European Management]ournal Vol. I4, No. 6, pp.

628-637, I996

Pergamon
80263-2373(96)00059-X

Copyright I996 Elsevier Science Ltd

Printed in Great Britain. All rights reserved
0263-2373/96 $17.00 + 0.00

The Impact of Human

Resource Management on
Organisational
Performance:
Theory and Research
JEAN-MARIE HILTROP, Senior Partner, InterCultural Consulting, Geneva

This article by Jean-Marie Hiltrop, considers some

of the models which have studied the link between
HRM and organisational performance. As yet, there
is little real evidence, but it is growing and indicates
that corporate HRM policies and practices - including 'best' practices are associated with high

(financial) performance, and can encourage employee behaviour and attitudes towards strengthening the competitive strategy of an organisation. But
such 'best' practices can vary widely and even
contradict each other. Questions are raised in the
article about these 'best' practices.
The first part of the article
looks at the relevant
theoretical models, and
the second part reviews
the findings of recent
empirical studies which
have evaluated the effects
of distinctive HR practices on organisational
outcomes. Copyright
1996 Elsevier Science Ltd

Introduction
In recent years, there has
been a great deal of debate
about the nature of the
relationship between personnel practices such as
selection,
training and
development and organisational strategies (Walker,
1980; Fombrun, 1984). This
debate has led to the
formulation of various
628

European ManagementJournalVoL14 No 6 December 1996

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

models and theories of 'strategic' HRM that postulate

explanatory links between HRM and organisational
performance. For instance, in their book on organizational capability, Ulrich and Lake (1990) argue that
'building better products or services, pricing goods or
services lower than the competition, or incorporating
technological innovation into research and manufacturing operations must today be supplemented by
organisational capability - the firm's ability to manage
people to gain competitive advantage. Merely hiring the
best people does not guarantee organisational capability.
Hiring competent employees and developing those
competencies through effective human resource practices, underpins organisational capability. Developing it
does not happen by quick fixes, simple programmes, or
managerial speeches. It involves adopting principles and
attitudes, which in turn determine and guide behaviour.
It is a way of thinking as well as acting, and it begins
with the realisation that there is a strong link between
competitiveness and effective people management' (p.
77). Like Guest and Hoque (1994), I suspect that many
managers would agree with this argument but are unsure
about whether such a view stands up to scrutiny.
This article reviews and discusses some of the models
and studies that have explored the link between HRM
and organisational performance. The overall conclusion
is that while there is a growing body of evidence that
certain types of HR practices are associated with high
(financial) performance, the list of 'effective' practices
varies from study to study and the effects are often not
very strong. Practices such as teamwork, performancerelated pay and decentralised decision-making are
highlighted regularly in recent research as the key
processes leading to competitive advantage (Pfeffer,
1994; Marchington, 1995). But from there the lists of
'effective' HR practices vary widely and even contradict
one another. Devising such a list may, in fact, be
impossible. In the second part of the article, the findings
of recent studies are reviewed that sought to assess the
effects of distinctive HR practices on organisational
outcomes. First, however, let us take a look at a number
of theoretical models that have made this link explicit.

Contingency Models of HRM

Throughout the 1980s and early 1990s, academics have
proposed a number of models and theories that postulate
explanatory links between HRM and competitive
advantage. One of the most documented models,
strongly associated with the Michigan Business School,
was outlined by Fombrun et al., (1984) and highlights the
importance of what has been called a 'contingency'
approach to HRM. Early interest in this approach
emphasised the importance of developing 'appropriate'
HRM systems that are consistent with broad
organisational requirements such as quality enhancement
or productivity improvement. The underlying assumption is that organisational effectiveness depends on there
being a tight 'fit' between human resource practice and
EuropeanManagementJournalVo114 No 6 December 1996

business strategies. As Sparrow and Hiltrop (I994) say:

