Int. Journal of Business Science and Applied Management, Volume 4, Issue 2, 2009
The effects of human resource practices on firm growth
Ilias P. Vlachos
Dept. of Agricultural Economics & Rural Development, Agricultural University of Athens
Iera Odos 75, Botanikos, 118 55, Athens, Greece
Tel: +30 210 5294757
Email: ivlachos@aua.gr
Abstract
Although the connection between firm growth and labour is well documented in economics literature,
only recently the link between human resources (HR) and firm growth has attracted the interest of
researchers. This study aims to assess the extent, if any, to which, specific HR practices may contribute
to firm growth. We review a rich literature on the links between firm performance and the following
HR practices: (1) job security (2) selective hiring, (3) self-managed teams (4) compensation policy, (5)
extensive training, and (6) information sharing. We surveyed HR managers and recorded their
perceptions about the links between HR practices and firm growth. Results demonstrated that
compensation policy was the strongest predictor of sales growth. Results provide overall support for all
HR practices except of job security. Eventually, selecting, training, and rewarding employees as well as
giving them the power to decide for the benefit of their firm, contribute significantly to firm growth.
Keywords: human resource practices, firm growth, selective hiring, compensation policy
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1 INTRODUCTION
The extent to which, if any, human resource management (HRM) impacts on organizational
performance has emerged as the central research question in the personnel/HRM field (see Becker and
Gerhart, 1996; Guest, 1997 for reviews). Although initial results indicate that some human resources
practices may have a positive effect on organizational performance, most scholars suggest that more
conceptual and empirical work is required (Brewster, 2004; Cardon and Stevens, 2004; Givord and
Maurin, 2004; Zhu, 2004). For the moment, although Human resources (HR) are considered as the
most valuable asset in an organization, they make a difference only for a few organisations (Pfeffer,
1998; Wimbush, 2005).
The link between human resources (HR) and firm growth is well documented in classic economic
theory. Overwhelming evidence suggests growth is driven by specialization and division of labour in
the processes of generation and attraction/development of technological opportunities. However, at the
firm level of analysis, only recently the link between human capital and growth has attracted the
interest of researchers.
Firm growth is often seen as an indication of market acceptance and firm success (Fesser and
Willard, 1990). Growth is considered as a top strategic priority for most firms yet only few companies
achieve growth and ever fewer in maintaining in (Baum and Wally, 2003; Zook and Allen, 2003).
Assuming, that firm growth involves more purposeful work and strategic decision making than leaving
it to random and chance events, the present study addresses a central research question: How do human
resource management practices contribute to firm growth?
The next section reviews the relevant literature on HR practices and firm growth. A discussion of
the methodology employed for data collection follows. The last two sections illustrate the data analysis,
the discussion of the key results and the provision of possible avenues for future research.
2 LITERATURE REVIEW
A growing body of empirical research has examined the effect of certain HRM practices on firm
performance. Although there is a long list of best HR practices that can affect either independently or
collectively on the organizational performance, results are hard to interpret. In order to determine any
effects of HR practices on firm growth, we choose to examine HR practices initially proposed by
Pfeffer (1998) which according to the literature, can be expected to influence the firm performance. In
his seminal work, Pfeffer (1998) proposed the following seven HRM practices: (1) employment
security (2) selective hiring, (3) self-managed teams and decentralization of decision making (4)
comparatively high compensation contingent on organizational performance, (5) extensive training, (6)
reduced status distinctions and barriers, including dress, language, office arrangements, and wage
differences across levels, and (7) extensive sharing of financial and performance information
throughout the organization.
The following sections will develop hypotheses concerning the relationship between HRM
practices and firm growth.
2.1 Compensation policy
Performance-based compensation is the dominant HR practice that firms use to evaluate and
reward employees’ efforts (Collins and Clark, 2003). Evidently, performance-based compensation has
a positive effect upon employee and organizational performance (see for reviews: Brown et al. 2003;
Cardon and Stevens, 2004). However, there is scarce evidence on the effects of compensation policy of
firm growth. Empirical studies on the relationship between performance-related pay and company
performance have generally found a positive relationship, but a growing body of empirical evidence
suggests that it is not just pay level that matters, but pay structure as well (Wimbush, 2005; Singh
2005).
Barringer et al. (2005) conducted a quantitative content analysis of the narrative descriptions of 50
rapid-growth firms and a comparison group of 50 slow-growth companies. Results demonstrated that
employee incentives differentiated the rapid-growth from the slow-growth firms. Firms that were eager
to achieve rapid-growth provided their employees financial incentives and stock options as part of their
compensation packages. In doing so, firms managed to elicit high levels of performance from
employees, provide employees the feeling that they have an ownership interest in the firm, attract and
retain high-quality employees, and shift a portion of a firm’s business risk to the employees.
Delery and Doty (1996) identified performance-based compensation as the single strongest
predictor of firm performance. Both performance-based compensation and merit-based promotion can
Ilias P. Vlachos
19
be viewed as ingredients in organizational incentive systems that encourage individual performance
and retention (Uen and Chien, 2004). Collins and Clark (2003) studied 73 high-technology firms and
showed that the relationships between the HR practices and firm performance (sales growth and stock
growth) were mediated through their top managers’ social networks.
Cho et al. (2005) suggested that incentive plans is effective in decreasing turnover rates. Banker et
al. (2001) conducted a longitudinal study of the effectiveness of incentive plans in the hotel industry
and found that incentive plans were related to higher revenues, increased profits, and decreased cost.
Paul and Anantharaman (2003) found that compensation and incentives directly affect operational
performance.
