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1 Student First Name:Tamer Student Second Name:Darwish Copyright subsists in all papers and content posted on this site. Further copying or distribution by any means without prior permission is prohibited, except for the purposes of non-commercial private study or research, as defined in the Copyright, Designs and Patents Act 1988, or as otherwise authorised by statute. To obtain permission, please contact the author of the relevant paper in the first instance or with details of your request. 1

2 Strategic HRM and Organisational Performance An Empirical Investigation in a Non-Western Context Theoretical and Empirical background on SHRM and Organisational Performance: From personnel management to human resource management (HRM), and finally to strategic human resource management (SHRM), the field has attracted a great deal of research attention because of its contribution and impact on the bottom line issues in organisations. This transition reflects the importance of the human capital in gaining competitive advantage and achieving valued organisational performance. Therefore, one of the dominant (if not the most dominant) research issue has been the impact of HRM on organizational performance. The relationship between HRM and performance has been a stormily debated issue over the last decade. A number of researchers have conducted studies on this research stream and at least some have confirmed the positive impact of SHRM on performance (see e.g., Delery & Doty, 1996; Razouk, 2011). However, researchers have also argued that the results of the HRM-performance links are not encouraging and are in fact ambiguous (Paauwe, 2009), and that there is a need for additional studies to support and emphasise the HRM-performance link (Guest, 2011), and that further investigations in different contexts is required (Chand & Katou, 2007). The majority of the empirical work that has been conducted in the HRM-performance link has given attention to sixteen best practices later consolidated into seven proposed by Pfeffer (1994, 1998). It is argued that the greater use of these practices (training and skill development, promotion from within, participation & employment, information sharing, and others) would lead to increased productivity and profitability and help organisations achieve competitive advantage. Although, this has been a popular classification, researchers have also used different measures to conduct HRM-performance link studies and there is no general consensus as to which mixture of HR practice would enhance organisational performance (Dyer and Reeves, 1995; Guest, 2011). Even if researchers used the same practices, the underlying meaning of these practices can be completely different. This has led to a plea by some authors for a specific theory on HRM in the first place (Paauwe, 2009; Guest, 2011). As is the case with HRM-performance link, there is no consensus among researchers on the measurement of organisational performance. It remains an imprecise and loosely defined 2

3 construct not only in the field of HR but in other fields as well (Rogers & Wright, 1998). For instance, Scott (1977, p.63) in his review of the measures of organisational effectiveness concludes that after reviewing a good deal of the literature on organisational effectiveness and its determinants, I have reached the conclusion that this topic is one about which we know less and less. Further, organisational performance can be defined in terms of HR related outcomes (turnover, job satisfaction, commitment, and others) or organisational outcomes (productivity, quality, service, efficiencies, and others) (Dyer and Reeves, 1995). It can also be defined in terms of financial indicators (ROA and ROE) or capital market outcomes: (market share, stock price, and growth). Some authors (e.g., Paauwe, 2009) emphasise the use of multi-dimensional concept of organisational performance in future research. In the final analysis though it seems, there is no general consensus and there is a call for a better theory on performance from some scholars (Paauwe & Boselie, 2005; Guest, 2011). Since the emergence of HRM-performance debate, two broad research streams have emerged to examine the relationship between HRM and performance. The first one follows a direct approach between individual HR practices and/or a bundle of HR practices and performance (Chand & Katou, 2007). The second research stream has focused on the indirect relationship between individual HR practices and/or a bundle of HR practices and organisational performance (Wright & Gardner, 2003). Researchers have also examined the impact of a bundle or system of HR practices on performance on the presumption that they are the appropriate level of analysis to examine the impact of organisation-level performances (Delaney & Huselid, 1996). It s said that a bundle (the internal or horizontal fit) of HR practices should generate greater effects because the whole is greater than the sum of its parts. For instance, to recruit and select good employees without training them, or train and develop them without giving them the authority to take decisions, will produce few effects; whereas implementing the three practices together would produce greater effects (Wall & Wood, 2005). This is in contrast to individual HR practices which, in isolation can produce only a limited amount of competitive advantage (Barney, 1995). In totality though there is again no agreement among researchers on what these practices should be, or on the number of practices that can enhance organisational performance (Dyer & Reeves, 1995; Wright & Gardner, 2003; Guest, 2011). 3

