level outcomes. For instance, employee motivation may serve to enhance employees’
efforts and performance and subsequently their aggregated performance.
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Saratoga Approach
Saratoga Institute, a HR performance measurement research and consulting company founded by Dr. Jac Fitz-Enz, a pioneer in human capital management, and headquartered in Saratoga, California, with offices throughout Asia, the Pacific, the Americas, and the Europe.
Saratoga released its first Best Practices Report in 1992 and it became an annual publication ever since. The Best Practice Report is a study of companies that fall within the top 25th percentile in Saratoga’s Human Resource Effectiveness Report. Over more than a decade, Saratoga has summarized particular commonalities from numerous companies that have been commended for best HR practices. The following are the commonalities which can serve as indicators or criteria when evaluating HR effectiveness:
Communication: How much the company care about the financial state and physical health of employees? What action has been taken?
Strategy and planning: What program or scheme has been developed to help the company from the aspects of profitability, minimizing litigation, cost control, operational and technological skills shortage, and total customer satisfaction? How does staff respond to such program in terms of cost, sales, quality of service/product, etc?
Interdependence: Do HR goals link to the company’s strategic business plan? Does HR department conduct any workshop or seminar with the company’s executives committee to discuss how much HR function contributes to the outcomes of the company and how
Interdependence: Do HR goals link to the company’s strategic business plan? Does HR department conduct any workshop or seminar with the company’s executives committee to discuss how much HR function contributes to the outcomes of the company and how