Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 1. Human Resource Management Practices and Psychological

Transcription

1 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 1 Human Resource Management Practices and Psychological Contracts in Swiss Firms: an Employer Perspective Sabine Raeder University of Oslo, Norway Ursula Knorr and Martin Hilb University of St. Gallen, Switzerland Author Note Sabine Raeder, Department of Psychology, University of Oslo, Norway; Ursula Knorr and Martin Hilb, Institute for Leadership and Human Resource Management, University of St. Gallen, Switzerland We thank the Zurich Association for Human Resource Management (Zürcher Gesellschaft für Personalmanagement) for helping the Swiss Cranet team to access the sample for the study. Chris Brewster provided feedback that greatly benefited the final version of the paper. Correspondence concerning this article should be addressed to Sabine Raeder, Department of Psychology, University of Oslo, Norway. sabine.raeder@psykologi.uio.no

2 Running head: HR PRACTICES AND PSYCHOLOGICAL CONTRACTS 32 Table 1 Means, Standard Deviations, Correlations, and Reliabilities Variable M SD Company size ,83 2. Sector (0=manufacturing, 1=services) Psychological contract fulfilment (.76) 4. Selection methods ** ** (.79) 5. Career development ** *.44*** (.88) 6. Performance appraisal * (.95) 7. Performance-based pay *.23*.26*.30**.35** (.91) 8. HR strategy and policies *.03.22*.36***.48*** (.72) 9. High-investment HR system index ** **.58***.68***.57***.76***.62*** (.67) 10. Organisational performance (.72) Note. Cronbach s alphas in brackets on the diagonal. *p <.05. **p <.01. ***p <.001.

3 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 2 Abstract This study investigated the relation between HRM practices and organisational performance, considering the fulfilment of the psychological contract as an intermediate variable. Apart from testing the influences of a high-investment HRM system index on the psychological contract, the influence of individual HRM practices and their interaction was examined. The sample consisted of HR managers of 92 firms in Switzerland and the data were collected for the Cranfield Network project. The results showed that the high-investment HRM system index predicted the fulfilment of the psychological contract, and some of the individual HRM practices were correlated with the fulfilment of the psychological contract. The interaction effect of performance appraisal and performance-based pay on the fulfilment of the psychological contract showed that performance appraisal is only effective in combination with a tangible consequence in form of performance-based pay. We neither found a mediation effect for the psychological contract nor an association with organisational performance. This might be due to fact that the questionnaire was filled in during the financial crisis in 2008 and that the organisational performance was assessed in an economic crisis. Our study sheds light on the relation between HRM practices and the psychological contract and contributes to the body of research on psychological contracts from a macro level perspective. Keywords: HRM practices, organisational performance, psychological contract

4 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 3 Human Resource Practices and Psychological Contracts in Swiss Firms: an Employer Perspective A growing body of research in strategic human resource management has focused on the relevance of Human Resource Management (HRM) practices for firm performance and provided empirical evidence (e.g., Delaney & Huselid, 1996; Lepak, Taylor, Tekleab, Marrone, & Cohen, 2007; Stavrou, Brewster, & Charalambousa, 2010). Although a positive relationship between HRM practices and performance was found, explanations as to why this relationship is effective are still lacking (see Wright, Gardner, & Moynihan, 2003). To better capture the complexity of the relationship, it was suggested to analyse indirect paths between HRM practices and firm performance (e.g. Boselie, Paauwe, & Jansen, 2001; Wright et al., 2003). In this paper, we investigate the psychological contract as an intermediate variable between HRM practices and firm performance. Psychological contracts are obligations and expectations in the employment relationship existing beyond the legal employment contract (Rousseau, 1989). Research has shown that the fulfilment of the psychological contract, meaning that the organisation fulfilled its obligations towards the employee as expected, has a favourable effect on employee attitudes, behaviour and performance (e.g., Henderson, Wayne, Shore, Bommer, & Tetrick, 2008; Sturges, Conway, Guest, & Liefooghe, 2005; Turnley, Bolino, Lester, & Bloodgood, 2003), which are essential for firms productivity (see Boselie et al., 2001; Paul & Anantharaman, 2003; Ramsey et al., 2000). When distinguishing micro and macro approaches in the context of HRM practices, Wright and Boswell (2002) assigned the psychological contract and the employment relationship to the individual or micro level of the analysis allowing researchers to link HRM practices to the psychological contract. Wright and Boswell focused on a definition of psychological contracts as organisational obligations, which employees perceive as legitimate due to their own contributions (see Rousseau, 1989). More recent research has investigated

