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L E A RNING OU TCOME S
At the end of this chapter, you should be able to:
- Describe the fundamental purposes of human resource management (HRM)
- Explain the multidisciplinary nature of HRM
- Outline the major functions and roles of HRM
- Discuss the economic, political, legal, social, technological and organisational contexts in which HRM takes place
- Outline the history and evolution of HRM in Australia
- Discuss the different approaches to HRM and their impacts on the employment relationship.
- Identify the twenty-first century challenges for the HRM profession.
CH A P T ER OU T L INE
- Introduction
- Defining human resource management
- The context of HRM
- HRM and organisational performance
- A brief history of HRM
- The human relations era
- Approaches to HRM
- The HRM profession in Australia
- Jobs and careers in HRM
- HRM challenges
- Conclusion
FOUNDATIONS OF
HUMAN RESOURCE
MANAGEMENT FOR
THE TWENTYFIRST
CENTURY
MIKE FAZEY AND PIETER NEL
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 3
Roger’s Shrubbery is a plant nursery involved in propagation and retail sales of plants and garden accessories. It has been established for seven years and has grown steadily from a small family business to a medium-sized business with more than 100 employees. The business has a simple structure: two managers report directly to the owner, Roger. One manages the propagation side of the business; the other manages the retail side.
Until now, Roger has looked after all workforce- related issues, but recently he has started to think that these issues are becoming too big and too complex for him to handle by himself, especially as he has had no formal management training. In the earlier days of the business, staffing was a fairly straightforward matter, but as the business has grown and the workforce has grown with it, Roger has begun to realise that managing the workforce effectively is not just about administering the payroll.
The following is a summary of some of the relevant business issues that Roger is facing:
- The workforce is quite diverse. Employees are aged between 17 and 54, but the majority are in the 35+ age bracket. Seventy per cent are female and 30 per cent male.
- Most employees are full-time workers with rostered five-day shifts covering seven days per week.
- The business plan includes expansion into garden design services.
- Sales are growing, albeit more modestly than in the business’s first few years of operation.
- Sales levels tend to mirror activity in the building industry, as about 66 per cent of the revenue comes from professional landscapers who do new homes
and commercial developments. The remainder of the revenue comes from the general public (that is, weekend gardeners).
- Workers’ compensation premiums have increased markedly this year because of several claims in the previous year. All were for back injuries caused by heavy lifting.
- Employees are paid in accordance with the relevant award, which is pretty basic. The approach to remuneration is pretty much ‘one size fits all’. In addition, there are several workforce-related issues that Roger knows he needs to deal with:
- An ageing workforce
- An increased need for people with horticultural skills/qualifications
- An increased absences by workers in the past year
- An increased staff turnover in the past year. Roger’s situation is typical of many businesses. There is a point at which the volume and complexity of
IL L U S T R AT I V E C A S E
HUM A N RE S OURCE M A N AGEMEN T IN A GROW ING BUSINE S S
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 5
more to it than that, as will become evident as you read the various chapters of this book. The fact is, HRM is a complex field with many different aspects and perspectives. After all, its main focus is people—the most complex things on the planet! HRM takes place within an organisational environment, so it is ultimately about contributing to the success of the organisation.
Theincrease in diversity in Australia started in the 1950s with an influx of migrants from southern and eastern European countries. Subsequent changes in immigration policy saw increased numbers of non-European migrants arriving from the 1970s onwards. Today, Australia receives migrants from Asia, Africa, South America and the Middle East, as well as from the United Kingdom, Ireland, continental Europe and New Zealand. As our society has become more diverse, so have our workplaces.
CASE IN POINT
Australia’s changing workforce
IN POINT
Multidisciplinary nature of HRM
HRM is an applied discipline that is informed by a range of fields of study. The complexity of HRM is illustrated by this multidisciplinary nature, as shown in Figure 1.1. It draws on fields of knowledge both within the sphere of business and outside it.
