Forth WEF 4th May slides

Measuring the impact of people management practices on business performance: 

Measuring the impact of people management practices on business performance John Forth (NIESR) Westminster Economics Forum Friday 4th May 2007

The context: 

The context Search for competitive advantage National level: productivity gap Firm level: wide dispersion in firm performance Focus on ‘black box’ “People are our most important asset” Smarter working: the knowledge economy How to maximise the return?

Overview: 

Overview What is ‘people management’? The basic propositions Theoretical perspectives The key questions Various measurement issues Next steps

What is ‘people management’?: 

What is ‘people management’? That part of an organisation’s activities which is concerned with inter alia: the recruitment, development, deployment and reward of its employees Current focus: practices that aim to engender a high degree of employee involvement in the execution and improvement of work processes Aided by practices that aim to ensure that employees have the ability, opportunity and motivation to be productive Labels: ‘high-involvement management’, ‘high commitment management’ or ‘high-performance work systems’ Contrasted with control-oriented methods of work organisation (Taylorism)

The basic propositions: 

The basic propositions Autonomy and variety -> motivation and commitment -> greater effort Collaborative working -> opportunities to share private knowledge -> better problem-solving -> improvements in working methods and quality Sophisticated recruitment and training -> skills to work autonomously and collaboratively Pay linked to performance -> employee identification & fairer distribution of rewards

Perspectives from industrial economics: 

Perspectives from industrial economics Technical efficiency a key determinant of productivity (along with capital deepening) Intangible assets increasingly an important notion The importance of knowledge as a source of competitive advantage, particularly tacit knowledge: Some firm-specific skills The design of work processes How to motivate workers and elicit co-operation Knowledge of markets and customers Knowledge of suppliers Also discussed in terms of human capital, relationship capital and organizational capital

Perspectives from labour economics: 

Perspectives from labour economics Historic concern with skills, incentives and rewards (returns to training, impact of performance-related pay, efficiency wages) More recently also a focus on teams, empowerment, asymmetric information and co-operation Teams allow transfer of valuable, idiosyncractic knowledge Autonomy can strengthen employee’s incentives by giving control over asset allocation Collaborative working can also alleviate monitoring costs through peer pressure

Perspectives from management theory: 

Perspectives from management theory Resource-based view: firms can earn supra-normal rents from superior resources that are: Valuable Rare imperfectly imitable (thro patents or need for sizeable initial investments) non-substitutable. AMO: Performance is a function of: Ability Motivation Opportunity Contingency theory: firms that better align their business strategy and HR activities will perform better than those that do not

Perspectives from psychology: 

Perspectives from psychology The basis of the employment relationship is determined to large extent outside of the legal contract of employment Emphasis on the ‘psychological contract’ based on elements such as: Fairness Respect Trust Loyalty Security HR practices that improve the psychological contract will have a positive impact on performance

Support from many quarters: 

Support from many quarters Many stakeholders have drawn attention to the potential benefits: CIPD-EEF (2003) Maximising Employee Potential and Business Performance: The Role of High Performance Working CBI-TUC (2001) The UK Productivity Challenge DTI (2005) High-Performance Workplaces – Because People Mean Business European Commission (1998) New Forms of Work Organisation OECD (1999) OECD Employment Outlook

Support from many quarters: 

Support from many quarters “What we did was to involve everybody within Jaguar. Previously, we'd involved management and certain staff. We involved everybody on the line, and we found out that the people on the line knew more about the problems and how to fix them than the engineers and the management… The solution was in combining the efforts of all the people at Jaguar: not just the management, not just the engineers, but also the people who actually built the cars. The results were nothing short of stunning.” Sir Nick Scheele (Jaguar Cars)

Some cautions: 

Some cautions Employees are not a passive factor of production: cohesiveness and reciprocity are important HR innovation is likely to be complex and to require continued commitment and a long-term view HR innovation is not a technical process: employees (and managers) may have fears, insecurities and heterogeneous tastes for responsibility or flexibility Managers may not wish to cede control Employees may face prospect of work intensification Employees may resist change (individually or collectively) There may be costs, e.g. training costs; disruption; wage costs

Some key questions: 

Some key questions Which HR practices are most important? How should these practices be configured? What is the scale of the return? Can the benefits be obtained in all firms? What about the costs?

The evidence – an overview: 

The evidence – an overview General conclusion: high-involvement methods have a positive impact on firm performance Research based on a variety of methods Few studies find negative effects But little consensus over the key questions Wood and Wall: “evidence promising, but only circumstantial”

Measurement – an overview: 

Measurement – an overview P = f(H,X) P = a + biHi + cjXj + e for a given sample k = 1…n Consider: Measures of performance (P) Measures of HR practice (H) How to approach b The range of controls or moderators (X) Issues in respect of e Nature of k

P=a + biHi + cjXj + e: 

P=a + biHi + cjXj + e Financial outcomes: stock market measures profitability Organisational outcomes: productivity quality Subjective vs objective measures Employee outcomes: Job satisfaction Commitment / loyalty Turnover/absenteeism Work intensification Timing

P=a + biHi + cjXj + e: 

P=a + biHi + cjXj + e Presence vs coverage vs intensity Rhetoric vs reality: Intended practices Actual practices Perceived practices Attitudinal outcomes Behavioural outcomes Purcell and Kinnie (2006) Bundles or ‘systems’

P=a + biHi + cjXj + e: 

P=a + biHi + cjXj + e Identifying the scale of performance effects from subjective measures Variations in b across firms Contingent effects Impact on the median firm

P=a + biHi + cjXj + e: 

P=a + biHi + cjXj + e Associations vs cause and effect Cross-sectional studies Longitudinal studies HR Performance

The nature of the sample: 

The nature of the sample Single-firm studies Sectoral studies Large-scale surveys Mixed method designs

Evidence: 

Evidence Findings generally positive But findings not wholly consistent Various measurement issues relating to: Measures of performance Measures of HR practice Estimation of average effects Causality Nature of the sample All studies come with caveats due to methodological limitations.

Next steps: 

Next steps More robust identification of cause and effect Greater focus on proximal outcomes More use of employee data More data-sharing and replication to test sensitivity

Measuring the impact of people management practices on business performance: 

Measuring the impact of people management practices on business performance John Forth (NIESR) Westminster Economics Forum Friday 4th May 2007