5 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 4 the psychological contract as reciprocal obligations which are also held by supervisors representing the employer (e.g., Dabos & Rousseau, 2004; Tekleab & Taylor, 2003) thus switching to the macro or organisational level of analysis. Few studies have investigated the psychological contract from an organisational perspective based on data of managers or HR managers representing the firm, although HRM practices are one of the main factors for actively influencing employment relationships at the organisational level (Suazo, Martínez, & Sandoval, 2009). In this study, we follow this reasoning and analyse the impact of HRM practices on psychological contracts and performance at the organisational level. Based on data collected in organisations in Switzerland for the Cranet survey (Brewster, Mayrhofer, & Morley, 2004), we relate HRM practices to the organisation s performance and the psychological contract. In the Cranet survey, a broad range of HRM practices is investigated with mainly objective measures. We present one of the few studies in the field of psychological contracts relying on employer data. We aim to contribute to the body of knowledge by exploring how psychological contracts can be formed, how they are shaped by company procedures and how they relate to productivity measures. This paper first presents research on HRM practices and performance and then focuses on the psychological contract in its mediating role between HRM practices and performance. Relations between the psychological contract and individual HRM practices are discussed and finally the empirical study is presented. HRM Practices and Organisational Performance A main concern of strategic human resource management is to show that HRM practices contribute to the performance of the organisation (Delery & Doty, 1996). Some authors, however, critically discussed methodical problems and the lack of a theoretical basis regarding the link between HRM practices and performance (e.g., Guest, 1997, 2001; Wall & Wood, 2005; Wright et al., 2003). Several alternative explanations for the relationship

6 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 5 between HRM practices and performance have been suggested. An effect of reverse causation might be present due to which performance causes high quality HRM practices, because resources are available in highly performing organisations (Wright, Gardner, Moynihan, & Allen, 2005). A confounding influence might exist indicating that companies with high quality HRM are also good at other types of management and thus arrive at a high performance level (Huselid & Becker). Such confounding variables could relate to leadership or organisational culture. Furthermore, it was suggested to analyse indirect paths between HRM practices and firm performance to better capture the complexity of the relationship (Boselie et al., 2001; Wright et al., 2003). The analysis of such intermediate processes helps to explore the chain of relationships from HRM practices to employee attitudes and behaviour and finally to organisational performance (Boselie et al., 2001; Paul & Anantharaman, 2003; Ramsey et al., 2000; Takeuchi et al., 2007). Employee commitment, loyalty, and competence were for example suggested as intermediate mechanisms which are shaped by HRM practices and which subsequently support firm performance. This study contributes to explore indirect paths by investigating the psychological contract as a potential intermediate process between HRM practices and organisational performance. The methodical problems, which were critically disputed, focused on how to measure HRM practices and performance. It was discussed whether to measure performance by selfreport or by objective values, by more proximal (e.g., direct consequences of HRM practices) or more distal outcomes (e.g., profit, Wright et al., 2003). It was argued that several raters should assess HRM practices in each organisation to prevent measurement error to occur (Gerhart et al., 2000). Furthermore, consensus has not yet been found on how to measure HRM practices and which practices to capture (Guest, 2001). Since the data for the present study is gathered in the context of the Cranet study, the options to adopt methodical

7 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 6 suggestions and study designs are limited. Our main interest thus focuses on the choice of HRM practices to be included in the analysis. Some studies investigated the effect of individual HRM practices, whereas others tested bundles or systems of HRM practices. Both kinds of approaches supported the expected relationship between HRM practices and organisational performance (e.g., Delaney & Huselid, 1996; Delery & Doty, 1996; Guthrie, 2001; Huselid, 1995). Advocates of the systems approach towards HRM practices argued that a set of aligned practices is more effective, because employees are exposed to several HRM practices applied in companies, which are of complementary value to work performance (see Lepak & Shaw, 2008). Different ways of clustering HRM practices have been tested (Becker & Gerhart, 1996; Lepak, Liao, Chung, & Harden, 2006; Ramsey et al., 2000) without finding one superior type of system. Systems of HRM practices revolved around increasing the commitment of employees to the organisation (i.e., high-commitment HRM practices, e.g., Whitener, 2001), aligning the employees interests with those of the company (i.e., high-involvement work practices, e.g., Guthrie, 2001), or enhancing the skills and the motivation of the employees (i.e., high performance work practices or high-investment HR systems, e.g., Huselid, 1995; Lepak et al., 2007) with the ultimate goal of improving firm productivity. The differences between systems were small and objective arguments in favour of one system do not exist (Wright & Boswell, 2002). We focus on high-investment HRM systems, because they broadly consider HRM practices and are applied to manage employment relationships (e.g., Lepak et al., 2007). In agreement with preceding studies, we expect that HRM systems aiming to develop employee skills and motivation as found in high-investment HRM systems enhance the performance of the organisation. Hypothesis 1: High-investment HRM systems are positively related to the performance of the organisation.