4 Hypotheses Based on the reasoning outlined above, we hypothesise as follows: H1: HR practices (recruitment and selection, formal training system, internal career opportunities, formal performance appraisal system, extrinsic incentives and reward, intrinsic incentives and rewards) will reduce employee turnover. H2: HR practices will be positively related to financial performance measured by ROA and ROE. H3: H3: Employee turnover will mediate the relationship between HR practices and financial performance. H4: There will be a positive relationship between the bundles/complementarities/or synergies of HR practices and financial performance. Data, Variables, and Methods The target population of this study is the financial sector of Jordan. A little past research into HRM has been undertaken in the context of the country of Jordan. Further, the chosen sector is one of the largest and well developed services sector in the country and is witnessing a great deal of deregulation which is attracting private investment from within the country and overseas. A count of all the firms operating in the financial sector revealed a population of 104 firms in banking, insurance, real estate, brokerage and other financial services. These firms are all listed on Amman Stock Exchange (ASE). It was decided to approach all the firms in the population for the purpose of data collection. We required two types of data for the study the first set consisting of primary data related to the HRM operations of these firms and second related to their financial operations. A detailed questionnaire was drafted to collect the primary data. All the 104 firms were contacted in person, of which 99 agreed to participate in the survey. Cross checks reveal data to be consistent and reliable. The matching financial data from profit and loss accounts and balance sheets of 99 firms was collected from the financial statements from ASE. Fortunately, government policies and regulations require all the listed companies to report the financial data in a consistent manner which makes the inter-firm comparisons meaningful and unbiased. 4

5 We were required to build scales to measure HR practices and employee turnover for the first half of the study. We developed these measures based on existing SHRM literature. The major part of our deliberation on HR practices has been developed based on the work of (Delery & Doty, 1996; Pfeffer, 1998). Theriou and Chatzoglou (2008) have pointed out that such practices that have been proposed by (Delery & Doty, 1996; Pfeffer, 1998) are expected to generate such inimitable human resources and lead organisations to gain a competitive advantage. In this study, HR practices scale covers five main areas of HRM: recruitment and selection, formal training system, internal career opportunities, formal performance appraisal system, and incentives and rewards. These practices are very common and we can most likely find them in any organisation which has an HR department or the basic HR functions. Such practices should be included in any work related to HRM theory building. Employee turnover is an important outcome variable. Inability to retain competent and skilled employees has been identified as a barrier to organisations success (Holt, 1993). Following work in literature (e.g., Huselid, 1995), employee turnover rate is measured by a simple and direct question concerning the percentage of total employees that voluntarily leave the company each year. Financial Performance is measured by ROA and ROE. Data on these variables were obtained from ASE database. The study also follows the cross sectional design adopted by other authors (e.g., Delaney and Huselid, 1996; Delery and Doty, 1996). The measures of ROA and ROE for this study were the year-end measures for 2007; the survey was completed in Finally, it is essential to include control variables in the study owing to their possible association with dependent variables. In this study we employ firm size and firm age as a control variable, measured respectively in natural logs (see also Kimberly, 1976) by the number of employees in each company, and the number of year the company has been in operation. Hierarchical regression analysis is used for the modelling of the data. Before conducting the regression analysis, data was screened and tested for the multivariate assumptions. Outliers test was also conducted and results revealed no extreme cases. Further, the results of normality test revealed that the variables skewness and kurtosis values lie within the acceptable limit of ranges except for firm size and firm age which were then transformed by converting them into logs. The relationships between variables were homoscedastic since all the variables met the normality assumption. Tests also revealed the absence of multicollinearity between the variables. 5

