Invest.persp1.

CHAPTER 1:AN INVESTMENT PERSPECTIVE OF HUMAN RESOURCE MANAGEMENT

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Copyright © 2005 South-Western. All rights reserved. 1–2

The Strategic View of Human ResourcesThe Strategic View of Human ResourcesThe Strategic View of Human ResourcesThe Strategic View of Human Resources

• Employees are Employees are human assetshuman assets – Increase in value to organization and marketplace when Increase in value to organization and marketplace when

investments of appropriate policies & programs are appliedinvestments of appropriate policies & programs are applied

• Effective organizations recognize that employees Effective organizations recognize that employees do have valuedo have value

– Much as organization’s physical & capital assets have valueMuch as organization’s physical & capital assets have value

• Employees are valuable source of Employees are valuable source of sustainable sustainable competitive advantagecompetitive advantage

• Employees are Employees are human assetshuman assets – Increase in value to organization and marketplace when Increase in value to organization and marketplace when

investments of appropriate policies & programs are appliedinvestments of appropriate policies & programs are applied

• Effective organizations recognize that employees Effective organizations recognize that employees do have valuedo have value

– Much as organization’s physical & capital assets have valueMuch as organization’s physical & capital assets have value

• Employees are valuable source of Employees are valuable source of sustainable sustainable competitive advantagecompetitive advantage

.. 1–3

Exhibit 1-1Exhibit 1-1

Sources of Employee ValueSources of Employee ValueExhibit 1-1Exhibit 1-1

Sources of Employee ValueSources of Employee Value


Sources of Employee ValueSources of Employee ValueSources of Employee ValueSources of Employee Value

• Technical KnowledgeTechnical Knowledge

– Markets, processes, customers, environmentMarkets, processes, customers, environment• Ability to Learn and GrowAbility to Learn and Grow

– Openness to new ideasOpenness to new ideas– Acquisition of knowledge & skillsAcquisition of knowledge & skills

• Decision Making CapabilitiesDecision Making Capabilities

• MotivationMotivation• CommitmentCommitment• TeamworkTeamwork

– Interpersonal skills, leadership abilityInterpersonal skills, leadership ability

• Technical KnowledgeTechnical Knowledge

– Markets, processes, customers, environmentMarkets, processes, customers, environment• Ability to Learn and GrowAbility to Learn and Grow

– Openness to new ideasOpenness to new ideas– Acquisition of knowledge & skillsAcquisition of knowledge & skills

• Decision Making CapabilitiesDecision Making Capabilities• MotivationMotivation• CommitmentCommitment• TeamworkTeamwork

– Interpersonal skills, leadership abilityInterpersonal skills, leadership ability


Adopting an Investment PerspectiveAdopting an Investment PerspectiveAdopting an Investment PerspectiveAdopting an Investment Perspective

• Determines how to best invest in peopleDetermines how to best invest in people

• CostsCosts

– Out-of-pocketOut-of-pocket– OpportunityOpportunity

• Human assets become competitive advantage B’coz Human assets become competitive advantage B’coz o It can not be duplicated.It can not be duplicated.o Required skills for most jobs become less manual, more Required skills for most jobs become less manual, more

knowledge-based in nature.knowledge-based in nature.

• Appropriate, integrated approach is needed(ex-a firm’s obj. is Appropriate, integrated approach is needed(ex-a firm’s obj. is innovation-can not afford high turnover b’coz fear of expence innovation-can not afford high turnover b’coz fear of expence onTD,etc)onTD,etc)

• strategy-consistent approach is needed( ex-org can buy strategy-consistent approach is needed( ex-org can buy ownership but not human assets )ownership but not human assets )

• Determines how to best invest in peopleDetermines how to best invest in people

• CostsCosts

– Out-of-pocketOut-of-pocket– OpportunityOpportunity

• Human assets become competitive advantage B’coz Human assets become competitive advantage B’coz o It can not be duplicated.It can not be duplicated.o Required skills for most jobs become less manual, more Required skills for most jobs become less manual, more

knowledge-based in nature.knowledge-based in nature.