8 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 7 The Psychological Contract as an Intermediate Process To better capture the relationship between HRM practices and performance, researchers have assumed intermediate processes which connect HRM practices and organisational performance indirectly and help to explain this relationship (Boselie et al., 2001; Paul & Anantharaman, 2003; Ramsey et al., 2000). Boselie et al. suggested employee satisfaction, motivation, involvement, trust, commitment, retention, and presence, as well as social climate between workers and management as intermediate variables. Ramsey, et al. found the intermediate variables employee commitment and job strain to be related to highperformance work practices and organisational performance, but failed to establish the mediating effect. Paul and Anantharaman demonstrated numerous relations between HRM practices, performance measures and the intermediate variables competence, teamwork, organisational commitment, and customer orientation, but did not succeed in framing a comprehensive model. Taking this argumentation further, we assume that the psychological contract serves as an intermediate factor which helps to transfer HRM practices into organisational performance. HRM practices are assumed to affect the psychological contract because they form part of the obligations of the employer towards the employee, and employees perceive them as inducements (see Suazo et al., 2009; Uen, Chien, & Yen, 2009). Thus, the HRM practices an employer carries out help to fulfil the psychological contract. The fulfilment of the psychological contract contributes to the performance of the employees (e.g., Henderson et al., 2008; Sturges et al., 2005; Turnley et al., 2003), which has a positive effect on the performance of the organisation (Paul & Anantharaman, 2003; Ramsey et al., 2000). To test these assumptions in a mediation model, we focus first on the association of psychological contracts with performance and second on the association of HRM practices with psychological contracts.

9 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 8 Psychological Contracts and Performance The relevance of the psychological contract for work performance has only been shown at the micro level of analysis based on employee data (see Wright & Boswell, 2002). We therefore report study results which have shown the importance of the psychological contract for employee performance and argue to explore the link between the psychological contract and firm performance. Several studies as well as a recent meta-analysis reported a correlation between the psychological contract and employee performance, which is positive for the fulfilment and negative for the breach of the psychological contract (e.g., De Cuyper & De Witte, 2006; Henderson et al., 2008; Johnson & O'Leary-Kelly, 2003; Lester, Turnley, Bloodgood, & Bolino, 2002; Restubog, Bordia, & Tang, 2006, 2007; Robinson, 1996; Sturges et al., 2005; Turnley et al., 2003; Zhao, Wayne, Glibkowski, & Bravo, 2007). Only Orvis, Dudley, and Cortina (2008) did not find any relationship between breach and employee performance unless for people low in conscientiousness. Breach of the psychological contract means that promises given either by the employer or by the employee were not kept or that obligations were not fulfilled (see Robinson, 1996). Whereas fulfilment focuses on positive aspects meaning that promises or obligations were kept, breach emphasises negative aspects. Uen et al. (2009) established a positive effect for relational psychological contracts and a negative effect for transactional psychological contracts on employee performance. Relational contracts are focusing on a long-term employment relationship with a strong socioemotional dimension, whereas transactional contracts are meant for a short-term commitment exchanging mainly tangible benefits. Thus, only a relational psychological contract is supportive for employee performance. Based on the studies suggesting intermediate processes between HRM practices and firm performance, we expect that the fulfilment of the psychological contract acts as a mediating variable and thus contributes to the performance of the organisation. A reason for

10 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 9 assuming this indirect effect is that the psychological contract predicts employee performance and can take over the role of an intermediate variable like employee commitment or satisfaction (see Boselie et al., 2001; Paul & Anantharaman, 2003; Ramsey et al., 2000). We further assume that employers consider the psychological contract as fulfilled, if they deliver to a sufficient degree on their obligations. Consequently, they expect employees to perform (see Lester et al., 2002; Tekleab & Taylor, 2003) which produces an impact on the overall performance of the organisation (Paul & Anantharaman, 2003; Ramsey et al., 2000). Hypothesis 2: The fulfilment of the psychological contract is positively related to the performance of the company. HRM Practices and Psychological Contracts Two recent literature reviews argued that HRM practices shape psychological contracts (Aggarwal & Bhargava, 2009; Suazo et al., 2009). The type of HRM practices such as the form of training or the number of incentives directs the psychological contract to be transactional or relational in nature. HRM practices create and form the employee perception of the psychological contract which affects employee behaviour and attitudes and finally organisational performance. The reviews emphasised that the company s promises on HRM issues might lead employees to perceive their psychological contract as breached at a later point in time, if the company does not fulfil its obligations as communicated. Only a few researchers have investigated the psychological contract in a macro perspective (see Wright & Boswell, 2002) as seen by the employer and connected it to HRM practices. Guest and Conway (2002) found in a survey of senior HR managers that the number of HRM practices provided by the employer enhanced the explicitness of the psychological contract and reduced the likelihood of breach. A qualitative study illustrated the way small and medium sized ICT companies in the UK used skill and career development for managing the psychological contract (Scholarios et al., 2008). The researchers found two

