Human Resource Management Practices on Organizational Performance
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The study evaluates the effects of human resource management practices on organizational performance in Oil and Gas Industry in Pakistan. A total of 150 managers of 20 randomly selected firms from Oil and Gas Industry responded to self-reported questionnaire that measured five HRM practices and subjective measures of organizational performance. Factor analysis was performed to identify human resource management practices. Regression analysis indicated a positive and statistically significant association of these practices with organizational performance. The study provides insight to management to use these practices as strategic tool for superior performance, and add to the limited empirical knowledge that exists in Pakistani context.
Keywords: Human resource management, organizational performance, Oil and gas industry, Pakistan.
Changing business environment in knowledge economy has made adoption of human resource management (HRM) imperative for competitive advantage. The impact of HRM practices on business performance has been extensively studied in the recent past. These studies have found a positive association between HRM practices and firms’ performance (Becker & Huselid, 1998; Chang & Kuo, 2004; Jarventaus, 2007; Rizov & Croucher, 2008; Sang, 2005). Most of these studies have been undertaken in the United States, and Europe (Boseli et al., 2001; Hoque, 1999) and Asia (Bjo¨rkman, I. and Xiucheng, 2002; Kundu & Malhan, 2007; Ngo et al., 1998). Within Pakistan, limited research has been done to examine the relationship of HRM practices and organizational performance. The strategic role of HRM has been well established. In Pakistan, there has been immense realization of the impact of strategic use of HRM practices and visionary companies are setting the pace to leverage this aspect for competitive advantage.
HRM practitioners are striving to meet the emerging challenges of new values of knowledge workers who have necessitated a new paradigm of peoples’ management characterized by heavy investment in human capital and innovative use of HRM practices for attraction and retention of talents for organizational sustainability. The Oil and Gas Industry in Pakistan is vital for the economy and considered as an issue of national self reliance, national security, and a major source of government’s revenues. With limited proven reserve of oil and gas in the country, Pakistan meets only 18% of the total domestic demands. The government incurs a colossal amount of scare foreign exchange on the import of oil bill.
The 158 European Journal of Economics, Finance and Administrative Sciences – Issue 24 (2010) economic environment in the country and dependence on imported oil has accentuated the problems for the government, people, and organizations. To meet the challenges of shortage of oil and gas, the government of Pakistan announced new Policy in 2009 for this Industry. The policy envisions self sufficiency in oil and gas production and a proactive approach on development of human resource to the international standards, and creating conducive environment for their retention in the country. Organizations operating in Oil and Gas Industry in Pakistan are aligning their strategy to meet the laid down objectives. Doek-Seob (2001) noted that HRM practices become a strategic instrument during economic downturn.
No empirical research has so far been undertaken to investigate the effects of HRM practices on firms’ performance in this industry. Thus a gap exists in the research in this area of strategic importance. The present study is an attempt to address this gap. The present study will offer valuable insight to the management of these organizations about the strategic importance of HRM practices for superior and sustainable organizational performance. In addition, it will add information to the limited empirical knowledge about link of HRM practices and business performance in a developing economy, where the strategic role of HRM is gaining popularity as a vital tool for business performance. The aim of this study is to examine the effects of HRM practices on organizational performance in Oil and Gas Industry in Pakistan.
2. Literature Review
Lately, human resource management has emerged as an essential factor for sustained competitive advantage. Research highlights that organizations develop sustained competitive advantage through management of scare and valuable resources (Barney, 1991). The human resource enables organizations to achieve optimization of resource, effectiveness, and continuous improvement consistently (Wernerfelt, 1984). An organization take time to nurture and develop human capital in the form of knowledge, skills, abilities, motivation, attitude, and interpersonal relationship, and makes it difficult for competitors to imitate (Becker & Gerhart, 1996). Pfeffer (1994) stressed that human resource has been vital for firm sustained performance. In knowledge economy, the human resource has been recognized as a strategic tool, essential to organizational profitability and sustainability. This realization has led to the new role of human resource managers as strategic partners in formulation and implementing organizational strategy (Myloni et al., 2004). Organizations are pursing proactively human resource management (HRM) practices and systems to capitalize on strength of this vital asset for sustained competitive advantage in knowledge economy (Jackson & Schuler, 2000; Mac Duffie, 1995)
Review of literature indicated essential HRM practices as workforce planning (Matthis & Jackson, 2004); job analysis (Cascio, 2006; Dessler, 2003); training and development (Kundo, 2003); recruitment and selection (Kulik, 2004); compensation and reward (Milkovich & Newmen, 1999); performance appraisal (Bernardin & Russel, 1993); career management (Schein, 1996); human resource information system (Wolfe, 1998); quality of work life, personnel diversity, employees attitude surveys (Armstrong, 2005; Bracken, 2000; Hayes, 1999). In meta-analysis of 104 articles, Boselie et al., (2005) concluded that the top four HRM practices are efficient recruitment and selection, training and development, contingency and reward system, and performance management that have been extensively used by different researchers. In recent years, the focus of research on HRM has shifted from study and relationship of individual HRM practices on business performanceto entire HRM system and its influence on organizational performance.