• Appropriate, integrated approach is needed(ex-a firm’s obj. is Appropriate, integrated approach is needed(ex-a firm’s obj. is innovation-can not afford high turnover b’coz fear of expence innovation-can not afford high turnover b’coz fear of expence onTD,etc)onTD,etc)

• strategy-consistent approach is needed( ex-org can buy strategy-consistent approach is needed( ex-org can buy ownership but not human assets )ownership but not human assets )

. 1–6

A DilemmaA DilemmaA DilemmaA Dilemma

• Failure to invest in employees causes Failure to invest in employees causes – Inefficiency Inefficiency – Weakening of organization’s competitive Weakening of organization’s competitive

positionposition

• Human assets are risky investmentHuman assets are risky investment

• Failure to invest in employees causes Failure to invest in employees causes – Inefficiency Inefficiency – Weakening of organization’s competitive Weakening of organization’s competitive

positionposition

• Human assets are risky investmentHuman assets are risky investment

. 1–7


Types of Organizational Assets/CapitalTypes of Organizational Assets/CapitalExhibit 1-2Exhibit 1-2

Types of Organizational Assets/CapitalTypes of Organizational Assets/Capital

. 1–8

Research FindingsResearch FindingsResearch FindingsResearch Findings

• HR practices directly related to profitability & HR practices directly related to profitability & market valuemarket value

• Primary reason for profitability: Primary reason for profitability: – Effective management of human capitalEffective management of human capital

• HR practices directly related to profitability & HR practices directly related to profitability & market valuemarket value

• Primary reason for profitability: Primary reason for profitability: – Effective management of human capitalEffective management of human capital

1–9

Exhibit 1-3Exhibit 1-3Performance can be measured by following set of outcomes (HR Value Performance can be measured by following set of outcomes (HR Value

Chain-a sequential and cause & effect r/p)Chain-a sequential and cause & effect r/p)

Exhibit 1-3Exhibit 1-3Performance can be measured by following set of outcomes (HR Value Performance can be measured by following set of outcomes (HR Value

Chain-a sequential and cause & effect r/p)Chain-a sequential and cause & effect r/p)


HR Metrics Are ComplexHR Metrics Are ComplexHR Metrics Are ComplexHR Metrics Are Complex

• 90% of Fortune 500 organizations evaluate 90% of Fortune 500 organizations evaluate HR operations on basis of three metrics:HR operations on basis of three metrics:– Employee retention and turnoverEmployee retention and turnover– Corporate moraleCorporate morale– Employee satisfactionEmployee satisfaction

• These metrics do not necessarily illustrate These metrics do not necessarily illustrate how HR impacts how HR impacts – Profits Profits – Shareholder valueShareholder value

• 90% of Fortune 500 organizations evaluate 90% of Fortune 500 organizations evaluate HR operations on basis of three metrics:HR operations on basis of three metrics:– Employee retention and turnoverEmployee retention and turnover– Corporate moraleCorporate morale– Employee satisfactionEmployee satisfaction

• These metrics do not necessarily illustrate These metrics do not necessarily illustrate how HR impacts how HR impacts – Profits Profits – Shareholder valueShareholder value


Mercer Model of Measuring HR ImpactMercer Model of Measuring HR ImpactMercer Model of Measuring HR ImpactMercer Model of Measuring HR Impact

• Identify a specific business problem that HR can Identify a specific business problem that HR can impactimpact

• Calculate actual cost of problem to org.Calculate actual cost of problem to org.• Choose HR solution that addresses problemChoose HR solution that addresses problem

• Calculate cost of solutionCalculate cost of solution• Calculate value of improvement 6 to 24 months Calculate value of improvement 6 to 24 months

after implementationafter implementation• Calculate specific return on investmentCalculate specific return on investment

(Caveat-ROI in human assets often not realized until (Caveat-ROI in human assets often not realized until some time in future)some time in future)

• Identify a specific business problem that HR can Identify a specific business problem that HR can impactimpact

• Calculate actual cost of problem to org.Calculate actual cost of problem to org.• Choose HR solution that addresses problemChoose HR solution that addresses problem

• Calculate cost of solutionCalculate cost of solution• Calculate value of improvement 6 to 24 months Calculate value of improvement 6 to 24 months

after implementationafter implementation• Calculate specific return on investmentCalculate specific return on investment

(Caveat-ROI in human assets often not realized until (Caveat-ROI in human assets often not realized until some time in future)some time in future)



Factors Influencing Organisation’s Factors Influencing Organisation’s Investment OrientationInvestment Orientation