11 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 10 approaches towards career management. The smaller group of companies favoured a low involvement/low sophistication approach, leaving the responsibility for development to the employees. The bigger group of companies promoted a high involvement, partnership-based approach with career planning and continuous learning. Some companies from the second group fostered a relational contract with higher loyalty from the employees by supporting the employees career. Combining micro and macro level, Uen, et al. (2009) linked commitment-based HRM systems measured at company level to psychological contracts measured at employee level. The findings indicated a positive effect of HRM practices on relational and a negative effect on transactional psychological contracts. The authors argued that the psychological contract captures the employees perception of the employment relationship and the HRM practices they are provided with. Thus, a mediating effect is expected in which HRM practices and employee performance are indirectly connected by the psychological contract. This mediating effect was only found for relational contracts, that is relational contracts as perceived by the employee serve to interpret the companies HRM practices and are beneficial for employee performance. The result that the mediation effect only holds for relational contracts might have appeared due to the substantial inter-correlations between relational and transactional contracts, and if entered together the relational variable takes over more explanatory power. Furthermore, commitment-based HRM systems correspond to the relational contract, as both stress aspects of a long-term relationship and loyalty. Several studies investigated the impact of HRM practices based on employee selfreport data, corresponding to the micro or individual level of analysis (see Wright & Boswell, 2002). Westwood, Sparrow, and Leung (2001) investigated HRM practices from five areas (i.e., planning and job design, recruitment and selection, performance evaluation, salary and wages, training and development) and dimensions of psychological contract contents. They

12 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 11 found some evidence for the relationship between HRM practices and the psychological contract. Conway and Monks (2008) tested a comprehensive set of HRM practices (i.e., career and performance, autonomy, communication, training, staffing, rewards, job security, teamwork), but only communication was associated with the psychological contract. Sturges, et al. (2005) found organisational career management to be positively related to the fulfilment of the psychological contract. Sels, Janssens, and Van den Brande (2004) related HRM practices to dimensions of the psychological contract. Internal career ladders were, for example, predicting the tangibility and the time frame of the contract, and pay for performance reduced the stability, the time frame and the exchange symmetry of the contract. Based on the studies at macro and micro level, it can be concluded that a higher quality of HRM practices is found in high-investment HRM systems related to the fulfilment of the psychological contract. Hypothesis 3: High-investment HRM systems are positively associated with the fulfilment of the psychological contract. As argued above, we assume the psychological contract to be an intermediate variable between HRM practices and firm performance. Research has shown that HRM practices are related to the psychological contract (Uen et al., 2009) and that the fulfilment of the psychological contract is positively related to employee performance (e.g., Henderson et al., 2008; Turnley et al., 2003), which is beneficial for firm performance. The psychological contract can be considered as a more proximal outcome of HRM practices, which is assumed to affect the more distal outcome organisational performance (see Wright et al., 2003). Hence, firm performance is assumed to be more closely related to the psychological contract than to HRM practices and a mediation effect should occur. Hypothesis 4: The fulfilment of the psychological contract mediates the relationship between high-investment HRM systems and firm performance.

13 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 12 The studies which tested the effect of individual HRM practices reported differentiated results for specific HRM practices (e.g., Conway & Monks, 2008; Delaney & Huselid, 1996; Delery & Doty, 1996; Harel & Tzafrir, 1999). Associations with organisational performance were found for training, incentive compensation, profit sharing, results-oriented appraisals and employment security (Delaney & Huselid, 1996; Delery & Doty, 1996; Harel & Tzafrir, 1999). Communication, career management, and performancebased pay were reported to be related to the psychological contract (Conway & Monks, 2008; Sels et al., 2004; Sturges et al., 2005). To improve the efficiency of HRM and to prioritise HRM practices, it is important to explore these differential effects of individual HRM practices on psychological contracts. We suggest that specific HRM practices are related to the fulfilment of the psychological contract. Fulfilment seen from managers is probably tightly connected to inducements provided by the company which are seen as tangible and intangible benefits to employees. In the context of HRM practices, provided inducements cover compensation, benefits, career development, and learning opportunities. They cover to a lower degree planning, information, recruitment, and selection, because these are not considered as benefits provided by the employer. Consequently, we assume that there is a close relationship for some practices such as career development, compensation and benefits, whereas there is no significant relationship for staffing practices, performance appraisal and planning expected. Hypothesis 5: HRM practices which are perceived as employer inducements (i.e., compensation and benefits, career development) are related to the fulfilment of the psychological contract. Hypothesis 6: HRM practices which are not perceived as employer inducements (i.e., staffing practices, performance appraisal, planning) are not related to the fulfilment of the psychological contract.

