HRM and performance: what next?

Jaap Paauwe, Erasmus University

Paul Boselie, Tilburg University
Human Resource Management Journal, Vol15, no 4, pages 68-83

The last decade of empirical research on the added value of HRM, also known as the 'HRM
and performance' debate, demonstrates evidence that H R M does matter (Huselid, 1995;
Guest et al, 2003; Wright et al, 2003). Unfortunately, the relationships are often statistically
weak and the remlts ambiguous. This article reviews and attempts to extend the theoretical
and methodological issues in this debate. Its aim is to build an agenda for future research
in this area. A brief overview of achievements to date is followed by the theoretical and
methodological issues related to what constitutes HRM, what is meant by the concept of
perfomzance and the nature ofthe link between these two. In thefinal section, it is argued that
research designs should start from a multi-dimensional concept of pe$rmance, including the
perceptions ofemployees; and build on the premise of H R systems as an enabling device for a
whole range of strategic options. This implies a reversal of the strategy-HRM linkage.
Contact: Jaap Paauwe, Department of Business Economics, H15-08, Rotterdam
School of Economics, Erasmus University, Burg.Oudlaan 50,3062 PA Rotterdam,
The Netherlands. Email: paauwe@few.eur.nl

E
mpirical results on HRM and performance have been presented in a range
of special issues of international academic journals such as the Academy of
Management Journal, the lnternational Journal of Human Resource Management and,
of course, 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). Eight years
later we observe only modest progress on those three fundamental issues. Boselie et
al (2005) conducted an exploratory analysis and overview of the linkages between
HRM 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, AM0 theory'
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 linkbetween the two and ask ourselves three questions:

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

Based on these three headings J questions, we will be able to categorise the still
unresolved issues and explore possible avenues for research in the future.

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 Jaap Paauwe and Paul Boselie

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), some on the value of HR in terms of
knowledge, skills and competencies (Hitt et al, 2001), several define HRM in terms
of individual practices (Batt, 2002) or systems /bundles of practices (Cappelli 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
directly on employee behaviour in terms of higher motivation, increased satisfaction,
less absence and increases in productivity (Wright et al, 1994). We observe that the
majority of the studies define HRM in terms of HR practices or systems/bundles of
practices. Boselie et a1 (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 HRM. In total they are
able to list 26 different practices, of which the top four 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 (eg Batt, 2002),
namely, to identify and recruit strong performers, provide them with the abilities
and confidence to work effectively, monitor their progress towards 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 of 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 applied
in more than half of all articles published after 2000. In contrast, for the papers using
strategic contingency theory and RBV, more than half 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), while 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 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.

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HRM and performance: what next?

Boxall and Purcell(2003) argue that both streams -best practice and best fit - might
each be right in their own way. Some basic principles, such as employee development,
employee involvement and high rewards, are universally successful, but the actual
design of the HR practice depends to some degree on unique organisational contexts.
The internal context - for example, the nature of the production system (eg assembly
line) - might create restrictions with respect to the successful design of some HR
practices (eg teamwork, performance-related pay), but the external context - for
example, the legislation and trade union influence - might also 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, organisational,
strategic and environmental. Although this is in line with what many other 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 organisation.
That kind of fit is well known under the heading of person-organisation fit (P-0 fit),
which Kristof (1996) defines a s the compatibility between people and organisations
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 emphasise 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 are 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 conceptualisation and operationalisation of HR practices
or systems of practices, we observe little or no attention paid to the degree of coverage
of 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
wales 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 a1 (2000) demonstrate
the low inter-rater reliability between employees, line managers and HR managers. This
is an interesting and highly relevant notion, but difficult to solve since these empirical
results demonstrate fundamental differences between employee groups within an

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 Jaap Paauwe and Paul Boselie

organisation. 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
w i h an organisation depends on factors such as the nature of their jobs (eg production,
techrucal support, administration, management), their professionalbackgrounds (eg level
of education, degree of professionalisation of the occupation) and needs and wants of
individuals (eg degree of employment security, need for challenging tasks).

