Strategic HR functions and firm performance: The moderating effects of high-involvement work practices

Asia Pac J Manag (2013) 30:91 113 DOI 10.1007/s10490-011-9264-6 Strategic HR functions and firm performance: The moderating effects of high-involvement work practices Hyondong Kim & Kang Sung-Choon Published online: 17 August 2011 # Springer Science+Business Media, LLC 2011 Abstract Although the strategic human resource management literature has emphasized the value of the integration of human resource management into strategic management, the mechanism through which the strategic integration of HR functions contributes to the improvement of firm performance is relatively unknown. Assuming that HR strategies cannot be successfully implemented without employee support for and commitment to these strategies, this research focuses on high-involvement work practices, which allow employees to participate in management decisions as potential moderators of the integration of HR functions in strategic management and firm performance. Using a sample of 203 unionized Korean firms, this research found that the effects of a strategic HR function on firm performance were moderated by highinvolvement work practices such as a pay-for-performance program, a careerdevelopment program, union participation in company strategy, and temporary worker benefits. The results suggest that a strategic HR function will not be successful without institutional mechanisms that foster employee involvement. Keywords Strategic HR function. HR process. Employee contribution and commitment In recent years, management scholars and practitioners have increasingly noted the strategic value of human resources because the acquisition, development, and Both authors contributed equally to this article. H. Kim (*) Department of Management, Dongguk University, 3-26 Pil-Dong, Chung-gu, Seoul 100-715, South Korea e-mail: kim1415@dongguk.edu K. Sung-Choon SK 613, Graduate School of Business, Seoul National University, San 56-1, Shillim-Dong, Kwanak-Ku, Seoul, South Korea e-mail: sk229@snu.ac.kr

92 H. Kim, K. Sung-Choon retention of human resources are embedded in a firm s unique history and culture and thus provide the firm with an idiosyncratic source of competitive advantage (Barney, 1991; Heneman, Ledford, & Gresham, 2000). To realize the strategic value of human resources, administrative or operational HR functions must be altered to have a strategic orientation (Ulrich, 1997). In a study of 115 subsidiaries of 89 Fortune 500 firms, Martell and Carroll (1995) reported that between 40 and 69 percent of subsidiaries in the United States had HR functions that were involved to some extent in strategic management processes. The integration of HR functions into strategic management can proceed through two phases: strategy formulation and implementation. Concerning strategy formulation, HR functions should provide insight into the types of employee knowledge, skills, and abilities that can be mobilized to create competitive advantage. In implementing a strategy, HR functions should organize and manage HR competencies and behaviors in alignment with the strategy. Prior HR scholars have exclusively focused on the integration of HR functions into strategy formulation. For example, Wright, McMahan, McCormick, and Sherman (1998) found that although HR executives involvement in strategic management was not directly associated with firm performance, their involvement had a substantial effect when the firms pursued a product innovation strategy for which skilled employees were a critical source of core competence. Likewise, Welbourne and Cyr (1999) showed that the involvement of HR executives had a positive effect on stock prices only in fast-growing, small pre-ipo firms. These studies suggest that the involvement of HR functions in strategy formulation positively influences firm performance, particularly when a firm s core business requires human capital as a strategic asset. An appropriate match between human resource management (HRM) and strategic choice does not automatically result in effective implementation (Becker & Huselid, 2006). HR researchers recently noted that weak relationships between HRM and firm performance may be attributed to the gap between intended and implemented HR strategies (Wright & Nishii, 2005). In many cases, the knowledge and skills that are required to implement strategies may reside in non-managerial employees (Grant, 1996; Guthrie, 2001). When a firm intends to utilize existing strategic resources and/or develop new strategic assets to implement a planned strategy, employee acceptance of and commitment to the strategy is indispensable. Therefore, our research focuses on high-involvement work practices, which are intended to enhance employees positive attitudes toward their jobs and employers, as a potential moderator in the relationship between a strategic HR function which refers to the degree to which an HR function is integrated into strategy formulation and implementation and firm performance. This study analyzes the effects of a strategic HR function on firm performance using a large-scale survey of Korean firms, whose HR systems and functions have changed dramatically since the economic crisis of 1997. Although Korean firms traditionally maintained paternalistic internal labor markets in which employee seniority and hierarchical control were key principles of HRM, to survive amid global competition, these firms have radically transformed their HR systems to become more performance oriented (Bae & Lawler, 2000). Accompanying these changes in the HR system, Korean firms have also made radical changes to HR functions, including administrative expertise and strategic partners. Thus, Korean

