The HR Practice - Performance Relationship: Theoretical and Empirical Challenges

1. The HR Practice - Performance Relationship: Theoretical and Empirical Challenges Patrick M. Wright Cornell University

2. HR Practices and Performance: Seminal Studies • Arthur (1992; 1994) • Huselid (1995) • MacDuffie (1995) • Delery and Doty (1996)

3. HR Practices and Performance: Some Additional Studies • Welbourne (1996) + • Youndt et al. (1996) + • Delaney & Huselid (1996) + • Lee & Chee (1996) ? • Huselid, Jackson, & Schuler (1997) + • Shaw, Delery, Jenkins, & Gupta (1998) + • Lee & Miller (1999) ?+ • Guthrie (2000) + • Ostroff, (2000) + • Bae & Lawler (2000) +

4. HR and Firm Performance: Summary • Numerous Studies Demonstrate Relationship between HR Practices and Firm Performance • 1 SD increase in HR practices results in 20% increase in profits per employee • While promising, there are a number of theoretical and empirical problems with this stream of research

5. Theoretical Challenges • Theoretical Frameworks • Resource Based View • Real Options Theory • Specific Theory - Black Box • How Many Boxes? • How Many Variables in each Box? • What’s the Causal Direction?

6. HR and Sustainable Competitive Advantage (VRIO Framework) How do we drive SCA with HR Practices? The Question of Value The Question of Rareness The Question of Imitability The Question of Organization

7. Difficult Supported to by Competitive Valuable? Rare? Imitate? Organization? Implications Performance No ---- ---- Competitive Below Disadvantage Normal Yes No ---- Competitive Normal Parity Yes Yes No Temporary Above Competitive Normal Advantage Yes Yes Yes Sustained Above Competitive Normal Advantage The VRIO Framework Is a resource . . .

8. Application of Resource-Based View - Conceptual • Wright et al. (1994) – focus on human capital • Lado and Wilson (1994) focus on practices • Boxall (1996) - HRA = HCA + HPA • Lepak & Snell (2000) – HR Architecture

9. Application of Resource-Based View - Summary • Human Capital Pool • Employee Relationships and Behavior • People Management Practices

10. Application of Resource-Based View - Empirical • Huselid (1995) • Koch & McGrath (1996) • Boxall & Steeneveld (1999) • Wright, McMahan & Smart (1994) • Lepak & Snell (in press) • Richard (2001)

11. Application of Resource-Based View - Summary • Empirical work has not directly tested the theory • Path dependence of HR systems? • HR practices impact on skills/behaviors? • Weakness of Cross-sectional attempts • Future focus on competencies and capabilities • Assess constructs (causal ambiguity, social complexity, etc.)

12. Convergence of SHRM and Strategy within the RBV • Core Competencies • Dynamic capabilities • Knowledge-based theories of the firm

13. Model of Strategic HRM (Wright, Dunford & Snell, 2002) Strategic Capability Change Renewal Processes to integrate, reconfigure, gain, and release resources—to match and even create market change. Learning and Innovation Knowledge Creation Knowledge Transfer Knowledge Integration Flow Core Competence ...a bundle of skills and technologies that enables a company to provide a particular benefit to customers. It represents the sum of learning across these resources. ( Hamel & Prahalad) Valuable People Management Practices Staffing, training, work design, participation, rewards, appraisal, etc. Rare Intellectual Capital Inimitable Stock Systems Organized People Human Capital Social Capital Organization Capital

14. Other Theoretical Perspectives • Transaction Costs • Population Ecology (inertia) • Institutional Theory • Real Options

15. Real Options – A Quick Look • Most SHRM Theory advocates People as a strategic Asset • Real Assets have both upside value, and downside risk • Virtually no SHRM research has addressed the downside risk of the human asset • Currently working on Application of Real Options Logic to SHRM

16. From Broad to Specific in Theory • We have talked about broad organization theories to help us understand the strategic role of HR • Now we transition to specific theory about the HR – Performance relationship as these relate to empirical studies

17. Theoretical Challenges • Theoretical Frameworks • Black Box • How Many Boxes? • How Many Variables in each Box? • What’s the Causal Direction?

18. How Many Boxes? Strategy Firm Performance HR Practices HRPractices

19. How Many Boxes? Employee Skills Employee Motivation Job Design and Work Structures Design of Human Resource Managem’t System Business and Strategic Initiatives Creativity Product’ty Discret’nyEffort Improved Operating Perform’ce Profit and Grow Mkt Value

20. How Many Variables in Boxes? Employee Skills Employee Motivation Job Design and Work Structures Design of Human Resource Managem’t System Business and Strategic Initiatives Creativity Product’ty Discret’nyEffort Improved Operating Perform’ce Profit and Grow Mkt Value

21. Causal Direction • Reverse Causation • Real Relationship, just reversed • Spurious Relationship • Real Empirical Relationship, just not causal • Implicit Performance Theories • No Real Relationship, only imagined and reported

22. Causal Direction? Reverse Firm Performance HR Practices Spurious HR Practices Firm Performance Good Management

23. Causal Direction Implicit Performance Theories of Respondents Firm Performance Respondents’ Reports of HR Practices Implicit Performance Theory

24. Implicit Performance Theories: Evidence • Significant support within the groups and leadership literatures • Happens when information processing requirements are high • Demonstrated by showing: • Similar Factor structures between real and simulated targets • Performance Effects (e.g., knowledge of performance impacts ratings of behavior)