To be effective, compensation practices and policies must be aligned with organisational
objectives. While performance-based compensation can motivate employees, sometimes employees
perceive it as a management mechanism to control their behaviour (Lawler and Rhode, 1976). In such a
case, employees are less loyal and committed, thus compensation plans have the opposite than desired
outcome (Ahmad and Schroeder, 2003; Rodrıguez and Ventura, 2003).
Employee turnover can significantly slow revenue growth, particularly in knowledge-intensive
industries (Baron and Hannan, 2002). Given that much of the tacit knowledge resides within
employees, significant turnover poses a threat to firm performance and its future growth potential. With
high turnover rates, firm growth flees away along with leaving managers who often become employers
of rival firms or establish themselves rival firms.
Therefore, we propose this hypothesis:
Hypothesis 1: Compensation Policy is positively related to firm growth
2.2 Decentralization & Self-managed teams
More and more, employees are required to work in teams, make joint decisions, and undertake
common initiatives in order to meet the objectives of their team and organization. Self-managed teams
can affect firm growth in two ways: Firstly, a surplus of junior managers in a firm may create and
support dynamics of firm growth. The growth stage is perhaps the most dynamic stage of a firm’s life
cycle. As the business expands, new levels of management are added. Decision-making becomes more
decentralized, middle managers gain authority and self-managed teams proliferate as the firm adds
more and more projects and customers (Flamholtz and Randle, 2000; Miller and Friesen, 1984).
Secondly, teamwork and decentralization of decision making promotes employee commitment
participation and create a sense of attachment, thus indirectly affecting firm performance (Tata and
Prasad, 2004).
Several studies identified self-managed teams and decentralization as important high-performance
HRM practices (Pfeffer, 1998; Wagner, 1994; Yeatts and Hyten, 1998; Singer and Duvall, 2000).
Jayaram et al. (1999) found that decentralised teams have a positive effect on two dimensions of the
performance, time and flexibility. Collins and Clark (2003) examined the role of human resource
practices in creating organizational competitive advantage and found that top management team social
networks (practices such as mentoring, incentives, etc.) mediated the relationship between HR practices
and firm performance. Haleblian and Finkelstein (1993) examined the effects of top management team
size and chief executive officer (CEO) dominance on firm performance in different environments.
Results showed that firms with large teams performed better and firms with dominant CEOs performed
worse in a turbulent environment than in a stable one.
Tata and Prasad (2004) found that a company with micro level of centralisation is a receptive
environment for self-managed teams. In a study of differential outcomes of team structures for workers,
supervisors, and middle managers in a large unionized telecommunications company, Batt (2004)
found that participation in self-managed teams is associated with significantly higher levels of
employment security, and satisfaction for workers and the opposite for supervisors. Black et al. (2004)
examined the impact of organizational change on workers and found evidence that self-managed teams
are associated with greater employment reductions.
Therefore, we propose this hypothesis:
Hypothesis 2: Decentralisation is positively related to firm growth.
2.3 Information Sharing
Sharing of information may have a dual effect: Firstly, it conveys employees the right meaning
that the company trusts them. Secondly, in order to make informed decision, employees should have
access to critical information. Communicating performance data on a routine basis throughout the year
help employees to improve and develop. Employees presumably want to be good at their jobs, but if
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they never receive any performance feedback, they may perceive to have a satisfactory performance
when in fact they do not (Chow et al., 1999). Furthermore, information sharing fosters organizational
transparency which reduces turnover (Ahmad and Schroeder, 2003) and forges synergistic working
relationship among employees (Nonaka, 1994).
Information sharing is not a widespread HR practice as someone might have expected it to be.
Many companies are vulnerable to share critical information with their employees because in this way
employees become more powerful and companies may loose control of them (Pfeffer, 1998).
Furthermore, information sharing always involves the danger of leaking important information to
competitors (Ronde, 2001). In a study of Japanese consultation committees, Morishima (1991) found a
positive association of information sharing with productivity and profitability, and a negative one with
labour cost. Constant et al. (1994) pointed out that attitudes about information sharing depend on the
form of the information. Burgess (2005) studied employee motivations for knowledge transfer outside
their work unit and found that employees who perceived greater organizational rewards for sharing
spent more hours sharing knowledge beyond their immediate work group. However, a significant
percentage of employees perceived knowledge as a means of achieving upward organizational
mobility. Therefore, employees sought information more often than shared it.
Roberts (1995) studied how HR strategy affects profits in 3,000 businesses throughout the world
and found that sharing information was related with higher profitability. However, Ichniowski and
Shaw (1999) compared US and Japanese steel-making plants and found that employee participation
based solely on problem-solving teams or information sharing did not produce large improvements in
productivity. In a study of Fortune 1,000 largest manufacturing and service companies on high-
performance practices, Lawler et al. (1995) found information sharing to correlate to firm performance
but results are inconclusive.
Therefore, we propose this hypothesis:
Hypothesis 3: Sharing of information is positively related to firm growth.
2.4 Selective Hiring
This practice can ensure that the right people, with the desirable characteristics and knowledge,
are in the right place, so that they fit in the culture and the climate of the organization. Moreover,
pinpointing the rights employees would decrease the cost of employees’ education and development.
Schuster (1986) argued that selective hiring is a key practice that creates profits. Huselid (1995)
examined HR practices of high performance companies and found that attracting and selecting the right
employees increase the employee productivity, boost organizational performance, and contribute in
reducing turnover.
Cohen and Pfeffer (1986) argued that hiring standards reflect not only organizations' skill
requirements but also the preferences of various groups for such standards and their ability to enforce
these preferences. Michie and Quinn (2001) proposed that a possible indirect link between selective
hiring and organisational performance can be the forging of internal bonds between managers and
employees that creates the write culture for productivity growth. Collins and Clark (2003) argued that
the practice of selective hiring results at sales growth. Paul and Anantharaman (2003) pointed out that
an effective hiring process ensures the presence of employees with the right qualifications, leading to
production of quality products and consequently in increase of economic performance.
