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HRM and Performance: What’s Next?

Jaap Paauwe
Erasmus University Rotterdam, paauwe@[Link]

Jean Paul Boselie

Erasmus University Rotterdam, boselie@[Link]

Paauwe, Jaap and Boselie, Jean Paul, "HRM and Performance: What’s Next?" (2005). Visiting Fellow Working Papers. Paper 13.
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HRM and Performance:

What’s Next?
Jaap Paauwe and Paul Boselie

Department of Business Economics, H15-08

Rotterdam School of Economics

Erasmus University, [Link] 50

3062 PA Rotterdam

The Netherlands

Tel.+31-10-4081366, Fax +31-10-4089169

E-mail: paauwe@[Link]

Tilburg University

Faculty of Social and Behavioural Sciences

Department of HR Studies, Room S152

P.O. Box 90153

5000 LE Tilburg

The Netherlands

tel.+31-13-4668166, fax +31-13-4663002

e-mail: [Link]@[Link]

1
HRM and Performance: What’s next?i

abstract

The last decade of empirical research on the added value of human resource management

(HRM), also known as the HRM and Performance debate, demonstrates evidence that

‘HRM does matter’ (Huselid, 1995; Guest, Michie, Conway and Sheehan, 2003; Wright,

Gardner and Moynihan, 2003). Unfortunately, the relationships are often (statistically)

weak and the results ambiguous. This paper reviews and attempts to extend the

theoretical and methodological issues in the HRM and performance debate. Our aim is to

build an agenda for future research in this area. After a brief overview of achievements to

date, we proceed with the theoretical and methodological issues related to what

constitutes HRM, what is meant by the concept of performance and what is the nature of

the link between these two. In the final section, we make a plea for research designs

starting from a multidimensional concept of performance, including the perceptions of

employees, and building on the premise of HRM systems as an enabling device for a

whole range of strategic options. This implies a reversal of the Strategy-HRM linkage.

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Introduction.

Empirical results on HRM and performance have been presented in a range of special

issues of international academic journals like the Academy of Management Journal, the

International Journal of Human Resource Management and the Human Resource

Management Journal. The empirical results suggest the added value of HR interventions.

However, there are still a number of unresolved issues.

In 1997 Guest argued that there was a need for (1) theory on HRM, (2) theory on

performance, and (3) theory on how the two are linked (Guest, 1997). Seven years later

we observe only modest progress on those three fundamental issues. Boselie, Dietz and

Boon (2005) conducted an exploratory analysis and overview of the linkages between

human resource management and performance in 104 empirical articles published in

prominent international refereed journals between 1994 and 2003. Their findings

demonstrated a deficiency in the literature regarding alternative theories on the concept of

HRM, the concept of performance, and on how the two are linked. Strategic contingency

theory, AMO theoryii and the resource-based view appear to be the most popular theories

applied in the 104 articles, but in most cases it is not clear how these theories link HRM

and performance. Hence, we need to turn back to Guest’s (1997) plea for theoretical

foundation of HRM, performance and the link between the two and ask ourselves three

questions:

• What is HRM?

• What is performance?

• What is the nature of the link between HRM and performance?

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Based on these three headings/questions we will be able to categorize the still unresolved

issues and explore possible avenues for research in the future.

What is HRM?

Under the heading of this clear - but apparently difficult to answer - question we deal

with the following issues: the lack of consensus with respect to the constituent parts of

HRM; the best practice versus the best fit approach; the different fits; coverage of

different employee groups; and the need to consider how HR practices are perceived.

Lack of consensus

There appears to be no consensus on the nature of HRM. Some studies focus on the

effectiveness of the HR department (Teo, 2002), others focus on the value of human

resources in terms of knowledge, skills and competencies (Hitt, Bierman, Shimizu and

Kochhar, 2001), several studies define HRM in terms of individual practices (Batt, 2002)

or systems/bundles of practices (Capelli and Neumark, 2001), and yet others

acknowledge the impact of these practices or systems on both the human capital value –

in terms of knowledge, skills and abilities – and on employee behaviour directly in terms

of higher motivation, increased satisfaction, less absence and increases in productivity

(Wright, McMahan and McWilliams, 1994). We observe that the majority of the studies

define HRM in terms of HR practices or systems/bundles of practices. Boselie et al.

(2005) show the enormous variety of different practices being used in the 104 analysed

articles. There is not one fixed list of generally applicable HR practices or systems of

practices that define or construct human resource management. In total they are able to

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list 26 (!) different practices, of which the top four- in order- are training and

development, contingent pay and reward schemes, performance management (including

appraisal) and careful recruitment and selection. These four practices can be seen to

reflect the main objectives of the majority of ‘strategic’ HRM programmes (e.g., Batt,

2002): namely, to identify and recruit strong performers, provide them with the abilities

and confidence to work effectively, monitor their progress toward the required

performance targets, and reward staff well for meeting or exceeding them. Another issue

is that even if we use the same concepts, the underlying meaning of the practice can be

totally different. This begs the question, how can a field of academic inquiry ever

manage to make progress if it is not able to come to terms with one if its central

concepts? Using content analysis Boselie et al. (2005) found that among the three most

often used theoretical frameworks, the AMO-framework is the only one used in more

than half of all articles published after 2000. In contrast, for the papers using strategic

contingency theory and RBV, more than half of them were published before 2000. So we

may be witnessing the birth of at least a certain commonality around how HRM might be

constituted in exploring the relationship between HRM and Performance.