Strategic HR functions and firm performance 93 firms provide an appropriate research context to test the effects of a strategic HR function on firm performance (Budhwar & Debrah, 2009). Theory and hypotheses To achieve effective strategy implementation, HR functions should encourage employees to accept strategic requirements and advise them to commit to strategic requirements (Ulrich, 1997). High-involvement work practices that support employee involvement in the business of the organization expand employee discretion (Riordan, Vandenberg, & Richardson, 2005) and increase employee commitment by appealing to intrinsic motivations (Bae & Lawler, 2000). Thus, highinvolvement work practices develop employee competencies and behaviors that support strategy implementation and thereby complement a strategic HR function by increasing the effectiveness of strategic management. Lawler (1992) posited that high-involvement work practices feature four organizational elements: power, information, knowledge, and rewards. All employees within a firm should be given the responsibility and information necessary for them to influence decisions regarding the firm s operations and performance (Power & Information). They should also be trained to deploy expertise based on a solid understanding of the decision-making processes of the firm (Knowledge). Finally, all workers in the firm must participate and share in the returns of their efforts through pay and benefit programs (Rewards). When HR functions implement a new HR strategy, they can enhance employees acceptance of and commitment to the new HR strategy by allowing employees to participate in decision-making processes and by giving them ongoing information about the business of the organization. While worker participation (or empowerment), as a sub-system of high-involvement work practices, can be derived from the CEO or senior managers of the firm, labor unions may also support employee participation. Through labor unions, employers and employees are willing to share detailed information about strategic decisions related to the firm and to cooperate to enhance firm performance. Accordingly, labor unions provide important participation mechanisms through which employees share power and information with the management of the organization. Career development and training opportunities can help employees to acquire the competencies that are required to implement a strategic HR function. By aligning personal interests with company objectives, a pay-for-performance program motivates workers to realize the strategic objectives of the HR function. Based on Lawler s (1992) conceptualization of high-involvement work practices, the existing literature has focused on regular workers. However, given the widespread use of alternative work arrangements (e.g., independent contractors and temporary workers), HR functions cannot implement strategic decisions effectively without support from both temporary and regular workers. Thus, the development and maintenance of cooperative relationships among core and temporary workers is critical for efficient strategy implementation (Lepak, Taylor, Tekleb, Marrone, & Cohen, 2007). Accordingly, this study expands the scope of

94 H. Kim, K. Sung-Choon high-involvement work practices by including the management of temporary workers in addition to studying the high-involvement practices of regular workers. We assume that HR strategic functions will be facilitated when accompanied by high-involvement work practices. In the sections that follow, we explore how each sub-system of high-involvement work practice will complement a strategic HR function to increase firm performance. Union participation For a strategic HR function to become more effective, it must communicate information about the firm s strategic decisions and operations. First, researchers have recently highlighted the possible discrepancy between intended and actual HR strategies during the implementation phase. For example, based on a case study of Hewlett-Packard (HP), Truss (2001) found that although the firm emphasized training and development programs, fewer than half of its workers felt that the firm s training programs improved their job performance. Further, HP could reduce the discrepancy between actual and perceived HR activities by communicating information about changes in HR programs to employees. The cultivation of a shared understanding among employees regarding HR processes and systems can also enhance the strategic contribution of HR. When HR activities assume a leading role in strategy planning and implementation, employees may experience feelings of anxiety about substantial changes to HR programs (Truss, 2001; Truss, Gratton, Hope-Hailey, Stiles, & Zaleska 2002). Thus, HR should not only encourage feedback about employee attitudes toward strategic planning and activities but also inform employees about the intent and implications of new programs to alleviate their concerns. Finally, when a firm launches strategic HR programs, it tends to place new expectations on employees. To satisfy their employer s demands, employees require detailed knowledge about their new strategic task responsibilities and the intended consequences of new HR activities. The firm must utilize communication channels and information-sharing programs that explain strategic HR programs to employee groups to ensure these programs effectiveness. Hence, research on strategic HR functions has consistently emphasized the importance of communication activities and the information sharing among employees and executives. As employee representatives, labor unions provide employees with institutional channels to obtain power and information in the organization. Through labor unions, employees can exert influence over firm strategies and operations. Labor unions play key roles in delivering employee demands and interests to management and in ensuring the establishment and implementation of practices that are compatible with employee interests. Moreover, labor unions provide employees with opportunities to access information regarding business activities and organizational outcomes. Thus, labor unions are expected to provide important participatory opportunities for employees at Korean workplaces. The existing literature suggests that labor unions function as either facilitators or barriers to workplace operations. Labor-management relations have traditionally been perceived as adversarial because labor unions tend to suppress managerial autonomy to preserve continued employment and worker welfare. Specifically, labor unions