Intended vs. perceived practices

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 organisation.
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 this has for our understanding of the concept of 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 (eg profits, sales, market share, Tobin’s q, GRATE)

2. Organisational outcomes (eg output measures, such as productivity, quality, efficiencies)
3. HR-related outcomes (ex attitudinal and behavioural impacts among employees,
such as satisfaction, commitment and intention to quit).

Based on the overview by Boselie et a1 (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. This is quite problematic
as financial indicators are being influenced by a whole range of factors (both internal
and external) that 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 (eg profits, market value) and HR interventions
is simply too large and potentially subject to other business interventions (eg 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 a1
(in press) as summarised by Wright and Haggerty (2005). Their literature review
identified 67 empirical studies that analysed the relationship between HR practices
and performance. The great najority of studies used a design labelled post-predictive
because ’...it measures HR practices after the performance period, resulting in those

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HRM and performance: what next?

practices actually predicting past performance’ (Wright and Haggerty, 208

Only a few studies explored the effect of HR practices on performance in the I
way by assessing HR practices at one point in time and relating them to subsr
Performance. This simply means that the majority of studies have ignored a ver]
rule for demonstrating causal relationships (Wright and Haggerty 2005).
Shareholder vs. stakeholder approach
The use of financial indicators emphasises a shareholders’ approach to the c(
of performance, emphasising that HR practices and systems contribute a sus
competitive advantage through enhancing skills and human capital. This assum1
organisations can maintain or create sustained competitive advantage through UI
rare, scarce, inimitable and valuable internal resources (Barney, 1991). HR is a po
potential internal resource that fits this general resource-based view idea (Pa
1994; Wright et a/, 1994; Boxall and Purcell, 2003). The next step in the theory
employees or HR are manageable (manoeuvrable) and developmental. In other 1
HR practices can: (a) increase the value of the human capital pool through develo
(ex skills training, general training, job rotation, coaching) and (b) influence e m
behaviour in the desired direction. The search for the Holy Grail in HRM is the
for those ’best practices’ or ‘best fit practices’ that ultimately result in sus
competitive advantage of the organisation. This can take place only if employr
willing to stay with the firm. Thus, employee commitment in terms of willingr
stay with the organisation and willingness to put in extra effort are very imF
in this context. This is probably why research in the area of HRM and perform:
becoming more interested in creating high commitment work environments th
HR practices or high involvement-high performance work practices (HIWI
HPWPs). The high involvement-high performance work practices perspective (SI
AMO-model) can thus be seen as an extension of the resource-based view.
The aforementioned also implies that we have to look for more proximal ii
of distal indicators of performance. Both organisational outcomes and HR-r
outcomes can be considered more proximal and thus more suited to mea:
performance. However, in this shareholders’ approach, the organisational an
related outcomes are still considered to be a means to an end - ie contribut
bottom-line performance of the firm. Such a financial meaning can be criticis
being ’too limited’ (Truss, 2001: 1123).
The stakeholders’ approach offers a different perspective by emphasisir
objectives of other constituencies with an interest in HRM practices and subst
performance of an organisation. This approach can be traced back to the st
writings of Beer et a1 (1984). More recently, we encounter full support for this apl
by, among others, Boxall and Purcell, (2003: 13) - who define three important gi
HRM, including social legitimacy aimed at bringing about employment citizr
- and Paauwe (2004). The latter argues that the survival of an organisation nc
depends on financial competitiveness but also on its ability to legitimise its exi
towards society and relevant stakeholders of the organisation (qemployees, custc
trade unions, local government). Legitimacy is an important concept for sustainabi
an organisational level, but so, too, is the organisation’s responsibility to the indi
employee and his or her moral values: the concept of fairness. If the relationship be
the employer and the individual employee is out of balance - for example, in the
increased performance pressures without fair pay - employees might feel they are
exploited, resulting in low commitment levels towards the organisation (Paauwe,

