Strategic Human Resource Management and Organizational Performance in Singapore

Transcription

1 Strategic Human Resource Management and Organizational Performance in Singapore David Wan, Ph.D. Assistant Professor of Management Faculty of Business Administration National University of Singapore Victor Kok Graduate Faculty of Business Administration National University of Singapore Chin Huat Ong Research Fellow, Centre for Business Research & Development Faculty of Business Administration National University of Singapore Research indicates that strategic HRM practices bring higher levels of organizational performance in Singapore. message frequently found in corporate mission statements, annu- A al reports and plaques on office walls is that people are a firm s most valuable resource. Having the right personnel at the right place and at the right time is of utmost importance to the survival and success of any organization. The 1990s saw the emergence of a new generation of workers who are characterized by decreased loyalty to their company and increased expectations for autonomy, self-development and greater involvement in company decision making. Simultaneously, in Singapore and in many parts of the world, the increasing emphasis on knowledge-based competitiveness in the current turbulent environment also accelerated the importance of human capital. 1 Careful management of this important resource calls for a strategic focus on human resource management (HRM) in the organization. Strategic HRM involves designing and implementing a set of proactive HR policies/practices that ensures that an organization s human capital contributes to the achievements of its corporate objectives. Fundamental to this perspective is an assumption that organizational performance is influenced by the set of HRM practices in place. This article investigates the relationship between strategic HRM practices and organizational performance in Singapore and looks at the implications of the findings for both managers and practitioners Sage Publications JULY/AUGUST

2 Past Studies on Strategic HRM The era of strategic HRM was ushered in nearly two decades ago, 2 and since then, a behavioral perspective has emerged as the predominate paradigm for research. However, it was only in the 1990s that the concept of bundling of human resource practices became popular and attracted numerous studies. Ferris, Russ, Albanese, and Martocchio 3 made one of the first major attempts to examine how effective management of human resources might contribute to positive organizational performance. In their study of 2,236 firms from the U.S. construction industry, the Ferris group addressed the roles played by three important organizational functions and activities on firm performance: the status and importance of the HRM function, the role of unions and strategic planning. They found that firms that had HRM departments were generally high performers (i.e., larger total sales volume), firms that had a higher percentage of their workforce unionized also performed better than firms with a lower percentage and, finally, firms performed better when they engaged in more formalized strategic planning. Cutuher-Gershenfeld 4 developed and tested a thesis that linked the industrial relations climate and economic performance. Based on a longitudinal analysis of changing patterns in labormanagement relations across workgroups in the primary manufacturing facility for Xerox Corporation, he classified labor-management relations into traditional, adversarial and transformational relations. His conclusion was that transformational labor relations are associated with higher levels of organizational performance than the other types of industrial relations climates. Based on questionnaire responses from human resource managers at 30 of the 54 existing U.S. steel mini-mills between November 1988 and March 1989, Arthur 5 found that mills with commitment systems had higher productivity, lower scrap rates and lower employee turnover than those with control systems. The first empirical research on an HR bundle or system was carried out by MacDuffie. 6 Using an international data set from 1989 to 1990, he surveyed 62 automotive assembly plants. His most significant finding was that innovative HR practices affect performance not individually but as a group. Huselid 7 found that high performance work practices were associated with lower employee turnover, greater productivity and higher corporate financial performance. His results were consistent across diverse measures of firm performance after corrections for selectivity and simultaneity biases. Using 590 profit and nonprofit firms from the National Organizations Survey, Delaney and Huselid 8 found positive associations between HRM practices such as training and staffing selectivity, and perceptual firm performance measures. In a subsequent study of 293 U.S. firms, Huselid, Jackson and Schuler 9 evaluated the impact of human resource managers capabilities on HR management effectiveness and the latter s impact on corporate performance. Their findings showed that large firms in the United States are more proficient in their technical HRM capabilities than in their strategic HRM capabilities. As time goes on, however, a ceiling effect may begin to constrain the ability of the U.S. firms to gain competitive advantage through continued improvement in technical HRM activities. In addition to this finding, they noted significant correlation between HRM effectiveness and employee productivity, cash flow and market value. All of these studies generally reveal a positive relationship between HRM policies/practices and firm performance. We decided to test six strategic HRM variables that have been consistently identified in the literature as proactive HRM practices. First, we tested each strategic HRM variable against firm performance. Second, we examined how this bundle of strategic HRM variables together affect firm performance. It is the combination of these practices, rather than individual ones, that shapes employee relations and firm outcomes. We tested the following specific hypotheses: 1. Extensive training is positively related to firm performance (financial and HR). 2. Selective staffing is positively related to firm performance. 3. Empowerment is positively related to firm performance. 4. Performance appraisal is positively related to firm performance. 5. Broad job design is positively related to firm performance. 6. Performance-based pay is positively related to firm performance. 7. A bundle of strategic HRM variables are positively related to firm performance. 34 COMPENSATION & BENEFITS REVIEW