'Different HRM practices serve to elicit and reinforce the
appropriate behaviours in the organisation. These 'role'
behaviours cut across the specific skills, knowledge and
abilities that are required to perform particular tasks.
They are considered as instrumental in the
implementation of competitive strategies. HRM
strategies are all about making business strategies work'.
The practices that Fombrun et al. (1984) felt to be the
most important in achieving this 'fit' are selection,
performance, appraisal, rewards and development. To
make them work, these four areas of HRM policy have
to be both externally consistent, so that HRM practices
are linked with the business needs of the organisation, as
outlined in the previous section; and internally coherent,
in order to emphasise the co-ordination and creation of
congruence among various HRM practices. This dual
alignment is deemed critical to channel behaviours and
create a dominant value or culture in the organisation
that enables the effective implementation of strategy
(Wright and McMahan, 1992).
Throughout the 1980s there were a number of variations
along this theme of 'strategic fit' (Lengnick-Hall and
Lengnick-Hall, 1988). One of the clearest expositions
and developments of this theme was given by Schuler
and Jackson (1987). In their model, HRM is seen as a
menu of strategic choices to be made by HR executives
intended to promote the most effective role behaviours
that are consistent with the organisation strategy and are
aligned with each other. The model's starting points are
the generic competitive strategies outlined by Porter
(1980) - i.e. quality enhancement, innovation and cost
leadership or reduction. For each strategy, Schuler and
Jackson developed a set of 'needed role behaviours'
which vary across a number of dimensions and then
stipulated a set of human resource practices that are
needed to bring about these behaviours. For example, an
organisation that adopts an innovation strategy needs to
foster behaviours that are creative, have a long-term
focus, a relatively high level of co-operation and
interdependence, a moderate concern for quality and
quantity, attention to both the process and the results, a
high degree of risk taking and a high tolerance of
ambiguity and unpredictability. In order to foster these
sorts of behaviours, it is argued, the organisation needs
job specifications that define close interaction and coordination among groups of individuals; performance
appraisal systems that reward group-based achievements; compensation systems that emphasise internal
equity rather than market-based pay; and broad career
paths to reinforce the development of a wider range of
skills.
Another perspective of the linkage between business
strategy and HRM is Miles and Snow's (1984a) model of
organisational adaptation, which deals with alternative
ways in which organisations define their product-market
domains (strategy) and construct mechanisms (structures
and processes) to pursue these strategies. Briefly, Miles
and Snow suggest that there are four basic types of
62 9

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

organisational strategies which they term 'Defender',
'Prospector', 'Analyser' and 'Reactor'. Each strategy has
its own unique organisational features and supporting
characteristics. For example, Miles and Snow (1984b)
suggest that the basic HRM strategy of Defenders will
be to 'build' human resources, as opposed to 'acquiring'
or 'allocating' them. This means that a defender company
typically engages in little recruiting above entry level,
with selection based on 'weeding out undesirable
employees', while training and development involves
extensive, skill-building programmes. In contrast,
Prospectors typically seek to buy in talent - a strategy
that should involve sophisticated recruiting at all levels
of the organisation, limited training, and extensive
psychological testing before hiring. By implication,
Miles and Snow suggest that analysers should match
their HRM strategy to the nature of the product-market,
and thus engage in 'make' or 'buy' HRM approaches as
appropriate to the different product-market domains.
The contingency-based models of HRM serve to
highlight the importance of ensuring that there is some
sort of coherence and consistency across a range of
human resource policies and practices in order to speed
up the implementation of any strategic change. The
prescriptions are however highly culture-bound and
generally only tested against US organisations. For
example, Jackson, et al. (1989) used surveys to
investigate the relationship between organisational
characteristics and personnel practices in 267 US
organisations. Such conceptions of HRM tend not to
fit easily with the European situation. Moreover,
contingency models of human resource management
tend to cast HRM in a reactive mode, seen as only
serving the efficient implementation of a pre-conceived
and rational strategy. This asks too little of HRM and
ignores the contribution that it can make to the
formation of strategy. Contingency models also assume
that generic typologies of strategy such as those
articulated by Porter (1980, 1985) are a valid starting
point. They are not. Generic strategies tend not to be as
mutually exclusive as asserted and the process of
strategy implementation is often one that creates its
own learning about HRM. The approach tends to
underestimate the importance of incremental processes
of strategy-making and strategy-change (Pascale and
Table 1