Behavioural Sciences
Ethics
Law
Management
Economics HRM
FIGURE 1.1 DISCIPLINES IMPACTING ON HRM
Explain the multidisciplinary nature of HRM
6 1 INTRODUCTION AND CONTEXT OF HUMAN RESOURCE MANAGEMENT
Economics covers government policies, studies of wage relativities, the bargaining power of trade unions and the forces of labour market supply and demand, which includes theories of wage determination. Unemployment, labour mobility, labour flexibility and labour productivity also come under the ambit of economics. Management encompasses those activities that are concerned with the efficient and effective running of organisations. It incorporates fields such as organisational behaviour, which Nelson and Quick (2011: 4) describe as the study of individual behaviour and group dynamics in organisations and organisational development (the systematic improvement of organisational structures and processes), as well as the implementation and management of organisational change. Management also encompasses areas such as planning and goal setting, leadership, business strategy and communication, and the processes of measuring and monitoring organisational performance. As we will see in Chapter 3, the employment relationship is regulated by a complex legal framework that impacts on how organisations manage their people. Employment laws are primarily concerned with ensuring fairness, equity, health and safety in the workplace. We will be exploring these issues in Chapters 4 and 5. The legal framework also mediates employment relations, dealing with things such as employment conditions and entitlements, wage setting, industrial action and termination of employment. Any endeavour that involves people has an ethical aspect, so ethics is an important part of HRM. In HRM, ethical considerations come to the fore often, especially when dealing with disciplinary issues, dispute resolution and a range of employment decisions. Human resource (HR) practitioners are often cast in the role of ethical stewards, responsible for ensuring the ethical treatment of employees and the ethical culture of the organisation. We will explore this aspect of HRM in Chapter 13. The behavioural sciences (for example, psychology, sociology and social psychology) are also important to HRM. They deal with issues such as personality, motivation, perception, power, conflict and organisational politics. These apply to the structuring of the organisation, teamwork, learning and job design, as well as the formation of organisational culture and change management. The study of HRM is, therefore, academically diverse, and it is this diversity that makes it such a challenging and fascinating discipline.
HRM perspectives Everybody in an organisation has an interest in the management of the workforce, and different groups have different perspectives. Senior management’s perspective is ‘big picture’. It is interested in the effective management of the workforce as a whole. It is interested in the productivity of the workforce and the benefits that the workforce can produce for the
8 1 INTRODUCTION AND CONTEXT OF HUMAN RESOURCE MANAGEMENT
Major HRM functions One way of looking at HRM is as a range of functions that combine to facilitate the effective management of the workforce in pursuit of organisational goals. The second part of this book focuses on these major functions. Before exploring them, however, it is useful to look at an overview of them (see Table 1.1).
These functional responsibilities have been made more effective and efficient in recent times through the development of human resource information systems. Part 2 of this book (Chapters 6 to 12) focuses on these functional areas of HRM. It is important to note that these functions do not exist in isolation from one another— they are interconnected. For example, HR planning processes might inform recruitment and selection activities as well as training and development. Performance management outcomes might drive remuneration systems. Job design might link with employee health, safety and wellbeing. These are just a few examples of this complex web of interconnections.