3 Measurements The prime objective of this study is to ascertain the relationship between strategic HRM and firm performance. The various variables used to measure these two constructs are described as follows. Strategic HRM Variables Six different variables are used to measure a firm s strategic HRM system. They are the following: selective staffing, extensive training, empowerment, performance evaluation, broad job design and performance-based pay. These six variables are considered sufficiently broad enough to capture the key dimensions of a strategic HRM system. Selective staffing was assessed using five items adapted from Snell and Dean. 10 These items capture aspects of staffing practices such as the amount of resources (time and money) spent on staffing. A sample item is, Great importance is placed on the whole staffing process in our firm (1= very inaccurate, 6= very accurate). Likewise, extensive training was measured by a six-item Likert-type scale. A sample item is, The training process for non-managerial employees in our firm is formal and systematically structured. Scale measurements for empowerment, appraisal, job design and performance-based pay were adapted from Bae and Lawler. 11 Eleven items were used to measure empowerment. High values represent such factors as high employment involvement, delegation, autonomy, pursuit of a cooperative climate and egalitarianism. A sample item is, The jobs in our firm provide non-managerial employees with many chances to use personal initiative or judgment in carrying out their work. Five items were used to assess performance appraisal. This reflects the extensiveness of appraisal efforts and whether the purpose of the evaluation is developmental or administrative. A sample item is, Much effort is given to measuring employee performance for non-managerial employees in our firm. Broad job design is measured by four items to reflect the extent to which jobs involve multiple skills and competencies. A sample item is, Most jobs are simple and repetitive in our firm. Five items were used to assess performance-based pay. This variable reflects the degree of the linkage of performance and pay level. A sample item is, Pay for non-managerial employees is closely tied to individual or group performance in our firm. Finally, the bundle of strategic HRM variables is obtained by summing the factor scores of the various strategic HRM variables as derived from exploratory factor analysis. Organizational Performance Variables We used a subjective measurement for organizational performance. Companies in Singapore are very reluctant to disclose their financial performance. Although financial data for publicly listed companies are readily available from their annual reports, taking such an approach would reduce the sample of multinationals in Singapore. Eight items were adapted from Khandwalla 12 because they involve both financial and HR performances of a firm. These include the following: employee job satisfaction, employee commitment or loyalty to the firm, public image and goodwill, growth rate of sales or revenues, product (or service) quality, employee productivity and financial strength. These items are segregated into two scales. Long-run level of profitability, growth rate of sales or revenues and financial strength are classified under financial performance. The rest of the items are classified under HR performance. For these items, subjects were asked to respond to a 6-point Likert-type scale based on the following statement: Compared to your industry average, how do you compare on each of the following? (1 = very low, 6 = very high). Five control variables were used: firm size, union status, industry, ownership type and country of origin for foreign firms. Firm size was measured as the sum of the number of full-time employees and part-time employees. Dummy variables include union status (unionized firm is coded 1, 0 otherwise), industry (manufacturing firm is coded 1, 0 otherwise) and ownership type (1 for joint venture, 0 otherwise). In addition, the firm s national origin is coded by a set of dummy variables: Singapore, the United States, Japan and Europe. JULY/AUGUST