Strategic HR functions and firm performance 95 negotiate with management to maximize collective outcomes for unionized groups. To satisfy the demands of unionized groups, labor unions tend to hold strong equality norms in the workplace. Thus, union participation in HR issues, which directly influences employees status and welfare, may lead to conflicts with management. However, recent industrial relations research has also noted that labor unions often cooperate with management to support organizational innovation and success (Boxall & Macky, 2009; Verma, 2005). For example, Cutcher-Gershenfeld and Kochan (2004) showed that the active involvement of labor unions in workplace strategies supports workplace innovation. Likewise, Block and Berg (2009) demonstrated that joint responsibility between labor unions and management facilitates the adoption of innovative work practices that reduce production costs and improve profitability at GM plants. These studies suggest that labor unions can provide productive solutions and constructive suggestions with respect to workplace operations. Accordingly, labor unions can support a firm s strategic management by mobilizing employee participation in strategic decision-making and program implementation. From the opposing views of the roles of labor unions present in the literature, it is apparent that the effects of union participation may vary with the type of union participation. Specifically, labor unions can collaborate with management to enhance labor productivity and operational efficiency when they are involved in the strategic management of the firm. However, union participation in HR issues may also lead to conflicts with management when unions try to suppress management autonomy to change employment practices. Recently, in South Korea, Kim and Bae s (2005) case study noted significant HRM differences between unionized and non-unionized companies. Although Samsung SDI and LG Electronics are subsidiaries of Chaebol group and belong to the electronics industry, union status significantly determines the characteristics of work practices and programs. At Samsung SDI, the employee participation system has been realized through a variety of programs, such as quality meeting, The Six Sigma program, and employee suggestion system. Employee participation at Samsung SDI tends to be restricted around the suggestions and committees. Samsung SDI relies on a top-down approach to workplace management. In contrast, LG Electronics motivates employee participation through collective bargaining. Labor unions have opportunities to participate at the strategic level, such as restructuring, investment, and product development. LG Electronics conducts a bottom-up approach to workplace management. Kato, Lee, Lee, and Lee (2005) reported that adversarial unionized workplaces have less quality control programs than harmonized working environments. Labor unions in South Korea may exert significant influences over workplace activities and programs, although it is endorsed by top management. Thus, we propose two separate hypotheses regarding the differential effects of union participation by reflecting strong bargaining powers in South Korea workplaces. Hypothesis 1a Union strategic participation will enhance the positive effect of a strategic HR function on firm performance. Hypothesis 1b Union HR participation will undermine the positive effect of a strategic HR function on firm performance.

96 H. Kim, K. Sung-Choon Career development and employee training programs The resource-based view of the firm suggests that a firm s unique human assets are a fundamental source of the firm s competitiveness (Barney, 1991). To respond to changing environments and to achieve a sustainable competitive advantage, a firm must develop flexible human assets that can quickly adjust to possible changes in firm strategy (Wright & Snell, 1998). Career development programs expand employees competencies, thus providing support for career development. Employee training programs also provide opportunities for workers to acquire skills and knowledge that support task performance. Through career development and employee training programs, employees can be exposed to a broad range of knowledge and perspectives, making them less inclined to resist change and more inclined to generate new knowledge and creative approaches (Beugelsdijk, 2008). In this respect, extensive career development and employee training programs are likely to expand the human resources available for strategic implementation and help the firm flexibly align human resources with a variety of strategic requirements (Takeuchi, Wakabayashi, & Chen, 2003). Accordingly, as a sub-system of highinvolvement work practices, career development and employee training programs are expected to expand the positive effects of a strategic HR function on firm performance. Hypothesis 2 Employee career development and training programs will enhance the positive effect of a strategic HR function on firm performance. Pay-for-performance program To effectively implement HR strategies, firms must determine a method to make lowlevel employees internalize the intention of these strategies. One such method is payfor-performance programs, which align personal interests with organizational objectives by connecting payouts to employee performance. Thus, through pay-for-performance programs, HR functions can shape employee behaviors and attitudes in a manner that is compatible with the firm s strategic objectives (Keizer, 2011). Pay-for-performance programs also support other elements of high-involvement work practices, including union participation, temporary worker management, career development, and employee training programs. Without the support of pay-for performance programs, these other elements may be unable to fully support strategic HR because without incentives, employees may be unwilling to participate in new programs, collaborate with temporary workgroups, and master new training and development. Therefore, companies must implement pay-for-performance programs as a critical part of highinvolvement work practices. Hypothesis 3 A pay-for-performance program will enhance the positive effect of a strategic HR function on firm performance Management of temporary workers Employment statistics from the Korean Ministry of Labor show that more than onethird of all employees are temporary workers (Eun, 2006). Because Korean labor law