Best practice vs. best fit

One of the key discussions within HRM is the distinction between the so-called best

practice and the best-fit approaches. Some say there are universalistic best practices in

HRM (Pfeffer, 1994), others argue that there are only best-fit practices (Wood, 1999),

stating that the effect of HR practices depends on the specific (internal and external)

context. It seems logical to believe in a best-fit approach in contrast to a somewhat

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simplistic best practice approach, but the empirical evidence still supports the best

practice approach (Delery and Doty, 1996). Gerhart (2004) demonstrates a critical

analysis of those who claim that some form of internal fit – the alignment of practices

with each other – outperforms the lack of this type of fit. Gerhart’s (2004) evaluation is

very convincing in showing that the systems approaches that build on the notion of

internal fit do not outperform the other approaches in which individual HR practices are

not aligned.

Boxall and Purcell (2003) argue that both streams – best practice and best-fit– might be

right each in their own way. Some basic principles like employee development, employee

involvement and high rewards are universally successful, but the actual design of the HR

practice depends to some degree on unique organizational contexts. The internal context -

for example, the nature of the production system (e.g., assembly line) - might create

restrictions with respect to the successful design of some HR practices (e.g., teamwork,

performance related pay), but also the external context - for example, the legislation and

trade union influence - might have a direct impact on the optimal HRM design. So the

whole debate about universalistic best practices versus best-fit practices actually

represents two sides of the same coin and both are relevant in exploring the linkage

between HRM and Performance.

Different fits

Wood (1999) makes a distinction between four different ‘fits’: internal fit, organizational

fit, strategic fit and environmental fit. Although this is in line with what many other

6
researchers consider to be the possible range of fits in HRM research, one of the most

important seems to be missing. That is, the fit between how the employee perceives HR

practices and whether that perception aligns with the values and goals of the organization.

That kind of fit is well known under the heading of Person-Organization fit (P-O fit),

which Kristof (1996) defines as the compatibility between people and organizations that

occurs when: (a) at least one entity provides what the other needs, or (b) they share

similar fundamental characteristics, or (c) both. A number of authors in the field of HRM

and Performance emphasize the importance of including workers’ perceptions. As Van

den Berg and colleagues note (1999: 302), ‘an organisation may have an abundance of

written policies concerning [HRM], and top management may even believe it is practised,

but these policies and beliefs are meaningless until the individual perceives them as

something important to her or his organisational ‘well-being’. Wright and Boswell,

(2002: 263) also note that in measuring HRM, it is vital to distinguish between policies

and practices. The former is the organisation’s stated intentions regarding its various

‘employee management activities’, whereas the latter are the actual, functioning,

observable activities, as experienced by employees. This is yet another plea to pay more

attention to workers’ perceptions and the importance of person-organisation fit. This

theme will recur in our final section when we discuss the importance of the strength of

the HRM system (Bowen and Ostroff, 2004).

Coverage of different employee groups

If we look more closely at the conceptualization and operationalization of HR practices

or systems of practices we observe little or no attention to the degree of coverage of

7
HRM –differentiation between employee groups and the percentage of employees

covered by the practices – and the intensity of HRM in terms of, for example, daily,

weekly, monthly or yearly interventions. Most prior research either uses simplistic scales

focusing on the application (or lack thereof) of a specific practice (Guest et al., 2003) or

some kind of scale that is supposed to capture the ‘degree to which the target group has to

do with’ a specific practice (Huselid, 1995).

The early empirical studies on HRM mainly used the input of single respondents, in most

cases the input from HR managers (Huselid, 1995). Gerhart et al. (2000) demonstrate the

low inter-rater reliability between employees, line managers and HR managers. This is an

interesting and highly relevant notion, but at the same time difficult to solve since these

empirical results demonstrate fundamental differences between employee groups within

an organization. These results suggest that different employee groups have fundamentally

different priorities and needs, something that should be taken into account in future

research. Lepak and Snell (2002) argue that HR differentiation towards specific

employee groups is necessary for overall effectiveness. The classification of employee

groups within an organization depends on factors like the nature of their jobs (e.g.,

production, technical support, administration, management), their professional

backgrounds (e.g., level of education, degree of professionalization of the occupation)

and needs and wants of individuals (e.g., degree of employment security, need for

challenging tasks).