Cho et al. (2005) examined pre-employment tests as a key component of selective hiring and
found that when employed, these tests can select employees that stay with a company longer. Passing
pre-employment tests may give an applicant a stronger sense of belonging to the company, resulting in
higher degrees of commitment if employed. Cardon and Stevens (2004) pointed out that for small
companies recruiting is often problematic. This can be due to several reasons such as limited financial
and material resources and jobs with unclear boundaries responsibilities, which decreases their
potential to hire qualified candidates. Therefore, we propose this hypothesis:
Hypothesis 4: Selective hiring is positively related to firm growth.
2.5 Training and Development
Training and development may be related to firm performance in many ways. Firstly, training
programmes increase the firm specificity of employee skills, which, it turn, increases employee
productivity and reduces job dissatisfaction that results in employee turnover (Huselid, 1995).
Secondly, training and developing internal personnel reduces the cost and risk of selecting, hiring, and
internalising people from external labour markets, which again increases employee productivity and
reduces turnover. Training and development like job security requires a certain degree of reciprocity: A
Ilias P. Vlachos
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company that train and develop systematically its employees advocates them that their market value
develops more favourably than in other firms. This increases employees’ productivity, commitment,
and lowers turnover. Companies may also assist their employees in career planning. In doing so,
companies encourage employees to take more responsibility for their own development, including the
development of skills viewed as significant in the company (Doyle, 1997).
Barringer et al. (2005) compared rapid-growth and slow-growth firms and found that rapid-growth
firms depend heavily on the abilities and efforts of their employees to maintain their growth-oriented
strategies. The fast-growth firms used training programs to achieve their objectives and emphasized
employee development to a significantly greater extent than their slow-growth counterparts. Therefore,
training and employee development practices are more common in rapid-growth firms than slow-
growth ones.
Miller (2006) examined the growth strategies in the retail sector and suggested that modern
retailers should place more emphasis on the policies and practices that could contribute to staff
retention, rather than on the immediacy of recruitment and selection. Zhu (2004) reviewed the changes
in the area of human resource development in Japan and observed that some companies and industries
have shifted towards a more strategic approach that emphasizes the impact of effective learning at both
individual and organizational levels on long-term organizational competitiveness. Husiled (1995) found
that the education and development of employees have a significant effect both upon the personnel
productivity and the sort-term and long-term indicators of organizational performance.
Ngo et al. (1998) investigated the effects of country origins on HR practices of firms from the
United States, Great Britain, Japan and Hong Kong operating in Hong Kong. Study results showed that
structural training and development and retention-oriented compensation were related to various
measures of firm performance. Paul and Anantharaman (2003), in searching the links between human
resource practices and organizational performance, proposed that career development programmes
demonstrate a true interest of the organization for the growth of its personnel, which, in turn, stimulates
commitment and devotion, which, subsequently, raises personnel productivity and consequently
economical output.
Cerio (2003) examined the manufacturing industry in Spain and found that quality management
practices related to product design and development, together with human resource practices, are the
most significant predictors of operational performance. Michie and Quinn (2001) investigated the
relationships between UK firms’ use of flexible work practices and corporate performance and
suggested that low levels of training are negatively correlated with corporate performance. Therefore,
we propose this hypothesis:
Hypothesis 5: The extent of training and development will be positively related to firm growth.
2.6 Job Security
Job security creates a climate of confidence among employees which cultivates their commitment
on the company’s workforce. Job security requires a certain degree of reciprocity: firstly, a company
must signal a clear message that jobs are secure; then, employees believing that this is true, feel
confident and commit themselves to expend extra effort for the company’s benefit; finally, a company
that have learnt that job security contributes to its performance, invests again in job security (Pfeffer,
1998). Probst (2002) has developed a conceptual model of the antecedents and consequences of job
security. Antecedents include worker characteristics, job characteristics, organizational change and job
technology change. Consequences include psychological health, physical health, organizational
withdrawal, unionisation activity, organizational commitment and job stress. Jon involvement, cultural
values, and procedural justices moderate job security perceptions and attitudes.
Buitendach and Witte (2005) assessed the relationship between job insecurity, job satisfaction and
affective organisational commitment of maintenance workers in a parastatal in Gauteng. Study results
revealed small but significant relationships between job insecurity and extrinsic job satisfaction and job
insecurity and affective organisational commitment. Job satisfaction was also found to mediate the
relationship between job insecurity and affective organisational commitment.
However, today’s business environments are far from providing job security to their employees.
For example, in an analysis of involuntary job loss in France between 1982 and 2002, Givord and
Maurin (2004) found evidence that technological changes contribute to keeping the employees for
shorter periods of time, thus increasing job insecurity.
When companies do provide job security, then empirical evidence suggests that it has a positive
effect on to firm performance. Following Pfeffer (1998), Ahmad and Schroeder (2003) found that
among others, job security impacts operational performance indirectly through organizational
commitment. Delery and Doty (1996) studied the US banking sector and found some support for a
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positive relationship between employment security and firm performance. In their study of 101 foreign
firms operating in Russia, Fey et al. (2000) found evidence that human resource practices indirectly
improve organisational performance. The results showed that not only, there was a direct positive
relationship between job security and performance for non-managers, but job security was the most
important predictor of HR outcomes for non-managerial employees. Results also suggested a direct
positive relationship between managerial promotions based on merit and firm performance.
Michie and Quinn (2001) examined labour market flexibility in over 200 manufacturing UK firms
and found that job security is negatively correlated with corporate performance. In contrast, results
showed that ‘high commitment’ organizations are positively correlated with good corporate
performance. Kraimera et al. (2005) used psychological contract and social cognition theories to
explore the role of full-time employees' perceived job security in explaining their reactions to the use of
temporary workers by using a sample of 149 full-time employees who worked with temporaries.
