Description
Although the connection between firm growth and labour is well documented in economics literature, only recently the link between human resources (HR) and firm growth has attracted the interest of researchers. This study aims to assess the extent, if any, to which, specific HR practices may contribute to firm growth.
Int. Journal of Business Science and Applied Management, Volume 4, Issue 2, 2009
The effects of human resource practices on firm growth
Ilias P. Vlachos
Dept. of Agricultural Economics & Rural Development, Agricultural University of Athens
Iera Odos 75, Botanikos, 118 55, Athens, Greece
Tel: +30 210 5294757
Email: [email protected]
Abstract
Although the connection between firm growth and labour is well documented in economics literature,
only recently the link between human resources (HR) and firm growth has attracted the interest of
researchers. This study aims to assess the extent, if any, to which, specific HR practices may contribute
to firm growth. We review a rich literature on the links between firm performance and the following
HR practices: (1) job security (2) selective hiring, (3) self-managed teams (4) compensation policy, (5)
extensive training, and (6) information sharing. We surveyed HR managers and recorded their
perceptions about the links between HR practices and firm growth. Results demonstrated that
compensation policy was the strongest predictor of sales growth. Results provide overall support for all
HR practices except of job security. Eventually, selecting, training, and rewarding employees as well as
giving them the power to decide for the benefit of their firm, contribute significantly to firm growth.
Keywords: human resource practices, firm growth, selective hiring, compensation policy
Int. Journal of Business Science and Applied Management / Business-and-Management.org
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1 INTRODUCTION
The extent to which, if any, human resource management (HRM) impacts on organizational
performance has emerged as the central research question in the personnel/HRM field (see Becker and
Gerhart, 1996; Guest, 1997 for reviews). Although initial results indicate that some human resources
practices may have a positive effect on organizational performance, most scholars suggest that more
conceptual and empirical work is required (Brewster, 2004; Cardon and Stevens, 2004; Givord and
Maurin, 2004; Zhu, 2004). For the moment, although Human resources (HR) are considered as the
most valuable asset in an organization, they make a difference only for a few organisations (Pfeffer,
1998; Wimbush, 2005).
The link between human resources (HR) and firm growth is well documented in classic economic
theory. Overwhelming evidence suggests growth is driven by specialization and division of labour in
the processes of generation and attraction/development of technological opportunities. However, at the
firm level of analysis, only recently the link between human capital and growth has attracted the
interest of researchers.
Firm growth is often seen as an indication of market acceptance and firm success (Fesser and
Willard, 1990). Growth is considered as a top strategic priority for most firms yet only few companies
achieve growth and ever fewer in maintaining in (Baum and Wally, 2003; Zook and Allen, 2003).
Assuming, that firm growth involves more purposeful work and strategic decision making than leaving
it to random and chance events, the present study addresses a central research question: How do human
resource management practices contribute to firm growth?
The next section reviews the relevant literature on HR practices and firm growth. A discussion of
the methodology employed for data collection follows. The last two sections illustrate the data analysis,
the discussion of the key results and the provision of possible avenues for future research.
2 LITERATURE REVIEW
A growing body of empirical research has examined the effect of certain HRM practices on firm
performance. Although there is a long list of best HR practices that can affect either independently or
collectively on the organizational performance, results are hard to interpret. In order to determine any
effects of HR practices on firm growth, we choose to examine HR practices initially proposed by
Pfeffer (1998) which according to the literature, can be expected to influence the firm performance. In
his seminal work, Pfeffer (1998) proposed the following seven HRM practices: (1) employment
security (2) selective hiring, (3) self-managed teams and decentralization of decision making (4)
comparatively high compensation contingent on organizational performance, (5) extensive training, (6)
reduced status distinctions and barriers, including dress, language, office arrangements, and wage
differences across levels, and (7) extensive sharing of financial and performance information
throughout the organization.
The following sections will develop hypotheses concerning the relationship between HRM
practices and firm growth.
2.1 Compensation policy
Performance-based compensation is the dominant HR practice that firms use to evaluate and
reward employees’ efforts (Collins and Clark, 2003). Evidently, performance-based compensation has
a positive effect upon employee and organizational performance (see for reviews: Brown et al. 2003;
Cardon and Stevens, 2004). However, there is scarce evidence on the effects of compensation policy of
firm growth. Empirical studies on the relationship between performance-related pay and company
performance have generally found a positive relationship, but a growing body of empirical evidence
suggests that it is not just pay level that matters, but pay structure as well (Wimbush, 2005; Singh
2005).
Barringer et al. (2005) conducted a quantitative content analysis of the narrative descriptions of 50
rapid-growth firms and a comparison group of 50 slow-growth companies. Results demonstrated that
employee incentives differentiated the rapid-growth from the slow-growth firms. Firms that were eager
to achieve rapid-growth provided their employees financial incentives and stock options as part of their
compensation packages. In doing so, firms managed to elicit high levels of performance from
employees, provide employees the feeling that they have an ownership interest in the firm, attract and
retain high-quality employees, and shift a portion of a firm’s business risk to the employees.
Delery and Doty (1996) identified performance-based compensation as the single strongest
predictor of firm performance. Both performance-based compensation and merit-based promotion can
Ilias P. Vlachos
19
be viewed as ingredients in organizational incentive systems that encourage individual performance
and retention (Uen and Chien, 2004). Collins and Clark (2003) studied 73 high-technology firms and
showed that the relationships between the HR practices and firm performance (sales growth and stock
growth) were mediated through their top managers’ social networks.
Cho et al. (2005) suggested that incentive plans is effective in decreasing turnover rates. Banker et
al. (2001) conducted a longitudinal study of the effectiveness of incentive plans in the hotel industry
and found that incentive plans were related to higher revenues, increased profits, and decreased cost.
Paul and Anantharaman (2003) found that compensation and incentives directly affect operational
performance.
To be effective, compensation practices and policies must be aligned with organisational
objectives. While performance-based compensation can motivate employees, sometimes employees
perceive it as a management mechanism to control their behaviour (Lawler and Rhode, 1976). In such a
case, employees are less loyal and committed, thus compensation plans have the opposite than desired
outcome (Ahmad and Schroeder, 2003; Rodr?guez and Ventura, 2003).
Employee turnover can significantly slow revenue growth, particularly in knowledge-intensive
industries (Baron and Hannan, 2002). Given that much of the tacit knowledge resides within
employees, significant turnover poses a threat to firm performance and its future growth potential. With
high turnover rates, firm growth flees away along with leaving managers who often become employers
of rival firms or establish themselves rival firms.