Intended vs. perceived practices

8
To make life even more complicated Wright and Nishii (2004) build a strong argument to

make a clear distinction between intended HR practices (those designed on a strategic

level), actual – or implemented – HR practices (those implemented by for example the

direct supervisor), and perceived HR practices (those perceived by the employees). The

majority of prior research on HRM and performance appears to focus on intended HR

practices, mainly designed at the strategic level of the organization. Little is known about

the actual enactment or implementation of HR practices and employees’ perception of

them.

What is Performance?

In this section we pay attention to the variety of performance indicators used in empirical

research, the distinction between shareholder and stakeholder approaches, and the kind of

implication it has for our understanding of the concept of performance.

Measuring performance

The performance outcomes of HRM can be captured in a variety of ways. We draw a

distinction, adapted from Dyer and Reeves (1995), between:

1. Financial outcomes (e.g., profits; sales; market share; Tobin’s q; GRATE)

2. Organisational outcomes (e.g., output measures such as productivity; quality;

efficiencies)

3. HR-related outcomes (e.g., attitudinal and behavioural impacts among employees,

such as satisfaction, commitment, and intention to quit)

9
Based on the overview by Boselie et al. (2005) we can conclude that financial measures

are represented in half of all articles (104) included in their analysis. Profit is the most

common followed by various measures for sales. Actually, this is quite problematic as

financial indicators are being influenced by a whole range of factors (both internal and

external), which have nothing to do with employees and their related skills or human

capital. As already noted by Kanfer (1994) and Guest (1997) the distance between some

of the performance indicators (e.g., profits, market value) and HR interventions is simply

too large and potentially subject to other business interventions (e.g., research and

development activities, marketing strategies). For example, having smart policies for

managing working capital can increase earnings substantially, but have nothing to do

with the proclaimed effect of HR practices (apart from apparently having selected the

right treasury manager). The use of these kind of indicators becomes even more serious

if we take a closer look at an analysis carried out by Wright et al. (in press) as

summarized by Wright and Haggerty (2005). Their literature review identified 67

empirical studies, which analyzed the relationship between HR practices and

performance. By far the majority of studies used a design labelled post-predictive

because “……. it measures HR practices after the performance period, resulting in those

practices actually predicting past performance” (Wright and Haggerty, 2005:8). Only a

few studies explored the effect of HR practices on performance in the correct way by

assessing HR practices at one point in time and relating them to subsequent performance.

This simply means that the majority of studies have ignored a very basic rule for

demonstrating causal relationships (Wright and Haggerty, 2005).

10
Shareholder vs. stakeholder approach to performance

The use of financial indicators emphasizes a shareholders’ approach to the concept of

performance, emphasizing that HR practices and systems contribute a sustained

competitive advantage through enhancing skills and human capital. This assumes that

organizations can maintain or create sustained competitive advantage through

unique/rare, scarce, inimitable, and valuable internal resources (Barney, 1991). Human

resources are a powerful potential internal resource that fits this general resource based

view idea (Paauwe, 1994; Wright et al., 1994; Boxall and Purcell, 2003). The next step in

the theory is that employees or human resources are manageable (manoeuvrable) and

developmental. In other words, HR practices can (a) increase the value of the human

capital pool through development (e.g., skills training, general training, job rotation,

coaching) and (b) influence employee behaviour in the desired direction. The search for

the Holy Grail in HRM is the search for those ‘best practices’ or ‘best-fit practices’ that

ultimately result in sustained competitive advantage of the organization. This can only

take place if employees are willing to stay within the organization. Thus, employee

commitment in terms of willingness to stay with the firm and willingness to put in extra

effort are very important in this context. This is probably why research in the area of

HRM and performance is becoming more interested in creating high commitment work

environments through HR practices or high involvement – high performance work

practices (HIWP’s and HPWP’s). The high involvement – high performance work

practices perspective (See also AMO-model) can thus be seen as an extension of the

resource based view.

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The aforementioned also implies that we have to look for more proximal instead of distal

indicators of performance. Both organisational outcomes and HR related outcomes can be

considered more proximal and thus more suited towards measuring performance.

However, in this shareholders’ approach the organisational and HR related outcomes are

still considered to be a means to an end, i.e., contributing to bottom-line performance of

the firm. Such a financial meaning can be criticized for being “too limited” (Truss, 2001:

1123).

The stakeholders’ approach offers a different perspective by emphasizing the objectives

of other constituencies with an interest in HRM practices and subsequent performance of

an organization. This approach can be traced back to the seminal writings of Beer et al.

(1984). More recently we encounter full support for this approach by, amongst others,

Boxall and Purcell, (2003: 13), who define three important goals of HRM, among which

social legitimacy aimed at bringing about employment citizenship, and Paauwe (2004).