Results demonstrated that employees' perceived job security negatively related to their perceptions that
temporaries pose a threat to their jobs. On the one hand, for those with high job security, there was a
positive relationship between benefit perceptions and performance. On the other hand, for those with
low job security, there was a negative relationship between threat perceptions and performance.
Therefore, we propose this hypothesis:
Hypothesis 6: The presence of job security is positively related to firm growth.
Figure 1 illustrates the associations between these hypotheses and relevant constructs.
Figure 1: The association between hypotheses and constructs
Decentralisation
Compensation
Policy
Training &
Development
Information Sharing
Selective Hiring
Job Security
Actual Sales Growth
Perceived Market
Share Growth
Perceived Overall
Improvement
perceived Firm
Growth
Actual Firm Growth
perceived firm
Growth
Perceived Sales
Growth
Ilias P. Vlachos
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3 METHOD
3.1 The sampling procedure and sample
While Figure 1 is a model of the firm performance, we choose to examine it as understood by the
individuals who take decisions about firm performance. In doing so, we operationalize and measure
individuals’ perceptions of the model’s variables in their work situations.
In order to develop robust model linking HR practices and firm performance, we drew our sample
from food companies operating in Greece for a minimum of five years. We included companies from
the food processing and trading sub-sectors, excluding hospitality and retailing. In doing so, we aimed
to increase the homogeneity of our population as we as decrease the necessary sample size to achieve
robust validity of data analyses.
Testing the research hypotheses in a specific sector adds to the validity of the research design
because managerial skills are to a large extent industry-specific. Furthermore, food industry is dealing
with subsequent food crises and human resources are considered as a valuable asset to survive and
maintain competitive advantage. In-depth interviews were conducted with key decision makers prior to
designing a pre-test. The questionnaire was pre-tested with randomly selected firms. Based on the
results of the pre-test instrument, the final questionnaire was refined. The respondents were mainly HR
managers or, in same instances, the managing directors (MD) of the food firms.
In terms of the empirical research, we posted 372 questionnaires. We got 71 questionnaires, most
of them answered by HR Managers (95%). We chose to include both HR and MD responses in the
sample size although we recognize that there would be different perceptions about HR practices and
organizational performance.
The total response rate was 19.1%. To ensure that the respondents were comparable to non-
respondents, analyses of variances were conducted between these groups. We also found no significant
differences between HR managers and managing directors. The non-response bias was assessed by
comparing early respondents with late respondents (Armstrong and Overton, 1977).
3.2 Statistical Analysis
SPSS v.10 on Windows XP was utilized for all analyses. We first had to reduce a large number of
variables to a smaller set of components. Principal component analysis is a preferred method for this
kind of study. We, then, used hierarchical regression in order to assess the effect of relation, if any,
between HR practices and firm growth measures.
Principal component analysis with varimax rotation was conducted to assess the underlying
structure for the nineteen HR practices questionnaire. Principal component analysis (PCA) involves a
mathematical procedure that transforms a number of (possibly) correlated variables into a (smaller)
number of uncorrelated variables called principal components. The first principal component accounts
for as much of the variability in the data as possible, and each succeeding component accounts for as
much of the remaining variability as possible.
PCA helps with the latter. Having too many features often results in the problem having too many
degrees of freedom leading to poor statistical coverage and thus poor generalization. The Varimax
rotation is an orthogonal rotation applied to a truncated set of principal components (Harman 1970,
Krzanowski 2000). Its application is an attempt to obtain modes that are simple to interpret.
Hierarchical regression models are well suited for this type of analysis. In hierarchical regression,
the order of predictor entry, whether individual or in blocks, makes a difference in the results and
conclusions. This allows examining the ‘effects’ of specific independent variables over and above one
or more dependant variables.
Surveys using questionnaires often result in small sample size in Greece (Ketikidis et al. 2007;
Pasiouras, 2008; Vlachos and Bourlakis, 2006). For example, Ketikidis et al. (2007) used a sample size
of 79 observations in six South East European countries including Greece. Pasiouras (2008) used the
total population of Greek banks to get 78 observations in order to estimate the technical and scale
efficiency of Greek commercial banks.
Measures
Principal component analysis with varimax rotation was conducted to assess the underlying
structure for the nineteen HR practices questionnaire. The scales were measured on a Likert format
ranging from 1 (strongly disagree) to 5 (strongly agree). Six factors were requested, based on the fact
that the items were designed to index the six HR practices. After rotation, decentralisation accounted
for 17.53% of the variance, compensation policy for 12.67%, training & development for 12.24%,
information sharing for 8.73%, selective hiring for 8.61%, and job security for 6.17%. We used the
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Anderson-Rubin Method, which ensures orthogonality of the estimated factors, to produce factor
scores.
Table 1 contains the items, the scale composite reliability (Cronbach α), and factor loadings for
the rotated factors, with loading less than 0.40 omitted to improve clarity.
The first factor, which included items measuring the firm’s decentralisation and decision making
practices was labelled Decentralisation (seven items, α= 0.906). The second factor, labelled
compensation policy, included items measuring the firm’s compensation practices and items measuring
the firm’s policy and HR practices to reduce turnover of employees (four items, α= 0.757). The third
factor, labelled training & development, included four items (α=0.647) measuring the firm’s emphasis
on train and develop its personnel. The fourth factor, labelled information sharing, included two items
(α=0.713) measuring the firm’s policy to share critical information and performance data with its
personnel. The fifth factor, labelled selective hiring, included three items (α=0.556) measuring the
firm’s policy to recruit personnel that fits its culture and objectives.