Therefore, we propose this hypothesis:
Hypothesis 1: Compensation Policy is positively related to firm growth
2.2 Decentralization & Self-managed teams
More and more, employees are required to work in teams, make joint decisions, and undertake
common initiatives in order to meet the objectives of their team and organization. Self-managed teams
can affect firm growth in two ways: Firstly, a surplus of junior managers in a firm may create and
support dynamics of firm growth. The growth stage is perhaps the most dynamic stage of a firm’s life
cycle. As the business expands, new levels of management are added. Decision-making becomes more
decentralized, middle managers gain authority and self-managed teams proliferate as the firm adds
more and more projects and customers (Flamholtz and Randle, 2000; Miller and Friesen, 1984).
Secondly, teamwork and decentralization of decision making promotes employee commitment
participation and create a sense of attachment, thus indirectly affecting firm performance (Tata and
Prasad, 2004).
Several studies identified self-managed teams and decentralization as important high-performance
HRM practices (Pfeffer, 1998; Wagner, 1994; Yeatts and Hyten, 1998; Singer and Duvall, 2000).
Jayaram et al. (1999) found that decentralised teams have a positive effect on two dimensions of the
performance, time and flexibility. Collins and Clark (2003) examined the role of human resource
practices in creating organizational competitive advantage and found that top management team social
networks (practices such as mentoring, incentives, etc.) mediated the relationship between HR practices
and firm performance. Haleblian and Finkelstein (1993) examined the effects of top management team
size and chief executive officer (CEO) dominance on firm performance in different environments.
Results showed that firms with large teams performed better and firms with dominant CEOs performed
worse in a turbulent environment than in a stable one.
Tata and Prasad (2004) found that a company with micro level of centralisation is a receptive
environment for self-managed teams. In a study of differential outcomes of team structures for workers,
supervisors, and middle managers in a large unionized telecommunications company, Batt (2004)
found that participation in self-managed teams is associated with significantly higher levels of
employment security, and satisfaction for workers and the opposite for supervisors. Black et al. (2004)
examined the impact of organizational change on workers and found evidence that self-managed teams
are associated with greater employment reductions.
Therefore, we propose this hypothesis:
Hypothesis 2: Decentralisation is positively related to firm growth.
2.3 Information Sharing
Sharing of information may have a dual effect: Firstly, it conveys employees the right meaning
that the company trusts them. Secondly, in order to make informed decision, employees should have
access to critical information. Communicating performance data on a routine basis throughout the year
help employees to improve and develop. Employees presumably want to be good at their jobs, but if
Int. Journal of Business Science and Applied Management / Business-and-Management.org
20
they never receive any performance feedback, they may perceive to have a satisfactory performance
when in fact they do not (Chow et al., 1999). Furthermore, information sharing fosters organizational
transparency which reduces turnover (Ahmad and Schroeder, 2003) and forges synergistic working
relationship among employees (Nonaka, 1994).
Information sharing is not a widespread HR practice as someone might have expected it to be.
Many companies are vulnerable to share critical information with their employees because in this way
employees become more powerful and companies may loose control of them (Pfeffer, 1998).
Furthermore, information sharing always involves the danger of leaking important information to
competitors (Ronde, 2001). In a study of Japanese consultation committees, Morishima (1991) found a
positive association of information sharing with productivity and profitability, and a negative one with
labour cost. Constant et al. (1994) pointed out that attitudes about information sharing depend on the
form of the information. Burgess (2005) studied employee motivations for knowledge transfer outside
their work unit and found that employees who perceived greater organizational rewards for sharing
spent more hours sharing knowledge beyond their immediate work group. However, a significant
percentage of employees perceived knowledge as a means of achieving upward organizational
mobility. Therefore, employees sought information more often than shared it.
Roberts (1995) studied how HR strategy affects profits in 3,000 businesses throughout the world
and found that sharing information was related with higher profitability. However, Ichniowski and
Shaw (1999) compared US and Japanese steel-making plants and found that employee participation
based solely on problem-solving teams or information sharing did not produce large improvements in
productivity. In a study of Fortune 1,000 largest manufacturing and service companies on high-
performance practices, Lawler et al. (1995) found information sharing to correlate to firm performance
but results are inconclusive.
Therefore, we propose this hypothesis:
Hypothesis 3: Sharing of information is positively related to firm growth.
2.4 Selective Hiring
This practice can ensure that the right people, with the desirable characteristics and knowledge,
are in the right place, so that they fit in the culture and the climate of the organization. Moreover,
pinpointing the rights employees would decrease the cost of employees’ education and development.
Schuster (1986) argued that selective hiring is a key practice that creates profits. Huselid (1995)
examined HR practices of high performance companies and found that attracting and selecting the right
employees increase the employee productivity, boost organizational performance, and contribute in
reducing turnover.
Cohen and Pfeffer (1986) argued that hiring standards reflect not only organizations' skill
requirements but also the preferences of various groups for such standards and their ability to enforce
these preferences. Michie and Quinn (2001) proposed that a possible indirect link between selective
hiring and organisational performance can be the forging of internal bonds between managers and
employees that creates the write culture for productivity growth. Collins and Clark (2003) argued that
the practice of selective hiring results at sales growth. Paul and Anantharaman (2003) pointed out that
an effective hiring process ensures the presence of employees with the right qualifications, leading to
production of quality products and consequently in increase of economic performance.
Cho et al. (2005) examined pre-employment tests as a key component of selective hiring and
found that when employed, these tests can select employees that stay with a company longer. Passing
pre-employment tests may give an applicant a stronger sense of belonging to the company, resulting in
higher degrees of commitment if employed. Cardon and Stevens (2004) pointed out that for small
companies recruiting is often problematic. This can be due to several reasons such as limited financial
and material resources and jobs with unclear boundaries responsibilities, which decreases their
potential to hire qualified candidates. Therefore, we propose this hypothesis:
Hypothesis 4: Selective hiring is positively related to firm growth.
2.5 Training and Development
Training and development may be related to firm performance in many ways. Firstly, training
programmes increase the firm specificity of employee skills, which, it turn, increases employee
productivity and reduces job dissatisfaction that results in employee turnover (Huselid, 1995).
Secondly, training and developing internal personnel reduces the cost and risk of selecting, hiring, and
internalising people from external labour markets, which again increases employee productivity and
reduces turnover. Training and development like job security requires a certain degree of reciprocity: A
Ilias P. Vlachos
21
company that train and develop systematically its employees advocates them that their market value
develops more favourably than in other firms. This increases employees’ productivity, commitment,
and lowers turnover. Companies may also assist their employees in career planning. In doing so,
companies encourage employees to take more responsibility for their own development, including the
development of skills viewed as significant in the company (Doyle, 1997).