14 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 13 We hypothesised above that there is no direct relation between HRM practices such as performance appraisal and the psychological contract as these HRM practices do not directly lead to tangible or intangible benefits. We further assume that these HRM practices might have an impact if they come along with HRM practices which are perceived as inducements provided by the employer. For example, the performance appraisal only produces tangible benefits if combined with performance-based pay and is only then considered as a company inducement. We focus on performance appraisal and submit that performance appraisal positively affects the fulfilment of the psychological contract, if it leads to higher compensation and benefits. Hypothesis 7: The relation between performance appraisal and the fulfilment of the psychological contract is moderated by compensation and benefits. Methods Sample The data were collected in autumn 2008 in Switzerland for the Cranet project (Brewster et al., 2004) which measures the state of HRM on a regular basis in more than 30 mainly European countries. The German version of the survey was sent to 993 companies in the German-speaking part of Switzerland to be filled in by HR managers or managers, if small and medium sized companies did not have a specialised HR manager. Ninty-nine questionnaires were returned resulting in a return rate of 10%. Seven cases were excluded due to missing values and finally the data of 92 participants were considered in the analysis. The sample consisted of small and medium sized and large-scale enterprises, which employed up to employees (M=3926, SD=11989). Sixty-two organisations were part of a corporate group. A broad range of industries was covered in the sample such as finance (N=20), engineering (N=16), retail and hotels (N=11), and public administration (N=4). Thirty-one

15 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 14 participants were female, 58 were male and three did not indicate their gender. Sixty-five participants had a university degree. Measures All scales, except for the psychological contract scale, have been previously applied in the German version of the Cranet survey (see Brewster et al., 2004, for a detailed description of the scales). Most of the scales required objective information on HRM practices, while others tapped the subjective perception of practices. From the broad range of scales on HRM practices in the Cranet survey, we chose five variables (i.e., selection, career development, performance appraisal, performance-based pay, planning), because similar dimensions were used in other studies (see Boselie, Dietz, & Boon, 2005; Lepak et al., 2007; Westwood et al., 2001). Furthermore, these variables proved to be reliable. Selection was elicited by means of selection methods. The respondents were asked to tick which methods they used for selecting four groups of employees (management, professional/technical, clerical, manual). Eight selection methods, for which validity had been shown (Schmidt & Hunter, 1998), were used for this scale (e.g., interview panel, one-toone interviews, application forms, psychometric tests, assessment centre ). First, the number of methods used for selection was summed up for each group of employees. Second, a scale was calculated by taking the means of the four sum scores for each group of employees. Cronbach s alpha was.79. Career development was measured with a 14-item scale. Participants were asked to subjectively assess the use of development measures on a five-point response scale (1=not at all to 5=to a great extent). The development measures consisted for example of special tasks/projects for career development, planned job rotation, assessment centres, succession plans, formal career plans, high flier schemes for managers, and networking. Cronbach s alpha of this scale was.88.

16 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 15 Performance appraisal was measured with a four-item scale. Participants were asked to indicate the percentage of employees in the four groups of employees (management, professional/technical, clerical, manual) that were assessed based on the appraisal system. Cronbach s alpha of this scale was.95. Performance-based pay were measured with four items. Participants were asked to indicate whether the company provides performance-based pay on a dichotomous scale (yes, no) for each of the four groups of employees (management, professional/technical, clerical, manual). A scale was formed of the four items with an internal consistency (Kuder- Richardson-20 coefficient) of.81. Planning was measured with a six-item scale capturing HRM strategy and policies. Participants were asked to indicate whether the organisation has an HR management strategy and policies in the areas HRM, corporate values, diversity, ethics, corporate social responsibility and communication. Answers were provided on a threepoint response scale (0=no, 1= yes, unwritten, 2=yes, written). Cronbach s alpha of this scale was.72. To create the high-investment HRM system index (see Lepak et al., 2007), the HRM practice variables were transformed to values ranging from 1 to 5 for adjusting for the differences in the measurement scales. Then the means of the variables (i.e., selection, career development, performance appraisal, performance-based pay, HRM strategy and policies) were calculated. Cronbach s alpha of this scale was.67 and therefore minimally acceptable (see DeVellis, 2003). Participants were asked to assess the performance of the organisation compared to other organisations in the sector on a five-point response scale (1=weak or at the lower end to 5=superior). Six items (i.e., service quality, level of productivity, profitability, product