Strategic HR functions and firm performance 97 stipulates conditions for the dismissal of permanent workers, some Korean firms use temporary workers as an alternative employment mechanism to control labor costs and maintain their ability to adapt to changing business circumstances (Eun, 2006). In this case, the use of temporary workers may negatively impact employee competency and commitment, which strategic HR systems aim to leverage to develop organizational competitiveness (Kwon, 2004). However, researchers have recently noted that temporary workers can be utilized as strategic assets. Lepak and Snell (2002) identified different modes of employment to examine how companies strategically utilize human capital. They suggested that there are two modes of temporary employment: contract and alliance. Under the contract mode, firms rely on temporary workers when human capital is not important or unique. However, it is sometimes necessary for firms to employ highly skilled contractors, that is, when their cost is lower than the labor costs that would incur from internal employment. Instead of hiring these workers as internal employees, firms form partnerships with temporary workers to utilize specialized skills and expertise to produce specific outcomes in a process that is known as the alliance mode of temporary employment. Lepak, Takeuchi, and Snell (2003) also showed that the use of temporary workers results in improved firm financial performance (ROE) when firms make a significant investment in internal development and encourage a long-term commitment from core work groups: contract workers can buffer core workers from potential risks and enable the firm to quickly adjust the amount and expense of human capital. Further, Dyne and Ang (1998) showed that temporary workers may have high levels of loyalty and commitment to organizations when firms actively invest in temporary workers. Interestingly, they showed that a temporary workforce with high levels of organizational commitment is as likely to exhibit pro-social behaviors (e.g., organizational citizenship behavior) as a permanent workforce. Bidwell (2009) compared the use of contractors and regular workers in the information technology departments of financial institutions. Managers prefer contractors to be assigned to positions where frontline managers interests differ from organizational interests (Bidwell, 2009). Additionally, Kwon (2004) investigated the use of temporary workers and its related effects in 182 South Korean companies. Whereas the number of temporary workers negatively impacts company performance, the institutionalization of a temporary-worker management system contributes to labor productivity, employee turnover, and profitability. Therefore, when firms treat temporary workers as important business partners and support their career development, the temporary workforce can serve as a valuable resource to improve organizational competitiveness (Felstead & Gallie, 2004). In summary, temporary workers can provide organizations with specialized skills and knowledge that are valuable but unavailable from internal employment and that complement the value of regular workers. Thus, the institutionalization of temporary worker management should help HR functions to mobilize the competencies and cooperation of temporary workers, which in turn support the implementation of HR strategies. Hypothesis 4 The institutionalization of temporary worker management will enhance the positive effect of a strategic HR function on firm performance.

98 H. Kim, K. Sung-Choon Methodology Sample and procedure Data were collected from the 2005 Workplace Panel Survey (WPS) conducted by the Korea Labor Institute (KLI), a government-funded labor policy group, from June 2005 to November 2005. The objective of the WPS survey was to understand how Korean firms manage human resources and to observe employment relationships in the workplace. The WPS survey was administered at 359 state enterprises in the public sector and 3,916 firms in the private sector, each of which had over 30 employees. A survey package was mailed to the HR manager, the industrial relations manager, and/or the firm s employee representative responsible for HRM and labor relations. Specific questionnaires were designed for each type of managers such that HR managers responded to questions about HR programs and policies, industrial managers responded to questions about company IR policies, and employee representatives responded to questions about labor union policies. The survey package included a letter that explained the objectives and methods of the survey and its importance. KLI used a variety of methods, including web-based surveys, paper-and-pencil questionnaires, and computer-assisted personal interviews, to increase the response rate of WPS. Approximately 50 percent of the total population, that is, 1,905 firms (1,615 in the private sector and 290 in the public sector), returned the survey. For our study, we selected firms with more than 100 employees because firms of this size can be assumed to have systematic HR programs (Datta, Guthrie, & Wright, 2005). We also eliminated state enterprises from our analysis, because state enterprises pursue public interests. HR department in state enterprises put focus on compliances with laws and regulations. As state enterprises may not be consistent with study purposes, we withdrew state enterprises from the samples. Because our study focuses on the moderating effect of union participation on the relationship between a strategic HR function and firm performance, we eliminated non-unionized firms from the final sample. After deleting the missing variables, the final sample included 203 firms. Measures Strategic HR function A strategic HR function is defined as the extent to which HR roles and responsibilities are integrated into a firm s strategic management. HR managers were asked to rate HR functions in strategic management on a five-point Likert scale, with responses ranging from (1) absolutely to (5) not at all for the following items: (1) Are HRM issues closely integrated with the business strategy of your firm? (2) Is the HR manager at your firm a major contributor to your business strategy? (3) Does the HR manager at your firm substantially influence the decisionmaking process of the CEO? (4) Does your firm exert concrete efforts to ensure that HRM is compatible with the business strategy? (5) Do persons in other divisions in your firm recognize the HR division as an architect of change and as a major partner in business? (6) Does HRM in your firm appropriately support the achievement of business strategy objectives? All items were reverse-scaled to test our hypotheses.