6 In addition, we performed principal component factor analysis with Varimax rotation for all the HR practices. The outcomes generated only one factor for each variable except incentives and rewards. Two factors were generated for this variable and they explained 41.65% of the total variance. The first factor is more associated with extrinsic incentives and rewards such as pay increase and valuable fringe benefits. The second factor, in contrast, is more associated with intrinsic incentives and rewards such as friendly and supportive workenvironment. This is consistent with the theoretical structure proposed by DeCenzo and Robbins (2005). The results confirm a robust and comprehensive structure of incentives and rewards. Therefore, we labelled the first factor as extrinsic incentives and rewards and the second factor as intrinsic incentives and rewards. We also conducted confirmatory factor analysis which provided three main indicators to assess the convergent validity in the form of factor loadings, average variance extracted (AVE), and reliability of the construct (Hair et al., 2010). The results show that the factor loadings of each construct indicators are significant ranging from 0.55 to 0.90, demonstrating a strong association between constructs and their factors. Further, the results indicated that AVE values were higher than the threshold value of 0.50 demonstrating adequate convergence of the constructs. Finally, the results of the Cronbach s alpha test indicate that the scales satisfy the reliability criterion with values ranging from.61 to.93. Taken together, the results of factor loadings, AVE, and reliability tests provide sufficient confirmation of the convergent validity. Further, we compared the square roots of AVE values with the constructs correlations from where the results showed that the squared roots of the AVE values were higher than any correlation of the HRM practices constructs indicating an acceptable level of discriminant validity (Fornell and Larcker, 1981). Discussion and Conclusions The present study contributes to our understanding of the value-added of strategic HRMperformance link in a completely different environment. In general, the results provide a moderate support in terms of the number of the specified relationships for the positive effect of strategic HRM practices on employee turnover and financial performance of the companies. Recruitment and selection, training, and internal career opportunities have a strong positive impact on employee turnover. These results indicate that if an extensive formal training is given to the employees in the companies, a lower percentage of the employees leave the company every year. Likewise, the organisation that promotes from- 6

7 within and set policies to recruit internally rather than externally and the implementation of more careful recruitment and selection plans leads to a lower employee turnover rate which companies would suffer annually. Regarding the rest of the HR practices, the results indicate no unique contributions in their relationship with employee turnover. The results also indicate that training is the only HR practice to strongly impact the financial performance of the companies. Training was found to be statistically and practically significant. Training has a direct strong positive impact on ROA and a weak effect on ROE. The results of the current study, however, do not support the indirect relationship between SHRM and organisational performance as stated in the third hypothesis. The results show that there is no evidence of mediation of employee turnover in the relationship between SHRM and performance. Further, despite the compelling theoretical argument of the complementarily thesis, the results of this study do not support this argument. Off 15 interaction effects, only one statistically significant interaction effect was found to impact both ROA and ROE. Future studies may shed the light on this issue by theoretically deriving and empirically testing this hypothesis. Although it may sound logical to say that components of an equation can solve an equation better than just one unknown, it is not as yet safe to say that HR practices as a bundle are related to performance more than its individual parts. A survey of literature on strategic HRM and its impact on performance reveals that empirical research results on this topic are as yet inconclusive. Hence, a lot of work is needed in this area of research until researchers can provide solid and strong evidence. Building on the existing works in the field, the present study contributes to the field of SHRM by providing an evidence for the value-added SHRM through the effects of some of the HR practices on performance indicators. The current study indicates that some of the HR practices such as training always have a positive effect on financial performance and most of the HR practices can certainly lead to a lower employee turnover rate. Moreover, this study provides an evidence of the value-added of SHRM in a completely different non-western environment as opposed to studies usually conducted in the case of North American or European, largely British firms. Finally, we address the theoretical issues in this study as one of the most important reasons of not reaching at definite conclusions in this debate. We argue that we have to keep a focus on what combination of HR practices are most likely to have the greatest impact on performance. Organisational performance measures, on the other hand, have to be identified and accurate. Although a number of measures have been suggested for measuring organisational performance, in actual practice measuring as to what actually contributes to 7