The latter argues that the survival of an organization not only depends on financial

competitiveness, but also on its ability to legitimize its existence towards society and

relevant stakeholders of the organization (e.g., employees, customers, trade unions, local

government). Legitimacy is an important concept for sustainability on an organizational

level, but also the organization’s role towards the individual employee and his or her

moral values are important: the concept of fairness. If the relationship between the

employer and the individual employee is out of balance - for example, in the case of

increased performance pressures without fair pay - employees might feel they are being

exploited, resulting in low commitment levels towards the organization (Paauwe, 2004).

12
Performance as a multidimensional concept

Using a stakeholders’ perspective implies that authors (Truss, 2001; Guest and Peccei,

1994) are in favour of using multiple measures of performance in order to do justice to

the multiple goals of HRM and to the different parties involved, both inside and outside

the firm. So, on the one hand we have the more strategic aspect of performance (based on

economic rationality), which emphasizes outcomes such as labour productivity,

innovation, quality, efficiency gains and flexibility (Boselie et al., 2005) and on the other

hand the more societal aspect of performance (based on relational or normative

rationality) emphasizing legitimacy and fairness (Paauwe, 2004). The latter two can be

operationalized through indicators like OCB, commitment, trust, perceived security,

and perceived fairness.

What is the nature of the relationship between HRM and performance?

The most crucial part in our overview of issues relating to the HRM and performance

debate is of course the linkage between the two, here we concentrate on the following

topics: the nature of the linkage, the relevance and non-relevance of strategy, the

importance of the institutional context and arising conflicting demands, the need for

multi-level analysis, and how to cope with reverse causality.

The nature of the linkage

Wright and Gardner (2003) question how many boxes should be taken into account when

studying the HRM - performance linkage. Becker, Huselid, Pickus and Spratt’s (1997)

13
model incorporates 7 boxes, starting with ‘business and strategic initiatives’ and finishing

with ‘market value’. In their model the design of the HRM system is derived from the

overall business strategy (See Figure 1).

- INSERT FIGURE 1 ABOUT HERE -

Guest’s (1997) model has 6 boxes, starting with a Porter-like strategy typology –

distinguishing differentiation/innovation, focus/quality and cost reduction oriented HRM

strategies – and ending with the financial outcomes return on investment (ROI) and

profits. Again, the HR practices are derived from the overall strategy (See Figure 2).

- INSERT FIGURE 2 ABOUT HERE -

Appelbaum et al.’s (2000) AMO-model links 3 boxes. The first box covers high

performance work systems and comprises: (1) ability/skills (e.g., formal and informal

training, education), (2) motivation/incentives (e.g., employment security, information

sharing, internal promotion opportunities, fair payment, PRP) and (3) opportunity to

participate (e.g., autonomy, team membership, communication). The second box consists

of effective discretionary effort and the final box reflects the plant performance (e.g.,

quality and throughput time, labour cost per unit of output, operating profit). See Figure 3

for a visual representation of their model.

- INSERT FIGURE 3 ABOUT HERE -

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To study the effects of HR interventions, either multiple individual HR practices or

systems/bundles of practices, it is preferable to use outcome variables that are closely

linked to these interventions, for example: attitudinal outcomes (e.g., employee

satisfaction, motivation, commitment, trust), behavioural outcome (e.g., employee

turnover, absence), productivity (output per unit effort), and quality of services or

products.

As stated before, there is little or no convincing empirical evidence that coherent and

consistent systems or bundles automatically lead to higher performance (Gerhart, 2004).

This theoretical claim is built on the notion of internal or horizontal ‘fit’. But there is

another proposition that affects the HRM - performance relationship, at least in theory:

the notion of external or vertical/strategic ‘fit’. The underlying idea is that matching the

overall company strategy with the HR strategy or system will result in increased

performance. In this respect it is striking that the framework by Appelbaum et al. (2000),

being the most commonly used and depicted above, does not take strategy as a starting

point, whereas the other two do so. So it is worthwhile to take a closer look at the

(non)relevance of including strategy in the chain of linkages

The (non) relevance of strategy

Many authors and popular textbooks in HRM mention the importance of the link between

corporate strategy and HRM. Unfortunately, there is no convincing empirical evidence

for this proposition (Purcell, 2004). Huselid (1995), for example, does not find any

15
empirical evidence for increased performance when aligning the overall company

strategy with the HR system of a specific organization. There are several plausible

explanations for this lack of evidence of the presumed necessary strategic fit.

First, strategy is often defined in a rather old-fashioned and relatively simplistic Porter-

like manner, such as differentiation/innovation, focus/quality and cost reduction.

Organizational reality is much more complicated and not easy to capture in a simple

‘three-piece suit’. The Porter-like definitions of the 1980s are rather static and do not take

into account the possibility of hybrid strategies or combinations of strategies that

companies might use, serving different markets at the same time. For this reason Purcell

(2004) argues that instead of trying to define a firm’s strategy in terms of differentiation,

focus or cost reduction it is much more interesting to try and determine “…how the firm

will deploy its resources within its environment and so satisfy its long-term goals, and

how to organise itself to implement that strategy (Grant, 2002: 13)”. Incidentally, this is

a more up to date definition of what strategic management nowadays entails/encompasses

(see Grant, 2005:19).

