The HR Practice - Performance The HR Practice - Performance Relationship: Theoretical and Relationship: Theoretical and

Empirical ChallengesEmpirical Challenges

Patrick M. Wright

Cornell University

HR Practices and Performance: HR Practices and Performance: Seminal StudiesSeminal Studies

• Arthur (1992; 1994)

• Huselid (1995)

• MacDuffie (1995)

• Delery and Doty (1996)

HR Practices and Performance: HR Practices and Performance: Some Additional StudiesSome Additional Studies

• Welbourne (1996) +• Youndt et al. (1996) +• Delaney & Huselid (1996) +• Lee & Chee (1996) ?• Huselid, Jackson, & Schuler (1997) +• Shaw, Delery, Jenkins, & Gupta (1998) +• Lee & Miller (1999) ?+• Guthrie (2000) +• Ostroff, (2000) +• Bae & Lawler (2000) +

HR and Firm Performance: HR and Firm Performance: SummarySummary

• Numerous Studies Demonstrate Relationship between HR Practices and Firm Performance

• 1 SD increase in HR practices results in 20% increase in profits per employee

• While promising, there are a number of theoretical and empirical problems with this stream of research

Theoretical ChallengesTheoretical Challenges

• Theoretical FrameworksTheoretical Frameworks– Resource Based ViewResource Based View– Real Options TheoryReal Options Theory

• Specific Theory - Black Box– How Many Boxes?– How Many Variables in each Box?– What’s the Causal Direction?

HR and Sustainable Competitive HR and Sustainable Competitive Advantage (VRIO Framework)Advantage (VRIO Framework)

How do we drive SCA with HR Practices?

The Question of ValueThe Question of RarenessThe Question of ImitabilityThe Question of Organization

The VRIO FrameworkThe VRIO Framework

Is a resource . . . Difficult Supported to by Competitive

Valuable? Rare? Imitate? Organization? Implications Performance

No ---- ---- Competitive Below Disadvantage Normal

Yes No ---- Competitive Normal Parity

Yes Yes No Temporary Above Competitive Normal Advantage

Yes Yes Yes Sustained Above Competitive Normal Advantage

Application of Resource-Based Application of Resource-Based View - ConceptualView - Conceptual

• Wright et al. (1994) – focus on human capital

• Lado and Wilson (1994) focus on practices

• Boxall (1996) - HRA = HCA + HPA

• Lepak & Snell (2000) – HR Architecture

Application of Resource-Based Application of Resource-Based View - SummaryView - Summary

• Human Capital Pool

• Employee Relationships and Behavior

• People Management Practices

Application of Resource-Based Application of Resource-Based View - EmpiricalView - Empirical

• Huselid (1995)

• Koch & McGrath (1996)

• Boxall & Steeneveld (1999)

• Wright, McMahan & Smart (1994)

• Lepak & Snell (in press)

• Richard (2001)

Application of Resource-Based Application of Resource-Based View - SummaryView - Summary

• Empirical work has not directly tested the theory– Path dependence of HR systems?

– HR practices impact on skills/behaviors?

• Weakness of Cross-sectional attempts• Future focus on competencies and capabilities• Assess constructs (causal ambiguity, social

complexity, etc.)

Convergence of SHRM and Convergence of SHRM and Strategy within the RBVStrategy within the RBV

• Core Competencies

• Dynamic capabilities

• Knowledge-based theories of the firm

KnowledgeIntegration

KnowledgeIntegration

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Systems

KnowledgeCreation

KnowledgeCreation

Intellectual Capital

Strategic Capability

People

KnowledgeTransfer

KnowledgeTransfer

Learning and Innovation

FlowFlow

StockStock

ChangeChange

Processes to integrate, reconfigure, gain, and release resources—to match and even create market change. RenewalRenewal

ValuableValuable

RareRare

InimitableInimitable

OrganizedOrganized

Model of Strategic HRM (Wright, Dunford & Snell, 2002)

Other Theoretical Perspectives

• Transaction Costs

• Population Ecology (inertia)

• Institutional Theory

• Real Options

Real Options – A Quick LookReal Options – A Quick Look

• Most SHRM Theory advocates People as a strategic Asset

• Real Assets have both upside value, and downside risk

• Virtually no SHRM research has addressed the downside risk of the human asset

• Currently working on Application of Real Options Logic to SHRM

From Broad to Specific in From Broad to Specific in TheoryTheory

• We have talked about broad organization theories to help us understand the strategic role of HR

• Now we transition to specific theory about the HR – Performance relationship as these relate to empirical studies

Theoretical ChallengesTheoretical Challenges

• Theoretical Frameworks

• Black BoxBlack Box– How Many Boxes?How Many Boxes?– How Many Variables in each Box?How Many Variables in each Box?– What’s the Causal Direction?What’s the Causal Direction?

How Many Boxes?How Many Boxes?