Goals and roles of HRM Boxall and Purcell (2011) have suggested that HRM has both economic and socio-political goals. Its economic goals focus on cost-effective labour, workforce flexibility and attaining competitive advantage through the workforce. These are all about helping the organisation to
TABLE 1.1 MAJOR FUNCTIONAL AREAS OF HRM FUNCTION DESCRIPTION Job analysis and design Determining job requirements; designing job descriptions Human resource planning Determining future staffing needs; developing strategies to meet those needs Recruitment and selection Acquiring new employees; making internal appointments and promotions Training and development Providing employees with job-related skills and knowledge; developing future potential Performance management Designing and managing systems for the assessment of employee performance Remuneration management Designing and managing pay and rewards systems, both monetary and non-monetary Health, safety and employee wellbeing
Developing and managing processes and systems to maintain a safe, healthy work environment
Outline the major functions and roles of HRM
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 9
be successful and sustainable. Its socio-political goals are concerned with social legitimacy and managerial power. Social legitimacy relates to the way the organisation’s people are managed. Managing the workforce without due regard for ethical and social standards will ultimately affect the organisation negatively. We will explore some of these social legitimacy issues in Chapter 13. The other aspect of HRM’s socio-political goals—managerial power—is largely about the politics of the organisation and the desire of management to exercise control. There can be tensions between these different goals. For example, efforts to achieve cost-effectiveness may be seen to be socially illegitimate if they bring hardship to individuals or the broader society of which the organisation is part. An important role for HRM, therefore, is to achieve an appropriate balance between economic goals and socio-political goals. These goals underpin HRM’s various roles. Broadly speaking, these roles can be divided into three categories: transactional, strategic and advisory. The transactional role is largely administrative in nature, and involves coordinating the various processes associated with the HRM functions we discussed earlier. This might include administering the payroll, processing leave applications, maintaining employee records, advertising job openings and processing job applications. These are day-to-day activities and are highly visible, so it is important to get them right. The strategic role is a higher level role that is directly concerned with contributing to organisational success. This could involve collecting and analysing workforce data, identifying longer term staffing issues and needs, and developing policies and strategies that address these needs. The strategic role connects HRM with the senior management of the organisation. We will explore strategic HRM in more detail in Chapter 2. While the strategic role is about HRM’s relationship with senior management, the advisory role is more about HRM’s relationships with line management and employees. As the name suggests, this role is about providing advice. For example, a line manager might seek advice from HR about how best to handle a disciplinary issue or about managing an employee with performance problems. An employee might seek advice about advancing their career or about dealing with a grievance. This is also a highly visible role that requires HR practitioners to develop and maintain positive relationships.
R E F L E C T I V E N O T E
HR’s goals and roles are diverse and require HR practitioners to see the world from the different perspectives of employees, line managers and senior managers. Sometimes there are tensions between those perspectives. Is it possible for HR to be all things to all people? When it comes to the crunch, whose perspective should take precedence? Another way of looking at HRM is as a range of roles focused on different aspects of workforce management. Table 1.2 shows these roles and the kinds of activities involved in undertaking them.
transactional role This involves the administration and coordination of HRM functions such as payroll management, processing of leave applications, maintaining employee records, advertising job openings and processing job applications.
strategic role This role includes research and analysis leading to the development of policies and strategies that contribute to the achievement of organisational goals and objectives.
advisory role This involves providing advice to managers and employees about how best to handle issues such as discipline, grievances, performance management, training and career development.
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 11
of its workforce, so it is important to be aware of these. The overall context can be seen as consisting of six sub-contexts: − The economic context − The social context − The political context − The legal context − The technological context − The organisational context.
The economic context
The economic context encompasses changes in business and labour market conditions that can significantly affect HR policies and practices. During periods of strong economic growth, organisations tend to focus more on the future, so policies and practices geared towards facilitating growth and development gain ascendancy. Good economic times often coincide with a competitive labour market, so organisations need to adjust their policies and practices in order to compete for scarce labour and skills. By contrast, difficult economic times cause organisations to focus much more on the present and be driven by survival rather than growth. During these periods, HR policies and practices tend to become less generous as organisations look for ways to reduce costs. They also tend to become more short term in their outlook. The social context links with the concept of social legitimacy that we discussed earlier. In the past, organisations have tended to underestimate its influence, but this is rapidly changing as businesses compete for the best people and strive to create stable and productive workforces. The social context is, of course, shaped by the society in which the organisation exists. Australian society is increasingly diverse with changing social trends and values including a growing focus on work–life balance, social mobility, health and safety, and many other factors. These changing values and attitudes typically create new challenges for HRM such as how to handle dual career couples in an interstate or international transfer; whether benefits coverage should be extended to the partners of gay employees; or how to deal with ‘down shifters’ (people who have decided on a lifestyle change involving less work, income and consumption). Changes in the demography of the Australian workforce are part of the social equation too. We are on the cusp of the biggest generational change that has ever occurred as members of the baby-boomer generation—which dominates the workforce at present—begin to retire in large numbers, making way for a new generation that has very different values and characteristics.