25. Information Processing Demands of Completing HR Practice Questionnaires • Executive must attend to and understand the information provided about company wide and business unit HR practices •   Executive must encode and store the information   • Time delay between the time the information is encoded and retrieved for survey completion • Information is subject to memory decay • HR practice information must be retrieved from memory • Information must be organized consistent with the scope of the survey questions

26. The Study • Line and HR; Working and Students (2X2) • Subjects presented with descriptions of high and low performing companies, then asked to indicate HR practices and HR effectiveness • Compared factor structure to Huselid (1995) • Expected performance effect, and that it would be most pronounced for HR/Students

27. e6 e4 e5 e2 e3 e1 Info. Grievance Employment Attitude Pay for Training Sharing Procedure Test Surveys Performance Skills and org. structures Employee motivation Merit Performance Merit Promotions Appraisal Pay e7 e9 e8

28. FIGURE 2 Performance x Experience Interaction for HR Practice Usage and Evaluation of HR Function

29. Implications • Similar factor structure indicates implicit theories • Performance effect indicates that knowledge of performance CAN impact ratings of HR • Surprising that greatest effects for working managers

30. Theoretical Issues - Conclusion • Still Greater need for application and testing of relevant organizational theories in SHRM • Need for more specific theory development regarding the process through which HR impacts performance • Need for better empirical research that specifically tests theory

31. Empirical Issues in SHRM • Lack of Good Theory testing • Measurement Issues • Unreliability of HR Measures • Levels of Analysis • Mostly Corporate because there is public performance information • Design Issues • Concurrent, not causal designs

32. HR and Firm Performance • Numerous Studies Demonstrate Relationship between HR Practices and Firm Performance • 1 SD increase in HR practices results in 20% increase in profits • Promising, but…..What about Construct Validity?

33. HR Practices and Reliability • Random vs. Systematic Error • Random - Attenuates relationship • .80 rxx ---> rxy*1.25 • .50 rxx ---> rxy*2 • Systematic - May inflate relationship

34. Measurement Issues • Are measures of HR practices reliable? • If not reliable, then why do we find an HR-firm performance effect? • How can we best measure HR practices to be reliable and valid?

35. Generalizability Analysis • Generalizability analysis seeks to partition error variance into different sources (rater, items, time, etc.) • It provides implications for the best way to increase reliability (e.g., to add raters or items)

36. Analyses • ICC (1,1) - Estimate of the reliability of a single respondent measure • ICC (1,k) - Estimate of the reliability of an aggregated (across respondents) measure • Both estimates are essentially interpreted as a percentage of the variance in the measure that is true score variance

37. Are HR Measures Reliable? • 14 firms • Average size approx 40,000 employees • Surveys of HR practices and HR effectiveness • Multiple HR respondents for practices • Also line respondents for effectiveness

38. Results • Avg. ICC(1,1) for practices Best Case Hourly .204 .418 Managerial .162 • Avg. ICC (1,1) for Effectiveness .301 .475 (scale)

39. Why Not Reliable? • Respondents Don’t Know • Corporate is the wrong place to ask because too much diversity (geography, divisions, business units, sites, jobs) • Coverage the wrong way to ask • Advantage - Objective • Disadvantage - not the way respondents think/focus • Misses sophistication, specificity, execution

40. If no Rxx, then why the Rxy? • Rxx does not have to be too high • Respondents’ Implicit Performance Theories (I.e., systematic error)

41. Huselid & Becker’s response • Organization size was too big • Organizations were too diversified • Items were different (policies/practices vs. practices) • Adding raters with no knowledge is not useful • Ultimately, it is an issue for future research

42. Later Paper (Wright et al. 2001) • Purpose is to address the call for more research on this issue • Used data from three different samples, varying from large diversified companies to small work groups • Examined interrater reliability among HR respondents, employees, and correspondence between HR and employees

43. Studies • Study 1 - 13 large companies, Senior HR and Senior Line respondents • Study 2 - 225 jobs across 94 banks, HR and incumbent responses • Study 3 - 190 jobs across 33 business units within one corporation, 17.75 ee’s per job and 1 HR respondent per unit

44. Expectations • Expected lowest reliability in Study 1 due to large, diversified nature of the sample, and highest in Study 3, given close proximity and small size

45. Results • Study 1 Average item ICC (1,1) = .42 Average item ICC (1,k) = .60 • Study 2 Average item ICC (1,1) = .16 Average item ICC (1,k) = .26 • Study 3 Average item ICC (1,1) = .16 Average item ICC (1,k) = .71 Average rpb ee-HR = .62

46. Discussion • Calls into question usefulness of single respondent measures of HR practices • Problem with reliability is not sample specific • Similar results to groups literature, but that literature uses multiple respondents for measures

47. Implications • Caution in interpreting effect sizes • More attention devoted to measurement error • More raters • Better measures of HR practices • Different rating scales • Knowledgeable raters • Alternative data collection strategies

48. Empirical Challenges • Levels of Analysis (Rogers & Wright, 1998) • Corporate • Most Research (56 of 80 effect sizes) • Business • Virtually no Research (5 of 80 effect sizes) • Site • Some Research (19 of 80 effect sizes)

49. Why so much research at Corporate Level? • Story of the drunk and the lamppost • Focus at corporate level because that is where the performance information is public, and thus, easily available.

50. Empirical Challenges • Firm Performance • Overemphasis on Market Measures (Tobin’s Q) • Few Organizational or Employee measures in spite of the fact that these are the proximal hypothesized variables impacted by HR