Strategic HR functions and firm performance 99 High-involvement work practices Union participation was measured by asking industrial relations managers to rate the extent to which their unions participate in the decision-making of the firm. Union participation was assessed in two areas of management decisions: firm strategy and HRM. We developed the measures by referring to previous studies (Deery & Iverson, 2005; Kato et al., 2005) that assess the extent to which labor unions are actively involved in a firm s strategic and HRM issues. Specifically, union participation in strategic decisions was measured with five items related to management strategy, investment strategy, and the introduction of new technologies and new machinery. Union participation in HRM was measured with three items that assessed the extent to which a union participated in HRM decisions regarding personnel appraisal, compensation, and promotion systems. All of the survey items on union participation employed a four-point Likert scale, ranging from (1) the management makes unilateral decisions without informing the union to (4) decisions are made jointly between labor and management. A firm s career development programs were measured by the number of activities and programs that firms provided to enhance employees self-development as of 2005. Referring to existing measures (Shaw, Gupta, & Delery, 2002; Zachartos, Barling, & Iverson, 2005), we measured career development and employee training programs by the number of programs a firm had implemented. Career development programs included: (1) assessment centers, (2) peer evaluations, (3) upward evaluations, (4) career counseling from direct supervisors, (5) career counseling from the HR department; (6) career workshops, (7) career paths for professionals, (8) individualized career plans, (9) succession plans, (10) career-related materials, (11) MBA programs, (12) internal referral programs, (13) job rotations, and (14) outplacement services. Employee training programs included: (1) internal training arrangements, (2) external training arrangements, (3) online training, (4) financial support for study groups, (5) technical guidance and worker training for subcontractors and vendors, (6) technical guidance and worker training by parent companies and primary contractors, (7) training leave, (8) tuition reimbursement program, and (9) scholarships. Because there are no appropriate existing measures of the management of temporary workers, we reviewed the literature on temporary workers (Foote, 2004) and identified major issues related to their management. Our measure of the management of temporary workers captures the ways in which a firm had managed those major issues. Six items encompassed the types of fringe benefits that a firm has offered temporary workers, including severance pay, paid holidays, pension, health insurance, unemployment insurance, and occupational insurance. Four items reflected HR programs for temporary workers such as training and education, promotions, pay raises, and performance appraisals. All of the 10 survey items were measured on a five-point Likert scale, which ranged from (1) each temporary worker management practice is used for none of the temporary workers to (2) less than 50% of temporary workers to (3) more than 50% of temporary workers to (4) all temporary workers. Pay-forperformance was measured by the percentage of pay-for-performance in total pay for regular workers. Firm performance Previous strategic HRM studies have used a variety of firm performance measures, such as ROE (Lepak et al., 2003), sales (Sun, Aryee, & Law, 2007) and labor efficiency as well as product quality (McDuffie, 1995). However,

100 H. Kim, K. Sung-Choon objective performance data related to stockholder equity (Tobin s Q and ROE) were not available in this study. Thus, this study measured firm performance with two performance indices firm revenue and net income. Several studies use the sales per person as performance measures for highinvolvement work practices. However, those studies control industry membership as manufacturing (Guthrie, 2001). As the sample of this study includes several industries (manufacturing, construction, retailing, transportation, financial, and business service), sales per person may not be generalized across multi-industry. Moreover, in accordance with industry membership, existing studies use different performance measures. For example, Shaw et al. (2002) used accident frequency ratio and out-of-service percentage for transportation industry. Collins and Smith (2006) operationalized sales-growth and revenues from new products and services as firm performance. Hmieleski and Baron (2009) used revenue and employment size as venture performance. Thus, this study used revenues that can be a generalized performance measure for different industry groups. Moreover, high-involvement work practices may increase revenues. However, high-involvement work practices incur costs by executing training and development programs, and empowering workers. It is necessary to consider costs incurred for high-involvement work practices when measuring the gains from high-involvement work practices (Zatzick & Iverson, 2006). Therefore, this study uses net income as well as revenues for company performance measures. Control variables We controlled for firm size and age, firm innovation strategy, labor relations, and industry membership, all of which might influence firm performance. Firm size was measured by the number of employees. Firm age was measured by subtracting the year of the firm s foundation from the year of the survey, 2005. Firm size and age were both log-transformed. Firm innovation strategy was measured by the average score of two items: (1) the degree to which the firm can respond rapidly to customer demands and market signals, and (2) the degree to which innovation is key to the company s competitive strategy. Labor relations were measured by averaging the following items: (1) labor and management both keep their promises; (2) negotiations occur in an atmosphere of mutual trust; (3) labor and management share information; (4) labor and management engage in joint consultations on most major changes to working conditions; (5) labor and management frequently argue over even minor issues; and (6) labor has a hostile attitude toward management. We reversed the last two items to confirm consistency in the survey questionnaire. To obtain the reliability of the labor relations measure, we aggregated the responses from labor representatives and industrial relations managers. Industry memberships include manufacturing, construction, retail, transportation, finance, and business services. Industry dummy variables were created to control for inter-industry differences. Results Table 1 presents the means, standard deviations, and correlations for the study variables. The average number of employees is approximately 953, and the average