R E F L E C T I V E N O T E
A survey undertaken by the Australian Human Resources Institute (AHRI) in 2014 found that 31 per cent of respondents believed it was essential for HR practitioners to have experience in line management roles (that is, working outside HR), and 60 per cent believed it was ‘somewhat important’. However, this isn’t always feasible. Can you think of other ways that HR practitioners can gain an understanding of the operational aspects of the organisations they work in? Source: AHRI 2014a
economic context Business and labour market conditions that affect HR policies and practices.
social context The prevailing values, attitudes and demographic features of the society in which business takes place.
12 1 INTRODUCTION AND CONTEXT OF HUMAN RESOURCE MANAGEMENT
The political context affects the regulatory framework that governs the employment relationship. This can change regularly, especially when new governments are elected. In addition, government policies relating to areas such as education, training and immigration can affect HRM activities. For example, a company’s ability to recruit skilled people from overseas is directly affected by the federal government’s policy on skilled migration. As Fazey (2013) has pointed out, governments are interested in a number of things that are also of interest to HRM, including: − Labour market participation − Unemployment − Access to the labour market for the disadvantaged − Labour supply and demand − Skills development − Skills shortages. Approaches vary according to political ideology and socio-economic factors. While some governments prefer to intervene directly in the labour market using a ‘social market’ approach, others tend to favour a ‘free market’ approach, which is less interventionist. Regardless of which approach is taken, government policies can have a profound impact on many areas of HRM.
The legal context Perhaps the most fundamental contextual factor affecting HR policy is the legal context or framework that surrounds employment. Employment law is drawn from two main sources: common law and statute law. Common law (or case law) is derived from decisions made in courts. These decisions establish precedents based on fundamental principles that are applicable generally. In the context of HRM, case law decisions provide the basis for understanding the legal principles that apply to employment scenarios, and the obligations that the employment relationship imposes on both employers and employees. HR policies, therefore, need to reflect those obligations. Statute law is legislation enacted by federal or state governments. Various types of statute laws affect employment and, therefore, HR policies and practices. The main ones are outlined in Table 1.3.
TABLE 1.3 TYPES OF STATUTE LAW AFFECTING HRM Employment/industrial relations
Covers setting of pay and conditions, minimum employee entitlements, grounds for dismissal, parameters for industrial action Anti-discrimination Outlaws discrimination in employment based on gender, race, age, disability and a range of other grounds
political context Government policies that affect the employment relationship and HRM practices.
legal context The common law principles and legislation that underpin the employment relationship.
14 1 INTRODUCTION AND CONTEXT OF HUMAN RESOURCE MANAGEMENT
HRM ANDORGANISATIONAL PERFORMANCE
In our earlier definition of HRM, we observed that ultimately HRM is geared towards contributing to organisational success. Implicit in this definition is the notion that an organisation’s people are fundamental to the achievement of its goals. Such a view is consistent with the resource-based view of the firm (RBV) , which proposes that an organisation’s competitive advantage stems from its internal resources. When these resources are valuable, rare, inimitable and non-substitutable, they give competitive advantage. These resources can include financial resources, physical resources and organisational resources as well as human resources (Barney 1991). Within RBV theory, it is the skills, knowledge, abilities and behaviour of the organisation’s human resources that provide the advantage. Truss et al. (2012) have further outlined a number of advantages stemming from an organisation’s human resources. These include the advantages gained from social capital (working relationships between individuals and groups), human processes (HR systems, policies and practices) and human systems (alignment of employees’ skills and attitudes with organisational systems, structures and processes). Boselie (2010) has proposed a value chain that links HR practices to competitive advantage (see Figure 1.3), and suggests that those HR practices should be specifically designed in order to achieve that advantage.