The researchers have different views about this new paradigm. Some researchers claim that the system view of HRM is appropriate, but others contend “that to arbitrarily combine multiple [HRM sub-] dimensions into one measure creates unnecessary reliability problems’ (Becker & Huselid, 1988, p.63). In addition, comprehensive examination of individual HRM practices highlights the significant predictor of business performance (Bjo¨rkman & Budhwar, 2007). 159 European Journal of Economics, Finance and Administrative Sciences – Issue 24 (2010) Researchers have used financial and non financial metrics to measure organizational performance. The financial measures include profit, sales, and market share. Non-financial measures include productivity, quality, efficiency, and the attitudinal and behavioural measures such as commitment, intention to quit, and satisfaction. (Dyer & Reeves, 1995). Divergent views exist to measure the organizational performance based on financial as well as non-financial measures. Hoskisson et al., (2000) identified the problems related to measurement of financial dimensions in emerging economies.
It has been argued that lack of market based financial reporting, inadequate regulatory mechanism and enforcement about financial reporting, lack of transparency in financial reporting, and provision of fictitious financial information are important issues facing emerging economies (Bae & Lawer, 2000; Hoskisson et al., 2000). A subjective measure facilitates managers to take into account organizational goals when evaluating its performance. Researchers argue that though perceptual measure may introduce limitations, the benefits are far greater than the risks. Several researchers have “raised persuasive doubts about the causal distance between an HR input and such output based on financial performance. Put simply, so many other variables and events, both internal and external, affect organizations that this direct relationship rather strains credibility (cited in Boselie et al., 2005, p.75).” The researchers argued that more proximal measures over which employees exert influence are theoretically more plausible and methodically easier to link These include productivity (Chang & Chen, 2002;
Huselid, 1995; Kato & Morishima, 2002; quality of product and service (MacDuffie, 1995; Jayaram et al., 1999), job satisfaction (Guest, 1999; Hoque, 1999), employees turnover intentions (Batt, 2002; Shaw et al., 1998), absenteeism (Lowe et al., 1997), trust in management (Whitener, 2001), and commitment (Tsui et al., 1997). Researchers also examined the negative impact of HRM practices on firm performance that include employees’ stress level (Ramsay et al., 2000); job-home spill over (White et al., 2003). In literature, primacy exists with regard to the use of subjective measures in earlier studies (Delaney & Huselid, 1996; Youndt et al., 1996). Strong evidence exist in prior studies that subjective measurement associate well with objective measures of organization’s performance (Geringer & Hebert, 1991; Powell, 1992). Wall et al. (2004) found that self-reported data is related to limited biases.
The researchers have investigated empirically the effects of HRM practices on organizational performance (Becker & Huselid, 1998; Boselie, 2002; Guest, 1997). Recent studies reflect an impressive influence of HRM practices on organizational performance. Researchers have divergent views about impact of HRM practices and firms’ performance. They argue that HRM practices and performance research have common attributes as well as contradictions (Boselie et al., 2005; Katou & Budhwar, 2006; Wall & Wood, 2005, Wright & Boswell, 2002).
In a study in Greece, Katou and Bedhwar (2006) found that HRM practices of staffing, training and promotion, involvement of employees, incentives, and safety and health have positive relationship with firms’ performance.
In a study of managers from Taiwan and Cambodia, Sang (2005) concluded that workforce planning; staffing; compensation, and incentives; teamwork; training, and employee security had a positive and significant influence on non-financial and financial dimensions of organizational performance. The study validated the positive effects on operational dimensions of performance, namely, production flexibility, product cost, product quality, and product delivery. In a comparative study of United States and Japan, Ichniowski and Shaw (1999) found that Japanese firms were more productive than United States’ firms on account of implementing HRM practices.
In a study in Taiwanese high technology firms, Chang and Chen (2002) established that HRM practices of workforce planning, training and development, benefits, teamwork, and performance appraisal significantly affected productivity. The study also found the negative relationship between human resource planning and employees’ turnover.
Ngo et al., (1998), in a study in Hong Kong companies, found that HRM practices of training and compensation increased firms’ performance. Tessema and Soeters (2006) investigated influence of 160 European Journal of Economics, Finance and Administrative Sciences – Issue 24 (2010) HR practices in Eritrea. The study found that efficient implementation of these practices enhanced the performance at individual and organization level.