Strategic HR functions and firm performance 101 Table 1 Descriptive statistics and correlations. Variables Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 1. Manufacturing.63.48 2. Construction.03.18.25 3. Retailing.07.25.36.05 4. Tranporstation.08.27.39.05.08 5. Finance.03.17.23.03.04.05 6. Business service.03.17.23.03.04.05.03 7. Firm size 960 2,025.07.05.05.08.02.08 8. Firm age 27.88 17.56.00.06.12.11.06.05.06 9. Firm innovation strategy 3.23.78.12.03.14.24.04.12.09.04 10. Labor relations 3.79.50.09.00.05.01.11.03.00.02.06 11. Strategic HR function 3.83.50.07.01.01.06.01.07.23.12.15.19 12. Union strategic participation 2.00.67.01.11.00.08.06.02.09.06.03.23.09 13. Union HR participation 3.28.78.07.00.15.10.00.06.15.04.00.18.07.21 14. Career development program 2.25 2.37.08.05.03.13.17.05.26.07.19.09.28.05.09 15. Employee training program 4.79 2.33.09.06.05.21.00.04.26.11.21.11.29.11.16.11 16. Pay for performance% 12.30% 58.97%.06.00.03.05.00.00.60.03.16.08.22.08.05.59.06 17. Temporary workers benefit 3.67.78.05.04.04.14.13.03.08.01.04.02.03.10.06.15.11.06 18. Temporary workers HR 2.20 1.20.17.01.07.00.21.07.05.12.03.10.03.04.05.07.05.07.52 19. Firm net income $7.83M $25.32M.09.04.13.09.04.03.62.01.14.11.21.08.06.32.29.06.13.05 20. Firm revenue $105M $256M.08.04.15.11.07.01.61.04.15.09.23.08.05.28.21.04.10.08.71 N = 203 (M = Million; $1 = 1,180 Won). All correlations with absolute values greater than.14 are significant at p <.05; correlations greater than.21 are significant at p <.01.

102 H. Kim, K. Sung-Choon firm year is 28 years. The average revenue and net income are $105.5 million and $7.83 million, respectively. Of the sample, 64% of firms are in the manufacturing industry, 3.3% in the construction industry, 7.5% in the retailing industry, 7.5% in the transportation industry, 2.8% in the financial industry, and 2.8% in the business service industry. The average number of career development programs a firm had offered their employees is approximately two programs per company. With respect to the frequency analysis of career development programs, companies prefer upward evaluations (68 companies, 31.9%), while the remaining firms use career counseling by direct supervisors (37 companies, 17.4%), mentoring (72 companies, 33.8%), MBA programs (63 companies, 29.6%), internal referral programs (41 companies, 19.2%), and job rotations (67 companies, 31.5%). Relatively few companies use assessment centers (6 companies, 2.8%), career workshops (13 companies, 6.1%), professional career paths (12 companies, 5.6%), succession planning (14 companies, 6.6%), and career-related materials (3 companies, 1.4%). For employee training programs, many companies use internal training arrangements (172 companies, 80.8%), external training arrangements (155 companies, 72.8%), online training (148 companies, 69.5%), tuition reimbursement programs (132 companies, 62%), and scholarships (75 companies, 35.2%). Approximately 15 25% of employees participate in other training programs as well. Table 1 also shows that a strategic HR function is significantly correlated with firm performance (firm net income: r =.21,p <.01; firm revenue: r =.23, p <.01). Of the moderating variables, career development programs (firm net income: r =.32,p <.01; firm revenue: r =.28, p <.01), employment training programs (firm net income: r =.29,p <.01;firmrevenue:r =.21,p <.01) and temporary worker benefit programs (firm net income: r =.13, p <.01;firm revenue: r =.10, p <.05) are positively associated with firm performance. Innovation strategy (firm net income: r =.14,p <.01; firm revenue: r =.15, p <.01) and labor relations (firm net income: r =.11, p <.05) are significantly associated with firm performance. The two firm performance measures are positively correlated (r =.71,p <.01). Validity and reliability Because most of our measures were newly developed or adapted for this study, we examined the validity and reliability of those measures. First, as discussed above, we developed our measures by referring to existing measures or the related literature; hence, our measures satisfied content validity. Next, we conducted correlation analysis with alternative measures to confirm the convergent validity of our measures. At first, since there in no appropriate existing measures of strategic HR function and temporary workers management, we reviewed the literature and identified major issues in managing them. Since there in no appropriate existing measures of a strategic HR function and temporary workers management, we reviewed the literature and identified major issues in managing them. Survey items in Truss et al. (2002) and Hailey, Farndale, and Truss (2005) identified strategic functions of HR department as composed of strategic competency and strategic importance. The survey items on 2005 WPS addresses competency (contributor to business