Athos, 1982). There is also a problem with the choice of

content areas for HRM. For example, the four policy
areas of selection, appraisal, rewards and development in
Fombrun's (1984) model seem to ignore important areas
such as the design and organisation of work and the role
of industrial relations. In addition, the whole idea of 'fit'
seems inappropriate for a world in which there are high
levels of dynamic and unpredictable change. Strategic
planning is in reality a multi-stage and multi-level
process. At what point and what level is an assessment
of fit best made? It is not surprising that in reviewing this
first approach Hendry and Pettigrew (1986) conclude:
'the contingency framework readily led to prescriptive
theorising, especially when linked to typologies of
strategy, 'culture' itself tended to be treated as a
manipulable variable, and people tended to get excised
from the equation' (p. 23).
Finally, while strategic integration is necessary in order
to provide congruence between business and human
resource strategy, integrating the two is easier said than
done for the following reasons (Cooke, 1992):
: The different levels at which organisational
strategies are formulated and the different
strategies adopted in diversified companies make it
difficult to develop a coherent view of what sort of
HR policies and practices will fit the overall business
strategy, and what types of contributions are
required during the process of business strategy
formulation.
: The evolutionary nature of business strategy makes
it difficult to pin down the appropriate HR policies.
o:* The absence of written business strategies adds to
the problems of clarifying the strategic business
issues which HR strategies should address.
o:o The qualitative nature of many HR issues such as
commitment, motivation and employee relations
may hinder the formulation and monitoring of HR
policies and practices.
These are serious problems and it may be difficult for the
HR strategist to overcome them completely. It must be
remembered, however, that integrating HRM into an
overall strategic thrust may be highly desirable. For example, when British Airways embarked on a programme

A r g u m e n t s For and Against a Matching or Contingency Approach to HRM

Arguments For

Arguments Against

1.

1.

2.
3.
4.

5.

Management personalities, skills and styles must

be selected to match different situations.
As business needs change, so must people.
Behaviours need to be channelled through appropriate
pay appraisal systems.
A contingency approach facilitates the use of different
approaches to employee relations in different parts
of the business.
It reduces the importance of questions about
culture, style and non-economic issues.

2.
3.
4.

5.

It a s s u m e s a rigidity of personality and stereotypes

managers.
It requires an unrealistic precision in selection systems.
It c r e a t e s a n unrealistic requirement for mobility and
flexibility.
Training, job rotation and rewards can be used to
develop a broad repertoire of behaviours in
managers.
The strategy process and business differentiation is
never really based on situational contingencies.

Source: Sparrow and H iltrop (1994).

630

EuropeanManagementJournalVo114No 6 December 1996

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

of sustained growth and globalisation, it developed an

integrated HR strategy aimed at achieving significant
cultural change in five main areas - communications,
management style, reward management, customer
satisfaction, and employee relations. The links between
each aspect of this strategy were emphasised in
extensive training programmes and new communication
channels were developed and used to ensure that everyone knew the new business strategy and requirements.

A 'Multiple-stakeholders' Perspective
A second view of strategic HRM emanates from the
Harvard Business School. This model was first articulated
by Beer, et al., (1984) and has tended to find greater favour
in Europe, particularly in the UK (Hendry and Pettigrew,
1990; Poole, 1990). It concentrates more on the softer
issues of strategic management, and given its roots in the
human relations tradition, stresses the 'human' aspect of
human resource management. In defining HRM as
involving all those management decisions and actions
that affected the nature of the relationship between the
organisation and the employee, the model argues that
historical problems of personnel management can only be
solved when general managers develop a philosophy or
viewpoint about how they wish to see employees
involved in and developed by the organisation. This
central philosophy can only be provided by general
managers to ensure that personnel management activities
do not simply become a set of uncoordinated activities,
each guided by its own tradition.
The model postulates a range of different stakeholder
interests such as shareholders, management, employee
groups, government, the unions and the community.
Although management are seen as having the upper
hand, the importance of 'trade-offs' between the owners,
employees and various employee groups is recognised,
as are mechanisms for reconciling employee interests
with the objectives of management. The model is not
solely limited to the American experience as, for
example, some attention is given to European models
of co-determination (Boxall, 1991). It also builds on the
matching model of Fombrun et al. (1984) by describing a
much broader range of content for HRM policy coordinators. The actual content of HRM is described in
relation to four policy areas:
1.

2.

3.