Barringer et al. (2005) compared rapid-growth and slow-growth firms and found that rapid-growth
firms depend heavily on the abilities and efforts of their employees to maintain their growth-oriented
strategies. The fast-growth firms used training programs to achieve their objectives and emphasized
employee development to a significantly greater extent than their slow-growth counterparts. Therefore,
training and employee development practices are more common in rapid-growth firms than slow-
growth ones.
Miller (2006) examined the growth strategies in the retail sector and suggested that modern
retailers should place more emphasis on the policies and practices that could contribute to staff
retention, rather than on the immediacy of recruitment and selection. Zhu (2004) reviewed the changes
in the area of human resource development in Japan and observed that some companies and industries
have shifted towards a more strategic approach that emphasizes the impact of effective learning at both
individual and organizational levels on long-term organizational competitiveness. Husiled (1995) found
that the education and development of employees have a significant effect both upon the personnel
productivity and the sort-term and long-term indicators of organizational performance.
Ngo et al. (1998) investigated the effects of country origins on HR practices of firms from the
United States, Great Britain, Japan and Hong Kong operating in Hong Kong. Study results showed that
structural training and development and retention-oriented compensation were related to various
measures of firm performance. Paul and Anantharaman (2003), in searching the links between human
resource practices and organizational performance, proposed that career development programmes
demonstrate a true interest of the organization for the growth of its personnel, which, in turn, stimulates
commitment and devotion, which, subsequently, raises personnel productivity and consequently
economical output.
Cerio (2003) examined the manufacturing industry in Spain and found that quality management
practices related to product design and development, together with human resource practices, are the
most significant predictors of operational performance. Michie and Quinn (2001) investigated the
relationships between UK firms’ use of flexible work practices and corporate performance and
suggested that low levels of training are negatively correlated with corporate performance. Therefore,
we propose this hypothesis:
Hypothesis 5: The extent of training and development will be positively related to firm growth.
2.6 Job Security
Job security creates a climate of confidence among employees which cultivates their commitment
on the company’s workforce. Job security requires a certain degree of reciprocity: firstly, a company
must signal a clear message that jobs are secure; then, employees believing that this is true, feel
confident and commit themselves to expend extra effort for the company’s benefit; finally, a company
that have learnt that job security contributes to its performance, invests again in job security (Pfeffer,
1998). Probst (2002) has developed a conceptual model of the antecedents and consequences of job
security. Antecedents include worker characteristics, job characteristics, organizational change and job
technology change. Consequences include psychological health, physical health, organizational
withdrawal, unionisation activity, organizational commitment and job stress. Jon involvement, cultural
values, and procedural justices moderate job security perceptions and attitudes.
Buitendach and Witte (2005) assessed the relationship between job insecurity, job satisfaction and
affective organisational commitment of maintenance workers in a parastatal in Gauteng. Study results
revealed small but significant relationships between job insecurity and extrinsic job satisfaction and job
insecurity and affective organisational commitment. Job satisfaction was also found to mediate the
relationship between job insecurity and affective organisational commitment.
However, today’s business environments are far from providing job security to their employees.
For example, in an analysis of involuntary job loss in France between 1982 and 2002, Givord and
Maurin (2004) found evidence that technological changes contribute to keeping the employees for
shorter periods of time, thus increasing job insecurity.
When companies do provide job security, then empirical evidence suggests that it has a positive
effect on to firm performance. Following Pfeffer (1998), Ahmad and Schroeder (2003) found that
among others, job security impacts operational performance indirectly through organizational
commitment. Delery and Doty (1996) studied the US banking sector and found some support for a
Int. Journal of Business Science and Applied Management / Business-and-Management.org
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positive relationship between employment security and firm performance. In their study of 101 foreign
firms operating in Russia, Fey et al. (2000) found evidence that human resource practices indirectly
improve organisational performance. The results showed that not only, there was a direct positive
relationship between job security and performance for non-managers, but job security was the most
important predictor of HR outcomes for non-managerial employees. Results also suggested a direct
positive relationship between managerial promotions based on merit and firm performance.
Michie and Quinn (2001) examined labour market flexibility in over 200 manufacturing UK firms
and found that job security is negatively correlated with corporate performance. In contrast, results
showed that ‘high commitment’ organizations are positively correlated with good corporate
performance. Kraimera et al. (2005) used psychological contract and social cognition theories to
explore the role of full-time employees' perceived job security in explaining their reactions to the use of
temporary workers by using a sample of 149 full-time employees who worked with temporaries.
Results demonstrated that employees' perceived job security negatively related to their perceptions that
temporaries pose a threat to their jobs. On the one hand, for those with high job security, there was a
positive relationship between benefit perceptions and performance. On the other hand, for those with
low job security, there was a negative relationship between threat perceptions and performance.
Therefore, we propose this hypothesis:
Hypothesis 6: The presence of job security is positively related to firm growth.
Figure 1 illustrates the associations between these hypotheses and relevant constructs.
Figure 1: The association between hypotheses and constructs
Decentralisation
Compensation
Policy
Training&
Development
InformationSharing
SelectiveHiring
JobSecurity
ActualSalesGrowth
PerceivedMarket
ShareGrowth
PerceivedOverall
Improvement
perceivedFirm
Growth
ActualFirmGrowth
perceivedfirm
Growth
PerceivedSales
Growth
Ilias P. Vlachos
23
3 METHOD
3.1 The sampling procedure and sample
While Figure 1 is a model of the firm performance, we choose to examine it as understood by the
individuals who take decisions about firm performance. In doing so, we operationalize and measure
individuals’ perceptions of the model’s variables in their work situations.
In order to develop robust model linking HR practices and firm performance, we drew our sample
from food companies operating in Greece for a minimum of five years. We included companies from
the food processing and trading sub-sectors, excluding hospitality and retailing. In doing so, we aimed
to increase the homogeneity of our population as we as decrease the necessary sample size to achieve
robust validity of data analyses.
Testing the research hypotheses in a specific sector adds to the validity of the research design
because managerial skills are to a large extent industry-specific. Furthermore, food industry is dealing
with subsequent food crises and human resources are considered as a valuable asset to survive and
maintain competitive advantage. In-depth interviews were conducted with key decision makers prior to
designing a pre-test. The questionnaire was pre-tested with randomly selected firms. Based on the
results of the pre-test instrument, the final questionnaire was refined. The respondents were mainly HR
managers or, in same instances, the managing directors (MD) of the food firms.
In terms of the empirical research, we posted 372 questionnaires. We got 71 questionnaires, most
of them answered by HR Managers (95%). We chose to include both HR and MD responses in the
sample size although we recognize that there would be different perceptions about HR practices and
organizational performance.
The total response rate was 19.1%. To ensure that the respondents were comparable to non-
respondents, analyses of variances were conducted between these groups. We also found no significant
differences between HR managers and managing directors. The non-response bias was assessed by
comparing early respondents with late respondents (Armstrong and Overton, 1977).