72 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO

 Jaap Paauwe and Paul Boselie

FIGURE 1 Conceptual model of Becker, Huselid, Pickus and Spratt

slra tegic system Cwativity pcrfwrnancc

initiative Employer

Jobdesign
and work

Source: Beckwet nl. 1997

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 emphasises outcomes such as labour productivity,
innovation, quality, efficiency gains and flexibility (Boselie ef al, 2005); and on the
other hand the more societal aspect of performance (based on relational or normative
rationality) emphasising legitimacy and fairness (Paauwe, 2004). The latter two can be
operationalised through indicators such as organisational citizenship behaviour (OCB),
commitment, trust, perceived security and perceived fairness.

RELATIONSHIP BETWEEN HRM AND PERFORMANC

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 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 et al’s (1997) model incorporates
seven 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).
Guest’s (1997) model has six 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).
Appelbaum et al‘s (2000) AMO-model links three boxes. The first box covers high-
performance work systems and comprises: (1) ability /skills (eg formal and informal
training, education), (2) motivation/incentives (eg employment security, information
sharing, internal promotion opportunities, fair payment, PRP) and ( 3 ) opportunity to
participate (eg autonomy, team membership, communication).The second box consists
of effective discretionary effort, and the final box reflects the plant performance (eg
quality and throughput time, labour cost per unit of output, operating profit). See
Figure 3 for a visual representation of their model.
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
__.__ ___________
HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 4,2005 73
HRM and performance: what next?

FIGURE 2 Conceptual model of Guest

I
. .____
HRM strategy HRM practice HRM Performance Financial
outcomes outcomes outcomes
Diffc-rmtiation - selection
(innovation) -training Commitment I’rofit
- appraid motivation - Productivity
Focus (quality) - rewards Quality -Quality ROI
-job design Co-operation -Innovation
Cost (cost - involvement Flexibility
reductno,,) - status and Involvement
wrurity -Absence
Organisational -Labour
citimnship turnovcr
- Conflirt
- Customer
cornpla ints
~~ -.-.......-
Source:Guest, 1997

linked to these interventions - for example, attitudinal outcomes (ex employee satisfaction,
motivation, commitment, trust), behavioural outcomes (eg employee turnover, absence),
productivity (output per unit effort) and quality of services or products.
As stated previously, 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
ef a1 (2000), the most commonly used and depicted in Figure 3, does not take strategy
as a starting point, whereas the other two do. So it is worth taking a closer look at the
(non-)relevanceof 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). Iiuselid (1995), for example, does not find
any empirical evidence for increased performance when aligning the overall company
strategy with the HR system of a specific organisation. 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. Organisational 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
FIGURE 3 Conceptual model of Appelbaurn, Bailcy, Berg and Kalleberg
~~ ..
High performance work system
I
Opportunity t o participate .