In a study in India, Paul and Anantharaman (2003) found indirect effects of HRM related activities on operational and financial performance of firms. The study did not find the causal association of single HRM practice with business performance. In another study Sing (2003) found that strategic use of HRM practices positively affect performance of organizations in India. BjorkmanIn and Xiucheng (2002) investigated the outcome of HRM practices on Western firms’ performance in China, and found a positive association between HRM practices and performance. Bartel (2000) evaluated the impact of HRM practices on performance in Canada and found significantly positive relationship between two constructs. In Israel, Harel and Tzafrir (1999) found that HR practices had positive relationship with firms’ performance in public and private sectors.
In Korea, Bae and Lawler (2000) concluded that HRM practices significantly affect organizational performance. Lee and Chee (1996) in their study did not find as association between HRM practices and business performance. Bae et al., (2003) concluded that high-performance work practices produced excellent results in Pacific Rim countries. Morishima (1998) concluded that organizations with integrated HR practices performed well in Japan than organizations with poorly integrated personnel practice In a study in New Zeeland, Guthrie (2003) validated the impact of HRM practices on employee turnover and profitability. Lee and Lee (2007) established that workforce planning, teamwork, training and development, compensation and incentives, performance appraisal, and employees’ security are important HRM dimensions that affect productivity, product quality, and business performance.
In a study in Taiwan, Chang and Chen (2002) determined significantly positive relationship of HRM practices with organizational performance. The study also found a negative relationship of workforce planning with employees’ turnover. It is argued that HRM practices enhance employees’ competency and motivation that affect organizational performance (Harel & Tzafrir, 1996) contended that HRM practices based on quality hiring, development, and retention boosts firms’ capability. Tsai (2006), in a study in Taiwan, found a positive relationship of employees’ empowerment and firms’ performance. In a study of HRM practices in Chinese small and medium enterprises, participatory decision-making, performance-based pay, free market selection and performance appraisal, employees’ commitment emerged as the most essential outcome for improving performance (Zheng et al., 2006).
Rizov and Croucher (2008) empirically examined the relationship of HRM practices and organizational performance in European firms. They found that collaborative form of HRM practices (characterized by valuing employees as assets and core partners, creating and communicating a culture of partnership between employer and employees as well as among employees, communicating organization’s mission, values, goals and strategy statement through explicit open communication policy and strong support for employees consultative bodies like unions and committees) reflected positive and statistically significant association with firms’ performance. Ahmed and Schroeder (2003) investigated effects of selective hiring, employment security, decentralization and use of teams, incentive and compensation, extensive training, status differences, and information sharing on organizational performance (quality, cost, flexibility, delivery and commitment). The study confirmed the positive and significant relationship of HRM practices with firms’ operational performance
Researchers (Chiu et al., 2002; Tepstra & Rozell, 1993) have established that HRM practices of extensive recruitment and selection, training and development, and compensation systems have positive association with firms’ performance.
Lam and White (1998) established that effective recruitment, competitive compensation, and efficient training and development have relationship with financial dimensions of performance (growth in sales, return on assets, and growth in stock values. Green et al., (2006) concluded that integrated 161 European Journal of Economics, Finance and Administrative Sciences – Issue 24 (2010) approach to HR practices exhibited satisfied and committed employees who demonstrated remarkable individual and team performance.
Harel and Tzafrir(1996) argued that HRM practices improve employees knowledge, skills and abilities (selection and training), through enhanced motivation (compensation and reward). Studies established that HRM practices aimed at acquisition and development of employees is an essential investment that develop valuable and rare human assets (Becker & Huselid, 1998) Huselid(1995) established that high involvement HRM practices have positive relationship with corporate performance, productivity, work attachment, and financial performance. Delaney and Huselid (1996) confirmed that selective staffing; compensation and incentive, and training had positive influence on performance of organization.
A significant number of empirical studies have explored the relationship between HRM practices and firms’ performance in American organizations (Arthur, 1994; Huselid et al., 1997; Youndt et al., 1996). Wright et al. (2005) explored the effect of HRM practices on firms’ performance in 45 business units in America and Canada and established a causal association between HRM practices and business performance. In Western countries, several studies have examined this relationship. In a study of 428 firms in Finland, HRM practices had positive influence on firms’ performance Lahteenmaki et al. (1998). Guthrie (2001) studied 128 companies in New Zeeland and found positive relationship between high-involvement work practices and firms’ performance. In Taiwan, Chang and Chen (2002) studied 62 firms to determine the effects of HRM practices on business performance and found a positive association. Stavrou and Brewster (2005), in a study of 3702 firms from European Members countries discovered a positive association between strategic HRM practices and business performance.