The last factor had low internal validity to be included in further analysis. The six factor, labelled
job security, included two items (α=0.383) measuring the ability of the firm to create a trustworthy
business climate.
3.3 Firm Growth
Respondents were asked to indicate their firm’s growth as compared to the industry’s average in
these areas: perceived sales growth, perceived market share growth, perceived overall improvement
and perceived firm growth. For perceived items, a 5-point scale ranging from bad (1) to very good (5)
was used. Furthermore, we calculated actual sales growth, and actual firm growth based on the last 3-
year firm performance. We calculated firm growth using sales and employee figures.
Although we believe the perceived firm growth measures are appropriate, they have some
limitations which should be discussed. The first is that they are self-reported responses from HR
managers, who may have a stake in seeing positive relationships between their decisions about
personnel recruitment, training, development and compensation with achievement of firm’s objectives.
However, the responses from the sample contain ample variance and means that do not reflect an
extremely strong positive bias (see Table 2, variables 2 through 7). If the respondents had greatly
inflated their responses, there may have been more consistently positive results than were seen.
Secondly, as in all self-reported studies, the possibility of common method variance should be
addressed. When both the outcome measure (i.e. firm growth) and the six predictor variables (i.e.
compensation policy, decentralisation), are self-reported on the same survey instrument, both measures
share common methods variance. There are several techniques that can be used to minimise common
method variance (see Podsakoff et al. 2003 for a review of these methods).
We used the Harmon’s factor test to examine whether or not common methods variance in the
predictor and outcome variables inflates the empirical relationships among the variables. Harmon’ test
consists of a factor analysis of all relevant variables. If a large degree of common method variance is
present, one factor will emerge. Such an analysis was conducted on the firm performance and HR
practices variables of this sample. Seven factors emerged, with the first factor (which, in cases of
common method variance, would account for most of the variance) only accounting for 18.472% of the
variance. Thus, common method variance is unlikely to bias this sample.
Third, management perceptions about concepts like firm growth and organisational performance
may actually be more valid indicators than objective data such as profitability, market share and sales,
since actual figures are directly related to a vast number of variables, such as trends in the economy,
industry factors, and other environmental factors. Therefore, self-reported measures may, in some
cases, represent more accurate descriptions than more objective measures (Day, 2003; Podsakoff and
Organ, 1986). In the present study, since we are interested in the direction of causation between HR
practices and firm effectiveness, the only people with the breadth and depth of knowledge to report
adequately about these concepts are the HR managers or managing directors.
Finally, since we were interested in assessing the separate factors of a successful collaboration, we
were limited in the number of objective measures that were available within the scope of this study.
Because of the previously stated arguments, we concluded that the expert opinions of HR managers or
managing directors would be valid and appropriate for this study. The results of data analysis should be
acceptable if adequate controls, such as Harmon’s one factor test, are reported for the data. While we
expect that further research into these firm performance constructs is essential, we believe that they are
acceptable for this initial research study.
Ilias P. Vlachos
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3.4 The Effect of HR Practices on Firm Growth
Table 2 presents the mean, standard deviation, and Pearson’s correlation analysis of control
variable (sales), firm growth (perceived sales growth, perceived market share growth, perceived overall
improvement, perceived firm growth, actual sales growth, and actual firm growth), and HR practices
(compensation policy, decentralisation, information sharing, selective hiring, training & development,
and job security). The control variable showed low correlation with growth variables as well as each
one HR practice.
Compensation Policy had significant association with perceived sales growth (r=-.328, p<.01)
perceived market share growth (r=.265, p<.05), and perceived overall firm performance (r=. 323,
p<.01). Decentralisation had significant association with perceived sales growth (r=-.284, p<.05)
perceived firm growth (r=.422, p<.01), and perceived overall firm performance (r=-.271, p<.01).
Information sharing had significant association with perceived sales growth (r=-.282, p<.05), perceived
firm growth (r=.373, p<.01) and perceived overall firm performance (r=-.345, p<.01). Selective hiring
had significant association with perceived sales growth (r=-.252, p<.05) perceived market share growth
(r=-.510, p<.01), perceived firm growth (r=-.317, p<.05). Training & Development had significant
association with perceived market share (r=-.274, p<.05) perceived firm growth (r=.311, p<.05), and
perceived overall improvement (r=. 346, p<.01).
Job security, which had low internal validity, showed no significant correlations with any
permanence measure. None HR practice showed any significant correlation with actual firm growth
variables (sales growth, firm growth).
We then conducted hierarchical multiple regression to determine the best linear combination of
HR practices for predicting firm growth. Initially, we entered the control variable (Firm size) in Step 1
of the regression equation. Based on the resource-based view, HR practices will be a competitive
advantage if are difficult to emulate. Similarly, large firms may have a resource advantage over smaller
firms. Therefore, we included firm size as a control variable, measured by the number of employees. In
Step 2, we entered the five HR practices into the regression equations. Finally, in Step 3, we entered the
ten interactions of the five factors into the regression equations. Tolerance tests showed no significant
collinearity among variables.
We used six measures of firm growth: sales growth (actual, perceived), firm growth (actual
perceived), perceived market share growth, and perceived improvement of overall firm performance.
The results are reported in detail in Table 3. Figure illustrates the results of the associations
between the research hypotheses and the researched constructs. The combination of HR practices in
Step 2 significantly predicted firm growth, in particular perceived firm growth (adjusted R2=.483;
F=11.9, p<.001) with all five variables significantly contributing to the prediction. The beta weights,
presented in Table 3, suggest that compensation policy (.2), decentralisation (.41), information sharing
(.35), selective hiring (.3), and training & development (.29) were perceived to contribute to firm
growth. The change in adjusted R square value was .49, p<.001. This indicates that 49% of the variance
of firm growth was explained by the model. According to Cohen (1988), this is a large effect which
makes us accept hypotheses 1 to 5.