3.2 Statistical Analysis
SPSS v.10 on Windows XP was utilized for all analyses. We first had to reduce a large number of
variables to a smaller set of components. Principal component analysis is a preferred method for this
kind of study. We, then, used hierarchical regression in order to assess the effect of relation, if any,
between HR practices and firm growth measures.
Principal component analysis with varimax rotation was conducted to assess the underlying
structure for the nineteen HR practices questionnaire. Principal component analysis (PCA) involves a
mathematical procedure that transforms a number of (possibly) correlated variables into a (smaller)
number of uncorrelated variables called principal components. The first principal component accounts
for as much of the variability in the data as possible, and each succeeding component accounts for as
much of the remaining variability as possible.
PCA helps with the latter. Having too many features often results in the problem having too many
degrees of freedom leading to poor statistical coverage and thus poor generalization. The Varimax
rotation is an orthogonal rotation applied to a truncated set of principal components (Harman 1970,
Krzanowski 2000). Its application is an attempt to obtain modes that are simple to interpret.
Hierarchical regression models are well suited for this type of analysis. In hierarchical regression,
the order of predictor entry, whether individual or in blocks, makes a difference in the results and
conclusions. This allows examining the ‘effects’ of specific independent variables over and above one
or more dependant variables.
Surveys using questionnaires often result in small sample size in Greece (Ketikidis et al. 2007;
Pasiouras, 2008; Vlachos and Bourlakis, 2006). For example, Ketikidis et al. (2007) used a sample size
of 79 observations in six South East European countries including Greece. Pasiouras (2008) used the
total population of Greek banks to get 78 observations in order to estimate the technical and scale
efficiency of Greek commercial banks.
Measures
Principal component analysis with varimax rotation was conducted to assess the underlying
structure for the nineteen HR practices questionnaire. The scales were measured on a Likert format
ranging from 1 (strongly disagree) to 5 (strongly agree). Six factors were requested, based on the fact
that the items were designed to index the six HR practices. After rotation, decentralisation accounted
for 17.53% of the variance, compensation policy for 12.67%, training & development for 12.24%,
information sharing for 8.73%, selective hiring for 8.61%, and job security for 6.17%. We used the
Int. Journal of Business Science and Applied Management / Business-and-Management.org
24
Anderson-Rubin Method, which ensures orthogonality of the estimated factors, to produce factor
scores.
Table 1 contains the items, the scale composite reliability (Cronbach ?), and factor loadings for
the rotated factors, with loading less than 0.40 omitted to improve clarity.
The first factor, which included items measuring the firm’s decentralisation and decision making
practices was labelled Decentralisation (seven items, ?= 0.906). The second factor, labelled
compensation policy, included items measuring the firm’s compensation practices and items measuring
the firm’s policy and HR practices to reduce turnover of employees (four items, ?= 0.757). The third
factor, labelled training & development, included four items (?=0.647) measuring the firm’s emphasis
on train and develop its personnel. The fourth factor, labelled information sharing, included two items
(?=0.713) measuring the firm’s policy to share critical information and performance data with its
personnel. The fifth factor, labelled selective hiring, included three items (?=0.556) measuring the
firm’s policy to recruit personnel that fits its culture and objectives.
The last factor had low internal validity to be included in further analysis. The six factor, labelled
job security, included two items (?=0.383) measuring the ability of the firm to create a trustworthy
business climate.
3.3 Firm Growth
Respondents were asked to indicate their firm’s growth as compared to the industry’s average in
these areas: perceived sales growth, perceived market share growth, perceived overall improvement
and perceived firm growth. For perceived items, a 5-point scale ranging from bad (1) to very good (5)
was used. Furthermore, we calculated actual sales growth, and actual firm growth based on the last 3-
year firm performance. We calculated firm growth using sales and employee figures.
Although we believe the perceived firm growth measures are appropriate, they have some
limitations which should be discussed. The first is that they are self-reported responses from HR
managers, who may have a stake in seeing positive relationships between their decisions about
personnel recruitment, training, development and compensation with achievement of firm’s objectives.
However, the responses from the sample contain ample variance and means that do not reflect an
extremely strong positive bias (see Table 2, variables 2 through 7). If the respondents had greatly
inflated their responses, there may have been more consistently positive results than were seen.
Secondly, as in all self-reported studies, the possibility of common method variance should be
addressed. When both the outcome measure (i.e. firm growth) and the six predictor variables (i.e.
compensation policy, decentralisation), are self-reported on the same survey instrument, both measures
share common methods variance. There are several techniques that can be used to minimise common
method variance (see Podsakoff et al. 2003 for a review of these methods).
We used the Harmon’s factor test to examine whether or not common methods variance in the
predictor and outcome variables inflates the empirical relationships among the variables. Harmon’ test
consists of a factor analysis of all relevant variables. If a large degree of common method variance is
present, one factor will emerge. Such an analysis was conducted on the firm performance and HR
practices variables of this sample. Seven factors emerged, with the first factor (which, in cases of
common method variance, would account for most of the variance) only accounting for 18.472% of the
variance. Thus, common method variance is unlikely to bias this sample.
Third, management perceptions about concepts like firm growth and organisational performance
may actually be more valid indicators than objective data such as profitability, market share and sales,
since actual figures are directly related to a vast number of variables, such as trends in the economy,
industry factors, and other environmental factors. Therefore, self-reported measures may, in some
cases, represent more accurate descriptions than more objective measures (Day, 2003; Podsakoff and
Organ, 1986). In the present study, since we are interested in the direction of causation between HR
practices and firm effectiveness, the only people with the breadth and depth of knowledge to report
adequately about these concepts are the HR managers or managing directors.
Finally, since we were interested in assessing the separate factors of a successful collaboration, we
were limited in the number of objective measures that were available within the scope of this study.
Because of the previously stated arguments, we concluded that the expert opinions of HR managers or
managing directors would be valid and appropriate for this study. The results of data analysis should be
acceptable if adequate controls, such as Harmon’s one factor test, are reported for the data. While we
expect that further research into these firm performance constructs is essential, we believe that they are
acceptable for this initial research study.
Ilias P. Vlachos
25
3.4 The Effect of HR Practices on Firm Growth
Table 2 presents the mean, standard deviation, and Pearson’s correlation analysis of control
variable (sales), firm growth (perceived sales growth, perceived market share growth, perceived overall
improvement, perceived firm growth, actual sales growth, and actual firm growth), and HR practices
(compensation policy, decentralisation, information sharing, selective hiring, training & development,
and job security). The control variable showed low correlation with growth variables as well as each
one HR practice.