17 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 16 to market time, rate of innovation, stock market performance ) were combined in a scale. Cronbach s alpha was.72. The fulfilment of the psychological contract was measured with a three-item scale originally developed by Robinson, Kraatz, and Rousseau (1994) and reformulated to fit to an employer sample by Tekleab and Taylor (2003). The items were translated to German for the purpose of this study. Contrary to the study by Tekleab and Taylor, one negative item was recoded so that the scale measured fulfilment of the psychological contract instead of breach. The items read as follows: The organisation has done a good job of meeting its obligations to the employees ; The organisation has repeatedly failed to meet its obligations to the employees (reverse coded); The organisation has fulfilled the most important obligations to the employees. The items were assessed on a five-point response scale (1=strongly disagree to 5=strongly agree). Cronbach s alpha of the scale was.76. We included company size and sector (0=manufacturing, 1=services) as control variables. Results Descriptive statistics and correlations of all study variables are reported in Table 1. Note that the control variable company size is significantly correlated with some HRM practices indicating that bigger companies report more delivery on HRM practices. The control variable sector is only related to performance-based pay showing that performancebased pay is less used in service firms. We tested whether the assumptions of regression analysis hold by inspecting the distribution of the variables prior to the analysis and the residuals after the analysis (see Tabachnick & Fidell, 2007). Hypothesis 1 investigated the predictive value of the high-investment HRM system for organisational performance. We regressed performance on the high-investment HRM systems index, but found no significant effect (Table 2) due to the lack of correlation between

18 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 17 performance and the HRM system (Table 1). Hypothesis 2 predicted the association of the psychological contract and organisational performance. We regressed performance on the fulfilment of the psychological contract and again found no significant relationship. Hypotheses 1 and 2 were not supported. Hypothesis 3 investigated the relationship between the high-involvement HRM system and the psychological contract. We regressed psychological contract fulfilment on the highinvolvement HRM system index (Table 3). The HRM system index was significantly related to the psychological contract and we found support for Hypothesis 3. Hypothesis 4 focused on the mediation effect of the psychological contract for the relationship between the HRM system and firm performance. Statistical mediation requires that the mediator psychological contract and the predictor HRM system are associated with the outcome performance (see Baron & Kenny, 1986). These requirements were not met (see Tables 2 and 3), and introducing the predictor and the mediator simultaneously did not change the effect for HRM systems (Table 2). Consequently, Hypothesis 4 was not supported. Hypotheses 5 and 6 suggested that HRM practices which are perceived as employer inducements are related to the psychological contract, whereas HRM practices which are not perceived as employer inducements remain unrelated. Both hypotheses were investigated by regressing psychological contract fulfilment on the individual HRM practices. When all HRM practices were introduced together we failed to find significant results (Table 3), although some variables significantly correlated with the psychological contract (Table 1). This is probably due to the fact that the correlations between HRM practices (e.g., between career development and selection) exceed the correlations between HRM practices and the psychological contract. Thus, the HRM practices are not explaining additional variance when introduced together. The correlation table (Table 1) shows that a larger number of selection methods is highly correlated with the psychological contract, whereas career development,

19 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 18 performance-based pay, and HRM strategy and policies are correlated to a medium degree, and performance appraisal is not correlated. We found evidence for some of the relations we expected and therefore conclude that Hypotheses 5 and 6 are partly supported. Hypothesis 7 predicted a moderating effect of performance-based pay for performance appraisal and the psychological contract. We first tested the main effects of performance appraisal and performance-based pay and second the interaction of both variables on the psychological contract. We introduced the two predictors and the interactions in a regression without considering the other HRM practices because of the comparably high intercorrelations of the HRM practice variables. The interaction term was significant and turned the main effect of performance appraisal significant. The graph of the interaction term (Figure 1) shows that the influence on the fulfilment of the psychological contract is highest if performance appraisal and performance-based pay were combined. It remained on an average level if performance-based pay is not offered by the company. It is lowest if performancebased pay is provided without formal appraisal processes. The results indicated that the combination of performance appraisal and performance-based pay is most effective and, thus, Hypothesis 7 is supported. Discussion This study aimed to investigate the relations between HRM practices, the psychological contract, and performance at an organisational level. The fulfilment of the psychological contract was considered as an intermediate variable between HRM practices and performance. Apart from testing the influences of a high-investment HR system index on the psychological contract, the influence of individual HRM practices and their interaction was examined. The results of our analysis neither found an association with organisational performance nor a mediation effect for the psychological contract. The high-investment HR system index predicted the fulfilment of the psychological contract, and some of the