For all perceived measures of firm growth, HR practices showed a significant effect. On the
contrary, HR practices had no significant relation to actual firm growth.
In Step 3, the ten interactions of the five HR practices had a moderate effect only on the perceived
firm growth (F= 4.422, p<.001) and the perceived overall firm performance (F= 3.281, p<.001) but
with no significant changes in R2. This indicates that the five HR practices have unique impact on firm
growth. Specifically, in Step 2, the changes in adjusted R square value were: perceived sales growth
R
2
=.336, p<.001; perceived market share growth R
2
= .342, p<.001; perceived firm growth R
2
=.49,
p<.001; and perceived overall firm performance R
2
=.399, p<.001.
Int. Journal of Business Science and Applied Management / Business-and-Management.org
26
Table 1: Rotated factor loadings for the six HR practices
Factor loadings
Decentralisation
Compensation
Policy
Training &
Development
Information
Sharing
Selective Hiring
Job Security
We encourage decentralized decision making
.864
We use teams to decide about production problems
.845
We regularly use teams to perform various task
.725
All team members contribute to decision making
.724
We encourage and reward personnel being team players
.638
.551
We reward personnel to reduce turnover
.784
We use incentives to boost individual performance
.608
.543
We select and pay employees based on their contribution
.583
Employees that care about firm’s objectives are rewarded
.539
.458
Training is a motive for employees to achieve more
.700
We systematically train and develop our personnel
.635
We provide training in one key skill
.410
.436
We train personnel to gain many skills and abilities
.549
.427
Our employees know well our objectives and strategy
.729
We inform personnel about their performance
.778
We use consultant when hiring personnel
.747
We use pre-recruitment tests
.655
We select personnel that fits our culture
.449
.476
We focus on job security
.814
Employees that perform modestly do not get fired
.446
.619
Eigenvalue
8.220
2.279
1.610
1.394
1.279
1.043
Initial percent of variance explained
34.249
9.497
6.709
5.810
5.330
4.347
Rotation sum of squared loadings (total)
4.207
3.040
2.937
2.094
2.067
1.480
Percent of variance explained
17.531
12.667
12.238
8.726
8.612
6.167
Cronbach α (sample N)
0.906
0.757
0.647
0.713
0.556
0.383
Extraction Method: Principal Component analysis. Rotation method: Varimax with Kaiser Normalization.
Ilias P. Vlachos
27
Table 2: Means, Standard Deviations and Correlation Matrix
Mean
SD
1
2
3
4
5
6
7
Control variables
Sales
20,187
74,661
1
,151
,031
,165
,194
-,046
,183
Firm Growth
Perceived Sales Growth
3.59
0.88
1
-.125
.515**
.585**
.104
.667**
Actual Sales Growth
0.06
0.37
1
-.181
.116
.522**
-.057
Perceived Market Share
Growth
3.58
0.96
1
.514**
.016
.398**
Perceived Firm Growth
3.68
0.91
1
.145
.694**
Actual Firm Growth
0.20
0.37
1
.153
Perceived Overall
Improvement
3.69
0.87
1
HR practices variables
Compensation Policy
1
0
.089
.328**
-.061
.265*
.211
.057
.323**
Decentralisation
1
0
.059
.284*
.083
.105
.422**
.230
.271*
Information Sharing
1
0
.126
.282*
-.003
.063
.373**
.172
.345**
Selective Hiring
1
0
.070
.252*
-.178
.510**
.317*
-.007
.233
Training & Development
1
0
.218
.241
.148
.274*
.311*
-.092
.346**
Job Security
1
0
-.100
-.016
-.233
.106
-.103
.131
-.009
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
Since the HR practices variables are factor scores, produced by the Anderson-Rubin Method, the scores produced
have a mean of 0, a standard deviation of 1, are uncorrelated, the correlations with each other are .00, and thus
are not included in this table. Sales: thousands of euros
Figure 2: Model results
Perceived overall Improvement
Actual Sales Growth
Perceived Firm Growth
Perceived Sales Growth
Compensation
Policy
Information
Sharing
Training &
Development
Decentralisation
Selective
Hiring
Perceived Market Share Growth
Actual Firm Growth
F
Adjusted RSquare
Change in adj. R
2
5.972***
0.298
0.336***
2.709**
0.280
0.086
F
Adjusted RSquare
Change in adj. R
2
F
Adjusted RSquare
Change in adj. R
2
F
Adjusted RSquare
Change in adj. R
2
F
Adjusted RSquare
Change in adj. R
2
F
Adjusted RSquare
Change in adj. R
2
Step 3Step 2
Step 3Step 2
Step 3Step 2
Step 3Step 2
Step 3Step 2
Step 3Step 2
0.478
-0.04
0.041
0.711
-0.07
0.131
6.253***
0.310
0.342***
3.510***
0.364
0.140
11.90***
0.483
0.490***
4.422***
0.438
0.039
0.711
-0.02
0.060
0.854
-0.03
0.139
8.129***
0.379
0.399***
3.281***
0.342
0.060
.31 .27 .26
.24
.23
.24.47
.24
.41 .30
.29
CP
SH
TDDE
IS
SH CP
TD
CP
SH TD DE
IS
.31 CP .26 DE.32 IS .22
SH
.33
TD
DE
IS
.35
SH TD .20
CP
Int. Journal of Business Science and Applied Management / Business-and-Management.org
28
Table 3: Hierarchical regression results of HR practices on six growth measures
