CHAPTER 1:
AN INVESTMENT
PERSPECTIVE OF
HUMAN
RESOURCE
MANAGEMENT
The Strategic View of Human Resources
1–2
Employees are human assets
Increase in value to organization and marketplace when investments of
appropriate policies & programs are applied
Effective organizations recognize that employees have value
Much as organization’s physical & capital assets have value
Employees are valuable source of sustainable competitive
advantage
Sources of Employee Value
1–3
• Technical Knowledge
– Markets, processes, customers, environment
• Ability to Learn and Grow
– Openness to new ideas
– Acquisition of knowledge & skills
• Decision Making Capabilities
• Motivation
• Commitment
• Teamwork
– Interpersonal skills, leadership ability
Copyright © 2002 South-Western. All rights reserved. 1–4
Valuation of Human Assets
1–5
Implications for Individuals and Organizations
Determination of compensation
Internal and external equity for employees in return for their contributions to
the organization.
Organization placement of resources and returns on employee development
are aligned and well-matched.
Advancement opportunities
Developing current employees creates motivation and permits promotion from
within.
Development of retention strategies
Effective means of retaining valuable employees allows for the recapture of
the invested costs of their development.
Copyright © 2002 South-Western. All rights reserved.
Adopting an Investment Perspective
1–6
• Determines how to best invest in people
• Costs
– Out-of-pocket
– Opportunity
• Human assets become competitive
advantage
• Required skills become less manual,
more knowledge-based
• Appropriate, integrated, strategy-
consistent approach is needed
A Dilemma
1–7
Failure to invest in employees causes
◦ Inefficiency
◦ Weakening of organization’s competitive position
Human assets are risky investment
Require extra effort to ensure that they are
not lost
Exhibit 1-2
Types of Organizational Assets/Capital
1–8
Research Findings
1–9
HR practices directly related to profitability & market value
Primary reason for profitability:
Effective management of human capital
Integrated management of human capital can result in 47%
increase in market value
Top 10% of organizations studied experienced 391% return
on investment in management of human capital
Exhibit 1-3
HR Value Chain
1–10
HR Metrics Are Complex
1–11
HR Metrics: a set of quantitative performance
measures HR managers use to assess their operations
Absence Rate
Cost per Hire
90% of Fortune 500 organizations evaluate HR
operations on basis of three metrics:
◦ Employee retention and turnover
◦ Corporate morale
◦ Employee satisfaction
These metrics do not necessarily illustrate how HR
impacts
◦ Profits
◦ Shareholder value
Features of HR Assets
1–12
Mercer Model of Measuring HR Impact
1–13
• Identify problem HR can impact
• Calculate actual cost of problem
• Choose HR solution that addresses problem
• Calculate cost of solution
• Calculate value of improvement 6 to 24 months after
implementation
• Calculate specific return on investment
• ROI in human assets often not realized until some time in
future
Exhibit 1-4
Factors Influencing Investment
Orientation
1–14
Investment-Oriented Organization
1–15
Organizational Characteristics:
Sees people as central to mission & strategy
Mission statement & strategic objectives espouse value of
human assets in achieving goals
Management philosophy encouraging development &
retention of human assets
Does not treat human assets in same ways as physical assets
Investment Orientation Factors
1–16
Senior Management Values & Actions
◦ Managers need “investment orientation” toward people
Attitude Toward Risk
◦ Investment in human resources inherently riskier
◦ Human assets never absolutely “owned”
Nature of Skills Needed by Employees
◦ The more marketable employee skills, the riskier the firm’s investment in
skill development
Investment Orientation Factors
1–17
Utilitarian (“Bottom Line”) Mentality
◦ Attempt made to quantify employee worth through cost-benefit analysis
◦ “Soft” benefits of HR programs difficult to objectively quantify
Availability of Outsourcing
◦ Given availability of cost-effective outsourcing, investments in HR should
produce highest returns & sustainable competitive advantages.
Reading 1.1: The Hidden Leverage of Human Capital (Oxman)
Model for Management Success
1–18
Strengthen key Leverage downtime
relationships Use variable-pay
Customers Address neglected areas:
Employees
Infrastructure
Marketing
Shareholders Operations
Reading 1.1
Model for Management Success
1–19
Refocusing staff on Building return on
what’s important compensation
◦ Performance management as ◦ Link base-pay progression to
disciplined, strategic, value- competency achievement
added process ◦ Link incentive pay to annual,
◦ Clearly define, differentiate & semiannual, or quarterly results
balance between core
competencies & results
Reading 1.2 (Rynes et al.)
Seven Common Misconceptions
1–20
1. Conscientiousness is a better predictor of
performance than intelligence.
2. Companies that screen job applicants for
values have higher performance than those
that screen for intelligence.
3. Integrity tests don’t work well in practice
because so many people lie on them.
4. Integrity tests have adverse impact on racial
minorities.
( An integrity test is a specific type of
personality test designed to assess an
applicant's tendency to be honest,
trustworthy, and dependable. )
Reading 1.2
Seven Common Misconceptions
1–21
5. Encouraging employee participation is more effective for
improving organizational performance than setting
performance goals.
6. Most errors in performance appraisal can be eliminated by
providing training to managers on how to avoid them.
7. If employees are asked how important pay is to them, they
are likely to overestimate its true importance.
Reading 1.2
Seven Common Misconceptions: Implications
1–22
1. Select new employees on both intelligence and
conscientiousness.
2. Assess intelligence and conscientiousness before values.
3. Define the values that are important and assess them
through carefully developed, valid procedures.
4. Use integrity tests with ability tests for high predictability.
Reading 1.2
Seven Common Misconceptions: Implications
1–23
5. Develop compelling goals; enlist participation and support it
through rewards.
6. Training and feedback are important, but errors are difficult
to eliminate. Top managers should serve as role models in
quality of performance reviews.
7. Attitude surveys are subject to biases; study behaviors as
well as attitudes.
Seven Common Misconceptions
1–24
Seven Common Misconceptions Implications
1 Conscientiousness is a better Select new employees on
predictor of performance than both intelligence and
intelligence. conscientiousness.
2 Companies that screen job Assess intelligence and
applicants for values have higher conscientiousness before
performance than those that screen values.
for intelligence.
3 Integrity tests don’t work well in Define the values that are
practice because so many people lie important and assess them
on them. through carefully developed,
valid procedures.
4 Integrity tests have adverse Use integrity tests with ability
impact on racial minorities. tests for high predictability.
5 Encouraging employee 1–25 Develop compelling goals;
participation is more effective enlist participation and support
for improving organizational it through rewards.
performance than setting
performance goals.
6 Most errors in performance Training and feedback are
appraisal can be eliminated important, but errors are
by providing training to difficult to eliminate. Top
managers on how to avoid managers should serve as role
them. models in quality of
performance reviews.
7 If employees are asked how If employees are asked how
important pay is to them, they important pay is to them, they
are likely to overestimate its are likely to overestimate its
true importance. true importance.
Reading 1.3 (Pfeffer)
Effective HRM Practices
1–26
Employment Security Training & Development
Selectivity in Recruiting Cross-Utilization & Cross-
High Wages Training
Incentive pay Symbolic Egalitarianism
Employee Ownership Wage Compression
Information Sharing Promotion From Within
Participation & Ownership Taking the Long View
Self-Managed Teams Measurement of Practice
Overall Philosophy
Reading 1.3
Effective HRM Practices
1–27
Very few firms will engage in all practices
While these practices are important for success, there are
other determinants as well
Downsides exist
◦ Requires more involvement and responsibility than some employees want
◦ Managers & others may resist them as well
◦ Turnover may result