20 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 19 individual HRM practices were correlated with the fulfilment of the psychological contract, but failed to predict it altogether. The interaction effect of performance appraisal and performance-based pay on the fulfilment of the psychological contract showed that performance appraisal is only effective in combination with a tangible consequence in form of performance-based pay. Overall, little research has been conducted to investigate the psychological contract from a company perspective based on data of HR managers and managers representing the firm. Our study thus sheds light on the relation between HRM practices and the psychological contract and contributes to the body of research on psychological contracts from a macro level perspective. HRM Practices and Organisational Performance A significant relation between HRM practices and the performance of the company was expected, but the performance measure was not related to any of the study variables. Other studies established some kind of relationship, although in some cases only a few HRM practices were predicting performance (e.g., Becker & Gerhart, 1996; Delaney & Huselid, 1996; Delery & Doty, 1996; Guthrie, 2001; Harel & Tzafrir, 1999; Huselid, 1995; Ramsey et al., 2000; Whitener, 2001). Other studies based on the Cranet survey found relations between HRM practices and firm performance, but did not include the same variables in their design as we used in our study (e.g., Gooderham, Parry, & Ringdal, 2008; Stavrou et al., 2010). The studies that applied a similar subjective measure of organisational performance assessing the performance compared to competitors found only a few HRM practices to be associated with it (e.g., Delaney & Huselid, 1996; Harel & Tzafrir, 1999). In Harel and Tzafrir s study only training and in Delaney and Huselid s study training and incentive compensation predicted performance. Our unexpected result might be due to the measure for organisational performance (Gerhart et al., 2000), the sample size or the context in which the data were collected. First, a

21 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 20 measure which taps the productivity of employees (e.g., Guthrie, 2001) might be closer related to the outcome of HRM practices and thus show a higher association to HRM practices and the fulfilment of the psychological contract (Guest et al., 2003; Wright et al., 2003). An objective measure of firm performance as used in other studies (e.g., Delery & Doty, 1996) might lead to a higher correlation with the objective measures of HRM practices. Second, the overall sample size was rather small and consisting of very diverse organisations. As organisations in different sectors and of different size apply different sets of HRM practices, this might be a reason that no relation to performance was found. Third, the survey was filled in at the time of the financial crisis in 2008 which might be a reason to assess firm performance on a different basis than in financially secure times. The participants might have compared the situation of their company to other organisations assessing how much the companies were affected by financial problems such as a decreasing stock price or a growing exchange rate for the Swiss franc burdening exports. Thus, external factors might have had more influence on the assessment than internal factors such as HRM practices. Finally, studies have shown that the relationship between HRM practices and performance differs between geographical regions and countries (Stavrou et al., 2010). Although not included in the cited study, Switzerland might belong to those countries in which little relation was found for specific HRM practices. The scales on HRM practices were mainly capturing the extent of HRM practices delivered to employees, instead of qualitative aspects and their fit to organisations and employees needs. Furthermore, it has to be assumed that the answers of the respondents from corporate groups cannot fully cover the situation of all units in the group (see Gerhart et al., 2000). Finally, we might also conclude that the extent of HRM practices is not linked to firm performance. High performance might allow organisations to increase their range of HRM

22 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 21 practices, but this is not necessarily proving that firm performance was enhanced by HRM practices (Guest et al., 2003; Wright et al., 2005). Over a longer period of time this reversed effect might also fade away leaving HRM practices and firm performance uncorrelated. Psychological Contract and Organisational Performance We argued that the fulfilment of the psychological contract might act as an intermediate variable as it was suggested for employee commitment or job satisfaction, but again no relation was present. As this is the only study testing the effect of the psychological contract on organisational performance, we do not consider it as a proof for the lack of a relationship. The psychological contract measure was for the first time used in the context of the Cranet survey and only in the Swiss part of the survey. We can neither compare our results to earlier data sets nor to the situation in other countries, but argue that the relation should be further explored. The relation to performance has only been established for employee data, thus, employee performance as seen by employees might act as an intermediate variable between the psychological contract and organisational performance. The psychological contract might only produce outcomes that are indirectly beneficial for firm performance such as organisational citizenship behaviour, intention to stay in the firm and low turnover. More intermediate variables might have to be considered between the psychological contract and organisational performance (see Boselie et al., 2001; Guest, 1997). HRM Practices and Psychological Contracts The overall scale of HRM practices turned out to significantly predict the fulfilment of the psychological contract, whereas the set of individual HRM practices did not. The HRM practices were too highly inter-correlated to show significant effects, which also appeared as a problem in other studies (e.g., Conway & Monks, 2008; Giauque, Resenterra, & Siggen, 2010; Kinnie, Hutchinson, Purcell, Rayton, & Swart, 2005). When introduced altogether, the individual HRM practices are competing for variance to be explained. Overall, our results

