Executive Summary
We examine whether firms that adopt certain human resource (HR) practices perform more successfully than do other firms. The HR practices on which we concentrate include provision of staff training, measurement of employee satisfaction and adoption of performance pay. We also examine whether adoption of a bundle of ‘high performance' HR practices improves firm performance.
The analysis uses data from an economy-wide survey, Statistics New Zealand's 2001 Business Practices Survey (BPS). The BPS is a survey of approximately 3,000 New Zealand firms, being a representative sample (having an 82% response rate) of all New Zealand firms with at least six full-time equivalent staff. It contains questions on a comprehensive range of employee practices, and also contains measures of firm performance. We are able to use these questions, plus other questions from the survey, to test whether adoption of certain employee practices has a causal impact on firm success. We examine also the types of firm that adopt certain employee practices.
Our results indicate that firms which adopt a suite of high performance HR practices experience a lift in their profitability, productivity and market share relative to their rivals. Two individual HR practices appear particularly important: performance pay for most or all employees, and firm-specific (innovation-related) employee training.
There are systematic differences in the types of firms that adopt high performance HR practices. Younger firms, large firms, and high-tech services firms are most likely to adopt high performance HR systems. Small, old (i.e. long-established) agriculture and manufacturing firms are least likely to adopt such systems.
We discuss reasons why management in many firms fails to adopt high performance practices. One reason is that high performance HR systems are more likely to have an impact on firm performance in some industries than in others. A low-tech firm with fixed coefficient technology operating in an undifferentiated commodity market may find little advantage in adopting potentially costly HR practices that neither improve productivity nor quality. Conversely, a firm operating in a market in which individual flair drives both quality and output may find that choice of HR practices is central to performance. This explanation is consistent with our findings regarding sectoral adoption of the identified HR practices.
A second explanation is that idiosyncratic ability of managers is important. Our statistical work indicates that underlying management characteristics and capabilities help explain whether firms adopt modern HR practices or not. Consistent with these findings, old firms have a tendency to have poorer HR practices. Managers in some of these firms may be habituated in "old school" practices that are no longer appropriate in a technological setting in which employees expect to be treated as self-reliant contributors to the firm.
Smaller firms also tend not to adopt high performance HR practices, possibly because they may not have the breadth of expertise to draw on in designing high performance systems.
Our results are relevant to understanding the impact of HR practices on firm performance. They indicate that adoption of a suite of high performance HR practices (plus performance pay and employee training) impacts on three different measures of firm performance. This finding, derived from a large sample that is representative of an entire economy, provides evidence that human resource practices really do matter.
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