Second, both Gerhart (2004) and Purcell (2004) underline the complexity of management

research in large companies, in particular multinational companies (MNC’s). Often, these

large companies are conglomerations of strategic business units, each serving its own

markets, customers and products/services. Therefore, Gerhart (2004) states that there are

fewer reliability problems with analysis at the plant or unit level.

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Third, there is no convincing theory or strong empirical evidence on the possible time-lag

between a change in strategy, any subsequent HR intervention and performance. The few

studies on HRM and performance that take a longitudinal perspective (Paauwe, 1989;

d’Arcimoles, 1997; Guest et al., 2003), suggest that the majority of HR interventions

have a long term effect on performance, sometimes taking up to two or three years before

generating effects. Some HRM practices (e.g., individual performance related pay) might

have a direct, short-term effect on performance (e.g., productivity), but most other

practices (e.g., training and development, participation, teamwork, decentralization)

probably have little effect in the short-run or (worst case scenario) fail to have any effect.

Wright, Dyer and Takla (1999) asked 70 HR managers to assume that a major strategic

change necessitated a significant overhaul of their firm’s HRM systems and were asked

to estimate the time it would take to design HR systems for delivery and implementation

(Wright and Haggerty, 2005). Their answers were in the range of nine to ten months for

the design and an additional ten to twelve months for the delivery, and then we still need

to add further months before the changed HR systems start to affect subsequent

performance.

Fourth, a whole range of factors other than strategy influence subsequent HRM strategy.

Based on an overview of the strategic management literature and its relevance for the

HRM/Performance relationship, Paauwe (2004) refers to the following: the role of the

entrepreneur, often also the founder and owner with his or her preferences for HRM

policies and practices; difference in cognitive processes of the participants involved in the

strategy making process, which can give rise to different mental maps and different

17
choices (see also Purcell, 2004); power relationships and the kind of resources being

controlled by the actors involved, which can give rise to non-strategic choices in HRM

policies and practices; culture and ideologies of the actors involved, which will also

affect the kind of choices in HRM; and, finally environmental and institutional forces,

stemming from trade unions and tripartite or bipartite consultative bodies (government,

trade unions, employers’ federations), which can have a large impact upon an

organization’s HRM strategy (see below).

Because of this, questions arise about the supposedly dominant role of corporate strategy

in defining subsequent HRM strategy. We cannot define strategy with a specific meaning,

the field of strategic management itself has shifted to more internal organisational and

implementation issues, empirical evidence is lacking and other factors also play a

significant role. So, in the final section of this paper, we downplay the influence of

corporate or business strategy on HRM strategy, and instead make a strong plea for

regarding HRM policies and practices as an enabler for a whole range of strategic options

(Paauwe, 2004: 99).

Institutional embeddedness and conflicting demands

Paauwe and Boselie (2003) argue that as organizations are embedded in a wider

institutional context this plays a role in shaping HRM practices and policies. Institutional

mechanisms (e.g., legislation with respect to conditions of employment, collective

bargaining agreements, employment security, trade union influence, employee

representation) shape employment relationships and HR decision making in

18
organizations. Paauwe (2004), for example, argues that most of Pfeffer’s (1994) best

practices (e.g., high wages, employment security, employee participation) are

institutionalized in a country like the Netherlands. Most of these best practices are

formalized and institutionalized through collective bargaining agreements. Some

industries, for example, prescribe a minimum amount to be spent on training by every

organization each year, defined in terms of a fixed percentage of the total labour costs.

This formalization might also have an effect on employees’ perception of these

institutionalized practices. Pension schemes, for example, are collectively arranged in the

Netherlands, mainly on industry level. Pension schemes are probably not considered to be

employee benefits and best practices in the Dutch context, as this would be in a country

like the USA. Another example is the best practice labelled wage compression. The

typical Dutch egalitarian culture (e.g., relatively low power distance, aim for marginal

differences between population groups in terms of prosperity) is reflected in collective

wage compression through a strong progressive tax system in which employees with high

incomes pay relatively more tax than those with lower incomes.

Paauwe (2004) acknowledges institutional differences at both a country level, for

example the US versus the Netherlands, and at an industry level, for example traditional

branches of industry such as the metal industry and the construction building industry

versus emerging branches of industry such as the ICT industry. Institutional mechanisms

(mimetic, normative and/or coercive) affect the relationship between HRM and

performance and should therefore be taken into account in future research (Paauwe and

Boselie, 2003). Moreover, they also draw our attention to the possibility of conflicting

19
demands. HRM theorisation is dominated by a unitarist perspective, but starting from a

more institutional perspective our eyes are opened to conflicting demands between

professionals, managers, and different occupational groupings that are represented by

their interest groups outside the organisation (e.g., professional associations, trade unions,

etc). Also the practices themselves might give rise to conflicting outcomes in terms of

increased productivity, which managers will appreciate, and increased levels of stress,

which workers will probably dislike. Labour intensification through increased employee

participation, decentralization, and emphasis on performance management (practices that

can be seen as high performance work practices) might create competitive advantage in

terms of financial performance, but the individual worker might experience increased

levels of stress and anxiety (Legge, 1995). We have to take into account conflicting HR-

outcomes in future research on HRM and performance.