Critical success factors
Sustained competitive advantage
Employee attitudes and behaviours
HR practices
FIGURE 1.3 HR VALUE CHAIN These theories and models, with their emphases on competitive advantage, have clearly been developed with the private sector in mind. There are also many organisations in the public and not-for-profit sectors whose ultimate goals are not competitive advantage. Rather, their goals involve fulfilment of their functions or delivery of services. Carberry and Cross (2013) have also pointed out that organisational success can encompass criteria other than competitive advantage (survival and the development and maintenance of corporate reputation, for example). However, regardless of how you define it, the contribution of HRM towards achieving organisational goals cannot be denied. Indeed, it can be concluded that, regardless of the nature of the organisation and the kinds of goals it is trying to achieve, its workforce and the way that workforce is managed are central to it achieving those goals. Nonetheless, defining exactly which HRM policies and practices contribute to organisational performance and exactly how they do so, has been difficult to pinpoint. Wilton (2011) identifies more than 20 studies that have found positive links between HRM and organisational performance. However, because the contexts, methodologies and types of HR practices examined vary significantly, a ‘magic formula’ eludes us. It would be logical to think that there is no magic formula—that different policies and practices will be successful in different organisations, different industries and different circumstances. This is part of what
resource-based view of the firm (RBV) The view that an organisation’s internal resources, including its human resources, are the main source of competitive advantage.
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 15
makes the HR profession challenging and interesting. HRM is not merely the application of a set of standard policies and practices. Making the right choices requires analysis, understanding of the business and its context and good judgment. We will further explore the relationship between HRM and performance in Chapter 2.
A BRIEF HISTORY OF HRM
Although organisations and their workforces have existed for hundreds of years, it has only been in the last century or so that theorists have considered the question of how to best manage those workforces. Consequently, HRM is a relatively young profession. In this section we will review the evolution of HRM theory and practice.
The scientific management era
Pioneer of scientific studies Frederick Taylor’s book The Principles of Scientific Management was published in 1911. In it, Taylor outlined methods for streamlining the organisation of work and for maximising the output of workers in the context of manufacturing. Fundamentally, the theory proposed that there was ‘one best way’ of getting work done. It also discussed the question of how to motivate workers to greater levels of output, positing that financial rewards for productivity were the most effective. Taylor was an engineer, so he was more concerned with increasing production than with creating positive employment experiences for workers. Indeed, he had rather a negative view of workers, believing them to be inherently lazy. The most obvious application of Taylor’s theories was the development of the production line, a manufacturing methodology that remains common today. Scientific management theory is significant in the history of HRM because it represents industry’s first attempts to actively manage workers.
The human relations era
Not everyone agreed with Taylor’s views. Soon after the publication of his scientific management theories, the discipline of industrial psychology began to emerge. Psychologists began to consider issues such as employee health and wellbeing, and in doing so, opposed Taylor’s somewhat one-dimensional approach to worker management. A landmark publication in the history of HRM, Elton Mayo’s The Human Problems of an Industrial Civilization , was published in 1933. Mayo wrote about issues such as monotony and morale, as well as considering the impact of industry on society. The book also contained an account of the now famous Hawthorne experiments, in which workers at an electric company were subjected to a series of tests and observations between 1924 and 1932. The studies illustrated the importance of group behaviour in the workplace and its effect on productivity. One major conclusion was that ‘important factors in the production of a better mental attitude and greater enjoyment of work have been the greater freedom, less strict supervision and the opportunity to vary
Outline the history and evolution of HRM in Australia
scientific management theory An early theory about streamlining the organisation of work for maximum efficiency.
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 17
organisations (for example, human capital management or people management), but human resource management is the term that has stuck. One of the reasons that the term ‘human resource management’ was controversial within the profession was that during this period, HR practitioners often saw their role as being employee focused rather than management focused. This attests to the influence of the human relations school. Indeed, it was not uncommon for HR practitioners to be less interested in business and more interested in employee welfare and employee advocacy. However, by the 1990s the momentum had started to shift towards a more strategic concept of HRM.
Strategic HRM
The period since the turn of the twenty-first century has been a time of transformation for HRM. Up to this point, HRM’s main concerns were related to the management of processes and systems. We are now in the era of strategic HRM, where the focus is very much on HRM making a tangible contribution to the achievement of organisational objectives rather than being considered an organisation’s housekeeping function. HR managers and practitioners have actively sought higher status in organisations, with many organisations now including the HR manager as part of the leadership group. The move to a more strategic outlook does not mean that HRM processes and systems have ceased to be important. They remain essential aspects of HR practice, although achieving an appropriate balance between the two has been challenging. We will see different approaches to HRM and explore the theory and practice of strategic HRM in Chapter 2.