HR Practices

Strategy

HR Practices

Firm Performance

How Many Boxes?How Many Boxes?

Business and Strategic Initiatives

Design of Human Resource Managem’t System

Employee Skills

Employee Motivation

Job Design and Work Structures

Creativity

Product’ty

Discret’nyEffort

Improved Operating Perform’ce

Profit and Grow

Mkt Value

How Many Variables in Boxes?How Many Variables in Boxes?

Business and Strategic Initiatives

Design of Human Resource Managem’t System

Employee Skills

Employee Motivation

Job Design and Work Structures

Creativity

Product’ty

Discret’nyEffort

Improved Operating Perform’ce

Profit and Grow

Mkt Value

Causal Direction

• Reverse Causation– Real Relationship, just reversed

• Spurious Relationship– Real Empirical Relationship, just not causal

• Implicit Performance Theories– No Real Relationship, only imagined and

reported

Causal Direction?Causal Direction?

Firm Performance

Firm Performance

Good Management

Spurious

Reverse

HR Practices

HR Practices

Causal Direction

Firm Performance

Implicit Performance Theories of Respondents

Respondents’ Reports of HR Practices

Implicit Performance Theory

Implicit Performance Theories: Implicit Performance Theories: EvidenceEvidence

• Significant support within the groups and leadership literatures

• Happens when information processing requirements are high

• Demonstrated by showing:– Similar Factor structures between real and simulated

targets

– Performance Effects (e.g., knowledge of performance impacts ratings of behavior)

Information Processing Demands of Information Processing Demands of Completing HR Practice Completing HR Practice

QuestionnairesQuestionnaires • Executive must attend to and understand the information provided about company wide and business unit HR practices

•  Executive must encode and store the information  

• Time delay between the time the information is encoded and retrieved for survey completion

• Information is subject to memory decay

• HR practice information must be retrieved from memory

• Information must be organized consistent with the scope of the survey questions

The Study

• Line and HR; Working and Students (2X2)• Subjects presented with descriptions of high

and low performing companies, then asked to indicate HR practices and HR effectiveness

• Compared factor structure to Huselid (1995)• Expected performance effect, and that it

would be most pronounced for HR/Students

Skills and org. structures

Info.Sharing

e1

AttitudeSurveys

e2

Pay forPerformance

e3

Training

e4

GrievanceProcedure

e5

EmploymentTest

e6

Employee motivation

MeritPromotions

e9

PerformanceAppraisal

e8

MeritPay

e7

10%

20%

30%

40%

50%

60%

70%

80%

90%

High Perf. Low Perf.

Performance Scenario

HR Practice Usage

Non-Experienced

Experienced

FIGURE 2

Performance x Experience Interaction for HR Practice Usage and Evaluation of HR Function

1.5

2.0

2.5

3.0

3.5

4.0

4.5

High Perf. Low Perf.

Performance Scenario

HR Effectiveness

Non-Experienced

Experienced

ImplicationsImplications

• Similar factor structure indicates implicit theories

• Performance effect indicates that knowledge of performance CAN impact ratings of HR

• Surprising that greatest effects for working managers

Theoretical Issues - ConclusionTheoretical Issues - Conclusion

• Still Greater need for application and testing of relevant organizational theories in SHRM

• Need for more specific theory development regarding the process through which HR impacts performance

• Need for better empirical research that specifically tests theory

Empirical Issues in SHRMEmpirical Issues in SHRM

• Lack of Good Theory testing• Measurement Issues

– Unreliability of HR Measures

• Levels of Analysis– Mostly Corporate because there is public

performance information

• Design Issues– Concurrent, not causal designs

HR and Firm PerformanceHR and Firm Performance

• Numerous Studies Demonstrate Relationship between HR Practices and Firm Performance

• 1 SD increase in HR practices results in 20% increase in profits

• Promising, but…..What about Construct Validity?

HR Practices and Reliability

• Random vs. Systematic Error

• Random - Attenuates relationship– .80 rxx ---> rxy*1.25– .50 rxx ---> rxy*2

• Systematic - May inflate relationship

Measurement IssuesMeasurement Issues

• Are measures of HR practices reliable?

• If not reliable, then why do we find an HR-firm performance effect?

• How can we best measure HR practices to be reliable and valid?

Generalizability AnalysisGeneralizability Analysis

• Generalizability analysis seeks to partition error variance into different sources (rater, items, time, etc.)

• It provides implications for the best way to increase reliability (e.g., to add raters or items)

AnalysesAnalyses

• ICC (1,1) - Estimate of the reliability of a single respondent measure

• ICC (1,k) - Estimate of the reliability of an aggregated (across respondents) measure

• Both estimates are essentially interpreted as a percentage of the variance in the measure that is true score variance

Are HR Measures Reliable?Are HR Measures Reliable?