Factors Influencing Organisation’s Factors Influencing Organisation’s Investment OrientationInvestment Orientation


Investment-Oriented OrganizationInvestment-Oriented OrganizationInvestment-Oriented OrganizationInvestment-Oriented Organization

• Sees people as central to mission & strategySees people as central to mission & strategy

• Mission statement & strategic objectives Mission statement & strategic objectives espouse value of human assets in achieving espouse value of human assets in achieving goalsgoals

• Management philosophy encouraging Management philosophy encouraging development & retention of human assets development & retention of human assets

• Does not treat human assets in same ways Does not treat human assets in same ways as physical assetsas physical assets

• Sees people as central to mission & strategySees people as central to mission & strategy

• Mission statement & strategic objectives Mission statement & strategic objectives espouse value of human assets in achieving espouse value of human assets in achieving goalsgoals

• Management philosophy encouraging Management philosophy encouraging development & retention of human assets development & retention of human assets

• Does not treat human assets in same ways Does not treat human assets in same ways as physical assetsas physical assets


Investment Orientation FactorsInvestment Orientation FactorsInvestment Orientation FactorsInvestment Orientation Factors

• Senior Management Values & ActionsSenior Management Values & Actions– Managers need “investment orientation” toward Managers need “investment orientation” toward

peoplepeople

• Attitude Toward RiskAttitude Toward Risk– Investment in human resources inherently riskier Investment in human resources inherently riskier – Risk high then return also highRisk high then return also high

• Nature of Skills Needed by EmployeesNature of Skills Needed by Employees– The more marketable employee skills, the riskier the The more marketable employee skills, the riskier the

firm’s investment in skill developmentfirm’s investment in skill development

• Senior Management Values & ActionsSenior Management Values & Actions– Managers need “investment orientation” toward Managers need “investment orientation” toward

peoplepeople

• Attitude Toward RiskAttitude Toward Risk– Investment in human resources inherently riskier Investment in human resources inherently riskier – Risk high then return also highRisk high then return also high

• Nature of Skills Needed by EmployeesNature of Skills Needed by Employees– The more marketable employee skills, the riskier the The more marketable employee skills, the riskier the

firm’s investment in skill developmentfirm’s investment in skill development


Investment Orientation FactorsInvestment Orientation FactorsInvestment Orientation FactorsInvestment Orientation Factors

• Utilitarian (“Bottom Line”) MentalityUtilitarian (“Bottom Line”) Mentality– Attempt made to quantify employee worth through Attempt made to quantify employee worth through

cost-benefit analysiscost-benefit analysis– ““Soft” benefits of HR programs difficult to objectively Soft” benefits of HR programs difficult to objectively

quantifyquantify

• Availability of OutsourcingAvailability of Outsourcing– Given availability of cost-effective outsourcing, Given availability of cost-effective outsourcing,

investments in HR should produce investments in HR should produce highest returnshighest returns & & sustainable competitive advantages over timesustainable competitive advantages over time..

• Utilitarian (“Bottom Line”) MentalityUtilitarian (“Bottom Line”) Mentality– Attempt made to quantify employee worth through Attempt made to quantify employee worth through

cost-benefit analysiscost-benefit analysis– ““Soft” benefits of HR programs difficult to objectively Soft” benefits of HR programs difficult to objectively

quantifyquantify

• Availability of OutsourcingAvailability of Outsourcing– Given availability of cost-effective outsourcing, Given availability of cost-effective outsourcing,

investments in HR should produce investments in HR should produce highest returnshighest returns & & sustainable competitive advantages over timesustainable competitive advantages over time..


Reading 1.1: The Hidden Leverage of Human CapitalReading 1.1: The Hidden Leverage of Human Capital

Model for Management SuccessModel for Management SuccessReading 1.1: The Hidden Leverage of Human CapitalReading 1.1: The Hidden Leverage of Human Capital

Model for Management SuccessModel for Management Success

• Strengthen key Strengthen key relationshipsrelationships– CustomersCustomers– EmployeesEmployees– ShareholdersShareholders

• Strengthen key Strengthen key relationshipsrelationships– CustomersCustomers– EmployeesEmployees– ShareholdersShareholders

• Leverage Leverage downtimedowntime– Use variable-payUse variable-pay– Address neglected Address neglected

areas:areas:• InfrastructureInfrastructure• MarketingMarketing• OperationsOperations