4 EXHIBIT 1 Breakdown of Respondents Ownership Sector Local Japan United States Europe Other Asia Total Manufacturing Construction Commerce Transport/storage/communications Finance Other services Total The Sample A mail survey approach was used in the study. A questionnaire was administered to the person in charge of the human resource department in the company. Each questionnaire was accompanied by a cover letter explaining the purpose of the study. Units of observation for this study are subsidiaries of multinational companies (MNCs) and local firms operating in Singapore. Each firm included in the sample had at least 50 full-time employees. The sample comes from different sectors of the economy. In the case of subsidiaries, both wholly owned MNC subsidiaries and joint ventures were included. A total of 2,160 companies compiled from the Singapore 1000 and Singapore Exchange Directory were targeted as the initial respondents. These companies were used because they fulfilled the requirements for this study. Companies in the Singapore 1000 are either public limited or private limited companies with at least two full years of operation. These companies are the topperforming companies in Singapore in terms of sales turnover and profits. Firms in the Singapore Exchange Directory are generally the large, local companies in Singapore. To pretest the questionnaire, five human resource executives from Singapore-based companies were chosen. The questionnaires were first administered to these respondents. Issues assessed during the pilot test were face validity, instructions and statement clarity, questionnaire layout and length. Improvements were made to the questionnaire based on the respondents comments. We are aware of the possibility of common-source bias as we only surveyed the HR manager. To reduce this problem, scale items were deliberately intermingled with one another. In addition, we left the organizational performance section toward the end of the questionnaire so as to limit the possibility of respondents rationalizing their answers. Results Because there are 36 statements representing the six strategic HRM variables, factor analysis was conducted to reduce the number of statements to a more manageable set. Internal consistency of all the scales was then assessed using Cronbach s reliability alpha. The interitem correlation results, available in exploratory factor analysis, were used to test the bivariate relationship between the strategic HRM variables and firm performance. This provides a first test for the six hypotheses. We next analyzed the data by hierarchical regression, which incorporates all explanatory and control variables. Two regression models were built. In the first model, the control variables were used as independent variables against firm performance (both financial and HR). In the second model, in addition to all the control variables deployed in the first model, the various strategic HRM factors identified in the exploratory factor analysis stage were added to the model, one factor at a time. The significant factors were then grouped together to form a bundle of strategic HRM variables and tested in the same manner. The change in F ratio assesses any statistical difference between the two models. Hierarchical multiple regression provided a confirmatory test for Hypotheses 1 to 6 and the test for Hypothesis 7. General Findings A total of 191 companies responded to the survey. The organizations were classified into six different industries: manufacturing, construction, 36 COMPENSATION & BENEFITS REVIEW

5 EXHIBIT 2 Factor Analysis of Strategic Human Resource Management Variables Factor Loadings Questionnaire Item Factor 1 Factor 2 Factor 3 Factor 4 Factor 5 Factor 6 Training: = Amount of money spent on training Availability of different kinds of training Opportunities for training High priority on training Systematically structured training process Extensive training for general skills Extensive transference of task and responsibilities Selection: = High selection criteria Much efforts in appraisal performance Much efforts to select the best person Great importance on staffing process Extensive selection process Participation in wide range of issues Amount of money spent on selection Empowerment: = Permitting enough discretion in doing work Providing chances to use personal initiative High pay level compared to same industry Focus on long-term potential of candidates Participation in very wide range of issues Engagement in problem solving and decisions Require multitasking Performance appraisal: = Pay raise and promotion tie to performance appraisal Pay tie to group performance Emphasis on personal development Team-based work: = Minimum status differentials for egalitarianism Coordination and control based on shared goals Clearly defined jobs and duties Performance-based pay: = Employee financial participation Provide employees ownership plan Eigenvalue Percentage of variance explained JULY/AUGUST