• 14 firms

• Average size approx 40,000 employees

• Surveys of HR practices and HR effectiveness

• Multiple HR respondents for practices

• Also line respondents for effectiveness

ResultsResults

• Avg. ICC(1,1) for practices Best Case

Hourly .204 .418

Managerial .162

• Avg. ICC (1,1) for Effectiveness

.301 .475 (scale)

Why Not Reliable?Why Not Reliable?

• Respondents Don’t Know– Corporate is the wrong place to ask because too

much diversity (geography, divisions, business units, sites, jobs)

– Coverage the wrong way to ask• Advantage - Objective

• Disadvantage - not the way respondents think/focus

• Misses sophistication, specificity, execution

If no Rxx, then why the Rxy?If no Rxx, then why the Rxy?

• Rxx does not have to be too high

• Respondents’ Implicit Performance Theories (I.e., systematic error)

Huselid & Becker’s responseHuselid & Becker’s response

• Organization size was too big

• Organizations were too diversified

• Items were different (policies/practices vs. practices)

• Adding raters with no knowledge is not useful

• Ultimately, it is an issue for future research

Later Paper (Wright et al. 2001)Later Paper (Wright et al. 2001)

• Purpose is to address the call for more research on this issue

• Used data from three different samples, varying from large diversified companies to small work groups

• Examined interrater reliability among HR respondents, employees, and correspondence between HR and employees

StudiesStudies

• Study 1 - 13 large companies, Senior HR and Senior Line respondents

• Study 2 - 225 jobs across 94 banks, HR and incumbent responses

• Study 3 - 190 jobs across 33 business units within one corporation, 17.75 ee’s per job and 1 HR respondent per unit

ExpectationsExpectations

• Expected lowest reliability in Study 1 due to large, diversified nature of the sample, and highest in Study 3, given close proximity and small size

ResultsResults

• Study 1 Average item ICC (1,1) = .42

Average item ICC (1,k) = .60

• Study 2 Average item ICC (1,1) = .16

Average item ICC (1,k) = .26

• Study 3 Average item ICC (1,1) = .16

Average item ICC (1,k) = .71

Average rpb ee-HR = .62

DiscussionDiscussion

• Calls into question usefulness of single respondent measures of HR practices

• Problem with reliability is not sample specific

• Similar results to groups literature, but that literature uses multiple respondents for measures

ImplicationsImplications

• Caution in interpreting effect sizes• More attention devoted to measurement

error– More raters– Better measures of HR practices– Different rating scales– Knowledgeable raters– Alternative data collection strategies

Empirical ChallengesEmpirical Challenges

• Levels of Analysis (Rogers & Wright, 1998)

• Corporate– Most Research (56 of 80 effect sizes)

• Business– Virtually no Research (5 of 80 effect sizes)

• Site– Some Research (19 of 80 effect sizes)

Why so much research at Why so much research at Corporate Level?Corporate Level?

• Story of the drunk and the lamppost

• Focus at corporate level because that is where the performance information is public, and thus, easily available.

Empirical ChallengesEmpirical Challenges

• Firm Performance– Overemphasis on Market Measures (Tobin’s Q)– Few Organizational or Employee measures in

spite of the fact that these are the proximal hypothesized variables impacted by HR

Issues in this RelationshipIssues in this Relationship

• Missing the mechanisms through which HR impacts profitability

• Designs have temporal issues that preclude making causal inferences

Black BoxBlack Box

• Only mediating (moderating) mechanism usually explored has been turnover

• Numerous authors have called for exploring the mediating mechanisms– Dyer and Reeves (1995)– Wright and Gardner (in press)

• A few models of mediation– Becker et al. ( 1997)

Becker et al. (1997)Becker et al. (1997)

Business and Strategic Initiatives

Design of Human Resource Managem’t System

Employee Skills

Employee Motivation

Job Design and Work Structures

Creativity

Product’ty

Discret’nyEffort

Improved Operating Perform’ce

Profit and Grow

Mkt Value

Temporal/Causal ProblemsTemporal/Causal Problems

• Most studies have not used designs to adequately infer causation in the HR-profitability relationship– Guthrie (quasi-longitudinal)– Ichniowski et al (quasi-longitudinal)– Huselid (contemporaneous & predictive)– Delery and Doty (contemporaneous)

Temporal/Causal ProblemsTemporal/Causal Problems

• Unable to assess reverse causation– E.g., are simultaneous correlations reflective of

past performance causing reports of HR practices or of employee attitudes?

Semi-ContemporaneousSemi-Contemporaneous

Jan 1 Jan 1

Measure HR

? ?

Measure of Performance

Overall Conclusions & Overall Conclusions & RecommendationsRecommendations

• Within Industry Studies• Business and Plant Level Studies• Reliable Measures of HR Practices

– Multiple Respondents– More Focused Target (job, site, business)– More specific measures

• Longitudinal/Predictive Studies

• Qualitative Research