23 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 22 correspond to previous studies which showed that a bundle of HRM practices is related to the psychological contract (Guest & Conway, 2002; Uen et al., 2009; Westwood et al., 2001). Due to the high correlations between the individual HRM practices, we were not able to explore which HRM practices are especially important for the psychological contract. The correlations between HRM practices and the psychological contract, however, showed differential effects, which were not fully corresponding to our hypotheses. As expected, we found a significant correlation for career development and performance-based pay and no significant effect for performance appraisal. Unexpectedly, selection methods and HRM strategy and policies were also correlated with the psychological contract. These are less likely considered as inducements towards the employees, but rather show that the organisations aim to provide HR management at a high level of proficiency. By testing the interaction between performance appraisal and performance-based pay we further explored the complementary value of aligned HRM practices (see Lepak & Shaw, 2008). It supported the view that coordinated practices contribute to positive work outcomes such as the fulfilment of the psychological contract. The participants from bigger companies evaluated the HRM practices more positively, either because they view the provided practices in a more positive light or because it is easier for a bigger organisation to provide well structured practices than for a small or medium sized enterprise. We interpret our results in favour of an integrated approach towards HRM (see Lepak & Shaw, 2008; Paul & Anantharaman, 2003), because the HRM system index showed a substantial association with the fulfilment of the psychological contract, whereas we did not find such a relationship with the individual HRM practices.

24 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 23 Limitations One limitation of this study is the high inter-correlations of the HRM practice variables, which were competing for variance to be explained, when introduced together. We thus could not test influences of individual HRM practices on our outcomes. Next, a substantial part of the variables in the Cranet survey are rated on categorical measurement scales (e.g., no/yes, no/unwritten/written) which we then aggregated to scales to be able to test the reliability. The categorical measurement scales fit the purpose to objectively measure HRM practices (e.g., selection methods, performance appraisal, performance-based pay, HRM strategy and policies) which can be considered as an advantage of the study. However, a better combination of objective information and measurement level would improve the quality of data required for quantitative analyses. Finally, the overall sample size was rather small and consisting of very diverse organisations. A bigger sample would allow researchers to distinguish between types of firms according to size or industry. We do not claim that our results are representative for organisations in general, as we consider the sample to be specific for the country the data were collected in. Switzerland is a small country with comparably many international firms and a prospering economy. This might not apply to other countries in Europe or on other continents. Implications for Further Research Some of the methodical limitations could be solved by improving the measures of HRM practices to ensure that they are not too highly correlated, while taking care that they cover the portfolio of practices the research focuses on. Measures which allow researchers to assess whether the HRM practices were appropriate and well implemented might also improve the results. Consequently, more emphasis should be given to issues of validation aiming to improve the validity and reliability of the measures. Such a portfolio of variables would allow researchers to explore specific effects of individual HRM practices with the goal

25 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 24 to actively influence the psychological contract. It has to be assumed that such a portfolio of HRM practices should fit to the business context which is for example defined by specific national cultures (Stavrou et al., 2010). While improving the reliability and validity of the questionnaire, the items should be transformed to be assessed on continuous measurement scales to be better suited for multivariate analyses. Given that the intermediate processes linking HRM practices and organisational performance are not fully explored, the study design could be extended to add variables at employee level. Thus, employee performance and employee outcomes could be related to HRM practices and organisational performance and their mediating effect could be tested. This would require a sample combining managers and employees from the same organisations. Information obtained from HR managers and employees might not correspond, for example a sophisticated career development programme might be provided, but the time to make use of it might lack due to high work load. This would allow researchers to obtain more realistic information about delivered HRM practices and consider this in an analysis combining micro and macro level. Before transferring the results to other national contexts, the study should be repeated in other countries or with an international sample. The psychological contract variable could be included in the international version of the Cranet survey in the coming years to test whether the relation between HRM practices, fulfilment of the psychological contract and organisational performance will improve after the consequences of the financial crisis of 2008 have been resolved. We could thus establish the psychological contract as an intermediate variable as suggested in other studies (e.g., Uen et al., 2009). Implications for Practice A number of consequences for practice can be derived from the results. HRM practices can be introduced and improved and are therefore efficient measures for influencing

26 Running head: HRM PRACTICES AND PSYCHOLOGICAL CONTRACTS 25 the employment relationship. In agreement with other studies, our research supported the fact that it is beneficial to focus on establishing a portfolio of high-level HRM practices depending on the resources available. It is beneficial to pursue an integrated approach of HRM by providing a consistent system of strategically aligned HRM practices to improve the efficiency of the organisation. Furthermore it is recommended to be aware of the messages implied in HRM practices and their effect on psychological contracts (Suazo et al., 2009) and to shape them intentionally. It is wise to take care to fulfil the psychological contract by providing the inducements which were promised and communicated and which fit to the employment relationship (see Lepak et al., 2007). Apart from the practices which correspond to company inducements, it is also important to consider those HRM practices which are only indirectly related to company inducements.