Activities involved in managing the flow of people

at all levels into, through and then out of the
organisation i.e. recruitment, selection, placement,
promotion, appraisal and assessment, promotion,
termination and various other forms of outflows.
Activities necessary to ensure that reward systems
are designed and operate in a way that attracts,
motivates and retains employees at all levels in the
organisation. It includes pay systems, motivation,
and benefits.
Management of levels of authority, responsibility
and power that are voluntarily delegated or

European Management Journal Vo114 No 6 December 1996

involved in decision-making within the organisation.

4. Definition and design of work and the way in which
people, information, technology and activities are
arranged in order to provide the most appropriate
outcomes.
Each policy area represents a series of major tasks that
managers must attend to. The attraction of this model
lies in both the breadth of content covered by these
policy areas and the emphasis it gives to developing
broad patterns of activity.
In considering whether an HRM policy enhances the
performance of the organisation, the well-being of
employees, or the well-being of society, Beer et al.
suggest the following four generic questions:
1.

2.

3.

4.

To what extent do HRM policies enhance the

commitment of people to their work and
organisation?
To what extent do HRM policies attract, keep, and/
or develop people with skills and knowledge needed
by the organisation and society, now and in the
future?
What is the cost effectiveness of a given policy in
terms of wages, benefits, turnover, absenteeism,
strikes, and so on/
What levels of congruence do HRM policies and
practices generate or sustain between management
and employees, different employee groups, the
organisation and community, employees and their
families, and within the individual?

While these all sound sensible enough, this specification

of desired outcomes makes the model highly
prescriptive. Not all organisations may use this language
or wish to achieve these particular outcomes. However,
the model allows for analysis of these outcomes at both
the organisational and societal level. It also
acknowledges a broad range of contextual influences
on management's choice of HRM activities. The
employment relationship is seen as a blending of
business and societal expectations. Although business
strategy has a major role to play, a number of other
factors such as socio-cultural considerations - including
patterns of unionisation, labour market regulations,
workforce characteristics, and community values are
included in the equation. Unlike the 'contingency'
models which point to a strong determination of HRM
action by the situation and the environment, the multiple
stakeholders model argues that managers are major
actors, capable of making unique contributions and
altering the organisational and environmental
parameters that influence HRM activities.

Contextual Approaches
The approaches and models discussed so far were
developed by North American scholars and may reflect
the US value system. Guest (1990), for instance, has
631

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

argued that the concept of HRM is as American as apple

pie. Consequently, in the 1980s there was a vigorous
debate about the relevance and adaptability of such
models to the European situation. In addition, academics
from the 'industrial relations' tradition have debated the
concept of HRM in the context of political change, a
shift in power from unions towards management, and
the threat of a mere re-labelling (with little substantive
change) of the role of the personnel function. They argue
that the concept of HRM is directed solely at
management needs and driven by their interests. As
personnel management adapt to the new circumstances
it will again rise in importance as a mediating discipline
that balances management demand with issues of supply
and the employee interest. Finally, the contingency and
stakeholder approaches have been criticised on the
grounds that:
,' Strategy should not really be seen as a ready-formed
output to which HRM can be easily moulded. It is
quite possible that changes in structure, culture or
other areas of HRM can precede strategy change
and therefore shape the way that the organisation
thinks about strategy.
~ Changes in strategy and HRM tend to occur over a
long time scale. This makes the process of change of
as much interest as the content of change. HRM
systems should not be designed in an overly rational
way when the processes that raise the need for them
are anything but rational.
o,'o It is not appropriate to label HRM as a single form
of activity. Organisations may follow a number of
different pathways in order to achieve the same end
result.
o~o Any analysis of HRM requires a sensitivity to
management of change processes, as well as an
understanding of the history (often over a 15 to 20
year time period) of how the organisation has
developed.
Building on the human resource policy framework
provided by the Harvard group, researchers at the
Centre for Corporate Strategy at Warwick Business
School therefore developed an understanding of
strategy-making in complex organisations and related
it to the ability to transform HRM practices. Their model
adopts the Harvard researcher's description of HRM
content (see the four policy areas outlined previously),
includes the need to consider the external business
environment and strategy, and builds in a requirement to
understand the culturally-unique role of the HRM
function in terms of:
~ the definition of its responsibilities,
o~- its perceived competence across a range of activities,
~- the way the function is organised.
To examine the link between strategic change and
transformations in the way in which people were
managed, the researchers conducted empirical
investigations of over twenty leading UK organisations.
(Hendry and Pettigrew, 1986, I990; and Hen&y,
632

Pettigrew and Sparrow, 1989). Their results showed

that:
I.
2.