Multi-level analysis

Prior research on HRM and performance has been mainly focused on organizational level

analysis. Wright and Boswell (2002) stress the importance of blending research on the

individual employee level (typical OB studies) with research at the organizational level

(typical SHRM studies). Multi-level theories seek to explain simultaneous variance at

multiple levels of analysis (Bowen and Ostroff, 2004). Multilevel analysis is simply

inevitable when looking at the sequence of boxes that reflect the HRM and performance

linkage (Guest, 1997; Becker et al, 1997; Appelbaum et al, 2000). The boxes in the

existing conceptual models implicitly reflect analyses at different levels of the

organization. If we want to know more about, for example, intended HR practices we

20
have to look at the job or employee group level, according to Wright and Nishii (2004),

while if we want to know more about how these practices are perceived by employees we

are in need of data at the individual employee level. Employee behaviour (e.g., employee

turnover, absence) and organizational performance (e.g., productivity, quality) can be

determined at employee group level in some cases and at plant unit level, while financial

performance indicators are probably exclusively available at plant or company level.

Reverse causality

Paauwe and Richardson (1997) observe the risk of overlooking the possibility of reverse

causality in linking HRM and performance. The most obvious form of reverse causality

can be illustrated by the following examples. First, organizations with high profits might

reveal a higher willingness to invest in HRM (e.g., profit sharing schemes, training and

development) than those that are less successful financially. Second, in times of national

or regional economic crisis organizations might have a tendency to recruit less - or in

some cases no - new employees and restrict, for example, training and development

expenditures. The cross-sectional nature of the majority of research on HRM and

performance makes it impossible to rule out these types of reverse causality. But there are

other potential forms of reverse causality (Den Hartog, Boselie and Paauwe, 2004). High

firm performance outcomes (e.g., high profits, market growth) might have a positive

effect on employee satisfaction and commitment. Most people enjoy being part of ‘a

winning team’ and high firm performance also signals organizational health and thus

employment security. In a longitudinal study Schneider, Hanges, Smith and Salvaggio

(2003), for example, find that profitability is more likely to cause job satisfaction than job

21
satisfaction is to cause profitability. Longitudinal research is important for determining

the real effects of HRM interventions on performance.

Challenges for future research

A number of conclusions can be drawn from this overview of research issues. Related to

the concept of HRM we see convergence arising around AMO theory and the associated

set of HR practices. The discussion on best practice versus best fit is an artificial one and

is highly dependent on our own perspective at the ‘surface (context specific)’ or at the

‘underpinning (generic)’ level (Boxall and Purcell, 2003:69). The range of fits analysed

in HRM-research needs to be supplemented by the Person-Organization fit in order to

include perceptions of workers and to be able to differentiate between employee groups.

In measuring performance there should be a clearer focus on more proximal outcomes

and research design should allow for the analysis of HR-practices and outcomes in the

right temporal order (causes should precede effects). Just defining performance in its

contribution to bottom-line financial performance does not do justice to the various actors

(both inside and outside the organization) involved in either the shaping of HRM

practices or affected by it. It is better to opt for a stakeholders’ approach, which also

implies opting for a multi-dimensional concept of performance. Along with corporate or

business strategy, a whole range of other factors play a role in shaping the relationship

between HRM and performance, among which the institutional context is critical. Finally,

we have emphasized the need for multi-level analysis and that more attention should be

paid to the possibility of reverse causality.

22
So, in the process of discussing a whole range of issues we have made a number of

choices, which we think are highly relevant. However, is that enough? Does that justify

the title ‘HRM: What’s next’? Will it take the field forward or is more needed? Below,

we point out two (highly interrelated) topics that need further exploration.

1. HRM as an enabling device for a whole range of strategic options (critical goals):

The Balanced HR perspective

Boxall and Purcell (2003: 7) build a framework for goal-setting and evaluation in HRM

and start by “positing two broad goals for business firms”: (1) viability with adequate

returns to shareholders and (2) sustained competitive advantage or consistent and

superior profitability, the latter representing an ultimate goal beyond the (first) survival

goal. In their model these ultimate business goals can be achieved by meeting critical HR

goals (increased labour productivity, organisational flexibility, and social legitimacy) and

critical non-HR goals (e.g. sales, market share). In previous analysis of HRM and

performance most attention has been paid to the cost-effectiveness element as the

ultimate HR goal, specifically ‘financial performance outcomes’ (Boselie et al., 2005).