Compensation Policy had significant association with perceived sales growth (r=-.328, p
Although the connection between firm growth and labour is well documented in economics literature, only recently the link between human resources (HR) and firm growth has attracted the interest of researchers. This study aims to assess the extent, if any, to which, specific HR practices may contribute to firm growth.
Int. Journal of Business Science and Applied Management, Volume 4, Issue 2, 2009
The effects of human resource practices on firm growth
Ilias P. Vlachos
Dept. of Agricultural Economics & Rural Development, Agricultural University of Athens
Iera Odos 75, Botanikos, 118 55, Athens, Greece
Tel: +30 210 5294757
Email: [email protected]
Abstract
Although the connection between firm growth and labour is well documented in economics literature,
only recently the link between human resources (HR) and firm growth has attracted the interest of
researchers. This study aims to assess the extent, if any, to which, specific HR practices may contribute
to firm growth. We review a rich literature on the links between firm performance and the following
HR practices: (1) job security (2) selective hiring, (3) self-managed teams (4) compensation policy, (5)
extensive training, and (6) information sharing. We surveyed HR managers and recorded their
perceptions about the links between HR practices and firm growth. Results demonstrated that
compensation policy was the strongest predictor of sales growth. Results provide overall support for all
HR practices except of job security. Eventually, selecting, training, and rewarding employees as well as
giving them the power to decide for the benefit of their firm, contribute significantly to firm growth.
Keywords: human resource practices, firm growth, selective hiring, compensation policy
Int. Journal of Business Science and Applied Management / Business-and-Management.org
18
1 INTRODUCTION
The extent to which, if any, human resource management (HRM) impacts on organizational
performance has emerged as the central research question in the personnel/HRM field (see Becker and
Gerhart, 1996; Guest, 1997 for reviews). Although initial results indicate that some human resources
practices may have a positive effect on organizational performance, most scholars suggest that more
conceptual and empirical work is required (Brewster, 2004; Cardon and Stevens, 2004; Givord and
Maurin, 2004; Zhu, 2004). For the moment, although Human resources (HR) are considered as the
most valuable asset in an organization, they make a difference only for a few organisations (Pfeffer,
1998; Wimbush, 2005).
The link between human resources (HR) and firm growth is well documented in classic economic
theory. Overwhelming evidence suggests growth is driven by specialization and division of labour in
the processes of generation and attraction/development of technological opportunities. However, at the
firm level of analysis, only recently the link between human capital and growth has attracted the
interest of researchers.
Firm growth is often seen as an indication of market acceptance and firm success (Fesser and
Willard, 1990). Growth is considered as a top strategic priority for most firms yet only few companies
achieve growth and ever fewer in maintaining in (Baum and Wally, 2003; Zook and Allen, 2003).
Assuming, that firm growth involves more purposeful work and strategic decision making than leaving
it to random and chance events, the present study addresses a central research question: How do human
resource management practices contribute to firm growth?
The next section reviews the relevant literature on HR practices and firm growth. A discussion of
the methodology employed for data collection follows. The last two sections illustrate the data analysis,
the discussion of the key results and the provision of possible avenues for future research.
2 LITERATURE REVIEW
A growing body of empirical research has examined the effect of certain HRM practices on firm
performance. Although there is a long list of best HR practices that can affect either independently or
collectively on the organizational performance, results are hard to interpret. In order to determine any
effects of HR practices on firm growth, we choose to examine HR practices initially proposed by
Pfeffer (1998) which according to the literature, can be expected to influence the firm performance. In
his seminal work, Pfeffer (1998) proposed the following seven HRM practices: (1) employment
security (2) selective hiring, (3) self-managed teams and decentralization of decision making (4)
comparatively high compensation contingent on organizational performance, (5) extensive training, (6)
reduced status distinctions and barriers, including dress, language, office arrangements, and wage
differences across levels, and (7) extensive sharing of financial and performance information
throughout the organization.
The following sections will develop hypotheses concerning the relationship between HRM
practices and firm growth.
2.1 Compensation policy
Performance-based compensation is the dominant HR practice that firms use to evaluate and
reward employees’ efforts (Collins and Clark, 2003). Evidently, performance-based compensation has
a positive effect upon employee and organizational performance (see for reviews: Brown et al. 2003;
Cardon and Stevens, 2004). However, there is scarce evidence on the effects of compensation policy of
firm growth. Empirical studies on the relationship between performance-related pay and company
performance have generally found a positive relationship, but a growing body of empirical evidence
suggests that it is not just pay level that matters, but pay structure as well (Wimbush, 2005; Singh
2005).
Barringer et al. (2005) conducted a quantitative content analysis of the narrative descriptions of 50
rapid-growth firms and a comparison group of 50 slow-growth companies. Results demonstrated that
employee incentives differentiated the rapid-growth from the slow-growth firms. Firms that were eager
to achieve rapid-growth provided their employees financial incentives and stock options as part of their
compensation packages. In doing so, firms managed to elicit high levels of performance from
employees, provide employees the feeling that they have an ownership interest in the firm, attract and
retain high-quality employees, and shift a portion of a firm’s business risk to the employees.
Delery and Doty (1996) identified performance-based compensation as the single strongest
predictor of firm performance. Both performance-based compensation and merit-based promotion can
Ilias P. Vlachos
19
be viewed as ingredients in organizational incentive systems that encourage individual performance
and retention (Uen and Chien, 2004). Collins and Clark (2003) studied 73 high-technology firms and
showed that the relationships between the HR practices and firm performance (sales growth and stock
growth) were mediated through their top managers’ social networks.
Cho et al. (2005) suggested that incentive plans is effective in decreasing turnover rates. Banker et
al. (2001) conducted a longitudinal study of the effectiveness of incentive plans in the hotel industry
and found that incentive plans were related to higher revenues, increased profits, and decreased cost.
Paul and Anantharaman (2003) found that compensation and incentives directly affect operational
performance.
To be effective, compensation practices and policies must be aligned with organisational
objectives. While performance-based compensation can motivate employees, sometimes employees
perceive it as a management mechanism to control their behaviour (Lawler and Rhode, 1976). In such a
case, employees are less loyal and committed, thus compensation plans have the opposite than desired
outcome (Ahmad and Schroeder, 2003; Rodr?guez and Ventura, 2003).
Employee turnover can significantly slow revenue growth, particularly in knowledge-intensive
industries (Baron and Hannan, 2002). Given that much of the tacit knowledge resides within
employees, significant turnover poses a threat to firm performance and its future growth potential. With
high turnover rates, firm growth flees away along with leaving managers who often become employers
of rival firms or establish themselves rival firms.