3.

4.

5.
6.

A number of leading UK organisations were indeed

undergoing a transformation in the way they
managed people.
Business change was the 'necessary condition' and
primary driving force behind new patterns of HRM.
However, there were also a number of important
political and process considerations to bear in mind.
Business changes brought about by acquisitions,
mergers, internationalisation, new technology, new
products or customer requirements for quality and
service acted as 'triggers' for new HRM activities, as
did large scale reductions in headcount to achieve
productivity
improvements,
labour
market
shortages, high levels of employee turnover, the
need to upgrade recruitment or a requirement to
meet rising career aspirations.
The contours of the strategic changes in HRM
experienced by organisations in the 1980s were
generally unclear at the outset. For many
organisations there was a strong element of
'learning by doing'.
The role of corporate leadership and 'HRM
champions' in bringing about successful change
was also significant.
Responsibility for the new HRM activities was
devolved increasingly to line management.
However, in order for the changes to 'take root' in
the
organisation and become 'stabilised',
organisations had to have already established a
number of activities such as: appraisal systems to
identify development needs; human resource
planning systems; integrated recruitment and
training; graduate intakes to accelerate development
in the organisation; open and continuous career
paths; and HRM budget relief mechanisms.

With regard to the effect of HR practices on

performance, the research revealed a range of conceptual
and process skills that were necessary in order to be able
to both understand the importance of HRM and manage
the changes it implied, such as:
,' A perception and understanding of the connections
between business and HRM needs.
o~o Diagnostic skills to audit and take stock of existing
skill bases in organisations in the light of anticipated
business and technological changes.
o~o Sensitivity to the changing internal situation during
major periods of change.
~ Political skills to mobilise the internal and external
forces of change, creating increasingly selfreinforcing patterns of HRM.
These characteristics helped managers change the
patterns of HRM within their own organisations. Whipp
(1991) later extended the analysis to organisations such
as Chrysler UK/Peugeot Talbot, Kleinwort Benson,
Longman Publishing, Prudential Corporation and Jaguar
Cars.
EuropeanManagementJournalVo114 No 6 December 1996

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

A Resource-based Perspective of the

Link between HRM and Organisational
Performance
The notion that the human resource policies and
practices of the firm have implications for the creation
of competitive advantage by providing the organisation
with a unique source of talent that is difficult to replicate
has been prevalent for many years. Recently, however,
interest in this notion has intensified as academics and
practitioners have explored ways to put this notion into
practice. For example, Bailey (1993) argued that human
talent is often 'under-utilised' and that organisational
efforts to elicit discretionary effort from employees are
likely to provide a source of competitive advantage that
cannot be easily replicated by competitors. Bailey argued
that certain HRM practices such as basic skill training,
coaching, mentoring and incentive compensation can
affect such discretionary effort through their influence on
employee skills and provide employees with the
competencies that are needed to yield returns in excess
of any relevant costs.
The effectiveness of even highly-trained people will be
limited, however, if they are not motivated to perform.
Consequently, effective HRM practices should affect
employee motivation through organisational systems
and cultures that encourage them to improve how their
roles are performed. Examples of firms' efforts to
enhance employee motivation include the use of 360
degree performance appraisals, performance related
compensation, the use of non-financial reward schemes
that recognise employees' high performance, and other
forms of incentives intended to align the interests of
employees with those of the organisation.
Finally, it is clear the contribution of even highly skilled
and motivated employees will be limited if jobs are
programmed or structured in such a way that employees
do not get the opportunity to use their skills and abilities
to improve their performance. Consequently, HRM
practices can also create competitive advantage through
provision of organisational structures, leadership and
work conditions that encourage initiative and creativity
among employees and allows them to find ways to
improve how their jobs are performed. Delegation,
cross-functional
teamwork
and
participative
management are examples of such conditions.
Thus, the theoretical literature clearly suggests that the
HRM practices of the organisation have important
implications for the firm's competitive advantage
through their influence on employees' skills, motivation
and opportunity to improve their performance. The
presumption in both this literature and the emerging
conventional wisdom is that more effective HRM
systems and practices, which simultaneously increase
the skills, motivation and freedom of employees are
sources of sustained competitive advantage that provide
a significant contribution to the firm's financial
performance. Unfortunately, very little empirical
European Management JournalVo114 No 6 December 1996

evidence supports such a belief. What empirical work

exists has largely focused on individual 'best' practices to
the exclusion of overall HRM systems or approaches
(Huselid, 1995).