We are in need for a more balanced perspective (e.g. Deephouse, 1999), taking into

account both the cost-effectiveness HR goal (represented by labour productivity and

product/service quality), the organisational flexibility urgency, and the social legitimacy

dimension. In a longitudinal study of commercial banks Deephouse (1999) finds

empirical support for strategic balance theory, which states that moderately differentiated

firms – with a balance between an institutional/legitimate focus and a market focus –

23
have higher performance than either highly conforming (emphasis on the

institutional/legitimate dimension) or highly differentiated firms (emphasis on the

market/economic dimension). Strategic balance theory acknowledges the relevance of

both market competition, represented by labour productivity and flexibility in the

framework of Boxall and Purcell (2003), and social legitimacy for firms seeking

competitive advantage. Until now little attention has been paid to the two critical HR

goals of flexibility and legitimacy. These two might turn out to be important for a more

realist perspective in future HR research.

First, based on the increased dynamics of the market place and the occurrence of

organizational change within companies as the new status quo, the goals of strategic

HRM systems (should) also encompass flexibility (Boxall and Purcell, 2003) and agility

(Dyer and Shafer, 1999). Dominated by both resource based and knowledge based views

of the firm, researchers in the field of strategic management increasingly emphasize

topics like absorptive capacity, knowledge management and the need for organisations

being able at the same time to respond to issues of exploitation and exploration. In fact,

the latest trend in the range of popular work systems (after ‘lean and mean’, and ‘high

performance - high involvement’) seems to be the creation of the ‘agile’ organization.

Agility is described as focussing on customer rather than market needs, mass

customization rather than mass or lean production (Sharp et al., 1999). Agility entails

more than just the production system. It is a holistic approach incorporating technical (the

operational system as emphasized by Boxall, 2004) information and human resource

considerations. In essence, an agile organisation (see Dyer and Shafer, 1999) implies a

24
very fast and efficient adaptive learning organisation, encouraging multi-skilling,

empowerment and reconfigurable teams and work designs. Under such a system, HRM

practices focus particularly on employee development, the encouragement of learning

and knowledge management. So, if we have managed to create a workforce which is

eager to learn, displays a willingness to change, is adaptive, flexible, etc., then we have

developed through our HRM systems the kind of knowledge, skills and abilities upon

which we can realize a whole range of strategic options (Paauwe, 2004). Cost

effectiveness (or labour productivity) and organisational flexibility (or agility) mainly

represent the employer’s perspective and do not fully take into account the employee’s

perspective and the societal dimension. Therefore, the third critical HR goal in Boxall

and Purcell’s (2003) basic framework is equally important for this proposed ‘balanced

HR perspective’: social legitimacy. This brings us to the second issue.

Second, creating a cost-effective and agile organisation is possible once we recognise that

employees should be treated fairly. The overall HRM system should be based upon added

value (cost effectiveness and flexibility) and moral values (social legitimacy and fairness

towards individuals), both economic and relational rationality (Deephouse, 1999). The

latter refers to establishing sustainable and trustworthy relationships with both internal

and external stakeholders, based on criteria of fairness and legitimacy (Paauwe, 2004).

Failing to meet objectives of legitimacy and fairness can lead to perceived injustice by

those involved (e.g. employees, managers, works council representatives, trade union

officers) and affect both employee behaviour and social relations within an organisation.

“People care deeply about being treated fairly…the evidence suggests that people can and

25
do distinguish their own absolute outcomes for two key dimensions of justice:

distributive, or how they did relative to others; and procedural, the process by which the

outcome was achieved (Baron and Kreps, 1999: 106).” The meta-analytical review of

organizational justice by Colquitt, Conlon, Wesson, Porter and Ng (2001) shows unique

positive effects of perceived justice (both procedural and distributive) on job satisfaction,

organizational commitment, employee trust and OCB underlining the relevance of

fairness and legitimacy in organizations. Meeting the criteria of relational rationality in

essence implies that managers need to ‘treat their people well’.

So, the signals communicated through HR practices by line managers must be clear

/distinct, consistent, and uniformly applied. Employees must not discern a lack of clarity,

a lack of consistency and a lack of consensus. This brings us to the importance of the

strength of the HRM system (Bowen and Ostroff, 2004).

2. The strength of the HRM system

Bowen and Ostroff (2004) are extremely interested in the relationship between HRM and

performance, and while accepting the evidence that HRM can indeed make a difference

they still wonder through which process this occurs. In order to answer that question they

develop ‘a framework for understanding how HRM practices as a system can contribute

to firm performance by motivating employees to adopt desired attitudes and behaviours

that, in the collective, help achieve the organization’s strategic goals’ (Bowen and

Ostroff, 2004: 204). A crucial linkage in the relationship between HRM and performance

is their focus on organisational climate, which they define as ‘a shared perception of what

26
the organization is like in terms of practices, policies and procedures, routines and

rewards, what is important and what behaviours are expected and rewarded (Bowen and

Ostroff, 2004: 205; referring to Jones and James, 1979 and Schneider, 2000). The

concept helps them to develop a higher order social structure perspective on the HRM –

firm performance relationship, which Ferris et al. (1998) call social context theory views

of the relationship between HRM and Performance. They apply this kind of theorizing to

HRM by emphasizing the importance of processes as well as content of HRM.