Strategic HR functions and firm performance 103 strategy; importance in decision-making of CEO) and strategic importance (integrated with business strategy; support the business strategy objectives) that is consistent with what Truss et al. (2002) and Hailey et al. (2005) identified. Moreover, we compared survey items with Wright et al. s (1998) items, which included: (a) provide input into the long-range strategic planning; (b) meet with managers to discuss HR issues; (c) meet with managers to discuss how HR can support long-range strategy; (d) provide innovative HR programs to enhance competitiveness; (e) identify future HR issues that could help or hinder future competitiveness; (f) develop HR systems to implement strategies; and (g) revise existing HR systems to be supportive of strategies. The survey items of the present study are consistent with Wright et al. (1998) in terms of strategic competency and strategic importance. We also used alternative measures to test discriminant validity with strategic HR value. Alternative items from 2005 WPS were (a) maximize employer loyalty and devotion to the company; (b) long-term employment nurture qualified people from our workers; (c) utilize regular workers as much as possible; (d) HRM is based on teamwork; and (e) focuses on long-term growth and development of workers. Exploratory factor analysis shows the differences between strategic HR function and HR value. Also, a strategic HR function cannot succeed without the professional skills and competencies of the HR staff. Thus, we tested the correlation between a strategic HR function and the professionalization of the HR staff (e.g., regular meeting with HR managers from competing firms, membership in HR associations, and assistance from HR consultants) and found a positive and significant correlation between the two variables (r =.16, p <.05). Therefore, the measurement on strategic HR functions has a sufficient validity. Moreover, the construct of high-involvement work practices is different from what existing literatures generally use to measure high-involvement work practices (e.g., union participation, temporary work management). With regard to temporary worker management, we also reviewed the existing literatures and identified issues (Foote, 2004). The issues raised in the use of temporary worker management are summarized as following: (1) inadequate socialization; (2) low expectations for a permanent job in the firm; (3) low levels of organizational commitment; and (4) perceptions of organizational injustice. Temporary worker benefit provides better incomes that mitigate the perceptions of organizational injustice and motivate expectations. Temporary worker HRM improves skills and competencies of workers that enhance organizational commitment and facilitate socializations. As the productivity of temporary work groups increases, firms are likely to institutionalize temporary workgroups. The average productivity of temporary workgroups was 76.48% of that of regular workers. We found that temporary worker benefit was positively related to the productivity of temporary work group (r =.131, p <.10) although temporary worker HR was not significantly related to the latter (r =.069, p >.10). Further, union participation taps into the issues that have been raised in previous studies. Kato et al. (2005) showed that labor representatives are more likely to discuss managerial plans, organizational restructuring, and employment adjustment and compensation as well as conducting collective negotiations and bargaining. Deery and Iverson (2005) also showed that labor unions are more likely to share

104 H. Kim, K. Sung-Choon information on management plans. Union participation measures of the current study assess the extent to which labor unions actively involve in company business (management strategy, HRM). Thus, by referring to existing studies, this study confirms the face validity of high-involvement work measures. Management policy toward union, 1 as rated by labor representatives, was also significantly correlated with union participation in company strategy (r =.255, p <.01) and union participation in HR management (r =.190, p <.01). Finally, with regard to discriminant validity, we conducted exploratory factor analyses to validate our six independent and moderating variables. The Root Mean Square Error of Approximation (RMSEA), Comparative Fit Index (CFI), and Goodness of Fit Index (GFI) were used to assess the validity of scale constructs. Results of these analyses indicate that our hypothesized model achieved an acceptable level of fit (X 2 = 515.648; df = 204; RMSEA =.074; CFI =.913) (Table 2). Hypothesis testing We tested the hypotheses using hierarchical regression analyses. The results are summarized in Table 3. Model 1 included the control variables and a strategic HR function. Model 2 demonstrated the main effects of the moderating variables, namely, high-involvement work practices. Model 3 tested our hypotheses by analyzing twoway interactions between the independent and moderating variables. We centered (mean = 0) the independent and moderating variables to minimize the effects of multicolinearity among the interaction terms (Cohen, Cohen, West, & Aiken, 2006). As shown in Table 3, a strategic HR function was marginally associated with firm net income (β =.11,p <.10) and firm revenue (β =.11,p <.10). None of the moderating factors were significantly associated with firm performance. With respect to the hypothesized moderating effects of high-involvement work practices, the interaction term between a strategic HR function and union strategy participation was positively associated with firm revenue (β =.14, p <.05). Thus, Hypothesis 1a was partially supported. The interaction terms between a strategic HR function and union HR participation were not significantly associated with any of the performance measures, thus failing to support Hypothesis 1b. The moderating effect of career development programs on the relationship between a strategic HR function and firm performance was significant only for firm net income (β =.19, p <.05), which provided partial support for Hypothesis 2. The interaction term between a pay-for-performance program and a strategic HR function was significantly associated with firm net income (β =.31, p <.001) and firm revenue (β =.310, p <.001), which provided support for Hypothesis 3. Consistent with Hypothesis 4, the institutionalization of temporary worker benefits programs positively interacted with a strategic HR function to influence firm net income (β =.17, p <.05). 1 Management policy toward union was measured by asking labor representatives about the attitudes of workplace management toward the union (1 = management seeks to weaken and disband the union; 2 = management recognizes the union but seeks to minimize union participation in management; 3 = management respects the union as its partner and seeks active union participation in management).