Best Practice Models of HRM

A fifth set of HRM models suggests that, although there
is 'no one best way' to manage people, organisations
which are adapting most successfully to the new social
and economic environment tend to be characterised by a
similar set of HR policies and practices. The major,
individual items typically mentioned in these 'bestpractice' models are:
~ relatively well-developed internal labour market
arrangements (in matters of promotion, training
and individual career development);
,' flexible work organisation systems;
o~ performance-based and/or skill-based compensation

practices;
o~'o high levels of teamwork and employee participation
in task-related decisions;
o'~ extensive internal communication arrangements.
The particular organisations which are typically held to
come closest to this profile are Japanese plants or
greenfield site operations. It is, however, widely
conceded that very few organisations are doing all
these things or do them all equally well. This may be
inevitable because of the inherent contradictions in
HRM. For example, Legge (1989) in querying the
concept of HRM, identified multiple and often
competing meanings in such desired values as
commitment to organisational objectives, career goals,
work group and family concerns. As she points out, 'if
we assume that HRM emphasises high standards of
performance and quality of product/service, individuals'
job commitment would seem important, along with their
desire to develop their skills and competencies. But the
higher the level of commitment to a particular set of
skills, arguably, there may occur a decrease in an
employee's preparedness to be flexible as between jobs,
or willing to accept a redefinition of a job that might
diminish elements to which a commitment has been
made' (p. 35).
This said, a number of US studies have concluded that
specific HR practices seem to characterise companies that
are especially effective in achieving competitive
advantage. For example, in a recent study of 'what
effective firms do with people', Pfeffer (1994) enumerates
sixteen distinctive management practices. They are
security of employment, coupled with the list of
activities listed in Table 2.
Many of these practices seem like fads because they are
often implemented without much understanding of the
underlying principles of human behaviour as well as a
tendency to do whatever is popular at the moment,
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IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

Table 2
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

What Effective Firms do with People

Financial incentives for excellent performance.

Work organisation practices that motivate employee
effort and capture the benefits of know-how and skill.
Rigorous selection and selectivity in recruiting.
Higher than average wages.
Employee share ownership plans.
Extensive information sharing.
Decentralisation of decision-making and empowerment.
Work organisation based on self-managed teams.
High investment in training and skill development.
Having people do multiple job and job rotation.
Elimination of status symbols.
A more compressed distribution of salaries across
and within levels.
Promotion from within.
Along-term perspective.
Measurement
of
HR
practices
and
policy
implementation.
A coherent view of the employment relation.

Source: J. Pfeffer (1994).

regardless of whether it makes sense in the specific

setting or organisation. However, as Pfeffer (1994)
points out, this trendiness does not necessarily mean that
the practices or the principles on which they are based
are false or useless. Indeed, what is so striking is how
stable basic ideas of how to manage people have been
over time.

communication, management style, career development,

performance management, working hours and employee
participation. For each area, respondents were asked to
indicate, on a five point Likert scale, to what extent they
agreed with a number of statements, such as 'A job
candidate's creativity is an important part of the
selection process at our company' and 'Salary increases
are definitely based on job performance at our company'.
As predicted, a strong positive correlation was found
between HRP and nearly every financial indicator. For
instance, the correlation coefficient between HRP and
profit margins was 0.37. This was illustrated by the fact
that highly progressive companies had an annual profit
growth of 10.8 per cent, compared to only 2.6 per cent
in the less progressive companies. After analysing the
financial data, Kravetz (1988) concluded that 'companies
that are low in HR progressiveness could add an extra
$56 billion to their profits each year by increasing their
profit to the levels of the highly progressive ones. That
is a tremendous potential, and the evidence strongly
suggests that human resource progressiveness is the way
to achieve it' (p. 43).
Another startling conclusion comes from a study by
Schuster (1986). After researching the management
structures and practices of 592 Fortune 1000 companies
in the US, Schuster identified six 'innovative' HRM
practices which were he thought to be related to the
general organisational philosophy which Peters and
Waterman (1982) termed 'attention to people'. These six
practices were:
I.