Perceived Sales Growth
Actual Sales Growth
Perceived Market Share Growth
Control variable
Step 1
(Control)
Step2
(HR practices)
Step3
(Interaction)
Step 1
(Control)
Step2
(HR practices)
Step3
(Interaction)
Step 1
(Control)
Step2
(HR practices)
Step3
(Interaction)
1. Firm Size
0.15
1.27
0.00
0.06
0.00
0.05
0.03
0.26
0.01
0.13
0.03
0.22
0.16
1.39
0.04
0.43
0.02
0.20
HR Practices
1. Compensation Policy
0.31
3.14**
0.32
2.39*
-0.05
-0.45
-0.04
-0.28
0.24
2.44*
0.17
1.33
2. Decentralisation
0.27
2.72**
0.26
2.06*
0.06
0.52
0.00
0.05
0.09
0.95
0.18
1.50
3. Information Sharing
0.26
2.61*
0.18
1.49
-0.00
-0.01
0.04
0.30
0.05
0.50
0.10
0.93
4. Selective Hiring
0.24
2.42*
0.24
2.04*
-0.14
-1.18
-0.21
-1.45
0.47
4.76***
0.47
4.20***
5. Training & Development
0.23
2.25*
0.23
1.97*
0.11
0.93
0.08
0.55
0.24
2.41*
0.25
2.24*
Interactions
1. Compensation Policy *
Decentralisation
-0.12
-0.92
0.24
1.49
0.02
0.22
2. Compensation Policy *
Information Sharing
-0.07
-0.46
-0.15
-0.82
0.09
0.66
3. Compensation Policy *
Selective Hiring
0.16
1.21
0.02
0.14
-0.39
-2.98**
4. Compensation Policy *
Training & Development
-0.03
-0.26
0.10
0.63
0.04
0.37
5. Decentralisation *
Information Sharing
0.05
0.43
0.09
0.61
-0.08
-0.72
6. Decentralisation *
Selective Hiring
0.08
0.58
0.06
0.35
-0.19
-1.46
7. Decentralisation * Training
& Development
0.17
1.34
-0.17
-1.07
0.00
0.00
8. Information Sharing *
Selective Hiring
0.10
0.67
0.05
0.28
-0.16
-1.16
9. Information Sharing
*Training & Development
0.00
0.05
-0.14
-0.87
0.17
1.42
10. Selective Hiring * Training
& Development
-0.18
-1.53
0.15
1.01
0.05
0.43
F
1.618
5.972***
2.709**
0.068
0.478
0.711
1.941
6.253***
3.510***
Adjusted R-square
0.008
0.298
0.280
-0.01
-0.04
-0.07
0.013
0.310
0.364
Change in adjusted R-square
0.022
0.336***
0.086
0.000
0.041
0.131
0.027
0.342***
0.140
Standardized regression coefficients are reported. Within cells, first row figure is beta coefficients and second row the t-test values, significant at: *p <0 .10 **p <0.01 ***p <0.001
Ilias P. Vlachos
29
Table 3: Continued
Perceived Firm Growth
Actual Firm Growth
Perceived firm performance Improvement
Control variable
Step 1
(Control)
Step2
(HR practices)
Step3
(Interaction)
Step 1
(Control)
Step2
(HR practices)
Step3
(Interaction)
Step 1
(Control)
Step2
(HR practices)
Step3
(Interaction)
1. Firm Size
0.19
1.63
0.01
0.22
0.07
0.69
-0.04
-0.37
-0.06
-0.52
0.00
0.04
0.18
1.54
0.01
0.11
0.00
0.02
HR Practices
1. Compensation Policy
0.20
2.37*
0.15
1.28
0.05
0.47
-0.10
-0.65
0.31
3.28**
0.37
2.91**
2. Decentralisation
0.41
4.77***
0.40
3.47**
0.16
1.39
0.18
1.16
0.26
2.77**
0.13
1.06
3. Information Sharing
0.35
4.07***
0.27
2.54*
0.15
1.28
0.27
1.85*
0.32
3.39**
0.30
2.60*
4. Selective Hiring
0.30
3.58***
0.28
2.66*
0.00
0.00
-0.12
-0.84
0.22
2.38*
0.18
1.62
5. Training & Development
0.29
3.38**
0.30
2.81**
-0.06
-0.51
-0.11
-0.78
0.33
3.41**
0.35
3.09**
Interactions
1. Compensation Policy*
Decentralisation
-0.09
-0.84
0.19
1.24
-0.17
-1.40
2. Compensation Policy*
Information Sharing
-0.01
-0.09
-0.11
-0.63
0.06
0.42
3. Compensation Policy*
Selective Hiring
-0.10
-0.86
0.00
0.02
0.06
0.48
4. Compensation Policy*
Training & Development
-0.01
-0.14
-0.25
-1.58
-0.02
-0.15
5. Decentralisation* Information
Sharing
-0.12
-1.06
0.21
1.36
0.13
1.11
6. Decentralisation* Selective
Hiring
0.06
0.47
0.09
0.56
0.13
0.99
7. Decentralisation* Training &
Development
-0.05
-0.43
-0.09
-0.60
-0.10
-0.86
8. Information Sharing*
Selective Hiring
0.05
0.38
-0.07
-0.43
0.16
1.13
9. Information Sharing* Training
& Development
-0.05
-0.43
-0.14
-0.90
-0.02
-0.23
10. Selective Hiring* Training &
Development
-0.06
-0.56
0.08
0.59
0.00
0.00
F
2.689
11.90***
4.422***
0.144
0.711
0.854
2.381
8.129***
3.281***
Adjusted R-square
0.023
0.483
0.438
-0.01
-0.02
-0.03
0.019
0.379
0.342
Change in adjusted R-square
0.037
0.490***
0.039
0.002
0.060
0.139
0.033
0.399***
0.060
Standardized regression coefficients are reported. Within cells, first row figure is beta coefficients and second row the t-test values, significant at: * p <0 .10 **p <0.01 ***p <0.001
Int. Journal of Business Science and Applied Management / Business-and-Management.org
30
4 DISCUSSION
The primary purpose of this study was to evaluate the impact of HR practices on firm growth. In
summary, a review of existing literature finds that there are HR practices positively linked to
organizational performance (Pfeffer, 1998; Becker and Gerhart, 1996; Guest, 1997; Cardon and
Stevens, 2004; Givord and Maurin, 2004; Zhu, 2004). Based on a comprehensive literature review, we
hypothesised that the following HR practices are related to firm growth: (1) Compensation policy, (2)
Decentralization & self-managed teams, (3) Information Sharing (4) Selective Hiring, (5) Training and
Development and (6) Job Security.