6 EXHIBIT 3 Descriptive Statistics and Interitem Correlations of Variables Standard Variable Mean Deviation 1. Training Selection 0.663*** Empowerment 0.562*** 0.531*** Performance appraisal 0.426*** 0.490*** 0.393*** Team-based work 0.455*** 0.481*** 0.473*** 0.255** Performancebased pay 0.387*** 0.390*** 0.382*** 0.98*** 0.327*** Financial performance 0.320*** 0.294*** 0.276*** 0.243** 0.187** 0.246** HR performance 0.480*** 0.452*** 0.456*** 0.393*** 0.410*** 0.370*** 0.605*** Note: The numbers in the exhibit represent the correlation coefficients of the variables. **p <.01. ***p <.001. commerce, transport and communication, financial and business services and other services. Firms in the manufacturing sector accounted for most of the respondents (35.6%). The breakdown of industries is shown in Exhibit 1 below. In terms of ownership, local firms comprise the highest proportion (32.5%). Exploratory Factor Analysis Results As discussed, the strategic HRM system covers 36 items. We undertook factor analysis to group these items into a smaller number of constructs. In the final varimax rotation, six factors (comprising 29 items) with eigenvalue greater than 1.0 were identified. This criterion is in line with Kaiser s rule, which states that only factors with eigenvalues greater than 1.0 are significant for analytical purposes. The six factors explained 59.4% of the total variance. More details, including the Cronbach test results, are shown in Exhibit 2. The category broad job design was discarded because all the variables that were supposed to measure the factor did not load together. A new factor, which had three variables loaded on it, was renamed team-based work to replace the factor. Consequently, Hypothesis 5 was changed to team-based work (instead of the initial broad job design) and is positively related to firm performance (financial and HR). The interitem correlation matrices for the scales used in the analysis are shown in Exhibit 3. The exhibit shows that there are significant relationships among the various factors, lending statistical support to the positive relationship between the specific strategic HRM variables and firm performance stipulated in Hypotheses 1 to 6. In particular, all the strategic HRM variables have consistently higher correlations with a firm s HR performance than financial performance. Financial Performance The regression results for the firm financial performance are shown in Exhibit 4. With the exception of team-based work and performance-based pay, all the other strategic HRM components have a positive impact on the financial performance of a firm. As such, the two are not included in the final analysis. Regression results reveal that the bundle of strategic HRM variables is also positively related to financial performance. However, the change in F ratio for the inclusion of this bundle, compared to the explanatory power of using the control variables alone, is minimal. Among the individual strategic HRM variables, the change in F ratio is the highest ( F = 8.109) when performance appraisal is added into the initial equation. Empowerment comes next ( F = 7.369), followed by selection ( F = 6.730) and training ( F = 4.454). HR Performance The regression results for the firm s HR performance are shown in Exhibit 5. The finding reveals that all the strategic HRM variables have a positive impact on HR performance. As measured by the change in F, empowerment exhibits the 38 COMPENSATION & BENEFITS REVIEW