The Research Evidence

The theoretical literature clearly suggests that there is a
strong relationship between an organisation's HRM
practices and performance. But is this supported by
empirical studies? And if this is so, which practices are
associated with what aspects of performance?
Although there are several methodological problems
with the studies that have tested the link between HRM
and organisational performance, the results are
encouraging. And although we are a long way from
proving that specific HR policies and practices are
causing better outcomes, the evidence is beginning to
accumulate that employers who use HR management
practices creatively and strategically are able to attract
and retain more talented people, thereby contributing to
organisational performance (Guest and Hoque, 1994).
For example, Kravetz (1988) conducted a survey of 150
Forbes 500 companies to examine the relationship
between 'Human Resource Progressiveness' (HRP) and
a variety of financial measures drawn from Standard &
Poor's Compustat Services, such as five-year growth in
sales, five-year growth in profits, and P-E ratio for the
latest twelve months. HRP was measured by asking the
vice presidents of human resources of each company in
the survey to complete a fifty-one item questionnaire on
human resource policies and practices in the areas of
634

2.
3.
4.
5.
6.

the assessment centre approach to personnel

selection;
flexible or 'cafeteria' approach in reward systems;
productivity bonus plans;
goal-oriented performance appraisal;
alternative work schedules; and
organisational development.

Senior human resource executives in each of the 592

companies were asked to indicate whether or not each
practice had been put into use, reasons for use (or
nonuse), and an evaluation of how successful each
practice had been in accomplishing the objectives for
which it was implemented. The general hypothesis was
that the greater the number of 'innovative' practices, the
more 'people-oriented' the management philosophy, and
the more effective the organisation. The results
supported this hypothesis. For instance, the average
return on equity of those firms using one or more of the
practices was 11 per cent higher than the return of those
firms not using any of the practices. The total utility of
the six practices for the average Fortune 1000 company
was estimated at $7.5 million per year (Schuster, I986).
Table 3 summarises the main conclusions of eight other
studies that have examined the influence of HR practices
on organisational performance. Although the findings
are promising, there are several problems with this type
of research. One obvious criticism is that these results do
not prove that innovative or progressive HRM practices
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IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

Table 3 Exploring the Effects of HRM Practices on

Organisational Performance

Ichniowski,

Shaw and Prennushi (1993), using

longitudinal data from 30 steel plants, found a positive
link between the use of 'cooperative and innovative'
HRM practices and productivity.
Terpstra and Rozell (1993) found a significant and
positive link between the extensiveness of recruiting,
selection test validation, and the use of formal selection
procedures and firm profits.
Russell, Terborg and Powers (1985) found a significant
link between the adoption of employee training
programmes and financial performance.
In a British study of new workplaces, Guest and Hoque
(1994) found that those establishments which have a
coherent and clearly articulated HRM strategy and have
a large number of practices in place that are likely to
promote commitment, also have superior quality and
productivity than those that either have no strategy or an
absence of such practices.
Huselid (1995) used data from a sample of nearly one
thousand US firms to examine the impact of HRM
practices on turnover, productivity and corporate financial performance. He concluded that the use of 'High
Performance Work practices' (including comprehensive
employee recruitment and selection procedures,
incentive compensation and extensive employee
involvement and training) have a statistically significant
impact on both intermediate employee outcomes
(turnover and productivity) and short- and long-term
measures of corporate financial performance.
Cook and Ferris (1986) compared the nature of human
resource management practices in high- and lowperforming firms within their industries that were
experiencing decline. They found that the human
resource practices of high-performing firms reflected a
longer-term focus, consistent with the firm's strategy,
and more horizontal integration among the different
activities within the human resource function. The high
performers also tended to do systematic planning during
good times to prepare for future fluctuations in the
internal and external environment.
Roberts (1995) studied how HR strategy affects profits in
3000 businesses throughout the world. The study
suggests that businesses can increase their profitability
by up to 15 per cent by ensuring that managers are
satisfied with their level of participation in decisionmaking, sharing information and involvement with
developing ideas for the business. The research also
shows that a well-run, professional appraisal system
can significantly improve the performance of individuals, and therefore the profitability of the business.
Since 1992, the Leading Edge Research Team based at
the London Business School and the Judge Institute of
Cambridge Institute has examined how eight large
companies link business strategy to individual and team
performance (Gratton, 1995). The findings suggest that
the closer or stronger the linkage between business
strategy and human resource processes, the greater
competitiveness and organisational effectiveness. Key
processes identified in the research include: reflecting
business goals in individual and team objectives, and in
performance measures, identifying people with high
potential; and creating development tracks that take
them through significant work experience.

