Human Resources and Business Performance: Findings, Unanswered Questions, and an Alternative Approach

Abstract

In 1996, Becker and Gerhart noted that much of the work on human resources (HR) and performance had traditionally been conducted at the individual level of analysis. However, in the 1990s, empirical research on HR and performance increasingly moved to the plant/unit and firm level of analysis with a new emphasis on understanding how HR practices influence business performance at these higher levels. In the present article, I describe the empirical findings of this evolving literature, unanswered questions, and an approach to the issue that differs from what has come to be the typical approach over the past 10 years or so. Key words: Human Resources, Performance, Employee Relations, Employee Attitudes, Methodology Findings on HR and Business Performance Early efforts to link HR practices to business performance generally focused on a single practice or area of HR. For example, business performance was found to be stronger where the industrial relations climate was more favorable (e.g., lower levels of grievances and conflict, better employee attitudes) and where the use of labor-management cooperation programs was greater (Cutcher-Gershenfeld 1991; Katz/Kochan/Gobeille 1983; Katz/Kochan/Weber 1985). This work was conducted at the plant/unit level of analysis (and typically in unionized settings). Other work, at the firm level of analysis, reported that business performance was stronger in firms emphasizing pay for performance in managerial compensation (Gerhart/Milkovich 1990) and in firms using more valid employee selection procedures (Terpstra/Rozell 1993). Subsequent research expanded the conception and measurement of HR to include an array of practices. To some extent, theory (Boxall/Purcell 2003) has evolved as a model to help guide choice of HR practices to study. AMO refers to ability-motivation opportunity' (Appelbaum et al. 2000; Bailey 1993; Gerhart, forthcoming; Huselid 1995; Ichniowski et al. 1996). Under the AMO model, HR practices are expected to influence business performance via the workforce's ability (e.g., using selective hiring, training), motivation (e.g., using pay for performance), and opportunity to contribute (e.g., using teams, suggestion systems). At the plant/facility level, key studies showing links between HR practices and performance were conducted by Arthur (1994), MacDuffie (1995), and Ichniowski/ Shaw/Prennushi (1997) in manufacturing and in the service sector by Batt (2002). At Uiefirm level, an early and influential study was conducted by Huselid (1995), followed by Delery and Doty (1996). For reviews of these and related studies, see Becker and Gerhart (1996), Boxall and Purcell (2003), and Gerhart (1999, forthcoming). The empirical work generally reports the same finding: the choice of HR practices is related to business performance, often strongly. (see Cappelli and Neumark for an empirical exception and Godard 2004 for a less optimistic review.) For example, Gerhart's (1999) review found that a one standard deviation increase in HR system practices (relative to the mean) designed to enhance workforce ability', motivation, and opportunity to contribute was associated with roughly 20 percent better firm financial performance. Consider that this finding means that firms one standard deviation above the mean are at 120 % of mean performance, while those one standard deviation below the mean are at 80 percent of mean performance, making for a 120/80 = 50 percent advantage of being +1 standard deviation versus -1 standard deviation. This is a large difference. How have such studies been received by HR scholars? An examination of the HR Division, Academy of Management, Scholarly Achievement Award (best article of the year) winning studies reveals that since 1990, the majority of award-winning articles have used either plant or firm performance as a major dependent variable (http://www.hrdiv.org/) and one or more HR practices as the independent variable(s). …