7 Financial Performance Equation Equation Equation Equation Equation Equation Equation Equation Variable 1 2 a 3 a 4 a 5 a 6 a 7 a 8 a Constant 3.325*** 2.849*** 2.435*** 2.262*** 2.348*** 2.823*** 3.225*** 2.265*** (0.352) (0.404) (0.483) (0.508) (0.476) (0.475) (0.362) (0.504) Joint ventures (0.330) (0.325) (0.326) (0.325) (0.322) (0.329) (0.331) (0.325) Union dummy (0.179) (0.181) (0.179) (0.181) (0.176) (0.179) (0.180) (0.184) Industry: manufacturing (0.157) (0.158) (0.155) (0.156) (0.154) (0.159) (0.158) (0.157) ln size 0.195*** 0.153*** 0.176*** 0.195*** 0.195*** 0.191*** 0.188*** 0.161** (0.054) (0.056) (0.054) (0.054) (0.053) (0.054) (0.055) (0.056) United States (0.329) (0.324) (0.324) (0.326) (0.322) (0.328) (0.333) (0.326) Japan (0.317) (0.315) (0.313) (0.311) (0.310) (0.318) (0.319) (0.314) Europe (0.330) (0.326) (0.325) (0.327) (0.323) (0.332) (0.335) (0.330) Singapore (0.298) (0.297) (0.297) (0.293) (0.292) (0.300) (0.299) (0.296) Training 0.167* (0.073) Selection 0.247** (0.092) Empowerment 0.283** (0.980) Appraisal 0.227** (0.076) Team-based work (0.077) Performance-based pay (0.052) Bundle b 0.321** (0.107) Adjusted R F 4.783*** 4.928*** 5.211*** 5.290*** 5.437*** 4.438*** 4.348*** 5.181*** df adjusted R F Note: Numbers in parentheses are standard errors. a. Statistics refer to the comparison of Equation 1. b. Excluding team-based work and performance-based pay. p <.10. *p <.05. **p <.01. ***p <.001. EXHIBIT 4 Regression Model of Firm Financial Performance largest incremental contribution ( F = ). Second is training ( F = ), followed by selection ( F = ). Performance appraisal, which contributes the most to firm financial performance incrementally, is ranked fifth in its contribution to HR performance. JULY/AUGUST

8 EXHIBIT 5 Regression Model of Firm Human Resource Performance HR Performance Equation Equation Equation Equation Equation Equation Equation Equation Variable 1 2 a 3 a 4 a 5 a 6 a 7 a 8 a Constant 4.331*** 3.474*** 2.959*** 2.764*** 3.029*** 3.103*** 4.091*** 2.335*** (0.267) (0.284) (0.344) (0.360) (0.347) (0.331) (0.362) (0.329) Joint ventures (0.251) (0.228) (0.232) (0.229) (0.233) (0.232) (0.240) (0.211) Union dummy 0.271* (0.137) (0.127) (0.128) (0.128) (0.127) (0.126) (0.131) (0.120) Industry: manufacturing (0.120) (0.112) (0.111) (0.110) (0.111) (0.112) (0.115) (0.102) ln size (0.040) (0.284) (0.038) (0.038) (0.037) (0.037) (0.039) (0.036) United States (0.252) (0.229) (0.232) (0.231) (0.234) (0.233) (0.243) (0.213) Japan * (0.245) (0.223) (0.226) (0.222) (0.227) (0.226) (0.234) (0.206) Europe (0.252) (0.229) (0.232) (0.231) (0.233) (0.234) (0.243) (0.214) Singapore (0.228) (0.209) (0.212) (0.207) (0.211) (0.212) (0.218) (0.193) Training 0.302*** (0.052) Selection 0.373*** (0.066) Empowerment 0.414*** (0.070) Appraisal 0.227*** (0.056) Team-based work 0.300*** (0.054) Performance-based pay 0.156*** (0.038) Bundle 0.321** (0.107) Adjusted R F 3.885*** 7.970*** 7.505*** 8.049*** 7.211*** 7.503*** 5.593*** *** df adjusted R F Note: Numbers in parentheses are standard errors. a. Statistics refer to the comparison of Equation 1. p <.10. *p <.05. **p <.01. ***p < COMPENSATION & BENEFITS REVIEW