EuropeanManagementJournaIVo114No 6 December1996

cause better financial performance, but only that the two

may be related. Having a highly profitable company
may allow managers to be more progressive in their
approach to people rather than the other way around.
Second, it is possible for an organisation to do all of the
things 'progressive' companies are doing and be
unprofitable and unsuccessful. IBM, for example, has
implemented most of the innovative and progressive
HRM activities listed above. That in itself, however,
could not overcome the weakness of an inappropriate
organisational structure, product strategy and culture.
Third, as Pfeffer (1994) points out, innovative HR
practices have potential downsides as well as benefits
and they are not necessarily easy to put in place,
particularly in a large, long-established organisation. For
example, many people and organisations resist the
introduction of merit pay, bonus payment and/or gain
sharing, believing it actually harms performance.

Conclusion
Contrary to popular belief, there is little real evidence
that HRM policies and practices are improving
organisational performance. Nevertheless, the evidence
is growing. And although it will take time before the
longitudinal data exists to fully test the theories and
models described above, the evidence is consistent with
the view that the HRM policies and practices of an
organisation have a powerful influence in motivating
employees to exhibit the kinds of attitudes and
behaviour that are needed to support and implement
the competitive strategy of an organisation. This
research raises a number of questions about the nature
of these practices - including what would be widely
recognised as 'best' practices. Four questions appear to
be especially significant:
: Is there a significant difference between the HRM
policies and practices of high-performance versus
low-performance organisations?
:- If so, what are the key internal and extemal
contextual factors that affect the design and
implementation of these HRM practices?
:" To what extent, and how, can the HRM practices
that support the success of high-performance
organisations be introduced into a lowperformance company?
;, What does all this mean for the way organisations
attract and motivate people?
The answers to these questions clearly have profound
implications for the management of human resources.
Ideally, they should give personnel managers a clear
sense of how they can adapt their existing HRM policies
and practices to create a skilled and motivated workforce and thereby enhance the competitiveness of their
organisation.
On the other hand, it would be wrong to assume that
the link between best practices and high performance is
63.5

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

universal or automatic. The arguments put forward by

Marchington (1995) in a recent article entitled 'Fairy
tales and magic wands: new employment practices in
perspective' are compelling. He warns against the danger
of adopting a diet of simple solutions that are based on
unrepresentative samples of case studies and tell stories
of happiness and peace where conflict and organisational
conflicts are aberrations instead of being the norm. As
Guest and Hoque (1994) say: 'The key is strategic
integration. What this means is that personnel strategy
must fit the business strategy, the personnel policies
must be fully integrated with each other and the values
of the line managers must be sufficiently integrated or
aligned with the personnel philosophy to ensure that
they will implement the personnel policy and practice.
This is a tall order which will often require reinforcement
through leadership and through the organisational
culture. Where this can be achieved, then there is
growing evidence that a distinctive set of human
resource practices result in superior performance' (p. 44).

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European ManagementJournalVo114 No 6 December 1996

IMPACT OF HUMAN RESOURCE MANAGEMENT ON ORGANISATIONAL PERFORMANCE

JEAN-MARIE
HILTROP, Gerstraat 4Z
8400 Oostende, Belgium
lean-Marie Hiltrop is a
specialist in the area of
human resource
management. Previously a
Professor at the University
of Leuven, Belgium, and
IMD, Lausanne, he has
been involved in executive
education for many years. His recent publications
include The Essence of Negotiation (I995) and
The Accidental Manager: Surviving the
Transition from Manager to Professional (1996).
He also works as Senior Partner for InterCultural
Consulting, Geneva, and undertakes workshops
worldwide for corporate clients.

European Management Journal Vo114 No 6 December 1996

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