Therefore, we propose this hypothesis:
Hypothesis 1: Compensation Policy is positively related to firm growth
2.2 Decentralization & Self-managed teams
More and more, employees are required to work in teams, make joint decisions, and undertake
common initiatives in order to meet the objectives of their team and organization. Self-managed teams
can affect firm growth in two ways: Firstly, a surplus of junior managers in a firm may create and
support dynamics of firm growth. The growth stage is perhaps the most dynamic stage of a firm’s life
cycle. As the business expands, new levels of management are added. Decision-making becomes more
decentralized, middle managers gain authority and self-managed teams proliferate as the firm adds
more and more projects and customers (Flamholtz and Randle, 2000; Miller and Friesen, 1984).
Secondly, teamwork and decentralization of decision making promotes employee commitment
participation and create a sense of attachment, thus indirectly affecting firm performance (Tata and
Prasad, 2004).
Several studies identified self-managed teams and decentralization as important high-performance
HRM practices (Pfeffer, 1998; Wagner, 1994; Yeatts and Hyten, 1998; Singer and Duvall, 2000).
Jayaram et al. (1999) found that decentralised teams have a positive effect on two dimensions of the
performance, time and flexibility. Collins and Clark (2003) examined the role of human resource
practices in creating organizational competitive advantage and found that top management team social
networks (practices such as mentoring, incentives, etc.) mediated the relationship between HR practices
and firm performance. Haleblian and Finkelstein (1993) examined the effects of top management team
size and chief executive officer (CEO) dominance on firm performance in different environments.
Results showed that firms with large teams performed better and firms with dominant CEOs performed
worse in a turbulent environment than in a stable one.
Tata and Prasad (2004) found that a company with micro level of centralisation is a receptive
environment for self-managed teams. In a study of differential outcomes of team structures for workers,
supervisors, and middle managers in a large unionized telecommunications company, Batt (2004)
found that participation in self-managed teams is associated with significantly higher levels of
employment security, and satisfaction for workers and the opposite for supervisors. Black et al. (2004)
examined the impact of organizational change on workers and found evidence that self-managed teams
are associated with greater employment reductions.
Therefore, we propose this hypothesis:
Hypothesis 2: Decentralisation is positively related to firm growth.
2.3 Information Sharing
Sharing of information may have a dual effect: Firstly, it conveys employees the right meaning
that the company trusts them. Secondly, in order to make informed decision, employees should have
access to critical information. Communicating performance data on a routine basis throughout the year
help employees to improve and develop. Employees presumably want to be good at their jobs, but if
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20
they never receive any performance feedback, they may perceive to have a satisfactory performance
when in fact they do not (Chow et al., 1999). Furthermore, information sharing fosters organizational
transparency which reduces turnover (Ahmad and Schroeder, 2003) and forges synergistic working
relationship among employees (Nonaka, 1994).
Information sharing is not a widespread HR practice as someone might have expected it to be.
Many companies are vulnerable to share critical information with their employees because in this way
employees become more powerful and companies may loose control of them (Pfeffer, 1998).
Furthermore, information sharing always involves the danger of leaking important information to
competitors (Ronde, 2001). In a study of Japanese consultation committees, Morishima (1991) found a
positive association of information sharing with productivity and profitability, and a negative one with
labour cost. Constant et al. (1994) pointed out that attitudes about information sharing depend on the
form of the information. Burgess (2005) studied employee motivations for knowledge transfer outside
their work unit and found that employees who perceived greater organizational rewards for sharing
spent more hours sharing knowledge beyond their immediate work group. However, a significant
percentage of employees perceived knowledge as a means of achieving upward organizational
mobility. Therefore, employees sought information more often than shared it.
Roberts (1995) studied how HR strategy affects profits in 3,000 businesses throughout the world
and found that sharing information was related with higher profitability. However, Ichniowski and
Shaw (1999) compared US and Japanese steel-making plants and found that employee participation
based solely on problem-solving teams or information sharing did not produce large improvements in
productivity. In a study of Fortune 1,000 largest manufacturing and service companies on high-
performance practices, Lawler et al. (1995) found information sharing to correlate to firm performance
but results are inconclusive.
Therefore, we propose this hypothesis:
Hypothesis 3: Sharing of information is positively related to firm growth.
2.4 Selective Hiring
This practice can ensure that the right people, with the desirable characteristics and knowledge,
are in the right place, so that they fit in the culture and the climate of the organization. Moreover,
pinpointing the rights employees would decrease the cost of employees’ education and development.
Schuster (1986) argued that selective hiring is a key practice that creates profits. Huselid (1995)
examined HR practices of high performance companies and found that attracting and selecting the right
employees increase the employee productivity, boost organizational performance, and contribute in
reducing turnover.
Cohen and Pfeffer (1986) argued that hiring standards reflect not only organizations' skill
requirements but also the preferences of various groups for such standards and their ability to enforce
these preferences. Michie and Quinn (2001) proposed that a possible indirect link between selective
hiring and organisational performance can be the forging of internal bonds between managers and
employees that creates the write culture for productivity growth. Collins and Clark (2003) argued that
the practice of selective hiring results at sales growth. Paul and Anantharaman (2003) pointed out that
an effective hiring process ensures the presence of employees with the right qualifications, leading to
production of quality products and consequently in increase of economic performance.
Cho et al. (2005) examined pre-employment tests as a key component of selective hiring and
found that when employed, these tests can select employees that stay with a company longer. Passing
pre-employment tests may give an applicant a stronger sense of belonging to the company, resulting in
higher degrees of commitment if employed. Cardon and Stevens (2004) pointed out that for small
companies recruiting is often problematic. This can be due to several reasons such as limited financial
and material resources and jobs with unclear boundaries responsibilities, which decreases their
potential to hire qualified candidates. Therefore, we propose this hypothesis:
Hypothesis 4: Selective hiring is positively related to firm growth.
2.5 Training and Development
Training and development may be related to firm performance in many ways. Firstly, training
programmes increase the firm specificity of employee skills, which, it turn, increases employee
productivity and reduces job dissatisfaction that results in employee turnover (Huselid, 1995).
Secondly, training and developing internal personnel reduces the cost and risk of selecting, hiring, and
internalising people from external labour markets, which again increases employee productivity and
reduces turnover. Training and development like job security requires a certain degree of reciprocity: A
Ilias P. Vlachos
21
company that train and develop systematically its employees advocates them that their market value
develops more favourably than in other firms. This increases employees’ productivity, commitment,
and lowers turnover. Companies may also assist their employees in career planning. In doing so,
companies encourage employees to take more responsibility for their own development, including the
development of skills viewed as significant in the company (Doyle, 1997).