• Leverage Leverage downtimedowntime– Use variable-payUse variable-pay– Address neglected Address neglected

areas:areas:• InfrastructureInfrastructure• MarketingMarketing• OperationsOperations


Reading 1.1 Reading 1.1

Model for Management SuccessModel for Management SuccessReading 1.1 Reading 1.1

Model for Management SuccessModel for Management Success

• Refocusing staff on Refocusing staff on what’s important what’s important

– Performance Performance management as management as disciplined, strategic, disciplined, strategic, value-added processvalue-added process

– Clearly define, Clearly define, differentiate & balance differentiate & balance between core between core competencies & resultscompetencies & results

• Refocusing staff on Refocusing staff on what’s important what’s important

– Performance Performance management as management as disciplined, strategic, disciplined, strategic, value-added processvalue-added process

– Clearly define, Clearly define, differentiate & balance differentiate & balance between core between core competencies & resultscompetencies & results

• Building return on Building return on compensationcompensation

– Link base-pay Link base-pay progression to progression to competency competency achievementachievement

– Link incentive pay to Link incentive pay to annual, semiannual, or annual, semiannual, or quarterly resultsquarterly results

• Building return on Building return on compensationcompensation

– Link base-pay Link base-pay progression to progression to competency competency achievementachievement

– Link incentive pay to Link incentive pay to annual, semiannual, or annual, semiannual, or quarterly resultsquarterly results


Reading 1.2Reading 1.2 Seven Common MisconceptionsSeven Common Misconceptions

Reading 1.2Reading 1.2 Seven Common MisconceptionsSeven Common Misconceptions

1.1. Conscientiousness is a better predictor of Conscientiousness is a better predictor of performance than intelligence.performance than intelligence.

2.2. Companies that screen job applicants for values Companies that screen job applicants for values have higher performance than those that screen have higher performance than those that screen for intelligence.for intelligence.

3.3. Integrity tests don’t work well in practice Integrity tests don’t work well in practice because so many people lie on them.because so many people lie on them.

4.4. Integrity tests have adverse impact on racial Integrity tests have adverse impact on racial minorities.minorities.

1.1. Conscientiousness is a better predictor of Conscientiousness is a better predictor of performance than intelligence.performance than intelligence.

2.2. Companies that screen job applicants for values Companies that screen job applicants for values have higher performance than those that screen have higher performance than those that screen for intelligence.for intelligence.

3.3. Integrity tests don’t work well in practice Integrity tests don’t work well in practice because so many people lie on them.because so many people lie on them.

4.4. Integrity tests have adverse impact on racial Integrity tests have adverse impact on racial minorities.minorities.


Reading 1.2Reading 1.2

Seven Common MisconceptionsSeven Common MisconceptionsReading 1.2Reading 1.2

Seven Common MisconceptionsSeven Common Misconceptions

5.5. Encouraging employee participation is more Encouraging employee participation is more effective for improving organizational effective for improving organizational performance than setting performance goals.performance than setting performance goals.

6.6. Most errors in performance appraisal can be Most errors in performance appraisal can be eliminated by providing training to managers on eliminated by providing training to managers on how to avoid them.how to avoid them.

7.7. If employees are asked how important pay is to If employees are asked how important pay is to them, they are likely to overestimate its true them, they are likely to overestimate its true importance.importance.

5.5. Encouraging employee participation is more Encouraging employee participation is more effective for improving organizational effective for improving organizational performance than setting performance goals.performance than setting performance goals.

6.6. Most errors in performance appraisal can be Most errors in performance appraisal can be eliminated by providing training to managers on eliminated by providing training to managers on how to avoid them.how to avoid them.

7.7. If employees are asked how important pay is to If employees are asked how important pay is to them, they are likely to overestimate its true them, they are likely to overestimate its true importance.importance.



Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: ImplicationsReading 1.2Reading 1.2

Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: Implications

1.1. Select new employees on both intelligence and Select new employees on both intelligence and conscientiousness.conscientiousness.

2.2. Assess intelligence and conscientiousness before Assess intelligence and conscientiousness before values. values.

3.3. Define the values that are important and assess Define the values that are important and assess them through carefully developed, valid them through carefully developed, valid procedures.procedures.