By process, Bowen and Ostroff refer to ‘how the HRM system can be designed and

administered effectively by defining metafeatures of an overall HRM system that can

create strong situations in the form of shared meaning about the content that might

ultimately lead to organisational performance’ (2004:206). These metafeatures ensure

that unambiguous messages are sent to employees that result in a shared construction of

the meaning of the situation. So they concentrate on understanding what features of the

HRM process can lead employees to appropriately interpret and respond to the

information conveyed in HRM practices. In this way they apply the concept of strong

situations to the so-called strength of the HRM system, which is a linking mechanism that

builds shared, collective perceptions, attitudes and behaviours among employees.

Characteristics like distinctiveness, consistency and consensus are key process features.

Distinctiveness is built by HR practices, messages, signals that display a large degree of

visibility, understandability, legitimacy and relevance. Here we see the connection with

the importance of values alignment and Person-Organisation fit. Individual employees

must perceive the situation as relevant to their own goals, which should be fostered in

27
such a way that they can be aligned to those of the organization. Of course, a strong

climate or strong HRM system might run the risk of being rigid. However, as Bowen and

Ostroff (2004:215) correctly remark, if the process of HRM emphasises a strong climate

including elements that focus on flexibility, innovation and willingness to change, then

employees will sense and share the idea that adaptability and agility is expected of them.

Final remarks

We are convinced that progress in understanding the relationship between HRM and

performance can be achieved by taking into account all the points made so far. However,

that kind of progress will be piece-meal. Consequently, real progress can only be made

by looking at the broader picture of developments in the field of strategic management,

the speed of change within companies and what this implies for managing people and

stakeholders. How can we achieve flexibility, agility and what is needed in terms of value

alignment at the various levels of analysis? We need to look beyond practices such as

staffing and the management of human resource flows. These are the kinds of hygiene

factors, which if not delivered cost-effectively will lead to underperformance of the

organisation. A real contribution to performance (in its multidimensional meaning) will

only happen once we approach HRM from a more holistic and balanced perspective,

including part of the organizational climate and culture, aimed at bringing about the

alignment between individual values, corporate values and societal values. This will be a

unique blending for each organization, which is difficult to grasp by outsiders (including

competitors) and thus contributes to sustained competitive advantageiii.

28
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 Figure 1 Conceptual model of Becker, Huselid, Pickus and Spratt

Business Design of Employee Produc- Improved Profit Market

& HRM skills tivity operating & value
Strategic System perfor- Growth
Initiatives Employee Creativity mance
moti-
vation Discretio-
nary
Job effort
design
& work
structures

Source: Becker et al. (1997)

36
 Figure 2 Conceptual model of Guest

HRM HRM HRM Behavior Perfor- Financial

Strategy practices outcomes outcomes mance outcomes
outcomes
Effort/
Differen- -selection Commit-
moti- profit
tiation -training High:
vation
(innova- -appraisal ment
Produc-
tion) -rewards
tivity ROI
-job- Coope-
Quality
Focus design ration
Quality Innova-
(quality) -involv-
tion
ement Involv-
Flexibi-
Cost -status & ement
lity Low:
(cost- security
Absence
reduction) Organiza-
Labour
tional
turnover
citizen-
Conflict
ship
Customer
com-
l i

Source: Guest (1997)

37
Figure 3 Conceptual model of Appelbaum, Bailey, Berg and

Kalleberg

HPWS

Opportunity to
participate Effective
Discretionary Firm
Skills
Effort Performance
Incentives

Source: Appelbaum et al.. (2000)

i
The authors would like to thank Patrick Wright, Shad Morris (both at Cornell University), the editor of
this journal and the anonymous reviewers for their helpful comments in drafting the final version of this
paper.
ii
AMO theory focuses on high performance work systems, in which the central elements are Ability,
Motivation and Opportunity to participate, cf. Appelbaum et al., 2000.
iii
In this respect it is interesting to refer to some recent empirical data, as collected among MNC’s in the
so-called Global Human Resource Alliance project. A research project carried out jointly by researchers
from Cornell University, Cambridge University, Erasmus University and INSEAD: A whole range of
internationally operating companies apply at a surface level more or less the same HR principles and
practices (being: talent management, leadership development, performance management, among which
appraisal and rewards, but the real secret among the most successful ones is the alignment of these

38
practices with the dominant value system in the organisation and the way it is being applied in a highly
consistent way, with a high degree of consensus among the different hierarchical levels and being
perceived as distinct and relevant by the employees at various levels in the organisation (being the criteria
of the B/O framework).

39