Barringer et al. (2005) compared rapid-growth and slow-growth firms and found that rapid-growth
firms depend heavily on the abilities and efforts of their employees to maintain their growth-oriented
strategies. The fast-growth firms used training programs to achieve their objectives and emphasized
employee development to a significantly greater extent than their slow-growth counterparts. Therefore,
training and employee development practices are more common in rapid-growth firms than slow-
growth ones.
Miller (2006) examined the growth strategies in the retail sector and suggested that modern
retailers should place more emphasis on the policies and practices that could contribute to staff
retention, rather than on the immediacy of recruitment and selection. Zhu (2004) reviewed the changes
in the area of human resource development in Japan and observed that some companies and industries
have shifted towards a more strategic approach that emphasizes the impact of effective learning at both
individual and organizational levels on long-term organizational competitiveness. Husiled (1995) found
that the education and development of employees have a significant effect both upon the personnel
productivity and the sort-term and long-term indicators of organizational performance.
Ngo et al. (1998) investigated the effects of country origins on HR practices of firms from the
United States, Great Britain, Japan and Hong Kong operating in Hong Kong. Study results showed that
structural training and development and retention-oriented compensation were related to various
measures of firm performance. Paul and Anantharaman (2003), in searching the links between human
resource practices and organizational performance, proposed that career development programmes
demonstrate a true interest of the organization for the growth of its personnel, which, in turn, stimulates
commitment and devotion, which, subsequently, raises personnel productivity and consequently
economical output.
Cerio (2003) examined the manufacturing industry in Spain and found that quality management
practices related to product design and development, together with human resource practices, are the
most significant predictors of operational performance. Michie and Quinn (2001) investigated the
relationships between UK firms’ use of flexible work practices and corporate performance and
suggested that low levels of training are negatively correlated with corporate performance. Therefore,
we propose this hypothesis:
Hypothesis 5: The extent of training and development will be positively related to firm growth.
2.6 Job Security
Job security creates a climate of confidence among employees which cultivates their commitment
on the company’s workforce. Job security requires a certain degree of reciprocity: firstly, a company
must signal a clear message that jobs are secure; then, employees believing that this is true, feel
confident and commit themselves to expend extra effort for the company’s benefit; finally, a company
that have learnt that job security contributes to its performance, invests again in job security (Pfeffer,
1998). Probst (2002) has developed a conceptual model of the antecedents and consequences of job
security. Antecedents include worker characteristics, job characteristics, organizational change and job
technology change. Consequences include psychological health, physical health, organizational
withdrawal, unionisation activity, organizational commitment and job stress. Jon involvement, cultural
values, and procedural justices moderate job security perceptions and attitudes.
Buitendach and Witte (2005) assessed the relationship between job insecurity, job satisfaction and
affective organisational commitment of maintenance workers in a parastatal in Gauteng. Study results
revealed small but significant relationships between job insecurity and extrinsic job satisfaction and job
insecurity and affective organisational commitment. Job satisfaction was also found to mediate the
relationship between job insecurity and affective organisational commitment.
However, today’s business environments are far from providing job security to their employees.
For example, in an analysis of involuntary job loss in France between 1982 and 2002, Givord and
Maurin (2004) found evidence that technological changes contribute to keeping the employees for
shorter periods of time, thus increasing job insecurity.
When companies do provide job security, then empirical evidence suggests that it has a positive
effect on to firm performance. Following Pfeffer (1998), Ahmad and Schroeder (2003) found that
among others, job security impacts operational performance indirectly through organizational
commitment. Delery and Doty (1996) studied the US banking sector and found some support for a
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22
positive relationship between employment security and firm performance. In their study of 101 foreign
firms operating in Russia, Fey et al. (2000) found evidence that human resource practices indirectly
improve organisational performance. The results showed that not only, there was a direct positive
relationship between job security and performance for non-managers, but job security was the most
important predictor of HR outcomes for non-managerial employees. Results also suggested a direct
positive relationship between managerial promotions based on merit and firm performance.
Michie and Quinn (2001) examined labour market flexibility in over 200 manufacturing UK firms
and found that job security is negatively correlated with corporate performance. In contrast, results
showed that ‘high commitment’ organizations are positively correlated with good corporate
performance. Kraimera et al. (2005) used psychological contract and social cognition theories to
explore the role of full-time employees' perceived job security in explaining their reactions to the use of
temporary workers by using a sample of 149 full-time employees who worked with temporaries.
Results demonstrated that employees' perceived job security negatively related to their perceptions that
temporaries pose a threat to their jobs. On the one hand, for those with high job security, there was a
positive relationship between benefit perceptions and performance. On the other hand, for those with
low job security, there was a negative relationship between threat perceptions and performance.
Therefore, we propose this hypothesis:
Hypothesis 6: The presence of job security is positively related to firm growth.
Figure 1 illustrates the associations between these hypotheses and relevant constructs.
Figure 1: The association between hypotheses and constructs
Decentralisation
Compensation
Policy
Training&
Development
InformationSharing
SelectiveHiring
JobSecurity
ActualSalesGrowth
PerceivedMarket
ShareGrowth
PerceivedOverall
Improvement
perceivedFirm
Growth
ActualFirmGrowth
perceivedfirm
Growth
PerceivedSales
Growth
Ilias P. Vlachos
23
3 METHOD
3.1 The sampling procedure and sample
While Figure 1 is a model of the firm performance, we choose to examine it as understood by the
individuals who take decisions about firm performance. In doing so, we operationalize and measure
individuals’ perceptions of the model’s variables in their work situations.
In order to develop robust model linking HR practices and firm performance, we drew our sample
from food companies operating in Greece for a minimum of five years. We included companies from
the food processing and trading sub-sectors, excluding hospitality and retailing. In doing so, we aimed
to increase the homogeneity of our population as we as decrease the necessary sample size to achieve
robust validity of data analyses.
Testing the research hypotheses in a specific sector adds to the validity of the research design
because managerial skills are to a large extent industry-specific. Furthermore, food industry is dealing
with subsequent food crises and human resources are considered as a valuable asset to survive and
maintain competitive advantage. In-depth interviews were conducted with key decision makers prior to
designing a pre-test. The questionnaire was pre-tested with randomly selected firms. Based on the
results of the pre-test instrument, the final questionnaire was refined. The respondents were mainly HR
managers or, in same instances, the managing directors (MD) of the food firms.
In terms of the empirical research, we posted 372 questionnaires. We got 71 questionnaires, most
of them answered by HR Managers (95%). We chose to include both HR and MD responses in the
sample size although we recognize that there would be different perceptions about HR practices and
organizational performance.
The total response rate was 19.1%. To ensure that the respondents were comparable to non-
respondents, analyses of variances were conducted between these groups. We also found no significant
differences between HR managers and managing directors. The non-response bias was assessed by
comparing early respondents with late respondents (Armstrong and Overton, 1977).