The initial studies focused on establishing a link of single HRM practices to firm’s performance (Cutcher-Gershenfeld, 1991). Subsequently group of HRM practices were identified as High Performance Work Systems (HPWS), and researchers established link of HPWP with excellent performance of organizations (Appelbaum, 2000; Huselid, 1995). Cappelli and Neumark (2001) found negative outcome of these practices with regard to firm’s performance. Godard (2004) argued that poor employee relationship limits the effectiveness of these HPWP. Strong evidence exists in literature about different HRM practices and their effects on superior firms’ performance. Researchers found a positive relationship between effective recruitment and selection practices and top-class performance (Harel & Tzafrir, 1996; Delany & Huselid, 1996); training and development (Bartel, 1994; Fey et al., 2000); compensation and reward (Chie et al., 2002; Batt, 2002); performance appraisal (Boselie et al., 2001, Bjorkmand & Xiucheng, 2002); employee relations (Kuo, 2004).
Prior studies have validated the link between HRM practices and superior business performance in United States and Europe (Boselie et al., 2001; Hoque, 1999); Asia (Bjorkmand & Xiucheng, 2002; Ngo et al., 1998) and Africa (Chebregiorgis & Karsten, 2007). Empirical studies indicate a strong and positive association between HRM practices and performance of organizations. (Cappeli, 1998; Katou & Budhwar, 2007; Kuo, 2004; Huselid et al., 1997; Youndt et al., 1996). The present study investigated five HRM practices namely; training and development, recruitment and selection, compensation and reward, performance appraisal, and employee relation and examined the effects of these practices on subjective measures of performance (product quality, productivity efficiency and overall perceived performance compared to industry average). 3. Research Hypotheses and Theoretical Framework
Based on the comprehensive study of literature, following hypotheses emerge: H 1: Recruitment and selection has significant relationship with organizational performance. H 2: Training and development has significant relationship with organizational performance. H 3: Performance appraisal has significant relationship with organizational performance 162 European Journal of Economics, Finance and Administrative Sciences – Issue 24 (2010) H 4: Compensation and rewards has significant relationship with organizational performance. H 5: Employee relations has significant relationship with organizational performance. 4. Research Method
4.1. Sample and Data Collection
Questionnaire survey was carried out between June-December 2009. Presently twenty eight companies (Public and Private Sectors) are operating in Pakistan. Primary data was collected from a sample of 20 randomly selected companies operating in public and private sectors in Oil and Gas Industry in Pakistan. The companies were chosen from the directory of Ministry of Petroleum and Natural Resource, Government of Pakistan. Two hundred questionnaires were despatched to these companies. A total of 150 filled questionnaires were received with a response rate of 75%. The respondents were managers in these companies at various tiers of management.
4.2. Measurement Development
Most of the statements used in the survey were drawn from an in-depth study of literature on HRM practices and its impact on organizational performance. The items used in the study were adapted from different studies (Ghebregiorgis & Karsten, 2007; Kundu & Malhan, 2007; Lee & Lee, 2007; Tzafir, 2005).
The instrument measured five HRM practices and its effect on organizational performance. The recruitment and selection practices contained (5 items); training and development (8 items); performance appraisal (6 items); compensation and rewards (6 items); employee participation (4 items); and organizational performance (5 items) respectively. The organizational performance measure included (5 items) related to perceived quality of products and services, production cost, market share, performance relative to competitors, and organization’s performance relative to industry average. Five points rating scale was used to measure the response. The scale ranged from five (strongly agree) to one (strongly disagree).
4.3. Pilot Testing of Instrument
The instrument was pilot tested using a sample of 40 managers from the population. The results of pilot study reflected appropriate adequacy (Nunnally, 1978).The Cronbach’s alpha of variables ranged from 0.782 to 0.856 respectively.
4.4. Results and Analysis
4.4.1. Descriptive Statistics
The results of descriptive statistics indicated general agreement of the respondents to the different HRM practices. The mean values ranged from highest 4.876 to lowest 4. 123). The results for training and development indicated highest concurrence (Mean = 4. 876, Standard Deviation = 0.715); recruitment and selection (Mean = 4.431, Standard Deviation = 0.829); performance appraisal (Mean = 4.217, Standard Deviation = 0.737); compensation and reward (Mean = 4.129, Standard Deviation = 0.924); employee participation (Mean = 4.123, Standard Deviation = 0.847); and organizational performance (Mean = 4.738, Standard Deviation = 0.571) respectively. The mean score and standard deviation reflected conformity of respondents’ perception about these HRM practices and the agreement to the model.