Skills Effective discretionary effort

Firm pcrformancr
Incentives
. . . ~

Source:Appelbaum rt (11, 2000

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 Jaap Paauwe and Paul B

that companies might use, serving different markets at the same time. For this re
Purcell (2004) argues that instead of trying to define a firm’s strategy in terr
differentiation, focus or cost reduction, it is much more interesting to try and deter
‘...how the firm will deploy its resources within its environment and so satis
long-term goals, and how to organise itself to implement that strategy (Grant,
13)’. Incidentally, this is a more up-to-date definition of what strategic manage
nowadays entails /encompasses (seeGrant, 2005: 19).
Secondly, both Gerhart (2004) and Purcell (2004) underline the complexi
management research in large companies, in particmlar multinational companies (MI
Often, these large companies are conglomerations of strategic business units, each se
its own markets, customers and products/services. Therefore, Gerhart (2004) stater
there are fewer reliability problems with analysis at the plant or unit level.
Thirdly, there is no convincing theory or strong empirical evidence or
possible time-lag between a change in strategy, any subsequent HR interventior
performance. The few studies on PRM and performance that take a longitui
perspective (Paauwe, 1989; d’Arcimoles, 1997; Guest ct a/, 2003) suggest tha
majority of HR interventions have a long-term effect on performance, sometimes ti
up to two or three years before generating effects. Some HRM practices (eg indiv
performance-related pay) might have a direct, short-term effect on performanc
productivity), but most other practices (eg training and development, particip
teamwork, decentralisation) probably have little effect in the short run or (worst
scenario) fail to have any effect. Wright et a1 (1999) asked 70 HR managers to as:
that a major strategic change necessitated a significant overhaul of their firm’!
systems and were asked to estimate the time it would take to design HR system
delivery and implementation (Wright and Haggerty, 2005). Their answers were i
range of nine to 10 months for the design and an additional 10 to 12 months fo
delivery, and then we still need to add further months before the changed HR sys
start to affect subsequent performance.
Fourthly, a whole range of factors other than strategy influence subsequent 1
strategy. Based on an overview of the strategic management literature and its relel
for the HRM-performance relationship, Paauwe (2004) refers to the following
role of the entrepreneur, often also the founder and owner, with his or her prefer1
for HRM policies and practices; difference in cognitive processes of the particil
involved in the strategy-making process, which can give rise to different m
maps and different choices (see also Purcell, 2004); power relationships and the
of resources being controlled by the actors involved, which can give rise to
strategic choices in HRM policies and practices; culture and ideologies of the a
involved, which will also affect the kind of choices in HIM; and, finally, environm
and institutional forces, stemming from trade unions and tripartite or bip;
consultative bodies (government, trade unions, employers’ federations), whicl
have a significant impact on an organisation’s HRM strategy (see below).
Because of this, questions arise about the supposedly dominant role of corp
strategy in defining subsequent HRM strategy. We cannot define strategy
a specific meaning: the field of strategic management itself has shifted to I
internal organisational and implementation issues, empirical evidence is lac
and other factors also play a significant role. So, in the final section of this ar
we downplay the influence of corporate or business strategy on HRM strategy
instead make a strong plea for regarding HRM policies and practices as an en
for a whole range of strategic options (Paauwe, 2004: 99).
~~~~~

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HRM and performance: what next?

Institutional embeddedness and conflicting demands

Paauwe and Boselie (2003) argue that as organisations are embedded in a wider
institutional context, this plays a role in shaping HRM practices and policies.
Institutional mechanisms (eg 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 organisations. Paauwe (2004), for example, argues that most of Pfeffer's (1994)
best practices (eg high wages, employment security, employee participation) are
institutionalised in a country such as the Netherlands. Most of these best practices
are formalised and institutionalised through collective bargaining agreements.
Some industries, for example, prescribe a minimum amount to be spent on training
by every organisation each year, defined in terms of a fixed percentage of the total
labour costs. This formalisation might also have an effect on employees' perception
of these institutionalised practices. Pension schemes, for example, are collectively
arranged in the Netherlands, mainly at industry level. Pension schemes are probably
not considered to be employee benefits and best practices in the Dutch context, as
they would be in a country such as the US. Another example is the best practice
labelled wage compression. The typical Dutch egalitarian culture (ex 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
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 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 (eg 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, decentralisation 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 organisational
level analysis. Wright and Boswell (2002) stress the importance of blending
research on the individual employee level (typical OB studies) with research at the
organisational level (typical SHRM studies). Multi-level theories seek to explain
simultaneous variance at multiple levels of analysis (Bowen and Ostroff, 2004).

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 Jaap Paauwe and Paul Boselie

Multilevel analysis is 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 organisation. If we want to know more about, for example,
intended HR practices we 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 (eg employee turnover, absence) and organisational
performance (eg 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, organisations with high
profits might reveal a higher willingness to invest in HRM (eg profit-sharing schemes,