3.2 Statistical Analysis
SPSS v.10 on Windows XP was utilized for all analyses. We first had to reduce a large number of
variables to a smaller set of components. Principal component analysis is a preferred method for this
kind of study. We, then, used hierarchical regression in order to assess the effect of relation, if any,
between HR practices and firm growth measures.
Principal component analysis with varimax rotation was conducted to assess the underlying
structure for the nineteen HR practices questionnaire. Principal component analysis (PCA) involves a
mathematical procedure that transforms a number of (possibly) correlated variables into a (smaller)
number of uncorrelated variables called principal components. The first principal component accounts
for as much of the variability in the data as possible, and each succeeding component accounts for as
much of the remaining variability as possible.
PCA helps with the latter. Having too many features often results in the problem having too many
degrees of freedom leading to poor statistical coverage and thus poor generalization. The Varimax
rotation is an orthogonal rotation applied to a truncated set of principal components (Harman 1970,
Krzanowski 2000). Its application is an attempt to obtain modes that are simple to interpret.
Hierarchical regression models are well suited for this type of analysis. In hierarchical regression,
the order of predictor entry, whether individual or in blocks, makes a difference in the results and
conclusions. This allows examining the ‘effects’ of specific independent variables over and above one
or more dependant variables.
Surveys using questionnaires often result in small sample size in Greece (Ketikidis et al. 2007;
Pasiouras, 2008; Vlachos and Bourlakis, 2006). For example, Ketikidis et al. (2007) used a sample size
of 79 observations in six South East European countries including Greece. Pasiouras (2008) used the
total population of Greek banks to get 78 observations in order to estimate the technical and scale
efficiency of Greek commercial banks.
Measures
Principal component analysis with varimax rotation was conducted to assess the underlying
structure for the nineteen HR practices questionnaire. The scales were measured on a Likert format
ranging from 1 (strongly disagree) to 5 (strongly agree). Six factors were requested, based on the fact
that the items were designed to index the six HR practices. After rotation, decentralisation accounted
for 17.53% of the variance, compensation policy for 12.67%, training & development for 12.24%,
information sharing for 8.73%, selective hiring for 8.61%, and job security for 6.17%. We used the
Int. Journal of Business Science and Applied Management / Business-and-Management.org
24
Anderson-Rubin Method, which ensures orthogonality of the estimated factors, to produce factor
scores.
Table 1 contains the items, the scale composite reliability (Cronbach ?), and factor loadings for
the rotated factors, with loading less than 0.40 omitted to improve clarity.
The first factor, which included items measuring the firm’s decentralisation and decision making
practices was labelled Decentralisation (seven items, ?= 0.906). The second factor, labelled
compensation policy, included items measuring the firm’s compensation practices and items measuring
the firm’s policy and HR practices to reduce turnover of employees (four items, ?= 0.757). The third
factor, labelled training & development, included four items (?=0.647) measuring the firm’s emphasis
on train and develop its personnel. The fourth factor, labelled information sharing, included two items
(?=0.713) measuring the firm’s policy to share critical information and performance data with its
personnel. The fifth factor, labelled selective hiring, included three items (?=0.556) measuring the
firm’s policy to recruit personnel that fits its culture and objectives.
The last factor had low internal validity to be included in further analysis. The six factor, labelled
job security, included two items (?=0.383) measuring the ability of the firm to create a trustworthy
business climate.
3.3 Firm Growth
Respondents were asked to indicate their firm’s growth as compared to the industry’s average in
these areas: perceived sales growth, perceived market share growth, perceived overall improvement
and perceived firm growth. For perceived items, a 5-point scale ranging from bad (1) to very good (5)
was used. Furthermore, we calculated actual sales growth, and actual firm growth based on the last 3-
year firm performance. We calculated firm growth using sales and employee figures.
Although we believe the perceived firm growth measures are appropriate, they have some
limitations which should be discussed. The first is that they are self-reported responses from HR
managers, who may have a stake in seeing positive relationships between their decisions about
personnel recruitment, training, development and compensation with achievement of firm’s objectives.
However, the responses from the sample contain ample variance and means that do not reflect an
extremely strong positive bias (see Table 2, variables 2 through 7). If the respondents had greatly
inflated their responses, there may have been more consistently positive results than were seen.
Secondly, as in all self-reported studies, the possibility of common method variance should be
addressed. When both the outcome measure (i.e. firm growth) and the six predictor variables (i.e.
compensation policy, decentralisation), are self-reported on the same survey instrument, both measures
share common methods variance. There are several techniques that can be used to minimise common
method variance (see Podsakoff et al. 2003 for a review of these methods).
We used the Harmon’s factor test to examine whether or not common methods variance in the
predictor and outcome variables inflates the empirical relationships among the variables. Harmon’ test
consists of a factor analysis of all relevant variables. If a large degree of common method variance is
present, one factor will emerge. Such an analysis was conducted on the firm performance and HR
practices variables of this sample. Seven factors emerged, with the first factor (which, in cases of
common method variance, would account for most of the variance) only accounting for 18.472% of the
variance. Thus, common method variance is unlikely to bias this sample.
Third, management perceptions about concepts like firm growth and organisational performance
may actually be more valid indicators than objective data such as profitability, market share and sales,
since actual figures are directly related to a vast number of variables, such as trends in the economy,
industry factors, and other environmental factors. Therefore, self-reported measures may, in some
cases, represent more accurate descriptions than more objective measures (Day, 2003; Podsakoff and
Organ, 1986). In the present study, since we are interested in the direction of causation between HR
practices and firm effectiveness, the only people with the breadth and depth of knowledge to report
adequately about these concepts are the HR managers or managing directors.
Finally, since we were interested in assessing the separate factors of a successful collaboration, we
were limited in the number of objective measures that were available within the scope of this study.
Because of the previously stated arguments, we concluded that the expert opinions of HR managers or
managing directors would be valid and appropriate for this study. The results of data analysis should be
acceptable if adequate controls, such as Harmon’s one factor test, are reported for the data. While we
expect that further research into these firm performance constructs is essential, we believe that they are
acceptable for this initial research study.
Ilias P. Vlachos
25
3.4 The Effect of HR Practices on Firm Growth
Table 2 presents the mean, standard deviation, and Pearson’s correlation analysis of control
variable (sales), firm growth (perceived sales growth, perceived market share growth, perceived overall
improvement, perceived firm growth, actual sales growth, and actual firm growth), and HR practices
(compensation policy, decentralisation, information sharing, selective hiring, training & development,
and job security). The control variable showed low correlation with growth variables as well as each
one HR practice.
Compensation Policy had significant association with perceived sales growth (r=-.328, p