9 In addition, the HR bundle (rather than individual HR components) contributes the most explanatory power to HR performance. Hence, all the hypotheses are supported here. On the whole, our finding suggests that strategic HRM has a more positive role in explaining a firm s HR performance than financial performance. Conclusions and Implications This study examined the relationship between strategic HRM variables and firm performance. As revealed in our analysis, the strategic HRM variables are found to have a positive effect on organizational outcomes, especially with respect to a firm s HR performance employee productivity, job satisfaction and commitment. Thus, our evidence suggests that effective implementation of key strategic HRM practices should be able to bring in higher levels of organizational performance. Second, our hierarchical regression results show a possibility that different aspects of performance could be affected by different strategic HRM variables. For a company promoting financial performance, performance appraisal appears to be the most important issue to tackle. On the other hand, companies interested in enhancing HR performance may emphasize the need for empowerment and training. There are a number of limitations that present opportunities for future research. One major limitation of this study is the relatively small sample size. With larger samples, there will be a more balanced breakdown of companies according to their countries of origin. In the present study, foreign firms are dominated by Japanese companies. Second, we have not investigated how organizational values affect HRM strategy and hence organizational performance. One way to assess an organization s HRM values is to examine its management philosophies and core values. We could then proceed to find out whether firms that organize human resource practices into systems consistent with their culture and organizational strategy do in fact perform better. Future studies should aim to obtain a more representative sample, investigate the possibility of the HRM system as a mediator variable between HRM values and organizational performance as well as use multiple channels of data collection and consider longitudinal analysis. Acknowledgment The authors would like to acknowledge financial support of the study from a research grant (RP991007) by the National University of Singapore. Notes 1. Business Times, Singapore, July 23, Tichy, N. M., Fombrun, C. J., & Devanna, M. A. (1982). Strategic human resource management. Sloan Management Review, 23, Ferris, G. R., Russ, G. S., Albanese, R., & Martocchio, J. J. (1990). Personnel/human resources management, unionization, and strategy determinants of organizational performance. Human Resource Planning, 13, Cutcher-Gershenfeld, J. (1991). The impact on economic performance of a transformation in workplace relations. Industrial and Labor Relations Review, 44, Arthur, J. B. (1994). Effects of human resource systems on manufacturing performance and turnover. Academy of Management Journal, 37, MacDuffie, J. P. (1995). Human resource bundles and manufacturing performance: Organizational logic and flexible production systems in the world auto industry. Industrial and Labor Relations Review, 48, Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal, 38, Delaney, J. T., & Huselid, M. A. (1996). The impact of human resource management practices on perceptions of organizational performance. Academy of Management Journal, 39, Huselid, M. A., Jackson, S. E., & Schuler, R. S. (1997). Technical and strategic human resource management effectiveness as determinants of firm performance. Academy of Management Journal, 40, JULY/AUGUST

10 10. Snell, S. A., & Dean, J. W., Jr. (1992). Integrated manufacturing and human resource management: A human capital perspective. Academy of Management Journal, 35, Bae, J., & Lawler, J. J. (2000). Organizational and HRM strategies in Korea: Impact on firm performance in an emerging economy. Academy of Management Journal, 43, Khandwalla, P. (1977). The design of organizations. New York: Harcourt Brace Jovanovich. David Wan is an assistant professor of management in the Faculty of Business Administration at the National University of Singapore. He earned his Ph.D. in business administration from the University of Manchester, United Kingdom. His research interests include the industrial relations climate, unionization, international HRM, interlocking directorates, strategic compensation and innovation management. He is also actively involved in the teaching of industrial relations modules at the Singapore Institute of Labor Studies. Chin Huat Ong is a research fellow at the Centre for Business Research & Development in the Faculty of Business Administration at the National University of Singapore (NUS). He has a master s degree from the NUS and is now working on his doctoral thesis on board of directors and corporate governance. His research interests include HRM, industrial relations, innovation management, industry studies, economic forecasting and strategic management. Victor Kok is an honors graduate from the Faculty of Business Administration at the National University of Singapore. 42 COMPENSATION & BENEFITS REVIEW