APPROACHES TO HRM
As we have already seen, HRM has been influenced by different schools of thought as it has evolved. This has led to different philosophical approaches to HRM. In this section, we will explore these philosophical positions and discuss how they impact the employer–employee relationship, and ultimately, the productivity and effectiveness of the workforce.
Hard and soft HRM
Broadly speaking, human resource management policies and practices embrace two particular philosophical positions. The two competing philosophies are perhaps best characterised by the Harvard model of HRM (sometimes referred to as the Harvard map of HRM) and the Michigan model of HRM. The Harvard model emerged from the human relations school of thought, which we have already discussed. The human relations school of thought brought the social science of psychology to the business of managing people and emphasised issues such as motivation and job satisfaction as keys to employee performance. Taking that fundamental philosophy as its base, the Harvard model sees employees as complex entities that cannot be managed like other resources. It proposes that people management policies and practices should have
Discuss the different approaches to HRM and their impacts on the employment relationship
Michigan model of HRM An approach to HRM that sees employees as resources to be managed like any other, focusing on cost control, efficiency and the achievement of organisational goals above all else.
Harvard model of HRM An approach to HRM that emphasises employee commitment, competence and congruence with organisational goals leading to the achievement of those goals as well as individual and societal wellbeing.
18 1 INTRODUCTION AND CONTEXT OF HUMAN RESOURCE MANAGEMENT
the ultimate objective of achieving employee commitment, competence and congruence with organisational goals, as well as cost effectiveness (Beer et al. 1984). Significantly, the Harvard model (see Figure 1.4) considers individual and societal wellbeing as long-term outcomes as well as organisational effectiveness. This is the significant point of difference between the Harvard model and the Michigan model of HRM.
Stakeholder interests
- Shareholders
- Management
- Employee groups
- Government
- Community
- Unions
Situational factors
- Workforce characteristics
- Business strategy and conditions
- Management philosophy
- Labour market
- Unions
- Task technology
- Law and societal values
HRM policy choices
- Employee influence
- Human resource flow
- Reward systems
- Work systems
HR outcomes
- Commitment
- Competence
- Congruence
- Cost-effectiveness
Long-term consequences
- Individual well-being
- Organisational effectiveness
- Societal well-being
FIGURE 1.4 THE HARVARD MODEL OF HRM
The Michigan model sees employees as resources to be managed in exactly the same way as any other resources. Drawing on strategic management theory, it emphasises cost control and efficiency, and advocates that people management policies and practices be directed exclusively to the achievement of business objectives (Tichy et al. 1982). The Michigan model is totally focused on human resources as tools for the achievement of organisational goals. It does not see employees as stakeholders in the same way that the Harvard model does, nor does it consider the social context. For proponents of this approach, employee performance is central, and HR systems—in particular those relating to selection, rewards, performance appraisal and employee development—have the fundamental role of optimising employee performance in pursuit of organisational goals (see Figure 1.5). These philosophies have come to be seen as embodying hard and soft approaches to HRM. Hard HRM is focused on directing employee performance towards the achievement of organisational goals. Soft HRM seeks to maximise performance by aligning organisational and employee needs. In reality, however, it is not possible to characterise organisational approaches to HRM as simply being one or the other. It is more accurate to see the two philosophies as being at opposite ends of a continuum. Organisational cultures tend not to occupy a fixed
20 1 INTRODUCTION AND CONTEXT OF HUMAN RESOURCE MANAGEMENT
Human capital and intellectual capital The concept of human capital (HC) has emerged from economic theory and has evolved to a point where it can be seen as an attempt to reconcile the different approaches to people management that we have just discussed. Traditionally, workforces have been seen as a cost of production. Contemporary HC theory sees the workforce as a capital asset, so workforce costs are seen as investments that produce a tangible return for the organisation and contribute to its overall value. Indeed, numerous studies have shown a positive link between investment in human capital development and organisational performance (Marimuthu et al. 2009; Argawala 2003; Garavan et al. 2001). An important difference between human capital and other forms of capital is that, rather than being owned by the organisation, human capital is engaged through the employment relationship. Part of that relationship is about recognising that an organisation’s intellectual capital is not restricted to tangible assets such as patents and intellectual property. Employees, too, possess stocks of intellectual capital (for example, skills, knowledge and ideas) that they choose either to use or to withhold in the workplace. The nature of the employment relationship influences the extent to which this discretionary effort is applied. Burr and Girardi (2002), expanding on an earlier model developed by Ulrich (1998), have identified three aspects of intellectual capital that can all be affected by an organisation’s approach to HRM (see Figure 1.7).