However, a review of literature pertaining to organizational performance shows that firm growth,
an indication of market acceptance and firm success as well as a top priority of most companies (Baum
and Wally, 2003; Zook and Allen, 2003; Fesser and Willard, 1990), has been studied mostly as a latent
variable of organisational performance (Pfeffer, 1998; Cardon and Stevens, 2004; Givord and Maurin,
2004).
Consequently, this paper argues that the selection of specific HR practices becomes a strategic
decision. Therefore, HR managers should be able to report on the concrete results of specific HR
practices on specific firm growth measures. Briefly, a survey of HR managers demonstrated that HR
practices are linked to firm growth. The findings of the study lead to a number of interesting
implications for HRM theorists and practitioners. The first (and rather obvious) implication can be
derived from the evidence found that all HR practices are related to firm growth, a finding consistent
with a variety of extant theories and studies,. Hence, firm growth as a strategic priority depends on
human capital: selecting, developing, and rewarding the best people as well as revealing to them
critical company information in order to make informed decisions which they are authorised to take.
More profound implications can be derived from the findings regarding the links between specific
HR practices and firm growth measures. All five HR practices contributed to perceived sales growth,
overall firm performance improvement, and firm growth. Selective hiring, compensation policy, and
training & development were the predictor of perceived market share growth. In particular, selective
hiring was strongly correlated to perceived market share growth (r2=.47, p<.01). On the contrary,
decentralisation and information sharing did not contributed significantly to market share growth.
Compensation policy was related to all perceived firm growth measures, being the strongest
predictor of sales growth and the weakest of firm growth. Linking sales with compensation benefits can
be an explanation of the high correlation between compensation policy and sales growth.
Decentralisation and team working was significant factor of firm growth. This finding may provide
some justification of the claim that as the business expands, decision-making becomes more
decentralized and self-managed teams proliferate as the firm adds more and more projects and
customers (Flamholtz and Randle, 2000; Miller and Friesen, 1984).
Training and development was related to all firm growth measures but it showed higher
correlation to overall firm performance improvement. Beta weight was 0.33 (r2 3.41, p<0.001). This
finding may have a profound implication: Given that firms were well established, they may have
already run many in-company training programmes and noticed and reported concrete evidence of the
benefits of training and development.
Information sharing comes with pros and cons. Information sharing has the inherent vulnerability
that informed employees will become more powerful and companies may loose control of them
(Pfeffer, 1998). Even worse, information sharing involves the danger of leaking important information
to competitors (Ronde, 2001). On the other hand, information sharing tells employees that the company
trusts them and thus gives them sensitive information to make informed decisions which will shape the
future of the company. The findings demonstrate that information sharing does positively relate to firm
growth. Information sharing was significantly correlated to sales growth, firm growth, and overall firm
performance improvement. Respondents did not perceive that job security was an important HR
practice. This finding can be attributed to the fact that most respondents were HR managers who might
be reluctant to report an insecure job environment in their company’s workplace.
The findings as a whole suggest that a positive relationship exists between the extent to which
companies implement HR practices and firm growth achievements. This overall result corroborates
previous empirical studies on the links between HRM and firm performance. These findings provide
tentative support of the contention that HR practices can create a competitive advantage.
Future research could clarify the causal relationship between HR practices and firm performance.
Another research stream is examining HR practices in sets in order to assess their collective effect. The
conceptual basis of further research can be extended. An interesting avenue for future research is the
market-based competitive advantage approach, which declares that the market determines who is
competitive or not (Reed et al., 2000). The market-based approach can provide another theoretical basis
Ilias P. Vlachos
31
than resource-based view of competitive advantage, in order to examine the effect of HR practices on
firm performance.
A series of limitations bounds the findings, conclusions, and implications of this study. The most
obvious limitations of this study stem from the sample used and the measures employed. We examined
a small set of HR practices that seem to have an effect on firm growth in Greek food industry. Given
that managerial skills are to a large extent industry-specific, generalizability of research findings
beyond the food industry remains an open question. Furthermore, given the dynamic nature of firm
growth, this study measured one instance of this dynamic phenomenon. The effects of HR practices can
take years to materialize into organizational performance. For example, selective hiring and training
can produce results after years. Often, high performance work practices have better results in bundles
than implemented in isolation. This study focused on established firms with more than 5 years of
operation. However, the stage of a firm’s lifecycle, either growth, mature, decline or revival stage
(Ciavarella, 2003) can be an important factor in applying specific HR practices. Another limitation of
the findings is the use of self-report questionnaires to collect data on all measures. This limits our
ability to draw conclusions about the causal nature of the relationships between HR practices and firm
growth. In a future study there would be of great value to see how different HR and MD responses are.
These limitations suggest that the interpretation of research findings need to be cautious they also
indicate a number of potentially fruitfully avenues for future research. Except from testing the research
hypotheses in other settings and environments, the combined effect of HR practices, and which practice
works better with another one is yet another open question. A large quantitative survey could also
control for mediating and/or moderating variables between human resource management and firm
performance.
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