4.4. Use integrity tests with ability tests for high Use integrity tests with ability tests for high predictability.predictability.

1.1. Select new employees on both intelligence and Select new employees on both intelligence and conscientiousness.conscientiousness.

2.2. Assess intelligence and conscientiousness before Assess intelligence and conscientiousness before values. values.

3.3. Define the values that are important and assess Define the values that are important and assess them through carefully developed, valid them through carefully developed, valid procedures.procedures.

4.4. Use integrity tests with ability tests for high Use integrity tests with ability tests for high predictability.predictability.



Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: ImplicationsReading 1.2 Reading 1.2

Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: Implications

5.5. Develop compelling goals; enlist participation Develop compelling goals; enlist participation and support it through rewards.and support it through rewards.

6.6. Training and feedback are important, but errors Training and feedback are important, but errors are difficult to eliminate. Top managers should are difficult to eliminate. Top managers should serve as role models in quality of performance serve as role models in quality of performance reviews.reviews.

7.7. Attitude surveys are subject to biases; study Attitude surveys are subject to biases; study behaviors as well as attitudes.behaviors as well as attitudes.

5.5. Develop compelling goals; enlist participation Develop compelling goals; enlist participation and support it through rewards.and support it through rewards.

6.6. Training and feedback are important, but errors Training and feedback are important, but errors are difficult to eliminate. Top managers should are difficult to eliminate. Top managers should serve as role models in quality of performance serve as role models in quality of performance reviews.reviews.

7.7. Attitude surveys are subject to biases; study Attitude surveys are subject to biases; study behaviors as well as attitudes.behaviors as well as attitudes.



Effective HRM PracticesEffective HRM Practices Reading 1.3 Reading 1.3

Effective HRM PracticesEffective HRM Practices

• Employment SecurityEmployment Security

• Selectivity in RecruitingSelectivity in Recruiting• High WagesHigh Wages• Incentive payIncentive pay• Employee OwnershipEmployee Ownership• Information SharingInformation Sharing

• Participation & Participation & OwnershipOwnership

• Self-Managed TeamsSelf-Managed Teams

• Employment SecurityEmployment Security• Selectivity in RecruitingSelectivity in Recruiting• High WagesHigh Wages• Incentive payIncentive pay• Employee OwnershipEmployee Ownership

• Information SharingInformation Sharing• Participation & Participation &

OwnershipOwnership• Self-Managed TeamsSelf-Managed Teams

• Training & DevelopmentTraining & Development

• Cross-Utilization & Cross-Utilization & Cross-TrainingCross-Training

• Symbolic EgalitarianismSymbolic Egalitarianism• Wage CompressionWage Compression• Promotion From WithinPromotion From Within• Taking the Long ViewTaking the Long View

• Measurement of PracticeMeasurement of Practice• Overall PhilosophyOverall Philosophy

• Training & DevelopmentTraining & Development• Cross-Utilization & Cross-Utilization &

Cross-TrainingCross-Training• Symbolic EgalitarianismSymbolic Egalitarianism• Wage CompressionWage Compression• Promotion From WithinPromotion From Within

• Taking the Long ViewTaking the Long View• Measurement of PracticeMeasurement of Practice• Overall PhilosophyOverall Philosophy



Effective HRM PracticesEffective HRM PracticesReading 1.3Reading 1.3

Effective HRM PracticesEffective HRM Practices

• Very few firms will engage in all practicesVery few firms will engage in all practices

• While these practices are important for While these practices are important for success, there are other determinants as success, there are other determinants as wellwell

• Downsides existDownsides exist– Requires more involvement and responsibility than Requires more involvement and responsibility than

some employees wantsome employees want– Managers & others may resist them as wellManagers & others may resist them as well– Turnover may resultTurnover may result

• Very few firms will engage in all practicesVery few firms will engage in all practices

• While these practices are important for While these practices are important for success, there are other determinants as success, there are other determinants as wellwell

• Downsides existDownsides exist– Requires more involvement and responsibility than Requires more involvement and responsibility than

some employees wantsome employees want– Managers & others may resist them as wellManagers & others may resist them as well– Turnover may resultTurnover may result

Invest.persp1.

Education

human assets copyright

hr metrics

hr solution

hr operations

pocketopportunityhuman

risky investment

set of outcomes hr value

appliedeffective organizations