Competence
Commitment
Control
Intellectual capital
FIGURE 1.7 DIMENSIONS OFINTELLECTUAL CAPITAL
The model suggests that, in order to optimise the intellectual capital that resides with people, organisations need to harness the capacity (competence) of employees, and their willingness to apply it (commitment), as well as giving them the opportunity to do so (control). The implication of this model is that HRM policies and practices that enhance employee capacity and willingness, and which provide opportunity, will increase employee performance and, ultimately, organisational performance.
human capital A concept that views employees as assets that produce a return on investment, rather than simply as costs.
intellectual capital The collective insights, expert knowledge and commitment of employees.
1 FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT FOR THE TWENTY FIRST CENTURY 21
The psychological contract
Unlike the formal employment contract, which is explicit, the psychological contract between employers and employees is implicit. It is an unwritten, mutual understanding about the nature of the employer–employee relationship. The nature of psychological contracts has undergone significant change in recent times, moving from the relational , which is characterised by mutual commitment, to the transactional , which is based on an economic exchange (Holland et al. 2015). Under a relational psychological contract, the employment relationship is seen as an exchange of effort and commitment by the employee in return for job security and career progression. Under a transactional psychological contract, there is no sense of mutual commitment: the employee merely sells their time and skills to the employer for an agreed amount of money. HR policies and practices are indicators of the type of psychological contract that the organisation favours. Grant (1999) has pointed out that where there is a mismatch between the type of relationship explicitly espoused by the organisation and an employee’s perceptions of the reality of the relationship, there are inevitably negative consequences such as cynicism, reduction in commitment and lower work quality. In other words, where an organisation’s rhetoric implies that the psychological contract is relational, but its actions indicate that it is, in fact, transactional, employees will feel that the contract has been breached and this will affect their work performance negatively. There is also a view that the trend towards transactional psychological contracts has negative long-term implications (Tsui and Wu 2005). This view places the onus on HR to develop policies and practices that emphasise reciprocity and are geared towards building long- term relationships between employers and employees. Importantly, Sonnenberg, Koene and Paauwe (2011) have found that ‘traditional’ HRM activities that are concerned with processes and systems are just as influential in shaping the psychological contract as HR practices that are specifically designed to enhance employee commitment.
Employee engagement
CEOs all over the world consider employee engagement to be one of their top strategic priorities. But what exactly is employee engagement? It is a term sometimes used interchangeably with terms such as ‘commitment’, but it is actually more than that. Engaged employees are not just motivated to do their jobs well; they are emotionally invested in the organisation. The global consulting firm Towers Watson (2012) developed the framework for ‘sustainable engagement’ shown in Figure 1.8, which recognises the multifaceted nature of employee engagement. The Towers Watson framework suggests that an organisation has an important role in facilitating sustainable engagement through its culture, work systems and the way it manages its people. This, in turn, suggests a central role for HRM in areas such as job design, employee health and wellbeing, and learning and development. Employee engagement also has a connection with the psychological contract. Logic seems to suggest that sustainable employee engagement can only happen where the nature of the psychological contract is relational. Yet, as
psychological contract An unwritten, mutual understanding about the nature of the employer– employee relationship.
employee engagement The extent to which employees are emotionally invested in an organisation.