training and development) than those that are less successful financially. Secondly, in
times of national or regional economic crisis organisations might have a tendency to
recruit fewer - or, in some cases, no - new employees and restrict, for example, training
and development expenditure. 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 et al, 2004). High
firm performance outcomes (ex 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 organisational health and thus
employment security. In a longitudinal study Schneider ef a1 (2003), for example, find
that profitability is more likely to cause job satisfaction than job 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 A M 0 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-organisation 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). Simply defining performance in its contribution to bottom-
line financial performance does not do justice to the various actors (both inside and
outside the organisation) 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 plays a role in shaping the relationship between HRM

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and performance, among which the institutional context is critical. Finally, we have
emphasised the need for multi-level analysis and that more attention should be paid
to the possibility of reverse causality.
So, in the process of discussing a whole range of issues, we have made a number of
choices that we think are highly relevant. However, is that enough? Does that justify
the title ‘HRM: what 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 (eg 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 of a more balanced perspective (eg 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 - 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
organisational 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
emphasise topics such as absorptive capacity, knowledge management and the need
for organisations to be able to respond to issues of exploitation and exploration at the
same time. 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’
organisation. Agility is described as focusing on customer rather than market needs,
and mass customisation 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 emphasised by Boxall, 2003) information and HR
considerations. In essence, an agile organisation (see Dyer and Shafer, 1999) implies
a very fast and efficient adaptive learning organisation, encouraging multi-skilling,
empowerment and reconfigurable teams and work designs. Under such a system,

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HRM practices focus particularly on employee development, the encouragement of

learning and knowledge management. SO,if we have managed to create a workforce
that 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
on which we can realise 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: 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 on added value (cost-effectivenessand 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 relationshps 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 (eg 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 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:
lob).’ The meta-analytical review of organisational justice by Colquitt et al (2001) shows
unique positive effects of perceived justice (both procedural and distributive) on job
satisfaction, organisational commitment, employee trust and OCB, underlining the
relevance of fairness and legitimacy in organisations. 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,
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 HRh4 and
performance, and while accepting the evidence that HRM can indeed make a difference
they still wonder through which process h s 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 organisation’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 the
organisation 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 Scheider, 2OOO). 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 theorising to HRM
by emphasising the importance of processes as well as content of HRM.

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HRM and performance: what next?

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. Thus, they concentrate on understanding what features
of the HRM process can lead employees to interpret and respond appropriately 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 such as distinctiveness, consistency and consensus are key process
features. Distinctiveness is built by HR practices, messages and 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 such a way that they can be aligned to those of the organisation.
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 piecemeal. Consequently, real progress can be
made only 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 HR 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 happen only once we approach HRM from a more
holistic and balanced perspective, including part of the organisational 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 organisation,
which is difficult to grasp by outsiders (including competitors) and thus contributes
to sustained competitive advantage.2

Acknowledgements
The authors would like to thank Patrick Wright, Shad Morris (both at Cornell
University) and the anonymous reviewers for their helpful comments in drafting the
final version of this article.

Notes
1.A M 0 theory focuses on high performance work systems, in which the central
elements are ability, motivation and opportunity to participate: cfAppelbaum et al, 2000.

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_._____-. . ~ . ~ _ _ _ _ _ -

2. In this respect it is interesting to refer to some recent empirical data, as collected

among MNCs in the so-called Global Human Resource Alliance project carried out
jointly by researchers from Cornell University, Cambridge University, Erasmus
University and INSEAD. These show that a whole range of internationally operating
companies apply at a surface level more or less the same HR principles and practices
(talent management, leadership development, performance management, including
appraisal and rewards), but the real secret among the most successful ones is the
alignment of these 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 perceived as distinct and relevant by the
employees at various levels in the organisation (the criteria of the B/O framework).

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