8 performance is fraught with difficulties. Consequently, having a concrete theoretical base for this relationship will absolutely cut down the time and the efforts to arrive at definite conclusions in this research stream. Despite the contributions of the current study, we acknowledge some limitations of it. The study is conducted with regard to one sector (financial) only and although very nearly the whole population of firms was covered, the sample size could be bigger. We thus suggest that future researchers conduct such a study with larger and more diverse sample. Furthermore, the study uses cross-sectional design. Although we have argued that strategic HRM practices should lead to stronger organisational performance, our cross-sectional design does not allow us to rule out the possibility of reverse causation (Wright et al., 2001). A longitudinal design would help to strengthen the reverse causation possibility and overcome time-lag effects of SHRM on performance. Finally, data was collected by single respondents where common method variance could have affected the observed relationship. Therefore, we encourage future researchers to use multiple respondents in order to get more truthful results. REFERENCES Barney, J. (1995), Looking inside for competitive advantage, Academy of Management Executive, 9, Chand, M., & Katou, A. (2007), The impact of HRM practices on organisational performance in the Indian hotel industry, Employee Relations, 29, DeCenzo, D., & Robbins, S., (2005), Fundamentals of Human Resource Management, 8 th Ed, Wiley, NJ. Delaney, J.T. & Huselid, M.A. (1996), The impact of human resource management practices on perceptions of organizational performance, Academy of Management Journal, 39, Delery, J. E., & Doty, D. H. (1996), Modes of theorizing in strategic human resource management: Tests of universalistic, contingency, Academy of Management Journal, 39, Dyer, L., & Reeves, T. (1995), Human resource strategies and firm performance: What do we know and where do we need to go?, International Journal of Human Resource Management, 6, Fornell, C., & Larcker, D. (1981), Evaluating structural equation models with unobservable variables and measurement error, Journal of Marketing Research, 18, Guest, D.E., (2011), Human resource and management and performance: Still searching for some answers, Human Resource Management Journal, 22, 1, Hair, J.F., Black, W.C., Babin, B.J., & Anderson, R.E. (2010), Multivariate Data Analysis, 7 th ed., Upper Saddle River, N.J. et al.: Prentice Hall. Holt, D., (1993), Management Principles and Practices, Englewood Cliffs, NJ: Prentice Hall. 8

9 Huselid, M. (1995), The impact of human resource management practices on turnover, productivity, and corporate financial performance, Academy of Management Journal, 38, Kimberly, J. (1976), Organisational size and the structuralist perspective, Administrative Science Quarterly, 21, Paauwe, J. (2009), HRM and performance: achievements, methodological, issues and prospects, Journal of Management Studies, 46, Paauwe, J., & Boselie, P. (2005), HRM and performance: what next? Human Resource Management Journal, 15, Pfeffer, J. (1994), Competitive Advantage through People, Boston, Mass: Harvard Business School Press. Pfeffer, J. (1998), Seven practices of successful organizations, California Management Review, 40, Razouk, A. (2011), High performance work systems and performance of French small- and medium-sized enterprises: Examining causal order, The international Journal of Human Resource Management, 22, 2, Rogers, E., & Wright, P. (1998), Measuring organisational performance in strategic human resource management: Problems, prospects, and performance information markets, Human Resource Management Review, 8, Scott, W. R. (1977), Effectiveness of Organizational Effectiveness Studies: New Perspectives on Organizational Effectiveness, San Francisco: Jossey-Bass Publishers. Theriou, G., & Chatzoglou, P., (2008). Enhancing performance through best HRM practices, organisational learning and knowledge management, European Business Review, 20: 3, Wall, T.D. & Wood, S. (2005), The romance of human resource management and business performance, and the case for big science, Human Relations, 58, Wright, P., Dunford, B.B., and Scott, S. (2001), Human resources and the resource based view of the firm, Journal of Management, 27, Wright, P., & Gardner, T.M. (2003), The human resource-firm performance relationship: Methodological and theoretical challenges, In The new workplace: A guide to the human impact of modern working practices, eds D. Holman, T.D. Wall, C.W. Clegg, P. Sparrow, and A. Howard, pp West Sussex, UK: Wiley. 9