Strategic HR functions and firm performance 105 Table 2 Exploratory factory analysis results. Strategic HR function Survey items 1 2 3 4 5 6 Closely integrated with the business strategy Major contributor to your business strategy Substantial influence on the decisionmaking process of the CEO Ensure that HRM is compatible with the business strategy? Recognize the pioneer of change and a major partner in business? Support the achievement of business strategy objectives?.702.019.019.050.061.096.834.014.014.035.023.101.793.006.006.070.027.062.800.015.015.030.011.070.716.013.013.037.086.086.594.087.087.085.006.145 Union strategic Management strategy.023.873.023.056.025.166 participation Investment strategy.017.870.017.095.021.160 Introduction of new technologies.097.634.097.041.016.072 and machinery Union HR participation Personnel evaluation systems.062.122.648.041.049.112 Compensation system.000.114.768.001.036.023 Promotion systems.012.050.748.030.069.067 Temporary worker Severance pay.019.049.030.884.234.038 benefit Paid holidays.037.034.002.872.197.001 Pension.003.050.048.978.146.005 Health insurance.012.040.034.978.162.012 Unemployment insurance.005.064.038.983.136.013 Occupational insurance.002.052.029.982.155.010 Temporary worker Training and education.012.062.023.391.619.068 HR management Promotion.014.044.054.301.914.045 Performance appraisal.023.019.038.262.537.059 To plot the interactions, we followed the suggestions provided in the literature (e.g., Cohen et al., 2006). Specifically, we used non-standardized regression coefficients to predict the indicators of firm performance, so predictors vary from the mean by ±1 standard deviation. Using the calculated results, we plotted the relationships among the dependent variables, independent variables and moderating variables at low (one standard deviation below the mean) and high (one standard deviation above the mean) levels. The plots in Figure 1 clearly show the positive interactions between a strategic HR function and high-involvement work programs. That is, a strategic HR function yielded a more positive impact on firm revenue under high levels of union strategic participation (Figure 1a), pay-for-performance (Figure 1b), and temporary worker benefits (Figure 1c). Also, under high levels of career development programs (Figure 2a) and pay-for-performance (Figure 2b), a strategic HR function had positive effects on firm net income. In sum, the graphs in Figures 1 and 2 show that the positive effect from a strategic HR function increases when firms undertake high levels of high-involvement practices.

106 H. Kim, K. Sung-Choon Table 3 Hierarchical regression results. Independent variables Firm net income a Firm revenue b I II III I II III Industries controlled Firm Size.40 ***.34 ***.26 ***.21 ***.40 ***.31 *** Labor Relations.07.03.01.05.06.00 Firm Years.00.08.00.03.01.03 Innovation Strategy.01.01.04.02.01.01 Strategic HR Function.12.07.22 **.11.10.26 * Union Strategic Participation.03.01.06.03 Union HR Participation.01.02.03.00 Career Development Program.13.07.12.08 Employee Training Program.08.07.05.06 Pay-For-Performance%.02.04.02.00 Temporary Worker Benefit.09.09.04.04 Temporary Worker HR.08.07.04.02 Strategic HR Function.10.13 * Union Strategic Participation Strategic HR Function.04.05 Union HR Participation Strategic HR Function.19 *.12 Career Development Program Strategic HR Function.01.02 Employee Training Program Strategic HR Function.31 ***.31 ** Pay-For-Performance% Strategic HR Function.11.17 * Temporary Worker Benefit Strategic HR Function.06.06 Temporary Workers HR Adjusted R 2.20.19.32.18.19.30 Model F 5.05 *** 3.40 *** 4.59 *** 4.52 *** 3.42 *** 4.29 *** a N = 209 N = 213 p <.01, * p <.05, ** p <.01, *** p <.001. Discussion The purpose of this study is to uncover the mechanism in which a strategic HR function is linked to firm performance. Assuming that HR strategies cannot be successfully implemented without employee commitment to these HR strategies, this research focuses on high-involvement work practices as potential moderating mechanisms between a strategic HR function and firm performance. The results

Strategic HR functions and firm performance 107 1a Union strategic participation 1b Pay-for-performance 1c Temporary worker benefit Figure 1 a Union strategic participation. b Pay-for-performance. c Temporary worker benefit show that although a strategic HR function has weak direct effects on firm performance, high-involvement work practices indeed moderate the relationships between a strategic HR function and firm performance. Specifically, the effectiveness of a strategic HR function is enhanced (1) when firms make strategic use of pay-forperformance programs; (2) when firms provide many career development programs for employees; (3) when firms support labor unions to participate in their strategic activities; and (4) when firms reinforce temporary workers cooperation and dedication to the firm by providing favorable benefit programs.

108 H. Kim, K. Sung-Choon 2a Career development program 2b Pay-for-performance program Figure 2 a Career development program. b Pay-for-performance program More specifically, the results show that pay-for-performance programs support a HR function s strategic activities by motivating employees to alter their attitudes and behaviors in a manner that is required for the effective implementation of strategic HR. The present study also suggests that when HR functions are integrated into a firm s strategic management, the firm should provide employees with career development opportunities to ensure that they possess competencies aligned with a firm s strategies. The results of the study support the moderating effects of union strategy participation on the relationship between a strategic HR function and company performance. The results suggest that labor unions can cooperate with management to support organizational innovation and success and thereby, support a firm s strategic management by mobilizing employee participation in strategic decision-making and program implementation. Labor unions generally favor equality the workplace, which may not be compatible with the HR strategy, especially when progressive HR practices and programs are introduced that emphasize individual achievement and competition (Boxall & Macky, 2009; Verma, 2005). Therefore, with increasing union involvement in HR-related decisions,