Unravelling the HRM–Performance Link: Value‐Creating and Cost‐Increasing Effects of Small Business HRM*

Abstract

 The majority of empirical studies on the HRM-performance link report a positive story. The costs associated with the productivity rise due to high performance work practices (HPWP) have been largely neglected. The purpose of this study is to develop a conceptual framework that maps both the value-enhancing and cost-raising impact of HPWP. In addition, we want to pronounce upon their overall effect on financial performance. To test our model, we rely on a sample of small businesses. Understanding both performance and cost-related effects of the implementation of HPWP is particularly valuable for small businesses since they often lack financial resources to implement HPWP and benefit less from economies of scale compared to their larger counterparts. Study results indicate that although greater use of HPWP is associated with increased productivity, this effect is offset by increased labour costs. However, we find an overall positive effect of HPWP on firm profitability.

High performance work practices in small firms: a resource-poverty and strategic decision-making perspective

“…In our study, fewer ability and motivation practices were reported by our sample of employees working in the smaller firms (Hypothesis 1). The costs involved in implementing formal training (A), career paths and high salaries (M) can be substantial and particularly difficult to shoulder by smaller firms (Sels et al 2006). In addition, the greater organisational complexity of larger firms and the increased difficulty in these firms to maintain direct control through an informal approach will lead to the implementation of more formalised ability and motivation practices (Mayson and Barrett 2006).…”

“…First, not as many organisations have adopted HPWP systems as might be expected given the claimed advantages (Kauhanen 2009). This seems to be especially the case with small organisations (Sels et al 2006). Second, the practices said to constitute a HPWPs vary from one research project to another, leading to the observation that as few as four practices seem to be consistently part of the HPWP 'system' measured by researchers Boxall and Macky 2009): (1) training and development, (2) contingent pay and reward schemes, (3) performance management (including appraisal) and (4) careful recruitment and selection.…”

“…In larger organisations, the complexity of aligning people to organisational goals increases as there is a greater task differentiation between employees which requires more management (Lawrence and Lorsch 1967;Mintzberg 1979). Formalised systems of HR practices reduce the need for direct control and interpersonal interactions (Mintzberg 1979), but these more formal systems for HRM only produce a return when a sufficient number of employees are involved: the returns for smaller firms do not outweigh the time and resources needed to implement HPWPs (Sels et al 2006). Davila (2005) found that the largest differences in formalised HR practices were seen in organisations in which the number of employees ranged from one to 30 and in those with more than 75 employees.…”

“…According to the resource-poverty perspective (Welsh and White 1981), means are constrained by the limited availability of financial resources and time, both of which are available in larger quantities in firms with more employees. Related to the resource-poverty perspective, explanations for the low score of small firms on the number of HPWPs present as compared to large organisations have been sought in the costs associated with HPWPs (Sels et al 2006) and with the concept of informality (Mayson and Barrett 2006).…”

“…Compared to larger firms, small firms are more constrained by limited resources. In terms of financial resources, the low uptake of HPWPs in small firms has been related to the high costs involved in implementing all of the practices (Sels et al 2006). In addition, the simple structure of smaller organisations allows for quick and relatively informal communication styles, which may conflict with the greater formality and relatively more time-consuming nature of the HPWP approach (Jack et al 2006).…”